August 2013
August 2013
From the desk of the editor Dear Readers,
Team Trade Winds is proud to bring to you the latest edition of IIFT’s monthly trade digest. Recently, India took over US as the largest buyer of Crude oil from Nigeria. The issue covers an in depth
story
on
Crude
oil
and
recent
developments seen in India. In our constant endeavour to provide you a diverse knowledge, we have come up with a brief report on Steel sector in India.
Inside the Issue Crude oil story in India:
Page 2
Africa & India: A Civil Union
Page 19
Sector Report: Steel Industry in India
Page 6
Free Trade Zones
Page 23
Company Analysis: Trafigura
Page 10
China: Emergence in Global
Commodity Market
Page 13
Knowledge Corner: Trade Barriers
Page 16
US-EU Trade Relations: Can they rise above the disputes
Page 25
Bridging India-China Trade Deficit
Page 30
Yours Sincerely,
“No Nation was ever ruined by Trade” - Benjamin Franklin
Team Trade Winds
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August 2013
The Crude Oil Story in India -
by Samarth Nagpal MBA-IB (2013-15)
The oil and gas sector plays a very important role in the economic and political scenario of the globe. The high economic growth in the past few years and increasing industrialization coupled with a burgeoning population have created a lot of concern for India’s energy scenario. India has 0.5% of the oil and gas resources of the world and 15% of the world’s population. This makes India heavily dependent on the import of the crude oil and natural gas. India’s crude oil production has not shown significant growth in the last 10 or more years whereas its refining capacity has grown by more than 20% over the last 5 years. Oil consumption is growing at approximately 4.1% per year and natural gas consumption at 68% per year. Crude Oil Import Data
India, as a developing nation is heavily dependent on crude oil imports, which can be shown by the amount of crude oil imported every year by the country. India, which relies on import for 79 per cent of its oil needs, bought a total of 182.5 million tonnes crude in 2012-13. It had in the previous fiscal imported 171.7 million tonnes of crude oil, up from 163.4 million tonnes in 2010-11 and 159.2 million tonnes of 2009-10.
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August 2013 Indian refiners imported 171.41 million tonnes of crude oil in 2011-12. Of this, 32.63 million tonnes came from Saudi Arabia, 24.51 million tonnes from Iraq, 17.67 million tonnes from Kuwait, and 15.79 million tonnes from the U.A.E. India imported 2,71,200 oil barrels per day (bpd) from Iran between April and February 2012-13, which was below the government’s target of 3,10,000 bpd for the fiscal year which ended on March 31. Oil imports from Iran have decreased to around 7.3 per cent in the period from last April to February, as compared to 11 per cent in the previous year.
Present Status Iran has been a major oil supplier to India. But due to international pressure, India has cut its Iranian oil imports by more than 40 percent in the first five months of the year, replacing the crude with shipments from Venezuela, Iraq and Oman, and pushing Iran down four places to seventh among its suppliers. India's imports of Iranian oil for May dropped 12.2 percent from a year ago to 213,500 barrels per day (bpd).Hindustan Petroleum Corp and Mangalore Refinery and Petrochemicals, halted their Iranian oil purchases in April as it became difficult to insure refineries, processing oil from the OPEC member, making the largest contribution to India's cuts this year. India imported nearly 80 percent more oil from Latin America in the January to May period as it cut its dependence on Iran. The region accounted for about a fifth of India's overall imports, up from 12 percent in the same period a year ago. India has set its ambitious target to reduce its crude oil imports to 50% by 2020 and 75% by 2025 and eventually achieve selfsufficiency and Energy Independence for India by 2030.This is possible as as only 73 bn barrels out of 205 bn barrels of prognosticated hydrocarbon resources have been established so far, leaving 133 bn barrels to be unlocked. A number of steps have been taken to boost domestic exploration and production of hydrocarbons. These include ministry allowing exploration in Mining Lease (ML) areas even after completion of exploration period to attract significant investments and add substantial value of oil & gas production in ML areas. Crude oil prices have risen dramatically over the Page 3
August 2013 last few years, driven by strong global demand, limited spare oil production capacity, and continuing political instability in certain oil producing regions. Since the price of crude oil has the most significant long-term impact on the average price of fuels, contributing to almost 50 percent of the retail price, it is not surprising to see average fuel prices significantly higher as well.
Production(ONGC)
Production(OIL India)
30
5 29 28.53
27
28.27 28.002
28
28
26.286
26.16 25.045
24 23
4
3.5 3.55
3.5
27.37
26 25
4.3
4.5 production in mn tonnes
mn metric tonnes
29
25.456
3.73
3.91
4.16 4.2 3.92 4 4.06
3
2.5 2
1.5 1
0.5 0
0
(Data post 2012 is estimated production)
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August 2013 Domestic crude oil production-India's crude-oil production fell 2.4% on year in May .Crude oil output fell to 3.17 million metric tons, or 749,550 barrels a day. The government's target was 3.20 million tons. Oil output from state-run Oil & Natural Gas Corp.fell 0.9% on year to 1.89 million tons-446,893 barrels a day--as high water content and a power shutdown at fields in Gujarat took their toll. Output at its main Mumbai High offshore field was lower than expected. Overall, the Indian economy is working towards self -sufficiency and players like ONGC and OIL are working towards achieving this task as can be shown by their production patterns. Sources:PIB
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August 2013
Sector Report: Steel Industry in India -
By Ashish Jain MBA-IB (2013-15)
The Indian Steel industry is more than 100 years old and came into its existing shape in 1991 after liberalization of Indian economy. Increased demand from sectors such as real estate, infrastructure, and automobile has made India an important steel market in the world.
―India is the 4th largest steel producer in the world‖ Current Scenario In the quarter ended June 2013, steel consumption in the country grew at only 0.2% y-o-y to 17.797 million tons. Currently, India is the 4th largest steel producer in the world. Import of steel for the quarter also decreased by 34.1% y-o-y to 1.32 million tons while export registered a growth of 12.7% and stood at 1.12 million tons. The sluggish growth in consumption can be mainly attributed to market conditions of infrastructure, automobiles and white and capital goods. The steel production has gone up from 53.5 million tons in 2008 to 73.6 million tons in 2012.However; Steel trade has remained more or less constant over the years.
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August 2013
Regulatory Environment National Steel Policy 2005: Under this policy, the government aims to achieve a 7% growth rate till 2019-20 to increase steel production in country to 100 million tons. The policy emphasizes to increase current production capacity, to reduce the procedural and bureaucratic delays, and to improve infrastructure situation in the country. Tax Structure in India
Key Developments ArcelorMittal and POSCO have dropped their plan to open up steel plants in India. ArcelorMittal has scrapped its 12 million tons Orissa project while POSCO has abandoned 6 million tons plant in Karnataka. Steel trading and role of International Traders in India International trading of steel is limited in India. There are a lot of small traders present in the country who are into the business for the long time and trade small quantities of steel in India. All the big manufacturers such as SAIL, Tata Steel, and JSW Steel sell their products through their agents spread all across the country to either traders or end consumers (Wire rod manufactures, construction companies, Cold Rolling mills etc.)
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August 2013 Key players and their production capacities
International Traders The key international traders present in Indian steel markets are: a) Stemcor (Global) b) Duferco (Global) c) Nippon Steel Trading (Japan) d) LG International (Korea) e) ThyssenKrupp (Germany) f) Marubeni Itochu (Japan) g) JFE Steel (Japan) None of these trader trades more than 1 million tonnes per year of steel in India. Most of Japanese and Korean companies mentioned above have their sales office in India which acts as a bridge between local Indian buyers and these manufacturing companies in Japan and Korea. These traders majorly supplies Hot Rolled Coils to auto manufacturers in India. Challenges and Opportunities Challenges: a) High Cost of Capital: Steel companies in India are charged an interest rate of around 14% compared with 2.4% in Japan and 6.4% in USA. b) Low Productivity: The advantage of cheap labour in India is offset by low productivity of Indian workers. For example, productivity at SAIL hovers around 75-100 tons per man per year compared with 1,000-1,500 tons per man per year for Japanese and Korean companies such as Nippon Steel and POSCO. c) High cost of raw materials: High cost of electricity, freight cost and other input material (coal etc.) dampens the industry. Page 8
August 2013 d) Quality of raw material: India does not possess high amount of coking coal, needed to produce steel. It hinders the growth of steel industry in the country. e) Poor infrastructure: Railways, roadways and ports in the country are not of good standard making logistics and transportation of the raw material and finished products difficult. f) Other factors: Stagnating demand, domestic oversupply, and falling prices of steel throughout the world in last few years have decreased the growth prospects of steel industry of the country. Opportunities: There is an immense scope to increase steel consumption in the country. Steel is the basic ingredient to develop any industry or infrastructure. To become a global power, India needs to improve its infrastructure capabilities and industrial output and it will result in more steel consumption. Sources: CCI, Wall Street
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August 2013
Sector Report: Steel Industry in India -
By Aishwarya Raj MBA-IB (2013-15)
About the company Trafigura is a leading international name in multi-commodity tradingand logistics setup in 1993. It mainly deals in oil and key raw materials which it sources, stores, blends and delivers to clients all over the world. It handles over two million barrels of crude oil and oil products every day and over nine million tons of concentrates annually. The company aims to balance supply and demand for raw materials that are essential for the smooth working of the global economy. It is fully privately held company which ranks third in oil trading and raw materials and second in industrial metals worldwide. Origin Two of the biggest commodities (Trafigura and Glencore) companies of the world today owe their origin to same company founded by Mark Rich in 1974 namely Marc Rich & Co, which was a pure- play trader with focus on oil. Trafigura was founded as a trading house in 1993 after a group of senior traders, including its current chief executive Claude Dauphin, left Marc Rich & Co. At present Dauphin owns ―less than 20 per cent‖ of the trading house while ―over 500 senior employees‖ control the rest. Global outreach Trafigura is headquartered in Switzerland, and has 81 offices in 56 countries worldwide. It believes in encashing the local knowledge and expertise of the people and 90% of its 8445 employees are nationals of the country they work in. This local knowledge encourages and enables employees to predict and address variations in worldwide supply and demand. Elements of business model Independent: Not tied to any major producer. Employee empowerment: Employees are empowered to take initiative and excel in their chosen environments. Personal interest: The people who work in this business are also its owners. That makes it personal. Logistics: Investments across the commodity supply chain to bring products to market efficiently and cost-effectively. Page 10
August 2013 Long-term business model: Building partnerships with host governments, project partners and local communities that deliver lasting, shared value. Lines of Business Oil trading
Petroleum
Crude, Gasoline, Fuel oil, Naphtha, LPG, LNG, Biodiesel, Ethanol
Non-ferrous
Shipping
bulk trading
Chartering
Concentrates and ores, refined metals, coal, iron ore
Logistics
Wet and Dry freight
Warehousing and transportation
Financials Revenue growth: Trafigura’s revenue peaked in the year 2011.
Global revenue over the years 140
USD(Billions)
120 100 80 60 40 20 0 19931994199519961997199819992000200120022003200420052006200720082009201020112012
Years
Profitability: The Company made profits of $991.9m on a turnover of $120.4 bn (2012), down 11 per cent from last year’s record $1.11bn. Its profit margin for trading compares favorably as compared to Vitol and Cargill but falls behind that of Glencore. Joint ventures & subsidiaries All the joint ventures and subsidiaries have close linkage with the core business of trading in commodities and raw materials. Puma Energy: The energy powerhouse acquired in the year 2000. Page 11
August 2013 Galena Asset Management: The finance arm of the company set up in 2003, with focus on financing commodities trade. Impala: A global warehousing and logistic company specializing in transportation, processing and storage of metals and bulk commodities. DT Group: The joint venture between TrafiguraPte Ltd and Cochan Limited providing logistic, infrastructure, investment and trading services in Africa and Asia. Facts & figures about Trafigura (2012)
102.8 million tonnes of oil and petroleum products were bought. 34.9 million metric tonnes of non-ferrous and bulk were traded. 46 tank farms owned by Puma Energy all over the world. 24.5 million m3is the projected throughput volume at Puma Energy. 2.1 million barrels of physical oil are transported every day. USD 4 Billion is the book value of the total industrial assets. 23 million metric tonnes of dry freight shipped. 55 million metric tonnes weight freight derivatives traded. Recent key developments Rosneft deal: Trafigura signed a supply-financing deal with Russian oil company OAO Rosneft to lend it 1.5 USD billion, as a major long term-oil buyer. The deal is a strategic move to expand operations in Russia and will put Trafigura at par with the other trading biggies, Glencore and Vitol. Copper mines sell-off: Trafigura’s Mining Group announced sale of copper producing mines Compañia Minera Condestable (CMC), SA. It has entered into an agreement to sell its 98.68% stake in CMC to Southern Peaks Mining LP, a Peru based private company. JV with SIPGL Logistics: North European Marine Services (NEMS: a Trafigura subsidiary) and China's SIPGL Logistics Co. Ltd. entered into a joint venture to create a metals logistics network. The target is better connectivity of mainland China with the world's metals markets. Possible venture: Trafigura is in talks with Brazilian billionaire Eike Batista about buying a controlling stake in his most valuable asset, the MMX SA mining company. Giving competition to it in the bidding process is Glencore Xstrata which also has had separate talks with MMX. The outcome is yet to be seen. Sources: Reuters
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August 2013
China Emergence in Global Commodity markets -
By Bharat S Jain MBA-IB (2013-15)
China is the manufacturing centre of the world today and the double digit average growth of more than 10% during the past decade has made sure that its economy has tripled in the last 13 years. It is the second largest economy after US with around $8 trillion worth of GDP. It has also become the world’s biggest trading nation ($3.87 tn) in goods by overtaking US ($3.82 tn).For so many countries around the world, China is becoming rapidly the most important bilateral trade partner. China is a manufacturing hub because of the cheap labour available and the large volumes of production it undergoes; making the task of other manufacturers of different nations very difficult to compete on the price front.
To achieve all these numbers and become the world leader in terms of trade in goods, it needs a lot of raw materials and resources. Hence, with this incredible expansion, China began to import commodities at an incredible pace. In 2000, the country imported only 70 million tons of iron ore; today, it’s more than 10 times that amount, at 763 million tons. Copper imports increased dramatically too, growing from 1.6 million tons in 2000 to more than 4 million tons per year today, according to BCA Research data. And when it comes to oil demand, 17 years ago, China was a net exporter.
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August 2013 ―China is the second largest importer of crude oil” China is a large consumer of a broad range of primary commodities. As a percent of global production, China’s consumption during 2010 accounted for about 20 percent of nonrenewable energy resources, 23 percent of major agricultural crops, and 40 percent of base metals.
That’s why it is widely accepted that the Asian giant spurred higher commodity prices in the past decade. And if the country was the force behind the boom, then the assumption is that China’s lower, but still healthy growth will be a drag on commodity prices as China is one of the largest consumers of metals, industrial raw materials and agricommodities globally. So any cooling in demand from China would exert a downward pressure on commodity prices. The consensus is that China is headed for slower economic growth than it experienced from 2001 to 2010, when its annual rate of expansion ranged from 8.3% to 14.2% and reached double digits six times, according to the World Bank. Even IMF has reduced its estimates of the growth to 7.75% from 8% of China for 2013. The latest disappointing quarterly GDP growth numbers from China lend credence to fears of a slowdown in the world’s second largest economy. Growth slowed to 7.5 per cent in the June quarter, second quarter in a row. It, therefore follows that countries that are major exporters of commodities such as Australia, Brazil, South Africa and Chile stand to lose while others such as India that are dependent on commodity imports may benefit from lower prices. For instance, rising cost of crude oil imports — a major strain on India’s trade account — can be expected to come down. Page 14
August 2013 The impact is, however, likely to be felt the most in case of copper, steel, iron ore, coal and aluminium as China accounts for a major chunk of the word demand for these commodities in particular. Prices of copper, iron ore and coal have already been trending downwards in recent past. Another way in which China could influence commodity prices is via the supply side. For instance, an industrial slowdown in China, the world’s largest producer of steel, would lead to domestic steel oversupply in China. As these find their way into the world market, they will exacerbate the already existing steel glut leading to further decline in prices.
China is becoming increasingly important for commodity markets. Looking ahead, I think that the commodity market developments will increasingly be determined by China. It is the key to the outlook for commodities markets, but it isn't the only factor. Commodities prices could face upward pressure over the next 10 years if other countries start to consume anything like China did over the past decade. Take India for an example. Compared with China, India consumes a small fraction of the world's commodities—for instance, 3% of the copper, compared with China's 37%, according to Barclays Capital—despite having nearly as many citizens. But that could change, because India is less developed than China, meaning it still has a vast amount of work to do on improving its infrastructure, particularly upgrading its power grid. One thing to keep in mind is that China is such a big market now that any increase in consumption—even in a slower but steady economic expansion—can create a big chunk of fresh demand, and push prices up accordingly. As Ms. Goldberg notes, ―They still are 1.3 billion people‖. sadfasfasdfasdafsfadadfadfadfasdfsafdasdfasasdfas
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August 2013
Knowledge Corner – Trade Barriers -
By Vivek Kumar Roy MBA-IB (2013-15)
Introduction Trade is the exchange of goods and services between entities (here: countries). This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events. There are enablers to the trade and there are barriers also. A trade barrier is the government imposed restraint on the free movement of goods and services across nations. These are measures that governments or public authorities introduce to make imported goods or services less competitive than locally produced goods or services.
Barriers to trade are often called "protection" because their stated purpose is to shield or advance particular industries or segments of an economy. Categorisation Barriers can take several forms but for convenience are broadly categorised into Tariff and Non-Tariff barriers. 1. Tariff Barrier: The most common form of barrier to the trade is Tax or Levies. Tariffs raise the price of imported goods relative to domestic goods. Further based on the mode of application of Tariff, it can be a) Specific Tariff levied on one unit of an imported good which may vary according to the type of good imported or b) Ad Valorem Tariff levied on a good based on a percentage of that good's value viz. Customs Duty. 2. Non-Tariff barriers: NTBs refer to restrictions that result from prohibitions, conditions, or specific market requirements that make importation or exportation of products difficult and/or costly. Few examples of NTBs are Import licenses, Export licenses, Import quotas, Page 16
August 2013 Subsidies, Voluntary Export Restraints, Local content requirements, Embargo, Currency devaluation, Trade restriction Reasons for Trade Barriers Barriers are often created to envelope nascent industries in developing nations or even by more advanced economies with developed industries. Few reasons for imposing barriers are presented below: • Infant Industries - Many developing nations use tariffs to protect infant industries. Government may choose to charge duty on the imported goods in the segment which it wants to foster growth domestically thereby providing the domestic industry a shield against the competitive pricing. The industry further benefits by increase in employment. • Protecting Consumers - A government may levy a tariff on products that it feels could endanger its population or which may be harmful for domestic consumption. • Protecting Domestic Employment - The possibility of increased competition from imported goods can threaten domestic industries. These domestic companies may fire workers or shift production abroad to cut costs, which means higher unemployment. • Revenue Generation – Tariff barriers are among the avenues for the Government to generate revenue. The approximate receipts of the Government of India from Customs Duty only accounts for INR 1.64 Lakh crore for FY 12-13. • National Security - Developed countries many a times develop barriers to protect certain industries that are deemed strategically important, such as those supporting national security. Defense industries are often viewed as vital to state interests, and often enjoy significant levels of protection. Impact of Trade Barriers Trade barriers have multidimensional impact on businesses, consumers and the governments. Major impacts are discussed below: • Increased Costs to Domestic Suppliers – Consumers are not the only one facing the wrath of Trade Barriers which equally burdens domestic suppliers of raw materials and commodities to domestic industries. Without trade barriers in place, such firms can rely on the law of comparative advantage, and can import raw materials on least cost basis but with barriers in place they are compelled to trade domestically and take the hit on their bottomline. • Reduced Competition – The fact that trade restrictions make it more costly to purchase goods from abroad results in the domestic industry facing less competition from foreign markets. In the short term, this can save jobs in select domestic industries. • Long Term impact - In the long term, businesses may see a decline in efficiency due to a lack of competition, and may also see a reduction in profits due to the emergence of substitutes for their products.
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August 2013 Positives of Removing Trade Barriers Removing trade barriers will lower costs and hence reduce prices. This benefits both consumers of final products, intermediaries and firms that need to use materials and other inputs from abroad. Removing trade barriers is also associated with a wider range of goods and inputs being available on the domestic market at competitive prices. Workers benefit as well, since jobs are likely to be created when exporting firms are able to sell more abroad, and the lower costs of inputs allow firms to expand production. The boost to GDP is also likely to stimulate employment growth. Certainly, some firms may find it more difficult to compete, but productive industries and firms will expand, increasing productivity and wages. In many cases, removing the barriers to trade along the supply chain requires investment – not in hard infrastructure, although improving infrastructure is clearly important – but in better-designed rules and regulations and in the capacity to enforce these in a way that causes minimal disruption to business. Again, this demands strong leadership and political commitment to open regional markets.
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August 2013
Africa & India: a civil union -
By Shreyas Dwivedi MBA-IB (2013-15)
The world economy has, in the last decade, shown a definite shift in its stance with the focus being on Asia as compared to the US and the EU. India and China lead the way for this transition, recording astounding growth and relative financial stability even during the 2007-08 economic crisis. This has resulted in increased weightage being given to the arguments of India and China, amongst others, on global platforms like the UN. However, if one were to look beyond the next 15 years, one would see the pattern of an African dominion emerging, especially in the context of international trade. Africa, being one of the most underdeveloped and poor continents in the world, seems to be an unlikely contender for the aforementioned title. Nevertheless, recent evidence states otherwise. This article will attempt to examine the trade prospects of Africa from an Indian point of view, thereby evaluating possibilities for India in the Africa growth story. . Brothers in Blood India and Africa have long shared a history of Western dominion, so empathy is a natural outcome. Both of them recognize the importance of consolidating power away from Western blocs and fostering a mutually sustainable African-Asian trade hub. Mahatma Gandhi underwent life changing experiences in Africa, and there can be no question that it played a significant role in the development of his own personal struggle. This is another common ground, should India strive to find one. Trade at a Glance Indian trade with Africa has blossomed very recently, with valuations touching $1 billion only in 2001. However, since then, the mutually beneficial relationship has grown at a CAGR of 24.8 % over the last decade. Bilateral trade grew at 32.1% from 2005-2011. Its current value stands at approximately $50 bn. Thus, India seems to be an important part of Africa’s growth story till now . Key Areas The primary focus of India when it comes to Africa, is energy. The African continent contains 10% of the planet’s oil reserves, and it will play an important part as India seeks to reduce its dependence on Middle Eastern countries, owing to recent political instability and draining reserves. Also, with US-Iranian tensions escalating, balancing these two friendships would be a tricky task. Currently Africa supplies about 20% of India’s oil requirements. Page 19
August 2013 In regard to this, several Indian firms such as Cairn India, have already made inroads into the African energy sector. They are looking to exploit a first-mover’s advantage in this sector.
Another area of focus is minerals and metals. Africa is the dominant owner of Earthly gold, accounting for 40% of its reserves. It also contains 80-90% of the planet’s chromium deposits. Taking note of this, Vedanta Resources has already invested nearly $4 bn in Africa, and plans to expand. Since 1964, India has been providing ITEC, i.e. Indian Technical and Economic Cooperation to Africa, mostly in a bid to counter bold diplomatic strokes made by China. However, these efforts have only recently gained traction, ever since India became a global hub of ICT services. Thus, Indian IT services have been a key part of the contributions towards bilateral trade with Africa. Also gaining ground have been Indian forays into sectors like telecom (Airtel’sacquisition of Zain), and hospitality (huge investments by the Tata Group). The African Edge The current data points to a definite edge which Africa has over India when it comes to bilateral trade, with it having a surplus of $14.8 billion with respect to India. Thus, the balance is currently tilted in Africa’s favors. This is partly due to India importing goods such as crude and gold, whose prices have sky-rocketed in the past couple of years. The Indian Advantage Even though Africa is in the driver’s seat, India has tremendous opportunities to tilt the scales in its favors. Africa is a largely untapped market, and IT services are today required in every sphere of development. Also, Africa contains the largest uneducated populace humanity has ever seen, and India is a world leader in online education, with revenues expected to touch $1 bn by the end of the decade. Thus, it could be the beginning of a symbiotic association. Also, Africa could benefit from India’s development model and try to inculcate some features of its growth story. Page 20
August 2013
Another advantage which India has is that unlike China, the major foray into Africa is by private corporations, and this results in much faster growth and better efficiency. Huge players such as Tata, Reliance, Vedanta, and Airtel have already ventured, and many are soon to follow. India’s biggest trading partner within Africa is Nigeria, with the major product being crude oil. South Africa comes in second, supplying 50% of India’s annual gold imports. Also, India’s energy consumption is expected to double within the next decade, and Africa would play a crucial role in solidifying India’s energy security. This would further strengthen possibilities of resolute trade relations. The Chinese Angle India has not directly competed with China when it comes to trade and involvement with Africa, as China has mainly focused on infrastructure development across the continent. Chinese governmental institutions have entered the African market- building roads, power centers and other basic infrastructure facilities. India has focused on energy, diamonds, gold, minerals, and telecom. However, an Indo-Chinese rivalry cannot be ruled out since both Asian giants have huge stakes in a beneficial partnership with Africa. China is currently Africa’s second largest trading partner ($150 bn), while India is the fourth ($50 bn). Also, China currently possesses a trade surplus with respect to Africa . The Pitfalls Africa still lacks basic infrastructure facilities in most parts of the continent. The lack of proper policing facilities and widespread poverty festers criminals to an astounding degree. Also, owing to extremely dense forest cover in some regions, the true valuation of natural resources is yet to be done. All these factors contribute to denting Africa’s image as an untapped trade goldmine. In conclusion, the writer opines that, taking proper precautions, India should energetically move forward with expansion plans in Africa. Another step could be additional support from the Central Government to companies which are trying to set up business arms in Africa. Page 21
August 2013 The shared history, deep cultural affiliations, huge common population base (millions of Indians live in Africa), and similar developmental goals could form the basis of a truly rewarding partnership. “Trade between India and Africa has a long and distinguished history. It goes back thousands of years to the days when Indian traders, sailed to the East coast of Africa in search of mangrove poles, elephant tusks, and gold and gemstones that made their way up from what is now Zimbabwe�
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August 2013
Free Trade Zones – Past, Present, Future -
By Sarthak Malik MBA-IB (2013-15)
Free Trade Zone (FTZ) is another name for globalization. FTZs or export processing zones are special areas within which goods are handed, manufactured and exported without the intervention of custom authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties. FTZs are established to encourage companies to set up their manufacturing units in the host country. Companies can obtain FTZ benefits such as, duty exemption on re-exports, duty elimination on waste, scrap, and yield loss, duty exemption on damaged, or nonconforming items, reduction in merchandise processing fees (MPF) and brokerage fees through weekly entry, cash flow savings, and relief from inverted tariffs. The objective is to develop a robust export infrastructure . This platform enables companies to integrate variety of benefits such as tariff and duty exemption, reducing their operational cost and develop competitive products for export. The world's first Free Trade Zone was established in Shannon, Ireland (Shannon Free Zone). This was an attempt by the Irish Government to promote employment within a rural area, make use of a small regional airport and generate revenue for the Irish economy.
Free trade zones are generally organized near major ports, airports and areas of geographical advantages for trade. Commencement of a FTZs requires lots of negotiations between partner countries to allow free flow of exports without any trade and non-trade barriers. Usually Free Trade Agreements (FTA) expedite the development of FTZs . Major trading blocs such has North American Free Trade Agreement (NAFTA), European Union(EU) and Association of Southeast Asian Nations(ASEAN) have agreed to provide a free trading platform within the trading nations. They ensure that regional trade barriers are removed to provide free flow of goods and services generated in the FTZs.
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In today's scenario major FTZ are majorly present in the developing nations such as China, India, Brazil, Bangladesh and Malaysia. These countries have set up export processing zones (EPZ) which provide labor intensive manufacturing centers that involves import of raw materials and export of factory products with quick turnaround time. FTZ provide cheap production units with many tax waivers to encourage foreign companies. The rationale behind is to bait foreign players to pump money in the country and develop the infrastructure. China has been a major beneficiary of the free trade agreement. One of the major reforms of was opening of free trade with other countries. In the last two decades China has emerged as a major exporting nation in the world. The Chinese government encouraged the development of EPZs at a large scale. The EPZs were provided with easy access to raw materials and cheap labor. These facilities attracted major foreign companies to set up their manufacturing units in China. The result was large flow of capital in form of foreign direct investment. These reforms enabled China to earn a competitive advantage over the developed world in the export market. The Chinese made goods were cheap and of equitable quality when compared to goods developed in other countries. The FTZ became the revenue hubs for the Chinese economy, providing platform to achieve a GDP growth rate of almost 10% for whole of last decade. Today China has become the world's largest trading nation, having trade surplus with almost all of its trading partners. India was also one of the first Asian nations to recognize the benefits of export processing zones, with the liberalization of economy in 1991. India opened its market to foreign companies. Major reforms were undertaken by Indian government to develop Special Economic Zones that would provide world class infrastructure and easy clearance without much delay. Incentives such as duty free imports of goods and exemption from income tax on export income were are provided in SEZs to promote investment from domestic and foreign sources. SEZs triggered large flow of foreign investment, leading to generation of additional economic activity and creation of employment opportunities. The Indian economy earned major benefits from exports and services generated from SEZs growing by almost 8% per annum for major part of last decade. The SEZs played a major role in creating skilled employment. But FTZs have also been criticized by many economists for encouraging businesses to set up operations in other countries, resulting in loss of jobs in home country. Many leaders, including USA president Barack Obama have criticized the outsourcing to developing nations. They believe that free trade agreements have somehow had a negative side effect on their economy. Many countries have lost on the domestic businesses due to hegemony of cheap products developed in the FTZs. Perfect example is dumping of cheap goods by China in Indian markets, thereby destroying the domestic players. The future FTZs need to be global trading hubs, which are unbiased to any region. The FTZs need to emphasis on creating better quality products with optimized prices. The government needs to ensure that FTZs products are competitively priced so that they do not create hegemony in the domestic markets. Page 24
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US-EU Trade Relations: Can they rise above disputes? - By Vibhor Aggarwal & Prafful Shrivastav MBA-IB (2012-14)
The United States and the European Union (EU) economic relationship is the one of the largest in the world—and it is still developing. The contemporary U.S.-European economic association has grown since World War II, lengthening as the six-member European Community extended into the present-day 27-member European Union. The economic connections have also become increasingly more multifaceted and symbiotic, covering an increasing number and type of trade and financial activities.
More than $1,500.5 billion flowed amid the United States and the EU on the current account in 2012, the largest amount of U.S. trade flows. The EU is the chief merchandise trading partner of the United States as a unit. In 2012, the EU accounted for â‚Ź206.3 billion of total U.S. exports (or 17.1%) and for â‚Ź296.4 billion of total U.S. imports (or 16.7%) for a U.S. trade deficit of $115.7 billion. If trade in services in further added to the trade in commodity, the EU becomes the largest trade partner of the United States, and accounts for nearly $193.8 billion (or 30.7% of the total in U.S. services exports) and $149.7 billion (or 35.4% of total U.S. services imports) in 2012. In addition, a net 150.0 billion USD flowed to EU countries from US residents in the form of direct investments, in 2012, while a net $105.9 billion flowed from EU residents to direct investments in the United States1. Not only are these countries major trading partners, but they are also allies. To this date, EU is a major factor in US policy considerations. For instance, not only the US, but EU and its members are prominent members of the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), the World Trade Organization (WTO) and the World Bank.
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Even though the amount Trans-Atlantic trade between the countries together amounted to more than â‚Ź500 billion, but still there are many policy disputes among the United States and the EU, which has been the cause for tensions and has sometimes led to bilateral trade disputes. Nonetheless, the EU-U.S. economic association remains dynamic. Assuming the trends towards globalization and the enlargement of EU endure, this affiliation is likely to develop in importance compelling more trade and investment obstructions to fall. Economists believe that such a symbiotic bond would not only bring economic benefits to both sides in the form of extensive choices of goods and services but also superior investment prospects. US-EU economic tie framework According to CIA World Factbook, United Source: http://www.spiegel.de/international/world/bild-884022States and EU merchandise trade accounts 462384.html for 47 percent of the world trade and these two economies together constitute nearly 40 percent of the world GDP2. Also, since both the economic powerhouses are nearly equivalent in term of economic development; a majority of the trade between EU and US is intra-industry trade, i.e., trade in similar products such as cars and computers. The US-EU relationship comes under the gamut of 3 major factors deciding the relationship framework:
Economic
Political
Safety
The General Agreement on Tariffs and Trade (GATT) and its successor, the 159-member WTO is another critical part of the US-EU bilateral trade relationship. It is the mechanism by which United States and EU conduct their trade and resolve the conflicts. Another critical component in the economic framework is the policies and practices followed by both the economies. These policies have facilitated in establishing strong economic ties between the EU and US, but, at times have been a source of controversy and bitterness. US-EU trade in goods and services
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The EU as a unit is the largest merchandise trading partner of the United States. At the same time, the United States is the largest non-EU trading partner of the EU. According to US Department of Commerce, in 2012, EU exports to the United States accounted for 17.1% of gross exports to non-EU nations, whereas EU imports from the United States accounted for 11.4% of gross imports from non-EU nations3. U.S. Merchandise Trade with Selected Trade Partners, 2012 (billions of dollars) Partner EU-27 Canada China Mexico Japan World
U.S. Exports 265.1 291.8 110.6 216.3 70 1,546.50
U.S. Imports 380.8 324.2 425.6 277.7 146.4 2,275.40
U.S. Trade Turnover 645.9 616 536.2 494 216.4 3,821.90
U.S. Trade Balances -115.7 -32.4 -315 -61.4 -76.4 -728.9
Data in billions of dollars (Source: U.S. Department of Commerce. Bureau of the Census)
For many years, US maintained a trade surplus with the EU. But, ever since 1993, the United States has been incurring mounting trade deficits with the EU (115.7 billion USD in 2012). Trade conflicts The trade relations between the two parties i.e. US and Eurozone are marked by several conflicts which can be classified as traditional foreign policy or regulatory trade conflicts primarily because each category is affected by various trade agreements to a different degree and order. The main trade conflicts can be grouped as follows: Traditional trade conflicts: These stem from the fact that the two transatlantic trading giants are keen to export goods to the other but do not show similar sentiment for imports. Tariffs, subsidies and policy instruments have long been used as effective tools for the same. As a result there have been conflicts between the two entities in several key sectors including aerospace, agriculture, steel etc. Conflicts due to foreign policies: EU or U.S. may initiate measures to protect their own economic interests at the cost of their trading partner’s interest. This may happen in the presence or absence of pressure by private sectors. From the EU perspective, extraterritorial provisions of U.S. sanctions, legislation and unilateralism in U.S. trade legislation are concerns that fit into this category. From a U.S. perspective, the EU’s preferential dealings with third countries, the Foreign Sales Corporation (FSC) export tax-rebate dispute, and challenges to varied U.S. trade laws could be said to be driven primarily by EU foreign policy priorities.
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Regulatory policy conflicts: These conflicts arise due to regulations that alter the terms of competition in the name of social and economic welfare of the nation. A major cause of these conflicts is EU’s need to harmonize standards in support of its drive towards a single market or to strengthen food safety and environmental standards. Management of Conflicts Most of the disputes between the two transatlantic trading giants have been because of regulatory differences rather than traditional barriers like tariffs or subsidies. However it is notable that to resolve such disputes the two have resolved primarily to bilateral negotiations rather than WTO dispute resolution mechanism. The Transatlantic Business Dialog (TABD) formed in 1995 has been instrumental in lowering trade and investment barriers across the Atlantic since its inception.
Today various protocols and organizations are formed that are responsible for ensuring that standards and quality of products meet the norms and regulations of trading partner. These bodies and agreements cover a wide range of sectors including electrical equipment, pharmaceutical products, telecommunications and information technology equipment among others. These trade restrictions continue to haunt exporters for whom pressurizing their government for trade retaliation seems to be the only way ahead. However, this hurts importers, consumers, and firms dependent on those imports as inputs in their production process. Thus, retaliation lists carry mainly luxury goods or items that are produced by both the parties. Attempts by either of the parties to increase trade retaliation may hurt the stakes these sides have in others economy through FDI or M&A activities or globalized patterns of protection consequently keeping a check of an ensuing trade war. Mircea Geoana, former Romanian foreign minister and ambassador to Washington, perhaps put the inside view best4. ―Strategically, we need it like air, to keep America and Europe together,‖ he said. ―Practically, it’s going to be very difficult.‖ The road ahead On the road to economic integration of the US and EU economies, there are a lot of benefits but they also come with a host of challenges as well. As these economies continue to integrate, some sectors or firms will ―lose out‖ to amplified antagonism and will battle the Page 28
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forces of transformation. This also challenges long-held philosophies of ―sovereignty,‖ as national or regional policies have extraterritorial bearing. Likewise, recognized understanding of economic concepts such as ―competition‖, ―markets,‖ and others are put to test as national borders dissolve with quicker integration of economies. U.S. and EU policymakers are facing the daunting task of managing the economic relationships which are becoming complex gradually in such ways that capitalize on benefits and keep frictions to the slightest, including cultivating novel frameworks. This would mean weighing the benefits of greater economic integration against the costs to constituents in the context of overall national interests. The debate will possibly become particularly acute as the United States and the EU follow negotiations to develop a free trade agreement—the Transatlantic Trade and Investment Partnership.
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Bridging India-China Trade Deficit -By Jatin Mungal & Prateek Srivastava
MBA-IB (2013-15)
India and China, two of the oldest civilizations in the world are creating ripples on the world stage. Home to around 36% of the world’s population India and China, combined with their high economic growth rates, provide a huge vibrant market. Both are a part of the BRICS (Brazil, Russia, India, China and South Africa) group of nations and share a relationship which is over 2000 years old. China has established itself as the factory to the world while India rules the roost in the services domain. The bilateral trade between the two countries has grown rapidly over the last decade and amounted to $67 billion for the year 2012. A decision to further enhance the trade to $100 billion was made at the first India China CEOs forum held at New Delhi in May 2013 during the visit of Chinese premier Li Keqiang. Chinese exports to India mainly include electrical and electronic components, machinery, fertilizers, organic chemicals, glass and ceramics-based products while India exports mainly raw materials like iron ore, copper and cotton.
India’s concern over this burgeoning bilateral trade is the ever increasing trade deficit which is loaded heavily in favour of China. Trade deficit occurs when one country imports more than it exports to the other country. For the last year this deficit stood at a whopping $29 billion. Over the first 6 months of 2013 though the overall bilateral trade between India and China has shrunk by 7.2% on year on year basis to $31.68 billion, Indian imports showed an increase of 4.2% to $23.62 billion resulting in a trade deficit of $15.56 billion in favour of China. A major reason for the decline in India’s exports to China is the decrease in demand for iron ore and cotton in China. In 2012, even though the total overall trade between India and China Page 30
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decreased, the trade balance increased by about $10b in favour of China. The main reason behind this was the decrease in export of iron ore from India which constitute major portion of the exports of India to China. Iron ore is a major component required to make steel. Due to over production by Chinese steel manufacturers, the demand for iron ore in China decreased. These steel manufacturers were already running losses and importing iron ore was not a viable option for them. 60 50 40 30 20 10 0 2003
2004
2005
2006
India's import from China
2007
2008
2009
India's Export to China
2010
2011
2012
Trade Balance
India China Trade (in billion dollars)
What should India do? In the current scenario, the trade deficit between India and China can only be bridged if the exports can be stepped up. There is genuine demand of Chinese products in India which makes it unviable to stop imports from China. Though Indian exports to China have been limited to only raw materials like iron ore, cotton the Chinese market provides immense scope for the healthcare and IT sector. India has a competitive advantage in these sectors some of which are discussed below Healthcare Chinese market provides ample opportunities for Indian pharmaceutical industry. The reform of Chinese health-care system with the commencement of New Rural Co-operative Medical Care System (NRCMCS) in 2005 led to an increased demand for better health-care. More than 685 million people from the rural area have enrolled under this scheme. The average cost per person is about 50 Yuan ($8 approx.). With its competency to provide economical generic medicines, Indian pharmaceutical industry can grab hold of this opportunity. Moreover, there is little involvement of the Chinese private sector in providing these services. The changing demographics of China also provide opportunity for pharmaceutical industry. China’s population has been gradually ageing because of one child policy. The graph below shows the population among various age groups.
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About 50% of population is above 36 years of age. The ageing population, changing lifestyle and increasing per-capita income has made China prone to western diseases like diabetes and high blood pressure. Moreover, China faces major public health challenges which provide Indian pharmaceutical industries a big market to cater to. China is the world’s largest consumer of tobacco and also the second largest tuberculosis affected country. However, China’s reluctance to open its health-care market may provide hindrance to India’s ambition to balance the trade between the two countries. The trade policies of both countries have to be congruent with one another. Rice, Wheat, Dairy Products and Meat China is the largest consumer of rice and second largest consumer of wheat in the world. The table below show the domestic consumption and production of wheat and rice w.r.t China’s imports from the world. Milled Rice (in Million Tonnes) Year Imports of China Production in India Domestic Consumption in India
2010 540 95980 90206
Wheat (in Million Tonnes) Year Imports of China Production in India Domestic Consumption in India
2010 927 80800 81760
2011 1790 105310 93334
2012 2900 104000 96100
2011 2933 86870 81406
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2012 3200 94880 83840
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It can be seen that the India can cater to the food grains need of China. With large stock of food grains available with the government, the export of these commodities to China could bring down the trade imbalance between the two countries. Better procurement, distribution and warehousing can help India to export these food grains. China is one of the largest importers of dairy products and India is the second largest producer of these products after the European Union. India’s export of dairy products to China is negligible when compared to other countries. China is also one of the largest importers of meat and fishery products. Therefore, this can be leveraged to bring down the trade deficit. Information Technology Industry After Tata Consultancy services became the first Indian IT service provider in China in 2002, the progress is not in line with the potential the Chinese market holds. Indian IT companies have been unable to take advantage of the local Chinese companies and their operations mostly include offshore centres for other Asian countries. According to technology research firm Gartner, China’s IT spending is slated to grow at 8% a year and will approximately amount to $170 billion by 2016. If Indian IT services and product companies are able to capture even 25% of that market the trade imbalance will come down drastically. It is India’s competence in this sector which should be leveraged to bridge a major portion of the trade deficit. Though all these areas hold a lot of potential for increasing India’s exports to China there are certain small problems which if solved will facilitate further growth of exports. For example meat and dairy products go through irrelevant quality checks - an issue which can be solved through diplomatic means. Similarly providing clear information on custom procedures, provincial rules and regulations in China, changes in policies by the government will provide a better environment and will encourage Indian exporters the environment to venture into the Chinese market. The opportunities in the Chinese market for the Indian businesses if used properly along with support from the government will definitely lead to a significant decrease in the trade deficit between India and China.
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