Measuring Competitiveness and Export Potentials: Viner’s Trade Creation and Trade Diversion

Appendix III: Measuring Competitiveness and Export Potentials: Viner’s Trade Creation and Trade Diversion

The other important partial equilibrium approach to estimate export competitiveness is the trade creation/trade diversion effects (Viner, 1950). Under this approach, if a product is competitive, naturally, on the basis of comparative cost advantage, it becomes trade creation. If a product is naturally uncompetitive, but acquires competitiveness through tariff adjustment under preferential arrangement, it becomes trade diversion.

For estimation of price competitiveness, each product is considered separately at a disaggregated level (i.e. at 6-digit HS level). In this approach, the export price of each product group (at the 6-digit level) from India is compared with the corresponding prices offered by its competitors in the global market.

Let us assume that India exports i th product to the world at a given price (PX kij ). Let us also assume that another competing supplier also exports the same product to world at a different price (PX kij ), where PX Nij denotes export price of India, for the i th product in j th market (world), PX kij represents export price of k-th competitor, for the i th product in the j th market, and N represents India.

For the i th product, if India has price competitiveness over other competitors in the j th market then the export price of India should be lower than those of other competitors. In such a case, the condition may be

PX Nij < PX kij ……..……..….(3) If India has price competitiveness in one product, it does not mean that all the

competitors in that product category necessarily have higher prices than that of India. For a given product, some of the competitors may also offer lower prices than India. In that case, India must look at the market share of those competitors, whose export prices are higher than that of India. The export market share of India’s inefficient competitors may be considered as India’s export potentials.

Suppose that India exports i th product, while another K-1 number of suppliers are also present for the same product segment in the world market. Each competitor holds some portion of the market share (Sh ikj ) in the import of the i th product by world. Therefore, the total market for the i th product is shared by all the k suppliers in the world. It means,

Sh ikj

where, Sh ikj stands for the market share of k exporters of the i th product to the world. Suppose that India has price competitiveness over a few competitors (but not all of them) in the export of i th product, and in case India effectively enters the world market as a supplier, the combined market share of uncompetitive competitors, assuming the ratio to be á, may

be treated as India’s potential export share.

0<á<1...........................................(5) where, á denotes the proportion of the market for the i th product, which is covered by

the exports of less competitive competitors of India in the world market. The export potential of India (POT Nij ) in the exports of i th product in world may be estimated as:

POT Nij = ψIM ij …….…………(6) where, IM ij stands for total imports of the i th product by world from all sources. If ψ is less than 1, it means that India has a price edge over a few competitors and a

part of the i th import market of the world will constitute India’s potential export. If ψ is equal to 1, it means that the entire import of the i th product by world would be India’s potential export. Jacob Viner denotes such trade potential as the trade creation effect of a regional trading arrangement.

In this measure, we assume that with changes in the policy environment, India may be able to improve its market share by taking over market segments from less efficient competitors in the world on the basis of absolute cost comparative advantage. One of the limitations of this measure is that it cannot explain a situation where a product of India has global competitiveness, but is yet to tap the export potentials in the world economy. This issue is empirically examined in some studies (for details see Mohanty, 2003, and Mehta and Mohanty, 2001a, 2001b). Since the actual prices of tradable products are not directly observable for comparative purposes, on account of distortions, the RCA measure could be a better alternative approach to deal with the issue of competitiveness.

Appendix IV

Major Exporting Destinations Common to Both India and China

Groups No

ISO

Major Destinations

(excluding the EU) 5 JPN

United States of America

Developed from the EU

United Kingdom

Hong Kong

IDN