Interpretation of The Gravity Model of Natural Rubber Export in International Markets

40 resulting in a decline in the value of exports from the three main exporting countries. Gross Domestic Product of Importing Countries GDPjt The GDP of importing countries variable GDPjt has a positive and significant effect on the export value of natural rubber. This is because the probability value of the variable GDPjt is below a 1 significance level 0.00 0.01. Based on estimates, this variable has a coefficient sign that is consistent with the hypothesis. The GDPjt variable coefficient is 1.573838, which means that with a 1 increase in GDPjt, the value of natural rubber exports to the destination countries will increase by 1.573838, ceteris paribus. This occurs because the GDP in importing countries continues to increase and grow, which will drive increased demand for natural rubber in the long run due to an increase in purchasing power. The GDP growth of each importing country is presented in Figure 17. Figure 17 GDP Growth of Importing Countries in 2003 – 2013 Source: Author’s elaboration with data from USDA, 2013 Based on Figure 17, it is known that the average percentage of GDP growth in the importing countries showed positive growth in the period from 2003 to 2012. The growth of GDP in the importing countries will increase the purchasing power and the consumption for a variety of goods and services, including natural rubber. China is the country with the highest average GDP growth between 2003 and 2012. The average value of real GDP growth in China reached 9.2 per year at its highest. The increase in China’s real GDP further led to an increase in the value of natural rubber, where the average value of natural rubber exports to China from the three main exporting countries reached 0.87 billion US in the period between 2003 and 2013. China is a country that has a strong, positive development in the automotive industry. In 2010, Chinas auto sales reached 18 million units. This figure is the world record for the highest number of car sales in one country throughout the history of the automobile. The automotive industry is the industry, which most frequently used the raw material of natural rubber. Moreover, demand is -10.0 -5.0 0.0 5.0 10.0 15.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 GDP gr owth Year USA Japan China Singapore Rep. Korea Germany Canada Brazil India Belgium 41 continually increasing for natural rubber within the automotive industry in order to meet consumer demand for vehicles CAW, 2011. Real Exchange Rate Erijt Based on the t-test that was performed for each independent variable, it can be seen that the variable exchange rate erijt has a negative and significant effect on the natural rubber export value. This is because the probability value of the variable erijt is below a 1 significance level 0.00 0.01. However, based on the estimation results, this variable has a coefficient sign that is not consistent with the hypothesis. The erijt variable coefficient is -1.383721, which means that with a 1 increase in the value of the real exchange rate depreciation, the natural rubber export value to the destination country will be reduced by 1.383721, ceteris paribus. An increase in the real exchange rate, which is commonly referred to as the depreciation of the real exchange rate, is ideally offset by an increase in the exports of natural rubber. The regression results of the gravity model contradict the theory from Tweeten 1992. Tweeten 1992 states that when the exporting country’s exchange rate depreciates, then the excess demand will increase so that the exported commodity prices rise in the export market, thus the exporting countries will increase the volume of exports. This result is indicative of the fact that for the three countries, exchange rates have developed similarly so that the variable captures an overall trending behavior. In addition, based on the data, the average real exchange rate has increased depreciated since 2003 1,969 unit to 2008 1,985 unit, with an average 1,990.43 unit. In the period from 2003 to 2008, the average natural rubber export value from exporting countries to importing countries amounted to 0.238 billion US annually. Between 2009 and 2013, the average real exchange rate actually decreased to 1,765.24 unit, indicating appreciation of the real exchange rate for the period. The appreciation of the real exchange rate that occurred between 2009 and 2013 was accompanied by an increase of 0.46 billion US in the average natural rubber export value. Growth of the natural rubber exports value is an indicator that the natural rubber supply to the destination countries has increased despite changes in the exchange rate. Furthermore, the presence of excess demand in the importing countries led to the appreciation of the real exchange rate, which fortunately does not decrease the natural rubber export value from exporting countries. Remoteness Index Rjt Based on the t-test performed for each of the four independent variables, it can be determined that only one variable is not significant at the 1 level, this is the remoteness variable index Rjt. The probability value of the Rjt variable is greater than a 1 significance level 0.462 0.01, which suggests that the change in the Rjt variable does not affect the natural rubber export value to each importing country. This implies that the multilateral resistance effects seem to be adequately captured by the exporter and importer fixed effects, and that there impact does not vary too much over time. Additionally, the development of the automotive industry greatly affects the value of natural rubber exports from the three main exporting countries. China, for example, is the importing country that 42 has the largest natural rubber export value from the three main exporting countries. Chinas demand for natural rubber is very high, due primarily to the rapid development of the automotive industry, which has grown extensively in recent years and is now a sector of economic importance for the country. In 2013, the consumption of natural rubber in China reached roughly 3.314 million tons, which is up 12 from the previous year. Presently, the majority of natural rubber consumption in China is for tires, shoe materials, hoses, tape, latex products and other rubber products. The rubber consumption of the automobile tire industry accounts for 70 of the total consumption of natural rubber in China. Of the remaining 30, which is not consumed by the tire industry, the rubber used in shoe production accounts for approximately one-third. As the automobile tire industry and the downstream natural rubber market develop constantly, the demand for rubber will continue in an upward trend. It is estimated that the consumption of natural rubber in China will reach 3.51 million tons by the end of 2014, and 4.52 million tons by 2018 with a growth rate of 6.5 annually. While the rapid development of the automotive industry will lead to an increase in the demand natural rubber, so the exporting countries will still be able to meet the demand for natural rubber despite the high value of the remoteness index. It can be concluded that the remoteness variable does not affect the natural rubber export value in the international market due to the high demand of consumer countries. 7 CONCLUSIONS AND POLICY IMPLICATIONS

7.1 Conclusions

Based on the discussion of the obtained results, a few main conclusions can be drawn pertaining to the present study: 1. The RCA is greater than one for the three main natural rubber exporters, Indonesia, Malaysia and Thailand, in the international market between 2003 and 2013. This suggests that these three countries have a comparative advantage for natural rubber production in the international market and also in each importing country. However, each destination country has a different exporter with which they have a greater affiliation, as demonstrated by the highest average RCA value. China, South Korea and India are the major natural rubber export destinations for Thailand. Meanwhile, the main natural rubber export destination countries for Indonesia are the US, Canada and Belgium. For Malaysia, Germany is the main natural rubber export destination. 2. The variables that significantly influence the natural rubber export value are, among others, the GDP of importing countries, natural rubber production of exporting countries, and exchange rate. The exchange rate variable has a coefficient sign that is not consistent with the hypothesis, but is supported by a condition that can explain it. Meanwhile, the remoteness index variable has no effect on the natural rubber export value. 43

7.2 Policy Implications

The result of the analysis can serve many purposes, primarily to be informative and advise relevant stakeholders in the natural rubber sector of the three main exporting countries. The following advice may be noteworthy: 1. Each exporting country can increase its natural rubber export by giving a higher export priority to destination countries that have a higher RCA comparative advantage, rather than exporting to destination countries with lower RCAs. Meanwhile, increased market share in these countries can be obtained through price competition and improved product quality of natural rubber. 2. The competitiveness of natural rubber can be improved by revitalizing natural rubber plantations through initiatives of the government and stakeholders in the natural rubber sector. Plantation revitalization can achieve through the expansion of planting and replanting areas that will contribute to the productivity of natural rubber. The improved productivity will help to increase the natural rubber production, as well as the natural rubber export value, which in turn can boost the competitiveness of natural rubber. 3. It would be ideal to develop gravity model equations in future studies that include other variables i.e. natural rubber price or include time fixed effect, which may affect the natural rubber export model. Further research can also be expected to analyze the competitiveness of various types of natural rubber and natural rubber by-products, for example, natural rubber latex, smoked sheets, technically specified natural rubber TSNR, etc.