Revealed Comparative Advantage: a Study of India and ASEAN Economies

Lal Bahadur Shastri Institute of Management, Delhi

LBSIM Working Paper Series LBSIM/WP/2020/18

Revealed Comparative Advantage: A Study of India and ASEAN economies

Rashmi Ahuja August,2020

LBSIM Working Papers indicate research in progress by the author(s) and are brought out to elicit ideas, comments, insights and to encourage debate. The views expressed in LBSIM Working Papers are those of the author(s) and do not necessarily represent the views of the LBSIM nor its Board of Governors.

WP/August2020/18 LBSIM Working Paper Research Cell Revealed Comparative Advantage: A Study of India and ASEAN economies Rashmi Ahuja Lal Bahadur Shastri Institute of Management Dwarka , Delhi

Abstract The trade relations between India and ASEAN economies have gained more attention among academicians and researchers especially after India initiated ‘Look East Policy’ in 1991. It gained even more importance after its upgraded version of ‘Act East policy’ and also the recent withdrawal of India from Regional Comprehensive Economic Partnership (RCEP). This paper aims to explore India’s comparative advantage with that of nine ASEAN economies in different product groups at SITC one-digit level classification for the period 2009-2018. This empirical analysis uses Balassa (1965) measure of Revealed Comparative Advantage (RCA). Our findings suggest that India has maintained stable comparative advantage in two primary product group and two labour-intensive product groups while Indonesia has maintained comparative advantage in highest number of product groups among all ASEAN economies over the considered period of study. Further, we identified that India could leverage its trade potential in two product groups i.e. Chemical and related products & manufactured Goods to further strengthen its trade relation with ASEAN. Keywords: Revealed Comparative advantage, ASEAN , India JEL classification: F14, F10, F13, B27,F4

Revealed Comparative Advantage: A Study of India and ASEAN economies

1. Introduction International trade has been one of the important elements of globalization during the past few decades. A number of International Trade theories (For instance, Absolute advantage, Comparative advantage by Ricardo, H-O theory, New trade theories etc) came up and tried to explain the reasons for occurrence of trade and the various patterns of international trade that exists among the countries. However, Ricardo’s Comparative advantage is still widely used as one of the important reasons for international trade and predicting the bilateral trade relations between the countries. The comparative advantage relates about how much productive or cost efficient is one country to another. After the pioneer work by Balassa (1965), Revealed comparative advantage (RCA) index became the standard method of calculating the comparative advantage in different economies. Established in 1967, ASEAN has now become one of the growth centres in the world economy. ASEAN is a diverse group consisting of economies at different levels of development such as Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam. If ASEAN were a single market then it represents the third largest market after China and India. Bilateral Relations between India and ASEAN get more strengthened with the formulation of ‘Look East Policy’ initiated in 1991. Further, India has also signed a bilateral free trade agreement (FTA) with ASEAN. India’s bilateral trade with ASEAN stood at $142bn in 2018 which is expected to reach $300 billion by 20251. Of total $142 bn total trade, $97 billion is in the merchandise and around $45 billion is in services. There has also been huge amount of Foreign Direct Investment (FDI) equity inflows into India from ASEAN economies i.e. $91 billion for the period April 2000-June 2009. Further, there has been economic cooperation between ASEAN and India in the form of various Joint ventures, aids and other incentives. After the withdrawal of India from Regional Comprehensive Economic Partnership (RCEP), India’s existing bilateral relationship with ASEAN has gained further attention. ASEAN is one of the important trading partners for India over the past few years. There exists an immense potential to transform India-ASEAN bilateral relationship into a sound economic partnership in the form of a robust trade bloc. Inspite of existence of such potential trade and investment oppourtunies between India and ASEAN, the fact that India has a trade deficit with the ASEAN over the past few years2 needs immediate attention. Against this background, it becomes even more important as well as interesting to examine the trade complementarities between ASEAN and India so that efforts could be made to realize the full trade potential between these two. This paper has twofold objective: Firstly, it examines the

1 As per study by PHD Research Bureau, PHD Chamber of Commerce and Industry. https://www.phdcci.in/wp- content/uploads/2019/11/Indias-Trade-and-Investment-Opportunities-with-ASEAN-economies.pdf , Accessed on 3th April,2020. 2 India’s trade deficit with ASEAN has increased from 9.86 percent in 2012-2013 to 21.85 percent in 2018-2019. https://commerce.gov.in/InnerContent.aspx?Id=74 ,Accessed on 4th April,2020.

structure of comparative advantage in India and nine3 ASEAN economies over the period 2009-2018. Secondly, it does a comparative evaluation of the similarities in the pattern of revealed comparative advantage for these ten economies. The rest of the paper is organized as follows. Section 2 presents a selective review of literature and section 3 talks about the methodology used in the paper. Section 4 discusses the RCA analysis for India and ASEAN economies. Finally, the last section concludes. 2. Selective Review of Literature There have been number of studies in the literature that have employed index of revealed comparative advantage to examine the comparative advantage for various economies. This section presents a select review of such studies in the literature. Balassa (1977) analysed the pattern of comparative advantage for industrial countries for the period 1953-1971. They found the evidence for existence of an association between the size and diversification of exports. Further, their findings suggest that first the export diversification increases with increase in technological development and then decrease with further increase in technological development. Richardson and Zhang (1999) used the Balassa RCA index to examine and interpret comparative advantage in US across time, trading partners and regions at different level of commodity classifications. They found these patterns of comparative advantage for US to be different across different parts of the world. Some of the reasons which they found for these differences are geographical proximity of the trading partners and influence of per-capita income (specially in case of manufacturers). Ferto & Hubbard (2002) examines the competitiveness of Hungarian agriculture in relation to the EU for the period 1992 to 1998 using indices of Revealed comparative advantage. Their findings suggest that Hungary has revealed comparative advantages for eleven of the 22 aggregated product groups: live animals; meat; cereals; vegetables and fruit; sugar; beverages; oilseeds; cork and wood; and animal and vegetable materials, oils and fats. Further, it also suggests that Hungary’s markets are unlikely to become less distorted with membership of the EU, at least in the medium term. Batra & Khan (2005) performed a systematic comparative evaluation of the similarities of the pattern of revealed comparative advantage for India and China for the years 2000 and 2003. They calculated RCA for all the ninety-seven chapters of the Harmonized System (HS - 1996) classification as well as at the more disaggregated six-digit level for both the countries using their exports data. Their analysis suggests that sectors that rank among the top ten according to the value of the index of RCA are not necessarily able to retain their position when ranked according to comparative advantage at the more disaggregated 6-digit level. Further, their findings also suggest that both the countries enjoy comparative advantage in Manufactured goods chiefly classified by material. Akhtar et al (2008) analysed the performance of footwear industry of Pakistan at two-digit as well as four-digit level and compared it with that of China and India. The study period is from 1996 to 2006.Their findings suggest that there has been shift in the comparative

3 Our study has considered nine economies and not considered Philippines due to unavailability of data for the period considered in the study.

advantage in Pakistan from disadvantage to comparative advantage over the study period. Their findings also suggest that India and China have comparative advantage in the foot-wear industry since 1990 but it is decreasing since 2001. Startiene & Remeikiene(2014) examined the competitiveness of the Lithuanian industrial products in global markets using Revealed Comparative Advantage index and Revealed symmetric comparative advantage index during the period of 2007–2011. Their findings from the RCA and RSCA values indicates that the Lithuanian food, chemicals, wood and textile manufactures captures the strongest competitive positions in global markets. Laosutsan et al (2017) explored the economic impacts of trade liberalization and improved connectivity on Thailand exports of 23 vegetable product groups to the ASEAN member states (AMSs) using the Revealed Comparative Advantage and Revealed Symmetric Comparative Advantage indexes for the period 2009-2013. Their results suggest that most ASEAN countries are in either the dog or question mark quadrant of the BCG matrix implying that the exports of vegetables experience a dual-low dilemma in which both the market share and the market growth are low. Veeramani & Anum (2018) analyse Indo-ASEAN Trade patterns for the period from 2012 to 2017.They examined the reasons for the increase in trade deficit between India and ASEAN for the past few years. Their findings suggest that India requires more liberal and appropriate trade policy with ASEAN nations in order to take advantage of India’s comparative advantage in products like Pharmaceuticals, Textiles, Agricultural Products, etc. Further, their study also indicates that RCEP can act as an important contributor to India’s Act East Policy and hence needs to be analysed carefully. From the review of the above studies in the literature, it can be observed that there have not been many extensive studies on the comparative evaluation of comparative advantage of India with respect to ASEAN economies for the period specially after the global financial crisis. Our preliminary study aims to fill this gap by making an attempt to examine the comparative advantage of India with respect to ASEAN economies and examine the potential trade linkages that could be leveraged for mutual benefit of both India and ASEAN. 3. Methodology We have used the RCA index to do a comparative analysis of India with respect to the other Nine ASEAN countries. Balassa(1965) RCA index is defined as a country’s share of world exports of a commodity divided by its share of total world exports. It uses relative exports share of the individual countries to examine the comparative advantage and hence the export potential of any economy. RCA index for a country i and commodity j is calculated as follows:

푋 푖푗⁄ 푋푤푗 푅퐶퐴푖푗 = 푋 or ……………………………………………….. (1) 푖⁄ 푋푤 Further, Equation (1) could be rearranged as follows : -

푋 푖푗⁄ 푋푖 푅퐶퐴푖푗 = 푋 ……………………………………...(2) 푤푗⁄ 푋푤

Where,

푋푖푗 is Country i’s exports in category j , Xwj is world exports in category j ,

푋푖 is the country’s i total exports and

푋푤 is the world total exports. The interpretation of the Revealed Comparative advantage index is straightforward. If the value of RCA index is greater than 1, then the country i has comparative advantage in category j. The RCA index has become the most widely used method to calculate competitive advantage after the pioneer work by Balassa(1965). Apart from that, studies in the literature also states some other advantages of RCA indexes and its modifications: - easy to use method; helps in examining the weakest and strongest sectors of an economy, helps in making better policy decisions. 4. Revealed Comparative Advantage: The analysis of India and ASEAN In this section, we have calculated the Revealed Comparative advantage (RCA) for India and nine ASEAN countries. The ASEAN economies considered for the study are Indonesia, Thailand, Malaysia, Singapore, Myanmar, Brunei, Lao’s Peoples Republic, Vietnam and Cambodia. Philippines was not included in the analysis due to unavailability of its data for the period considered in this study4. The period chosen for the study is 2009-2018. We have performed the individual calculations of RCA index for all the above ten countries at the SITC Revision 4 one-digit level using the export data from UMCOMTRADE. The nine product groups across which we conduct our analysis are: Table 1 : Nine Product groups at SITC one-digit classification SITC Industry Code

0 Food and live animals

1 Beverages and tobacco

2 Crude materials, inedible, except fuels

3 Mineral fuels, lubricants and related materials

4 Animal and vegetable oils, fats and waxes

5 Chemicals and related products, n.e.s.

6 Manufactured goods classified chiefly by material

4 The data for Philippines at SITC One-digit level is only available for year 2017 and 2018 from UMCOMTRADE.

7 Machinery and transport equipment

8 Miscellaneous manufactured articles

9 Commodities and transactions not classified elsewhere in the SITC

Next, we discussed the broad implications and inferences that emerges from our analysis. The mean of RCA’s for the period 2009-2018 is reported in the Table 2 for India and the nine ASEAN economies. From Table 2, it can be observed that India has comparative advantage in six out of nine industries with mean RCA greater than 1. In case of ASEAN economies, Indonesia, Singapore and Lao Peoples Republic exhibit comparative advantage in five out of nine industries with mean RCA greater than one. The average RCA in Myanmar is greater than one for the four industries reflecting their comparative advantage in those industries. Thailand shows comparative advantage in two primary products (Food and live animals & Crude materials, inedible, except fuels) and one capital-intensive product (SITC-7 i.e. Machinery and transport equipment).Cambodia maintained its favourable position only in Miscellaneous manufactured products with an overall mean RCA of 7.11 whereas Brunei maintained its favourable position in Mineral fuels, lubricants and related materials (SITC-3) with an RCA of 7.7 which is much higher than 1 over the study period. Malaysia maintained strong comparative advantage with RCA of 14.14 in Animal and vegetable oils, fats and waxes besides its comparative advantage in Machinery and transport equipment too. However, Vietnam shows comparative advantage in only two industries out of 9 industries. Table 2 : Mean RCA for India and Nine ASEAN Economies for the period 2009-20185

Industry Classification IND VIET MALAY THAI INDO SING MYN CAMB BRUN LAO Food and live animals 1.467 2.427 0.519 2.062 1.070 0.239 4.307 0.533 0.018 2.202 Beverages and tobacco 0.509 0.431 0.610 0.702 0.748 1.093 0.217 0.422 0.032 5.764 Crude materials, inedible, except fuels 1.241 0.841 0.739 1.357 2.572 0.185 2.501 0.762 0.048 6.856 Mineral fuels, lubricants and related materials 1.253 0.523 1.406 0.381 2.151 1.211 2.593 0.0002 7.704 0.601 Animal and vegetable oils, fats and waxes 0.666 0.310 14.14 0.437 22.08 0.165 0.044 0.407 0.001 0.007

5 Mean RCA is for the period 2010-2018 for Indonesia, Myanmar and Laos as the data for 2009 is not available.

Chemicals and related products, n.e.s. 1.111 0.235 0.671 0.872 0.622 1.133 0.016 0.056 0.217 0.331 Manufactured goods classified chiefly by material 2.022 0.840 0.724 0.999 1.051 0.301 0.958 0.207 0.047 2.051 Machinery and transport equipment 0.438 0.856 1.188 1.213 0.357 1.368 0.051 0.169 0.063 0.193 Miscellaneous manufactured articles 1.211 2.602 0.862 0.798 0.927 0.667 1.123 7.111 0.081 0.649 Commodities and transactions not classified elsewhere in the SITC 0.414 0.128 0.127 0.460 0.181 1.756 0.836 0.136 0.029 1.154 Source: Author’s compilation based on UMCOMTRADE database. Further, the average RCA for Beverage and Tobacco is less than one for India and greater than one for Singapore and Lao People’s Republic. This implies that there lies some scope to trade beverage and tobacco between India and ASEAN economies with high RCA. Similarly, there is a scope for trade in machinery and transport equipment between India and Malaysia, Thailand & Singapore based on their revealed comparative advantage indices. It is also evident from Table 2 that Malaysia and Indonesia have very high RCA indices of 14.4 and 22.08 respectively in Animal and vegetable oils, fats and waxes whereas India has low RCA of about 0.666 only. This again implies a possible trade linkage between India and ASEAN nations like Malaysia and Indonesia in SITC-4 category. It is in line with the fact that Indonesia and Malaysia exports to India are substantial in this category for the period 2010-2018(refer Figure 1). Figure 1: Indonesian and Malaysian Exports in Animal and vegetable oils, fats and waxes to India for 2010-2018

6E+09 5E+09 4E+09 3E+09 Indonesia 2E+09 Malaysia 1E+09 0 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source : Author’s compilation based on UMCOMTRADE database. From the individual calculation of RCA for all countries for each of the year from 2009-2018, our findings suggest that India is able to maintain its comparative advantage in 4 out of 9 industries as per SITC one-digit classification and it remained stable over the whole period 2009-2018. Out of these four industries, two are from the group of primary commodities (Food & live animals and Mineral fuels, lubricants &related materials) and other two are labour-intensive products (Manufactured goods classified chiefly by material and miscellaneous manufacturing articles). In Crude materials, inedible except fuels, India maintained its comparative advantage till 2016 after which its RCA index started decreasing implying either its comparative disadvantage or diversification into other product groups. Another interesting and important inference that emerges from our analysis is that India shifted from comparative disadvantage to comparative advantage in Chemicals and related products since 2012 only (See Figure 2) .All ASEAN economies except Singapore has comparative disadvantage in this category. This implies that there exists some scope of possible trade between India and Eight ASEAN economies (other than Singapore) in chemical & related products. It is in line with the fact that total exports from India to these nine ASEAN economies in Chemical and related products has increased from $1.7 bn in 2009 to $4.67 in 2018. Figure 2 : RCA index calculation for India in Chemical & related products for the period 2009-2018.

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Source: Author’s compilation based on UMCOMTRADE database. Our findings from the individual RCA analysis of ASEAN nations reveals that Indonesia maintained its stable comparative advantage in highest number of industries i.e. four throughout the period 2009-2018. Out of these four industries, three are from the group of primary commodities (Crude materials, inedible except fuel; Mineral fuels, lubricants & related materials; Animal & vegetable oils, fats & waxes) and one is from labour intensive products (Manufactured goods classified chiefly by material). Malaysia, Myanmar, Singapore, Laos and Thailand maintained stable comparative advantages in three industries each for the period 2009-2018. Vietnam shows favourable position in Food & Live animals and Miscellaneous manufactured articles by maintaining an RCA greater than 1 throughout our study period. Cambodia exhibits a stable comparative advantage in Miscellaneous manufactured products while Brunei shows the stable comparative advantage in Mineral fuels, lubricants and related materials throughout the period 2009-2018.

From the Figure 3, it can be observed that India has comparative advantage in SITC-0 : Food and Live animals. From the ASEAN nations, four nations i.e. Vietnam, Thailand, Laos peoples Republic and Myanmar also have comparative advantage with RCA greater than 1 in SITC-0 category. Hence, India could face competition in this category from these four nations especially Myanmar with a high average RCA of 4.3. Figure 3 : RCA index in SITC ‘0’ category : Food and Live animals

6 5 4 3 2 1 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

India Vietnam Malaysia Indonesia Thailand Singapore Myanmar Cambodia Brunei Lao

Source : Author’s compilation based on UMCOMTRADE database. Similarly, another industry where India has comparative advantage is SITC-3 i.e. Minerals, fuels, lubricants and related materials with an average RCA of 1.25. Five out of the nine ASEAN economies considered for our study has comparative advantage in SITC-3 like India (see Figure 4). India could face tough competition in SITC-3 from these ASEAN economies especially Brunei with high comparative advantage in SITC-3 with an average RCA of 7.7 which is much higher than 1 . Figure 4 : RCA index in SITC ‘3’ category : Mineral fuels, lubricants and related materials.

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

India Vietnam Malaysia Indonesia Thailand Singapore Myanmar Cambodia Brunei Lao

Source : Author’s compilation based on UMCOMTRADE database. Figure 5: RCA index in SITC ‘6’ category - Manufactured Goods classified chiefly by material

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

India Vietnam Malaysia Indonesia Thailand Singapore Myanmar Cambodia Brunei Lao Source : Author’s compilation based on UMCOMTRADE database. From the figure 5, it is evident that India has a clear advantage in SITC-6 category of manufactured Goods classified by material. India has maintained an RCA greater than one through-out our study period. Although Lao People’s Republic used to have a high comparative advantage with RCA index greater than 1 in this category till 2012 after which RCA index started decreasing. It started increasing again from 0.79 in 2017 to 1.28 in 2018. Thailand has also witnessed volatility in its RCA index during our study period with an RCA just close to 1 in 2018. Similarly, Indonesia started with comparative advantage in 2010 which then shifted into comparative disadvantage till 2013. After 2013, RCA index of Indonesia increases to 1.18 in 2018 implying again its comparative advantage in SITC-6 category. Inspite of all this, India still has a more favourable position in this category with its RCA increasing from 1.94 in 2014 to 2.04 in 2018 and being stable throughout this period. Figure 6 : RCA index in SITC ‘8’ category - Miscellaneous manufactured articles.

10 8 6 4 2 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

India Vietnam Malaysia Indonesia Thailand Singapore Myanmar Cambodia Brunei Lao

Source : Author’s compilation based on UMCOMTRADE database. In SITC-8 category i.e. miscellaneous manufactured articles (Figure 6), Vietnam and Cambodia have strong comparative advantage as compared to India with average RCA value of 2.6 and 7.1 respectively. India could face tough competition in this category from these two ASEAN nations. Besides that, even Myanmar has shifted from comparative disadvantage in 2015 in this category to comparative advantage in 2018. In order to face competition from these three nations in ASEAN market, India needs to strengthen its comparative advantage in this category. 5. Conclusion

In this paper revealed comparative advantage has been analysed at one-digit level of SITC classification for India and nine ASEAN economies for the period 2009-2018. Our individual RCA analysis for each economy reveals that India has maintained stable comparative advantage over the period 2009-2018 in highest number of industries (SITC 0,3,6 and 8) among the ten economies analysed. India is then followed by Indonesia with stable comparative advantage in four industries throughout our study period. Out of the rest eight ASEAN nations, five nations have maintained stable comparative advantage in three product groups and two nations (Brunei & Cambodia) have maintained stable comparative advantage in only one product group over our study period. Vietnam has maintained stable comparative advantage in only one product group over our period of study. It is also examined that India has shifted from comparative disadvantage to comparative advantage in Chemicals & related products after 2012. In this product group, all other ASEAN nations (except Singapore) have comparative disadvantage which implies that there exists some scope for increased trade in this product group. Another possible trade linkage that could be leveraged by ASEAN economies is in product group 1 i.e. Beverages and Tobacco where India has comparative disadvantage over the period 2009-2018 whereas Lao People’s Republic has strong comparative advantage with an average RCA of 5.76. Besides this, we also identified the product groups where the structure of comparative advantage in India is similar to that of some ASEAN economies and hence India could face tough competition from those nations. For instance, Malaysia and Indonesia with a very high RCA indices of 14.4 and 22.08 respectively in Animal and vegetable oils, fats and waxes points to the possibility of possible trade linkage with India having an average RCA of 0.666 only. Further, another interesting finding that emerges from our analysis is that India can leverage its trade potential in Product group 6 in increasing its exports to ASEAN economies. Only Indonesia in ASEAN economies has comparative advantage in product group 6 i.e. Manufactured goods classified chiefly by material. It forms a part of labour-intensive products and India being a labour-abundant economy could leverage that and efforts could be made in this direction to increase its comparative advantage more in this product group. References Akhtar,N. ,Nadia, Z. & Ghani, E. (2008). Changing Revealed Comparative Advantage: A Case Study of Footwear Industry of Pakistan, The Pakistan Development Review, 47(4) , 695–709 Balassa, B. (1965). Trade Liberalization and Revealed Comparative Advantage, The Manchester School of Economic and Socal Studies, No. 33, 99-123. Balassa, Bela (1977). Revealed Comparative Advantage Revisited: An Analysis of Relative Export Shares of the Industrial Countries, 1953-1971, The Manchester School of Economic & Social Studies, 1977, 45(4), 327-44 . Batra,A. & Khan,Z. (2005). Revealed Comparative advantages : An analysis for India and China , Indian Council for research on international economic relations(ICRIER) Working Paper No.168.

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