TradePotentialBetweenBrazilandIndia An examination based on comparative advantagestructures Brasília July 2005
1 Trade Potential Between Brazil and India An examination based on comparative advantage structures Renato Fonseca Marcelo S. Azevedo Edson Velloso Brasília July 2005 English Version of Estudos CNI 3, July 2005. This study, elaborated by the National Confederation of Industry - Brazil (CNI), seeks to contribute to the efforts carried on jointly with the Confederation of Indian Industry (CII) to promote the Brazil - India bilateral trade. The authors thank José Augusto Fernandes for the useful comments. The authors retain sole responsibility for remaining errors or omissions that may come to be found.
2005. CNI Confederação Nacional da Indústria Total or partial reproduction of the articles is allowed, provided the source is explicitly indicated. The CNI Studies series has the purpose of disseminating studies undertaken by the CNI staff, and from time to time by other reseachers, and to provide a forum for the analysis of relevant policy issues for the country s development. The series aims to put forward and analyze policies and also explore the implications of this research for the design and conduct of public policies. The analyses and conclusions set forth are those of the authors and do not necessarily indicate concurrence by CNI. F676p Fonseca, Renato. Trade Potential Between Brazil and India: An examination based on comparative advantage structures / Renato Fonseca, Marcelo S. Azevedo, Edson Velloso. Brasília : CNI, July, 2005. 30 p.: il. (CNI Studies, 1) ISSN: 1. Foreign Trade 2. Comparative Advantage 3. Brazil 4. India I. Azevedo, Marcelo. II. Velloso, Edson III. Title CDU 339.5 (81:540) CNI National Confederation of Industry / Brazil Setor Bancário Norte, Quadra 1, Bloco C Edifício Roberto Simonsen 70040-903 Brasília DF Brazil Phones: (55 61) 3317-9001 Fax : (55 61) 3317-9994 www.cni.org.br SAC Costumer Service Phones: (55 61) 3317-9989 / (55 61) 3317-9992 sac@cni.org.br
ABSTRACT This study seeks to identify the trade potential between Brazil and India. The analysis is centered on the comparative advantage structures of the two countries, as identified by means of Balassa s Revealed Comparative Advantage Index, based on trade flow in the three-year period between 2000-2002. The results suggest low complementarity between the supply and demand of the two economies, which stands as one of the main factors underlying the low volume of bilateral exchanges. Nonetheless, it was possible to identify a set of goods of high mutual benefit should they be traded between the two countries.
TRADE POTENTIAL BETWEEN BRAZIL AND INDIA AN EXAMINATION BASED ON COMPARATIVE ADVANTAGE STRUCTURES SUMMARY OF FINDINGS Brazil-India bilateral trade has registered significant growth in the last ten years. Nevertheless, bilateral interchange continues to have little significance for either country. The strong growth of bilateral trade was not the result of a diversification of the product roster. On the contrary, the concentration actually increased. Brazilian sales to India differ from the country s export profile to the rest of the world. Brazilian export revenues for the world as a whole are primarily derived from sales of manufactured products, particularly those that are scale-intensive. However, sales to India are very highly concentrated in labor-intensive semi-manufactured products of agricultural origin and, more recently, energy sources. The profile of Indian exports to Brazil is also different to that of the country s total exports. Sales of R&D-intensive manufactured products to Brazil are much more expressive, in relative terms, than those destined to other parts of the world. From a universe of 5,131 products transacted in world trade, Brazil exported 3,610 in the three-year period between 2000 and 2002 and revealed comparative advantages in 792 of these products, responsible for 84% of total Brazilian export revenues. India exported 4,229 products and presented comparative advantages in 1,315, which correspond to 86% of the country s total export value in the three-year period. Considering just the products for which Brazil and India have comparative advantages, a coincidence was identified in 240 - corresponding to 3 and 18% of the products for which Brazil and India, correspondingly, has a comparative advantage. In terms of value, such products accounted in the 2000-2002 three-year period for 28% and 2 of Brazil and India s respective export revenues in terms of the group of goods for which each country has a comparative advantage. Brazil and India cannot be considered strong competitors in the international market. The overlap of the products for which both countries have revealed comparative advantages represents less than 1/3 of the number of products for which Brazil and India have revealed comparative advantages, as well as the revenues derived from the export of these items. Furthermore, evaluation of the destinations of these sales shows that the competition is even more restricted. Excluding the United States and Europe, Brazilian sales are mostly directed to Latin America, whilst India s main market is Asia.
The comparison between the comparative advantage structures of Brazil and India indicates that the two economies would be complementary. Three sectors responded for 5 of Brazilian exports of products for which the country had a comparative advantage in the three-year period under consideration: scale-intensive manufactured products (19%), labor-intensive semi-manufactured products of agricultural origin (18%) and basic agricultural products (14%). In the case of India, 72% of the external sales of products for which the country has revealed comparative advantages are distributed among the following sectors: labor-intensive manufactured products (38%), semi-manufactured products of mineral origin (22%) and basic agricultural products (12%). With the exception of basic agricultural products, the economies of the two countries are competitive in different sectors and could exchange products in these sectors. Both countries have an important participation of manufactured products on their roster of competitive products, which opens the possibility for intra-industry exchanges. However, the apparent complementarity between the two economies stands in contrast with the low volume of bilateral trade, even with the merchandise with which the countries are competitive. The comparative disadvantages structures of Brazil and India are very similar, which means that both countries are very similar in terms of their import rosters. A considerable portion of the comparative disadvantages of both Brazil and India are found in manufactured products from specialized suppliers (25% and 17%, respectively), R&D -intensive manufactured products (2 and 12%, respectively) and semi-manufactured products of mineral origin (12% and 32%, respectively). Isolated analysis of the comparative advantage structures (supply) tends to the conclusion that the two economies would be complementary. Incorporation of the comparative disadvantage structures (demand) into the analysis shows there to be, indeed, low complementarity, thereby justifying the low trade volume. In spite of the low potential for interchange, it is possible to identify opportunities for gains for both countries in terms of bilateral trade. This study presented an analysis based on comparative advantage and disadvantage structures that enabled the selection of a set of goods with high trade potential between Brazil and India. Such products are concentrated, in terms of Brazilian exports, in manufactured products from specialized suppliers and semi-manufactured products of mineral origin, and, for India, in R&D-intensive and in scale-intensive manufactured products.
SUMMARY 1 INTRODUCTION... 9 2 BRAZIL AND INDIA IN WORLD TRADE... 9 3 BRAZIL-INDIA BILATERAL TRADE... 11 4 COMPARATIVE ADVANTAGE STRUCTURES: METHODOLOGY AND DATABASE... 13 5 COMPARATIVE ADVANTAGES OF BRAZIL AND INDIA... 15 5.1 BRAZIL AND INDIA AS COMPETITORS IN THE WORLD MARKET... 15 5.2 THE COMPLEMENTARITY BETWEEN BRAZIL AND INDIA... 17 6 THE IMPORT STRUCTURES OF BRAZIL AND INDIA... 19 7 GROWTH OPPORTUNITIES FOR BILATERAL TRADE... 20 7.1 BRAZILIAN EXPORTS... 21 7.2 INDIAN EXPORTS... 22 8 FINAL CONSIDERATIONS... 24 APPENDICES APPENDIX A... 25 APPENDIX B... 27 REFERENCES... 30
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1 INTRODUCTION Bilateral trade between Brazil and India has more than doubled in recent years, reaching US$1.2 billion in 2004. Nevertheless, bilateral interchange continues to have little significance for either country, in spite of their considerable consumer markets. The trade roster is very concentrated and the strong trade growth at the start of this decade was mainly due to the exchange of just a small set of products and does not therefore represent a dynamization of bilateral trade as a whole. Brazil and India do not compete in any significant way in terms of world trade. Both countries export rosters have a strong participation of basic and semi-manufactured products but are, to a certain extent, complementary. Growth of bilateral trade would apparently offer a potential for mutual gains. The countries import rosters are, however, very similar and concentrated in manufactured products. It should be noted that this, in itself, would not represent a hindrance to bilateral interchange. Most of the trade between developed countries is of an intra-industry nature characterized by exchanges of equal, but differentiated, industrial products. The problem is that neither Brazil nor India are competitive in terms of most of the products demanded by the other, which therefore hampers the initiation of intra-industry trade between them. Both Brazil and India have other trade partners that are more competitive and more favorably located geographically (with consequently lower transport costs). The low trade volume between the two countries is not only linked to the distance between them but also, and primarily, to the low complementarity between their supply and demand structures. There are, however, some opportunities to be explored by the two countries. Such opportunities are identified, albeit in a preliminary fashion, through the comparative advantages and disadvantages of each country as identified through the recent performance of Brazil and India in world trade. 2 BRAZIL AND INDIA IN WORLD TRADE India is often compared with Brazil. This is not by chance. Both countries have continental dimensions and big populations. Brazil and India are systematically increasing their presence in world trade and broadening their economic opening while facing problems with poverty and bad distribution of income. Both countries are regional potencies in ascension and are, accordingly, characterized as emerging markets with power to attract international investment. The Indian Gross Domestic Product (GDP) increased 6.9% in the country s last fiscal year (April 1, 2004 through March 31, 2005) and grew 8.2% in the fiscal year ending March 2004. The Indian economy expanded at an average 6. annual rate between 1993 and 2003. The Brazilian GDP grew at an average 2.5% annual rate in this same period of comparison, versus 2.8% per annum for world GDP growth. According to the World Bank, the US$603 billion Indian GDP in terms of purchasing power parity registered in 2003 was the fourth largest in the world, behind the US, China and Japan. Brazil occupied the ninth position according to this criterion. Also in terms of purchasing power parity, India has a relatively low per capita GDP of US$2,900, compared to US$7,600 for Brazil (which stood 93 rd in the world ranking, 2002 figures). 9
The Indian government started to modify its trade policy in 1991, which brought about a significant alteration of the country s foreign trade profile. Imports have been stimulated by a series of reforms which have, amongst other measures, reduced import tariffs, although they remain high. The government also assumed a commitment with the World Trade Organization (WTO) to gradually eliminate all of its import quotas by 2005. Exports were also benefited by legislatory changes that resulted in a simplification of some trade procedures and the removal of internal export barriers. Brazil also started a trade opening process at the start of the Nineties. However, the liberalization process of the Brazilian economy was much deeper. Most non-tariff barriers were incorporated into tariffs, which in turn were gradually reduced during the first half of the decade. The trade opening stimulated an intense modernization process of Brazilian industry that resulted in an increase of its competitiveness and, consequently, of exports. India has increased its participation in international trade in a consistent manner over the past ten years. The country s exports registered an average annual growth rate of 10.2% between 1993 and 2003. India s participation in world exports increased from 0.58% to 0.78% in that period, with external sales climbing from US$22 billion to US$57 billion, according to IMF statistics. Brazilian exports registered strong growth in 2003 and 2004, thereby maintaining the recovery path of their participation in world trade that was initiated in 2000. The Brazilian participation in world exports stood at 1.47% in 1984 but decayed to 0.86% by 1999. However, as of 2000, the country has been gaining space in world exports. Its stake reached in 2003 and preliminary statistics indicate a further increase in 2004. Brazilian external sales jumped from US$51.1 billion in 1999 to US$73.1 billion in 2003 and US$ 96.4 billion in 2004. Indian imports registered average annual growth of 10.8% between 1993 and 2003, versus 8.9% for Brazil and 6.7% for world imports. Indian external purchases jumped from US$24 billion in 1993 to US$71 billion in 2003. In the case of Brazil, imports rose from US$25.2 billion in 1993 to US$48.3 billion in 2003 and US$62.8 billion in 2004. The Indian trade flow expanded from US$46.1 billion in 1993 to US$128 billion in 2003, higher therefore than the Brazilian trade flow of that time (US$ 121 billion). Manufactured products are responsible for more than half of the Indian trade flow. These products accounted on average for 59% of exports and 52% of imports in the three years between 2000 and 2002. Labor-intensive goods were a highlight amongst manufactured goods exports, representing some 35% of the export total. On the other hand, the standouts of manufactured goods imports were provided by items intensive in research and development (R&D-intensive) and from specialized suppliers (18% and 17% of the total, respectively). Semi-manufactured products of mineral origin are also important in both rosters, accounting for 25% of total imports and 2 of exports. Manufactured goods also responded, on average, for the biggest slice of Brazil s foreign trade in the three years between 2000-2002. Such products were responsible for 7 of Brazilian external purchases, with prominent participations of R&D-intensive (26%), specialized suppliers (2) and scale-intensive manufactured products (17%). In terms of external sales, manufactured products represented 44% of the average export value in the three-year period under consideration, with scale-intensive items as a highlight (19%). Brazilian external sales of labor-intensive semi-manufactured agricultural products and basic agricultural products were also important (16% and 12%, respectively). 10
3 BRAZIL-INDIA BILATERAL TRADE Brazil-India bilateral trade has registered significant growth in the last ten years. The trade flow between the two countries expanded at an average annual rate of 3 from US$216 million in 1993 to US$1.2 billion in 2003. The trade balances have been in favor of Brazil since 1984, with the exception of the period between 1996 and 1998 and the years 2000 and 2001. The growth rate of trade between the two countries exceeded both the expansion of total Indian and total Brazilian trade, but the bilateral interchange continues to be very inexpressive for the two economies. India s participation in Brazilian total exports rose from 0.32% in 1993 to just 0.68% in 2004, while imports of Indian products climbed from 0.36% to 0.89% of Brazilian total imports. Graph 1 US$ Millions 700 600 500 400 300 200 100 Brazil-India Bilateral Trade 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Brazilian Exports Brazilian Imports Source: Secretariat of Foreign Trade (SECEX), of the Ministry of Development Industry and Foreign Trade (MDIC) The strong growth of bilateral trade was not the result of a diversification of the product roster. On the contrary, the concentration actually increased. Trade has been strongly influenced in recent years by two relevant facts. The expansion registered in 2002 and 2003 was actually due to the expansion of exchanges of Brazilian crude oil for Indian diesel. These exchanges are the result of an agreement signed in 2002 between Petrobras and Reliance. Petrobras exported crude produced from the Marlim field in the Campos Basin (Rio de Janeiro) that is rather inadequate for Brazilian refineries (which were designed to operate with lighter crude, such as from the Persian Gulf) and imported diesel as a consequence of the lack of capacity of Petrobras refineries, which operated at full capacity. This agreement, which expired in 2003, was responsible for more than 9 of the growth of Brazilian exports to India in 2002 and 2003. Additionally, 2004 witnessed a strong increase of Brazilian sugar sales to India. The latter is the world s biggest consumer of that commodity and second biggest producer but experienced a crop failure in 2003/2004 that cut production by some 3. The dynamism of the bilateral interchange of recent years must therefore be qualified. Brazilian exports to India have presented a strong concentration in recent years. The five main products on the Brazilian export roster represented some 4 of total sales in 1996, climbing to 65% of total value in 2004. In 2003, just two products crude oil and soy oil were responsible for 68% of sales. In 2004, sugar and soy oil accounted for 4 of the total. 11
Brazilian sales to India differ from the country s export profile to the rest of the world. Brazilian export revenues for the world as a whole are primarily derived from sales of manufactured products, particularly those that are scale-intensive. However, sales to India are very highly concentrated in labor-intensive semi-manufactured products of agricultural origin and, more recently, energy sources. These product groups had 32% and 29% stakes, respectively, in Brazil s total export value to India in the three years between 2000 and 2002, compared to participations of 16% and in total Brazilian worldwide exports. The expressive increase of Brazilian crude oil sales to India, as a result of the aforementioned agreement, deserves highlighting. There were no Brazilian exports of that product to India between 1996 and 2001. However, in 2002 and 2003, this product responded for 5 and 46%, respectively, of Brazilian exports to India (the equivalent of US$333 million and US$255 million, respectively). Such sales fell practically to zero in 2004. Sugar is another product that has displayed a significant performance, exports of which leapt from US$5.2 million in 2003 to US$ 134.6 million in 2004. The US$129.3 million sales increase of this product in relation to 2003 outpaced the US$98.4 million expansion of the total export roster value to India in the same period. Sugar sales represented 2 of Brazil s total export value to India in 2004. The recent period has seen a shift in the composition of soy-complex sales to India. Crude soy oil exports increased thirty fold between 1996 and 2004, coming to be responsible for 2 of the export roster value at the end of the period in contrast to the sharp decline of refined oil sales. Refined soy oil exports registered a slight recovery in 2004, coming to represent 2% of the roster value versus 0.08% in 2003. However, they have previously responded for more than 1 of the roster value. Note that Brazil does not export soy beans to India (with the exception of 2003). Finally, automobiles and ethyl alcohol have also been a highlight. Exports of automobiles of between 1,000 to 1,500 CC grew more than twenty fold in 2003 and 2004 in comparison with 1998 and 1999. Even exports of automobiles of between 1,500 and 3,000 CC, which were inexistent in the three-year period between 1996 and 1998, reached more than US$1.5 million in 2004. There was also a consequent increase of Brazilian exports of diverse auto parts. Sales of Brazilian ethyl alcohol to India were initiated in 2004, when exports amounted to US$85.7 million, corresponding to 1 of the roster. The Brazilian import roster of Indian products is much more diversified, but presented a strong concentration process at the start of this decade. Whereas, at the end of the Nineties, the five main products imported by Brazil accounted for less than 2 of the total value, this participation stood at 38% in 2004 after reaching 5 in 2003. Diesel, which has been the main Brazilian import product from India in the last three years, came to respond for 45% of Brazilian purchases from the country in 2002 and 2003 (the period in which the agreement between Reliance and Petrobras was in force), but declined to 29% in 2004. Medicines, their main active agents and other organic chemicals, are also relevant products on Brazil s Indian-import roster, accounting for 36% of the total value imported in 2004. Of somewhat lesser importance are synthetic textile threads, leather dyes and colorings, and electrical machinery. The profile of Indian exports to Brazil is also different to that of the country s total exports. Sales of R&D-intensive manufactured products to Brazil are much more expressive, in relative 12
terms, than those destined to other parts of the world. In the years between 2000 and 2002, such products accounted for 3 of exports to Brazil, versus just 8% of Indian exports to the rest of the world. The importance of sales of energy sources products are another standout; they represent 29% of the Indian export value to Brazil but less than 2% of the country s exports to the rest of the world. The distance between the two countries may provide a partial explanation for the low volume of bilateral trade. There is no direct maritime traffic between Brazil (or the Mercosul, in fact) and India. Products always need to pass first through Europe or Singapore. According to the Joint Secretary of India s Ministry of Navigation, Susheel Kumar, during the Brazil-India Entrepreneurs Joint Meeting held on June 14, 2004, in São Paulo, direct navigation between the two trade blocks will only be possible with triple the merchandise volumes. This is one of those chicken and egg situations in which one cannot be certain of what causes what. Whether the trade level is low because of the lack of direct lines of transport or the lack of lines is due to the low trade volume. In any case, although it is indeed important, the question of distance does not seem to be the main factor justifying the low trade flow between Brazil and India. Other factors, such as the elevated import tariffs particularly the Indian tariffs also contribute to the low trade volume 1.However, the low level of complementarity of the demand and supply structures of the two economies seems to be the biggest hindrance. 4 COMPARATIVE ADVANTAGE STRUCTURES: METHODOLOGY AND DATABASE The low volume of interchange between Brazil and India may be the result of the comparative advantage structures of the two economies. According to traditional foreign trade theory, based on Ricardo s Law of Comparative Advantages and the Heckscher-Ohlin Theory, the greater the difference between the relative production factors of each country and, consequently, the relative supply structure, the bigger the trade volume. This type of exchange is known as inter-industry, as the countries exchange products from different industries. However, most of the interchange between developed countries is of the intra-industry type, whereby there is an exchange of similar products (differentiated), i.e. produced by the same industry or by parts, spares and components used within the same industry. In this case, the greater the similarities between the countries in terms of both the supply and demand structures, the greater the trade volume. Intra-industry trade is stimulated by the economies taking advantage of economies of scale and through product differentiation, and therefore takes place almost exclusively between industrialized products 2. It is important, in both situations, that the countries supply and demand structures be known in order to determine the trade potential between them. One way of calculating a country s comparative advantage structures is by means of the performance of the country s exports in terms of world trade. 1 The limiting effect on bilateral trade between Brazil and India provoked by elevated import tariffs is expressed in the National Foreign Trade Council (2005). 2 Additional details on traditional trade theory and intra-industry trade can be found in textbooks on international economics, such as Salvatore (1997) or Krugman & Obstfeld (2002). 13
This task is based on the foreign trade statistics collected by Unctad and made available through the PC-TAS database (Trade Analysis System on Personal Computer: Harmonized System, 1998-2002). The statistics are classified according to the Harmonized System. Product definition in our study was based on this classification, whereby we opted to work with the highest possible level of disaggregation (six digits), which resulted in a universe of 5,131 products. In order to minimize atypical variations of trade volume, we opted to work with tri-annual average levels, taking the period 2000-2002 as a base. Countries that did not report their statistics in at least two of the three years in question were excluded from the sample, thereby reducing the number of countries to 138. Exports from these countries amounted to an average annual value of US$5.1 trillion in the three year period between 2000-2002, corresponding to 82% of total world exports. The sample is therefore very representative of world trade 3. The European Union was considered as a whole, thereby excluding intra-community trade. Exports or imports from the European Union accordingly refer solely to transactions between member and non-member countries. Note that, in spite of the entry of new countries to the European Union in 2004, the current analysis considered just the 15 countries in the Union until 2003. The country count for the purposes of the analysis is therefore 123 plus the European Union. Products were classified according to the utilization intensity of production factors as laid out in the methodology proposed by Pavitt (1984). The taxonomy was updated by Brazil s Center for Foreign Trade Studies Foundation (Fundação Centro de Estudos de Comércio Exterior, Funcex). The comparative advantages structures of Brazil an India are based on the classification of products by intensity of use of the production factors proposed by Pavitt (1984) and estimated by means of the Revealed Comparative Advantage Index (RCAI), developed by Balassa (1965, 1971). In relation to the demand structure, we opted to construct a Comparative Disadvantage Index inspired by Balassa s RCAI. Brazil s RCAI for a given product i is defined as the ratio between the participation of the sales of the product i in total Brazilian exports and the participation of world sales of the same product in total world exports. That is: RCAI BR i = X X World i BR i X j X j BR j World j where X i BR represents Brazilian exports of the product i and X i World represents world exports of the product i. Brazil is said to have a revealed comparative advantage with the product in question when the RCAI is greater than the one. The higher the RCAI is, the bigger the country s comparative advantage. 3 The participation of the sample of exports in total world exports was calculated utilizing the three-year average world export statistics (2000-2002) according to the International Financial Statistics of the International Monetary Fund IMF. 14
Determination of the exchange potential for the economies in question also requires knowledge of which products are relatively more important on each country s import roster thereby verifying its consumption pattern or demand structure. Inspired by the RCAI, we calculated a Revealed Comparative Disadvantages Index (RCDI), which is defined in an analogous manner to the RCAI; however, the imports of each product are observed instead of their exports. Thus, Brazil s RCDI for a given product i is defined as the ratio between the participation of the purchases of product i in total Brazilian imports and the participation of world purchases of the same product in total world imports. That is: RCDI BR i = M M World i BR i M j M j BR j World j BR World where M i represents Brazilian imports of the product i and M i represents world imports of the product i. The country will have a comparative disadvantage with products whose RCDI is greater than one. The higher the RCDI is, the greater the country s comparative disadvantage. Analogically, RCAI and RCDIs were elaborated for India. It should be stressed that the indices are calculated based on past trade flows, presupposing that a country s relative productive efficiency can be identified by means of its performance in international trade. Obviously, such a presupposition means that trade flows should not be affected by random factors such as subsidies, quantitative restrictions, differentiated import tariffs between countries, etc. These indices should therefore be employed with caution, particularly in the case of primary products (which are more subject to national government interventions that artificially modify trade flows). Such problems are common in any index based on a country s trade performance, and are not exclusive to those utilized in this study. 5 COMPARATIVE ADVANTAGES OF BRAZIL AND INDIA From a universe of 5,131 products transacted in world trade, Brazil exported 3,610 in the three-year period between 2000 and 2002 and revealed comparative advantages in 792 of these products. Such products therefore represented 22% of the products exported by the country in the period but their US$45.6 billion revenues were responsible for 84% of total Brazilian export revenues. In this same period, India exported 4,229 products and presented comparative advantages in 1,315, i.e. in 3 of its export roster. India s international revenues from these products amounted to US$33.4 billion, corresponding to 86% of the country s total export value in the three-year period. 5.1 BRAZIL AND INDIA AS COMPETITORS IN THE WORLD MARKET Considering just the products for which Brazil and India have comparative advantages, a coincidence was identified in 240 - corresponding to 3 of the products for which Brazil has a comparative advantage and 18% of those for which India has a comparative advantage. In terms of value, such products accounted in the 2000-2002 three-year period for 28% and 2 of Brazil 15
and India s respective export revenues in terms of the group of goods for which each country has a comparative advantage. Brazilian exports of these products averaged a total US$12.9 billion between 2000 and 2002, almost double the value of Indian sales (US$6.7 billion). Table 1 presents the 240 products selected according to the intensity of use of production factors. As can be seen in the Table, most are manufactured products that are scale-intensive (72 products) and semi-manufactured products of mineral origin (34 products), besides many basic products (25 agricultural and 13 mineral). From the point of view of Brazil, the product overlap with India in terms of the products for which both countries revealed comparative advantages is more relevant in the basic minerals products market. India is competitive in 59% of the basic mineral products for which Brazil has a comparative advantage. Although these 13 basic products represent just 5% of the 240 selected products, they accounted for 24% of Brazilian revenues and 1 of Indian revenues in terms of the total external sales of the 240 products in the period under consideration. Iron ore is a standout in this group, responsible for 2 and 8% of Brazilian and Indian exports, respectively, of the 240 products. Table 1 Products Where Brazil and India are Competitors in the World Market by Intensity of Inputs Average Annual Value 2000-02 Intensity of Inputs Number of Products Brazilian Exports 3 (US$ 10 ) Revenues (Share) Indian Exports 3 (US$ 10 ) Revenues (Share) Energy sources 1 8,710 5,740 Basic 38 5,918,213 46% 2,664,135 4 agricultural 25 2,777,756 22% 1,768,542 26% minerals 13 3,140,457 24% 895,593 1 Semi-manufactured 47 3,276,612 25% 1,157,926 17% labor-intensive of agricultural origin 9 2,408,759 19% 572,132 9% capital-intensive of agricultural origin 4 438,190 154,531 2% of mineral origin 34 429,662 431,263 6% Manufactured 154 3,668,418 28% 2,900,817 4 labor-intensive 46 985,603 8% 978,600 15% scale-intensive 72 2,291,389 18% 1,464,401 22% specialized suppliers 19 199,017 2% 115,337 2% R&D-intensive 17 192,409 342,479 5% excluding aircrafts 17 192,409 342,479 5% aircrafts 0 0 0 Total 240 12,871,952 10 6,728,618 10 Source: PC-TAS (Unctad); and CNI staff calculations In terms of value, Brazil also faces significant competition with India in the international market amongst basic agricultural products, particularly coffee and tobacco. Coffee accounted for 1 of Brazil s export revenues from the 240 products in the period 2000-2002, but for just 2% of equivalent Indian revenues. Tobacco was responsible for 6% of Brazilian revenues and of Indian revenues in the same period. Standouts in other sectors are bovine meat, soy-oil extraction residuals, tires, cast iron and laminated sheet steel. In the case of India, competition with Brazil is most relevant in basic agricultural products, which were responsible for 26% of Indian revenues from the sales of the 240 selected products. 16
Standouts are frozen shrimp (12% of Indian revenues from this category), cashew nuts (5%) and coffee (2%). Iron ore is also a standout, accounting for almost 8% of Indian exports, and also granite, insecticides, cast iron products and footwear. The Latin American market, exclusive of Brazil, represents less than of Indian sales, whereas it accounts for almost 15% of Brazilian exports of the 240 selected products. More than 4 of Indian exports of these products are destined to other Asian countries, whereas this market receives just 2 of Brazilian exports. Asia is India s main export market, whereas Brazil s main destination is Europe, which receives 42. of the country s sales. The European market is also important for India (30.2%) and together with the North American market (which accounts for approximately 18% of each country s exports) represents the main arena of competition between the two countries. This result was already expected given that these two markets respond for the lion s share of international trade. In summary, Brazil and India cannot be considered strong competitors in the international market. The overlap of the products for which both countries have revealed comparative advantages represents less than 1/3 of the number of products for which Brazil and India have revealed comparative advantages, as well as the revenues derived from the export of these items. Furthermore, evaluation of the destinations of these sales shows that the competition is even more restricted. Excluding the United States and Europe, Brazilian sales are mostly directed to Latin America, whilst India s main market is Asia. 5.2 THE COMPLEMENTARITY BETWEEN BRAZIL AND INDIA The comparison between the comparative advantage structures of Brazil and India indicates that the two economies would be complementary. Table 2 presents the breakdown of each country s product roster for the items with revealed comparative advantage according to the intensity of use of production factors. Three sectors responded for 5 of Brazilian exports of products for which the country had a comparative advantage in the three-year period under consideration: scale-intensive manufactured products (19%), labor-intensive semi-manufactured products of agricultural origin (18%) and basic agricultural products (14%). Fourth position is filled by R&Dintensive manufactured products, which represent 1 of the export value almost half of which is derived from aircraft sales. In the case of India, 72% of the external sales of products for which the country has revealed comparative advantages are distributed among the following sectors: labor-intensive manufactured products (38%), semi-manufactured products of mineral origin (22%) and basic agricultural products (12%). The fourth most important sector, accounting for 1 of the export value of the aforementioned products in the three years between 2000-2002, is the scale-intensive manufactured products. With the exception of basic agricultural products, the economies of the two countries are competitive in different sectors and may exchange products in these sectors. Both countries have an important participation of manufactured products on their roster of competitive products, which opens the possibility for intra-industry exchanges. 17
Intensity of Inputs Table 2 Exports of Products each Country has Revealed Competitive Advantage by Intensity of Inputs Average Annual Value 2000-02 Number of Products Brazil Exports 3 (US$ 10 ) Revenues (Share) Number of Products India Exports3 (US$ 10 ) Revenues (Share) Energy sources Basic agricultural minerals Semi-manufactured labor-intensive of agricultural origin capital-intensive of agricultural origin of mineral origin Manufactured labor-intensive scale-intensive specialized suppliers R&D-intensive excluding aircrafts aircrafts Total 7 612,691 5 673,154 2% 83 9,646,878 2 142 4,896,425 15% 61 6,247,263 14% 108 3,882,211 12% 22 3,399,615 7% 34 1,014,214 232 14,651,708 32% 269 8,303,246 25% 99 8,201,331 18% 52 815,324 2% 25 3,217,542 7% 15 183,950 108 3,232,836 7% 202 7,303,972 22% 470 20,704,352 45% 899 19,529,231 58% 113 3,900,662 9% 501 12,851,970 38% 196 8,534,850 19% 227 3,569,310 1 96 3,469,536 8% 84 715,801 2% 65 4,799,305 1 87 2,392,150 7% 62 2,187,122 5% 85 2,389,263 7% 3 2,612,183 6% 2 2,887 792 45,615,630 10 1,315 33,402,055 10 Source: PC-TAS (Unctad); and CNI staff calculations In the case of inter-industry trade, it is not only important that countries supply different products in a competitive manner but also that the demands be compatible with the supply, primarily when dealing with economies with an elevated transport cost between them. Transport costs can more than offset the comparative advantage of the potential partner, thereby leading to that demand being met domestic producers or other countries. The questions of supply and demand structures and transport costs are also crucial in the case of intra-industry trade. It is not enough that the demands be similar. The potential partner must have the capacity to meet the demand and be sufficiently competitive to compensate the transport costs. India purchased 719 of the 792 products for which Brazil presented comparative advantages in the 2000-2002 period, but just 154 originated from Brazil. This group was responsible for 45% of the total number of Brazilian products exported to India and responded for 62% of the value of Brazilian sales to the partner in question. India imported, on average, US$4.8 billion per year of these products in the three-year period under consideration. Products originating from Brazil totaled, on average, just US$237 million. Brazil was the eighth biggest supplier of the Indian market, accounting for 4.9% of Indian imports of the products for which Brazil presented comparative advantages. On the other hand, Brazil acquired 1,188 of the 1,315 products for which India possesses comparative advantages, but just 428 originated from India. This group represented less than two thirds of the goods exported by India to Brazil, but corresponded to 9 of the total value exported in the three years between 2000 and 2002. The low trade volume is once again evident in this case. The Brazilian market absorbed US$277 million of these products in the period under consideration. India was the fourth biggest supplier of these products to the Brazilian market but accounted for just 3.7% of the value of Brazilian imports of the set of goods for which India possessed revealed comparative advantages. 18
The apparent complementarity between the two economies stands in contrast with the low volume of bilateral trade, even with the merchandise with which the countries are competitive. A better understanding of the degree of complementarity between the two economies requires a comparison of the supply and demand structures. 6 THE IMPORT STRUCTURES OF BRAZIL AND INDIA Use of the (previously defined) RCDI enables the identification of the products that are relatively most important on the import rosters of each country thereby also identifying their consumption pattern. Only through analysis of what each country has to offer and what each country wants in terms of its international exchanges can we get a precise idea of the trade potential between the economies. Brazil revealed comparative disadvantages in 1,727 products in the three-year period between 2000 and 2002. Manufactured products from specialized suppliers and R&D-intensive accounted for the majority of imports of these goods. On the other hand, India presented comparative disadvantages in 1,464 products. Outlays with imports of these goods were concentrated in purchases of semi-manufactured products of mineral origin, manufactured products from specialized suppliers and R&D-intensive manufactured products. Table 3 organizes the products according to the intensity of use of production factors: Intensity of Inputs Table 3 Exports of Products each Country has Revealed Comparative Disadvantage by Intensity of Inputs Total Imports Share Brazil India Energy sources Basic agricultural minerals Semi-manufactured labor-intensive of agricultural origin capital-intensive of agricultural origin of mineral origin Manufactured labor-intensive scale-intensive specialized suppliers R&D-intensive excluding aircrafts aircrafts Total (US$ 10 3 ) Source: PC-TAS (Unctad); and CNI staff calculations 6% 6% 7% 9% 6% 6% 17% 4 7% 2% 2% 12% 32% 7 45% 4% 6% 16% 9% 25% 17% 26% 1 2 12% 6% 34,690 23,756 19
The comparative disadvantages structures of Brazil and India are very similar, which means that both countries are very similar in terms of their import rosters. A considerable portion of the comparative disadvantages of both Brazil and India are found in manufactured products from specialized suppliers (25% and 17%, respectively), R&D -intensive manufactured products (2 and 12%, respectively) and semi manufactured products of mineral origin (12% and 32%, respectively). Such structures are not complementary to the comparative advantage structures. In other words, there is little complementarity between the supply and demand structures which accordingly reduces the trade potential between the two countries. Isolated analysis of the comparative advantage structures (supply) tends to the conclusion that the two economies would be complementary. Incorporation of the comparative disadvantage structures (demand) into the analysis shows there to be, indeed, low complementarity, thereby justifying the low trade volume. The similarity of the demand patterns could stimulate growth of intra-industry trade between Brazil and India, such as already takes place in the majority of North-North relationships. However, the blossoming of this type of trade is hampered by the low competitiveness of both countries with many of these products (supply) and by the elevated transport costs. Each country therefore seeks to meet its demand through other countries. In the three-year period between 2000 and 2002, Brazil s main suppliers of R&D-intensive or specialized suppliers manufactured products were the US (38%) and the European Union (37%). In the case of India, the purchases of these goods primarily came from the European Union (34%), the US (17%), Singapore (1) and Japan (9%). In summary, Brazil and India do not compete with each other in the international market, at least in an intense manner. The comparative advantage structures of the two countries are not equal. However, the two economies are also not complementary. Brazilian supply does not combine with Indian demand and the same situation occurs with Indian supply and Brazilian demand. The two countries have similar import demands that may be catered to by other countries that have greater comparative advantages in their production and are more favorably located geographically (and consequently have lower transport costs). 7 GROWTH OPPORTUNITIES FOR BILATERAL TRADE The low complementarity of the supply and demand structures of the two economies does not rule out the possibility of the existence of mutually beneficial exchanges between Brazil and India. Even amongst manufactured products, there are possibilities for expansion or even for the creation of bilateral trade. An exercise whereby the revealed comparative advantages and disadvantages of each country were confronted was employed as a means to identify the opportunities for an increase of bilateral trade. It should be stressed, however, that the following analysis is only partial and is based only on the trade flow in the three years between 2000 and 2002. Other important factors also play a role in determining bilateral trade, such as tariffs and non-tariff barriers, cultural characteristics, the possibilities for production expansion, transport costs, etc. Moreover, the product definition employed here (to six digits of the Harmonized System) may hide significant differences between the products exported by Brazil and those imported by India (and vice-versa) as a result of the level of aggregation. 20
Thus, the proposed selection of products cannot be considered definitive. In the same way, such products cannot be considered the only ones for which sales to India have growth possibilities. The objective of this exercise is merely to provide an initial idea of the trade potential and further studies are therefore required in order to better define that potential. 7.1 BRAZILIAN EXPORTS From the point of view of Brazilian exports, 233 products were identified as having greater growth potential in terms of bilateral exchanges. This selection resulted from the overlap of the group of products for which Brazil has comparative advantages with the group for which India has comparative disadvantages. A point calling attention is that, within the 792 products for which Brazil has a comparative advantage, the set that is highlighted here presents a bias towards products with lower generation of export revenues. Representing 29% of the total set of products for which Brazil is competitive, the subset accounts for just 14% of Brazilian sales of the original product set (US$6.5 billion of the total US$45.6 billion). With the aim of focusing the analysis, we opted to consider just those products that already represent significant volumes in terms of Brazilian exports and Indian imports. In this way, as of the aforementioned overlap, we selected those goods whose export value was greater than or equal to the average value of Brazilian exports. An analogous procedure was performed with Indian imports. The set of goods was accordingly reduced to 62 products (see Appendix A). The new set accounts for less than 8% of the 792 products for which Brazil has revealed comparative advantages and for 1 of the export value of Brazilian exports from these 792 merchandise items in the three years between 2000 and 2002. Brazil was the sixth biggest supplier of this merchandise to India, even though it exported almost 6 of the 62 selected goods in the three-period under consideration. Its main competitors in the Indian market are the European Union, Argentina, Japan, the US, and Singapore. Collectively, these countries accounted for 59% of Indian imports of these products, whereas Brazil had just 7% participation. The position of Argentina is particularly interesting. The country exported just 17 of the selected products but accounted for 12% of Indian imports of this group of goods. However, this is solely due to soy sales. Excluding soy from the import roster lowers Argentina s participation to 17 th in the ranking and Brazil s to 9 th. In terms of value, 68% of Brazilian exports of this group of products to India in the three years between 2000 and 2002 were labor-intensive semi-manufactured agricultural products, primarily soy oil (responsible for 66%). Manufactured products accounted for just 1 of the sales of these selected products to India. Some of the greatest possibilities for the expansion of exports lie in manufactured products from specialized suppliers and semi-manufactured products of mineral origin. Brazil s main competitors in these products are the European Union and Japan, in the case of specialized provides, and Singapore, Australia and, once again, the European Union, in the case of semimanufactured products of mineral origin. Note that they are all countries with considerable advantages in terms of transport costs in comparison with Brazil. 21
Table 4 Products with Greater Trade Growth Potencial by Intensity of Inputs Average Annual Value 2000-02 - US$ 10 3 Intensity of Inputs Number of Products Brazilian Exports Indian Imports Brazilian Exports to India Energy sources 1 18,760 19,248 401 Basic 3 173,398 336,684 23,435 agricultural 2 148,735 292,380 16,200 minerals 1 24,664 44,305 7,235 Semi-manufactured 18 1,489,513 997,415 131,225 labor-intensive of agricultural origin 3 471,833 449,635 114,753 capital-intensive of agricultural origin 2 89,410 57,068 0 of mineral origin 13 928,270 490,712 16,472 Manufactured 40 3,451,339 1,304,532 21,810 labor-intensive 5 780,205 106,541 3,816 scale-intensive 14 673,845 350,705 4,011 specialized suppliers 17 1,847,731 701,799 11,319 R&D-intensive 4 149,558 145,487 2,664 excluding aircrafts 4 149,558 145,487 2,664 aircrafts 0 0 0 0 Total 62 5,133,011 2,657,878 176,871 Source: PC-TAS (Unctad); and CNI staff calculations Engines, their parts and spares, and compressors are standouts amongst manufactured products from specialized suppliers, while gold and nickel are highlights in the case of semi-manufactured products of mineral origin. There is also much room for an increase of Brazilian exports of soy oil, leather, flat rolled iron or steel, and cotton. 7.2 INDIAN EXPORTS The same analysis was applied to Indian exports. We identified the overlap between the merchandise for which India possesses comparative advantages and Brazil revealed comparative disadvantages. From this point of view, 403 products were selected as having the greatest potential for the growth of bilateral exchanges. Although this set includes much more products than that identified from the point of view of Brazilian exports, there is a persisting bias for those products with lower generation of export revenues. The product set hereby identified for India represents 3 of the total number of products for which the country has comparative advantages, but responds for just 2 of total Indian sales of the products for which it has comparative advantages (US$6.9 billion out of a total US$33.4 billion). 22