IEAssignmentAnalysisofTradePatternofSAFTA

KumarGaurav

RollNo‐24

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TableofContentsIntroduction .........................................................................................................................................................3

MeasuringRevealedComparativeAdvantage ..................................................................................................3

RevealedComparativeAdvantage‐TheAnalysis .............................................................................................4

RankingofSectorsBasedonRCA ..................................................................................................................4

MeasuringRevealedComparativeDisadvantage .............................................................................................5

CalculationofdRCA.............................................................................................................................................6

Analysis:OpportunityandThreats.....................................................................................................................7

TradeConformityIndex ......................................................................................................................................9

OpennessIndex ...................................................................................................................................................9

Constantmarketshare......................................................................................................................................10

ShiftShareApproach ........................................................................................................................................11

References .........................................................................................................................................................13

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IntroductionI have done the analysis of trade of SAFTA. I have taken the data from WITS from year 2002-

2006. I have done the RCA, RCDA and dRCA analysis to find the competitive advantage of

SAFTA. After that I have found the TCI of SAFTA with India. For finding the openness of

SAFTA openness ratio is calculated. Constant Market Share analysis is done to know the

increase of SAFTA in all regions of the world. Shift Share approach helps us to find the best

products to export from SAFTA on the basis of last 3 years of data. All the calculations have

been done in excel sheet which can be mailed to you, if required.

MeasuringRevealedComparativeAdvantage

The concept of revealed comparative advantage (Balassa 1965, 1977, 1979, 1986) pertains to the

relative trade performance of individual countries in particular commodities. On the assumption

that the commodity pattern of trade reflects the inter-country differences in relative costs as well

as in non-price factors, this is assumed to “reveal” the comparative advantage of the trading

countries. The factors that contribute to movements in RCA are economic: structural change,

improved world demand and trade specialization.

In this report I have used Balassa’s (1965) measure of relative export performance by country

and industry/commodity, defined as a country’s share of world exports of a commodity divided

by its share of total world exports. The index for country i commodity j is calculated as follows:

RCAij = (Xij/Xwj)/(Xi/Xw)

Where

Xij = ith country’s export of commodity j

Xwj = world exports of commodity j

Xi = total exports of country i

Xw = total world exports

The RCA is measured using post-trade data. The index of revealed comparative advantage

(RCAij) has a relatively simple interpretation. If it takes a value greater than unity, the country

has a revealed comparative advantage in that product.

The advantage of using the comparative advantage index is that it considers the intrinsic

advantage of a particular export commodity and is consistent with changes in an economy’s

relative factor endowment and productivity. The disadvantage, however, is that it cannot

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distinguish improvements in factor endowments and pursuit of appropriate trade policies by a

country.

RevealedComparativeAdvantage­TheAnalysisIn this report Revealed Comparative Advantage (RCA) analysis has been undertaken at the

sector level for the country SAFTA. RCA indices have been calculated for SAFTA in all the 97

chapters of the Harmonized System (HS -1996) classification for the year 2002 to 2006. The

index of RCA is calculated using data on exports from UN COMTRADE

RankingofSectorsBasedonRCAAt the HS 2-digit level SAFTA holds comparative advantage in 38 sectors. SAFTA enjoys

maximum comparative advantage in HS-63 i.e. Other made up textile articles; set. The value of

the index of RCA for this sector is 12.37 for year 2004. Second product is Other vegetable textile

fibres; pap products with RCA of 10.99. We have ranked all the sectors which have comparative

advantage on the basis of RCA-2004.

Product Product Name RCA(2003) RCA(2004) 63 Other made up textile articles; set 13.27 12.37 53 Other vegetable textile fibres; pap 9.00 10.99 50 Silk. 12.11 10.48 52 Cotton. 11.20 10.10 13 Lac; gums, resins & other vegetable 8.12 9.20 09 Coffee, tea, matï and spices. 10.11 8.73 57 Carpets and other textile floor co 8.08 7.71 71 Natural/cultured pearls, prec stone 6.78 7.51 26 Ores, slag and ash. 3.82 6.55 62 Art of apparel & clothing access, n 6.64 6.16 14 Vegetable plaiting materials; veget 7.03 6.15 61 Art of apparel & clothing access, 6.13 6.15 10 Cereals 4.47 4.71 42 Articles of leather; saddlery/harne 4.93 4.59 41 Raw hides and skins (other than fu 3.59 3.68 67 Prepr feathers & down; arti flower; 3.63 3.60 03 Fish & crustacean, mollusc & other 3.42 3.05 25 Salt; sulphur; earth & ston; plaste 2.73 2.97 54 Man-made filaments. 4.25 2.83 55 Man-made staple fibres. 3.08 2.78 97 Works of art, collectors' pieces an 4.28 2.78 58 Special woven fab; tufted tex fab; 1.77 2.16

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23 Residues & waste from the food indu 2.34 1.99 65 Headgear and parts thereof. 1.48 1.91 08 Edible fruit and nuts; peel of citr 1.52 1.72 64 Footwear, gaiters and the like; par 1.59 1.54 74 Copper and articles thereof. 1.54 1.41 36 Explosives; pyrotechnic prod; match 1.50 1.39 72 Iron and steel. 1.37 1.36 68 Art of stone, plaster, cement, asbe 1.68 1.35 24 Tobacco and manufactured tobacco su 1.13 1.27 73 Articles of iron or steel. 1.14 1.25 07 Edible vegetables and certain roots 1.27 1.15 60 Knitted or crocheted fabrics. 0.77 1.15 29 Organic chemicals. 1.12 1.12 12 Oil seed, oleagi fruits; miscell gr 1.34 1.10 11 Prod.mill.indust; malt; starches; 1.86 1.08 32 Tanning/dyeing extract; tannins & 1.26 1.05

MeasuringRevealedComparativeDisadvantage

The concept of revealed comparative disadvantage pertains to the relative trade performance of

individual countries in particular commodities. On the assumption that the commodity pattern of

trade reflects the inter-country differences in relative costs as well as in non-price factors, this is

assumed to “reveal” the comparative advantage of the trading countries. The factors that

contribute to movements in RCDA are economic: structural change, improved world demand

and trade specialization.

In this report I have done measure of relative import performance by country and

industry/commodity, defined as a country’s share of world imports of a commodity divided by

its share of total world imports. The index for country i commodity j is calculated as follows:

RCDAij = (Xij/Xwj)/(Xi/Xw)

Where

Xij = ith country’s import of commodity j

Xwj = world import of commodity j

Xi = total import of country i

Xw = total world import

The RCDA is measured using post-trade data. The index of revealed comparative disadvantage

(RCDAij) has a relatively simple interpretation. If it takes a value greater than unity, the country

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has a revealed comparative disadvantage in that product. So the country will be importing that

particular product.

CalculationofdRCAdRCA is difference in the RCA of this year and last year. We have calculated the dRCA from

2003 to 2004. For example for dRCA-2004, we have subtracted RCA-2003 from RCA-2004.

dRCA = RCA(i)-RCA(i-1)

dRCA>0 signifies that the comparative advantage in that particular country is increasing year by

year. It means that company is gaining its advantage in terms of labor or capital. Thus company

is gaining in terms of competitive advantage.

Product Product Name dRCA 26 Ores, slag and ash. 2.72 53 Other vegetable textile fibres; pap 1.98 13 Lac; gums, resins & other vegetable 1.08 71 Natural/cultured pearls, prec stone 0.73 65 Headgear and parts thereof. 0.43 58 Special woven fab; tufted tex fab; 0.39 60 Knitted or crocheted fabrics. 0.38 10 Cereals 0.24 25 Salt; sulphur; earth & ston; plaste 0.24 89 Ships, boats and floating structure 0.20 08 Edible fruit and nuts; peel of citr 0.20 27 Mineral fuels, oils & product of th 0.17 94 Furniture; bedding, mattress, matt 0.16 24 Tobacco and manufactured tobacco su 0.14 28 Inorgn chem; compds of prec mtl, r 0.13 73 Articles of iron or steel. 0.11 39 Plastics and articles thereof. 0.09 41 Raw hides and skins (other than fu 0.09 04 Dairy prod; birds' eggs; natural ho 0.08 35 Albuminoidal subs; modified starche 0.08 16 Prep of meat, fish or crustaceans, 0.08 78 Lead and articles thereof. 0.07 15 Animal/veg fats & oils & their clea 0.06 87 Vehicles o/t railw/tramw roll-stock 0.04 76 Aluminium and articles thereof. 0.03 37 Photographic or cinematographic goo 0.02 45 Cork and articles of cork. 0.02 61 Art of apparel & clothing access, 0.01

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51 Wool, fine/coarse animal hair, hors 0.01 48 Paper & paperboard; art of paper pu 0.01 66 Umbrellas, walking-sticks, seat-sti 0.01 30 Pharmaceutical products. 0.01 84 Nuclear reactors, boilers, mchy & m 0.01 44 Wood and articles of wood; wood ch 0.01

For the above sectors dRCA is greater than one. They are not ranked in any order.

Analysis:OpportunityandThreats

Further analysis can be done by using the following conditions. We can look for those sectors

which have opportunities and threats in the coming year. We will calculate opportunities and

threats for the year 2006.

RCA>1 and RCDA<1 Static Opportunity Set

RCA>1 and dRCA>0 Dynamic Opportunity Set

RCDA>1 and RCA<1 Static Threat Set

RCDA>1 and dRCA>0 Dynamic Threat Set

RCA >1 and dRCA>0: The items which satisfy this criterion are the ones which have an

increasing potential to export for the country. While signing a trade agreement a country can

ensure that tariffs from its trading partners are not imposed on export of the commodity as RCA

for exporting country is increasing. For SAFTA we have following product which fulfill above

condition in 2004.

Product Product Name RCA(2003) RCA(2004) dRCA 08 Edible fruit and nuts; peel of citr 1.52 1.72 0.20 10 Cereals 4.47 4.71 0.24 13 Lac; gums, resins & other

vegetable 8.12 9.20 1.08

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24 Tobacco and manufactured tobacco su

1.13 1.27 0.14

25 Salt; sulphur; earth & ston; plaste 2.73 2.97 0.24 26 Ores, slag and ash. 3.82 6.55 2.72 29 Organic chemicals. 1.12 1.12 0.00 41 Raw hides and skins (other than

fu 3.59 3.68 0.09

53 Other vegetable textile fibres; pap

9.00 10.99 1.98

58 Special woven fab; tufted tex fab; 1.77 2.16 0.39 60 Knitted or crocheted fabrics. 0.77 1.15 0.38 61 Art of apparel & clothing access, 6.13 6.15 0.01 65 Headgear and parts thereof. 1.48 1.91 0.43 71 Natural/cultured pearls, prec

stone 6.78 7.51 0.73

73 Articles of iron or steel. 1.14 1.25 0.11

RCDA > 1 and dRCA < 0 : The items which lie in the dynamic threat set is the ones for which

there is a reduction in competitiveness of the product coupled with an already existing

disadvantage over the years. These items pose a threat as a country with a high RCA in that

product can flood the domestic market. While signing a trade agreement a country can ensure

that these items are kept in the sensitive list. For SAFTA we have following product which fulfill

above condition in 2006.

Product Product Name RCA(2003) RCA(2004) dRCA 03 Fish & crustacean, mollusc &

other 3.42 3.05 -0.37

07 Edible vegetables and certain roots

1.27 1.15 -0.12

09 Coffee, tea, matï and spices. 10.11 8.73 -1.37 11 Prod.mill.indust; malt; starches; 1.86 1.08 -0.78 12 Oil seed, oleagi fruits; miscell gr 1.34 1.10 -0.25 14 Vegetable plaiting materials;

veget 7.03 6.15 -0.88

23 Residues & waste from the food indu

2.34 1.99 -0.35

32 Tanning/dyeing extract; tannins &

1.26 1.05 -0.21

36 Explosives; pyrotechnic prod; match

1.50 1.39 -0.11

42 Articles of leather; saddlery/harne

4.93 4.59 -0.34

50 Silk. 12.11 10.48 -1.63

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52 Cotton. 11.20 10.10 -1.10 54 Man-made filaments. 4.25 2.83 -1.42 55 Man-made staple fibres. 3.08 2.78 -0.30 57 Carpets and other textile floor co 8.08 7.71 -0.38 62 Art of apparel & clothing access,

n 6.64 6.16 -0.49

63 Other made up textile articles; set 13.27 12.37 -0.90 64 Footwear, gaiters and the like;

par 1.59 1.54 -0.05

67 Prepr feathers & down; arti flower;

3.63 3.60 -0.03

68 Art of stone, plaster, cement, asbe

1.68 1.35 -0.32

72 Iron and steel. 1.37 1.36 -0.01 74 Copper and articles thereof. 1.54 1.41 -0.13 97 Works of art, collectors' pieces an 4.28 2.78 -1.50

TradeConformityIndexTrade conformity index or TCI gives the conformance of trade between two countries i.e. it

enables us to find if a country has a demand for products offered by another country.

For SAFTA values of TCI for the years 2003-2004 are given as below:

Year TCI 2003 0.54 2004 0.64

From the data above it is clear that the trade conformity between India and SAFTA has increased

from 2003-2004 i.e. the potential of trade between SAFTA and India is increasing.

OpennessIndexOpenness index or trade dependence index is the value of total trade (imports and exports as a

percentage of GDP).

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Openness of an economy is determined by a large number of factors, most importantly by trade

restrictions like tariffs, nontariff barriers, foreign exchange regimes, non-trade policies and the

structure of national economies.

The share of trade transactions in a country’s value added is a result of all these factors. It is

possible that an open and liberalized economy has a relatively small openness index, if a large

proportion of its GDP is created by non-traded activities supported by the domestic market. Low

trade dependence may indicate high trade restrictions either in that country or towards that

country in overseas markets, or both.

The openness indices for SAFTA are as follows:

In US $ Billion

Year Total Trade GDP Openness index

2003 194598001.9 744363000 0.261428902

ConstantmarketshareConstant Market Share (CMS) analysis is a popular tool for analyzing changes in exports of a

country. It helps us to estimate the change in competitiveness of the export basket in an

importing country.

The intrinsic norm of this analysis is that a country's export share in a given market should

remain unchanged over time. The difference between the actual export growth from a member

country into a given market and the unchanging export share implied by the ‘constant-market

share norm’ is attributed to the following three factors:

The model can be divided into two parts

1. Scale effect into three parts:

• Increase in export due to growth in world exports

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• Increase in export due to the concentration in commodities whose exports are expanding

faster than total world export (as against those whose exports are falling/ expanding

slower than total world export).

• Increase in export due to concentration in zones or regions of the world whose imports are

rising faster than world average (as against those whose imports are falling/ expanding

slowly).

2. The competitiveness effect is the increase in export that cannot be accounted for by the

scale effect. The unexplained residual indicates the difference between country A’s actual

exports increase to country B and the hypothetical increase if country A maintained its share

of exports of each commodity group in country B.

ShiftShareApproachShift-share analysis requires measurements on a variable of interest (an exported product) for

each member of the group (exported items) at the beginning and end of a specified period of

analysis.

The growth rate (GR) of the item (i) can be measured as:

Now the growth rate of all items (k) is the ratio of total value of terminal time periods to the total

value at the initial time period:

where i = 1---------n.

The expected value of the growth is the product of growth all items and the value at the initial

time period.

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The expected change of the value of a growth variable for a particular item in a given time period

is the difference between the expected value and the actual value for the item at the end of the

initial time period. If E(ΔVi) is the expected change, then

The difference between the actual change and the expected change is the net shift. So, the Net

Shift is :

Now the sum of positive net shifts or the sum of negative net shifts S represents the total absolute

net shift

• The relative gain or loss in the value of a growth variable for a particular product i, in a

given time period is defined as the percentage net shift (which represents market gain or

loss) Pi

Where

On the basis of above we have calculated the percentage net shift for SAFTA. Top 10 products in

that list are given by:

Product Product Name Ni/S*100 62 Art of apparel &

clothing access, n 25.35230177

27 Mineral fuels, oils & product of th

22.49032369

26 Ores, slag and ash. 19.70335828 52 Cotton. 14.06766996 63 Other made up textile

articles; set 10.46641372

61 Art of apparel & clothing access,

9.483586246

72 Iron and steel. 7.499529688 54 Man-made filaments. 7.372731748 85 Electrical mchy equip

parts thereof 4.73338238

71 Natural/cultured pearls, prec stone

4.717361861

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Thus from Shift Share we can find the growth rate of all the 97 products and out of those

products we have seen that export of these products is high.

References1. World Integrated Trade Solutions

2. http://www.econstats.com/weo/CCHE.htm