International Trade Pattern

Arjun GuptaKritika Handoo

Shwetanshu Gupta

International Trade

It refers to exports & imports of goods & services by a firm to a foreign based

buyer (importer) or from a seller (exporter).

Trade is crucial for the very survival of countries that have limited resources

(Singapore or Hong Kong) or that have skewed resources (Caribbean).

Therefore countries with diversified resources (India, US, China, UK) engages in

international trade.

Trade Pattern

Patterns of international trade give an overview of types of products traded & the

countries involved in trading.

Any shift in trade pattern is a result of changes in economic environment & trade

policies of a nation.

Macroeconomic factors in the trading country as well as the overall world economic

environment influence international flow of goods and services.

Thus, trade pattern reveals vital information regarding changes taking place in an

economy.

• The world experienced several major waves of economic development since the

industrial revolution of the late 18th & early 19th centuries & each wave has been

accompanied by an equally major expansion of international trade.

• The initial wave, in the latter half of the 19th century, saw early industrializing

Europe and North America pull away from the rest of the world while expanding

their trade.

• The current & most extensive wave started after the 1980s & resulting in opening up

of some countries, including China and India, on the most rapid process of industrial

catch-up experienced to date.

Trade History

Cont’d

• In the mid-19th century, economic relations were governed by a Europe centric

network of bilateral trade agreements & the international gold standard, nominally

led by Great Britain, which was the dominant economic power at the time.

• After 1945, economic relations were governed for the first time by a multilateral

system of rules, including the General Agreement on Tariffs and Trade (GATT) &

Bretton Woods institutions (IMF & World Bank). These same institutions,

dramatically expanded, also underpin the most recent phase of global economic

development.

• Above graph show the growth of real trade exceeded the real GDP by 2% points.

• This reflects increasing significance of international trade.

The sluggish pace of trade growth in 2013 was

due to a combination of factors, including low

import demand in developed economies &

moderate import growth in developing

economies . On the export side, both developed

& developing economies recorded only small

increase.

Several factors contributed to the weakness of trade & output in 2013,

• Lingering impact of the recession in the European Union

• High unemployment in euro area economies (Germany being a notable exception)

• Crisis in US economy.

The latter contributed to financial volatility in developing economies in the second half of

2013, particularly in certain emerging economies with large current account imbalances.

World Trade

MERCHANDISE EXPORT/IMPORT

SERVICE EXPORT/IMPORT

The world economy has been receiving shocks

at regular intervals since the 2008 crisis.

While, there was recovery in global economy after the 2008 crisis, with developing countries leading the recovery and developed countries like US and Euro Area countries facing unemployment and recessionary trends, a reversal of roles seems to have taken place recently

INDIA AS EMERGING POWERHOUSE

Indian economy opened up in the early 1990s with the introduction of

a series of breakthrough economic reforms which included, inter alia,

opening for international trade & investment, deregulation, tax

reforms & privatization, thus creating a new chapter for India’s

international trade & investments.

World’s 10th largest economy based on nominal GDP in 2013

World’s 3rd largest economy in terms of purchasing power parity

(US$ 5.1 trillion in 2013), after USA and China; expected to cross

US$ 6 trillion by 2016

Cont’d

Favorable demographic profile: 64.8% of the population in the age group of 15

to 59 years.

Stable FOREX reserves, increased at a rate of 7.9% over FY 2005 to FY 2014

Ranks 3rd among the most favoured investment destinations in the world

(behind China & USA) in UNCTAD’s World Investment Prospects 2013-15

JBIC Survey on Overseas Business Operations by Japanese Manufacturing

Companies, India is:

– Second to China as the most promising country for investment in the long

term

– Second to Indonesia as the most promising country for investment in the

medium term

INDIA’S INTERNATIONAL TRADE

INDIA’S EXPORT COMPOSITION

INDIA’S MAJOR TRADING PARTNERS

INDIA’S TRADE BASKET

Growth in exports of engineering goods has been the outcome of diversification to new

markets. Sri Lanka has emerged as a major export destination for engineering goods

during this period. This diversification has helped Indian companies gain resilience in the

face of the on-going slowdown, especially in a number of EU markets.

Similarly, exports of readymade garments were boosted by a growing labour cost

advantage of Indian companies relative to competitors from other emerging markets and

developing economies (EMDEs) like China, Bangladesh, Vietnam and Cambodia some

of which (e.g., Bangladesh and China) are facing shortages of labour and tightening of

domestic labour laws.

The sharp decline in international crude oil prices in recent months seems to have

adversely impacted exports of petroleum products which accounted for about 22 per cent

of total exports in April-September 2014.

Exports of iron ore continued to be constrained by domestic supply-side issues, despite

partial lifting of the ban on mining activity

• The decline in cotton yarn exports was due to fall in international prices as well as lower

demand from China. With China’s new cotton policy in place Chinese mills have access to

cheaper cotton from the domestic market, thereby lowering the international price as well

as global demand. Chinese authorities have recently decided not to issue additional import

quota, thereby guiding domestic textile companies to use more Chinese cotton.

• Higher imports of iron and steel is an indicator of an improving outlook for domestic

construction and manufacturing sectors.

• India’s coal imports reflect domestic supply-side bottlenecks in the wake of legal rulings

on coal block allocation & growing needs of thermal based power plants.

• Rise in imports of electronic goods is due to an inverted duty structure as certain finished

electronic goods carry lower import duty than components & raw materials. Thus domestic

companies prefer to import finished goods rather than manufacturing them domestically.

• In contrast, imports of capital goods (viz., machine tools, machinery, project goods)

remained subdued or declined, with growth in domestic production of capital goods

strengthening.

INDIA’S TRADE IN SERVICES

INCREASING SHARE IN SERVICE EXPORTS

INDIA EMERGING AS GOBAL PLAYER

Direction of trade is referred to as set of a country’s trading partners and their significance in trade.

The countries where goods are exported and their significance on country’s trading pattern is called “

Direction of Exports”

Trade Deficit

Despite the import growth turning

modestly positive India’s trade

deficit narrowed in April-

September 2014 as compared

with the corresponding period of

2013-14 reflecting some

improvement in export

performance

Gains From International Trade

Trade indices are instruments used to measure he benefits derived by a nation

from international trade.

Indices helps in assessing the impact of trade volume or unit value realization on a

country’s gain from trade.

For instance, if there is rise in value of imports without increase in quantity, it

simply implies financial burden for the country.

To assess the gain from trade terms like “ TERMS OF TRADE” is used.

TERMS OF TRADE: PRICE INDEX OF EXPORTS

_________________________

PRICE INDEX OF IMPORTS

India’s Balance of Payments

Balance of payments (BoP) accounts are an accounting record of all monetary

transactions between a country and the rest of the world. These transactions include

payments for the country's exports and imports of goods, services, financial capital,

and financial transfers.

The BOP accounts summarize international transactions for a specific period,

usually a year.

In USD Bn

Issues Pertaining To Indian Economy

Product Diversification along with Market Diversification

While there has been market diversification & changes in India's export basket, not much of demand-based product diversification has taken place. In the top 100, 15 imports of the world India has only five items with a share of 5 per cent & above.

Most of the items in the top 100 world imports include the three Es— electronic, electrical, and engineering items—& some textiles items.

Though gain in shares of engineering goods in recent years is a positive sign, India lags behind many other competing countries.

• Till now our focus was on exporting what we can, now we have to shift to items for which there is world demand & we also have basic competence. A demand-based export basket diversification approach with a perceptible shift to the three Es could lead to greater dividends for India.

Export Infrastructure

Export infrastructure, particularly ports-related infrastructure, which affects trade,

needs immediate attention.

Even the best of our ports do not have state-of-the-art technology as in Singapore

& Shanghai.

Port infrastructure issues include poor road conditions & port connectivity,

congestions, poor cargo handling techniques & equipment, lack of access for

containerized cargo, and frequent EDI server down or maintenance, resulting in

multiple handlings, increased lead time, high transaction costs, & thus loss of

market competitiveness

Issues of Inverted Duty Structure

Inverted duty structure is making Indian manufactured goods uncompetitive

against finished product imports in the domestic market.

Under the inverted duty structure, finished goods are taxed at lower rates than

raw materials or intermediate products which discourage domestic value addition.

Manufactures like aluminum products, capital goods, cement, chemicals,

electronics, paper, steel, textiles & tyres are subject to duty inversion.

One of reasons for duty inversion is the regional/ bilateral Free Trade

Agreements with countries like Japan, South Korea, ASEAN, etc.