EMERGING MARKET EXPORTERS PRICE EXPORTS ACCORDING TO THEIR DESTINATION

Exporters from emerging markets price their exports according to the market of destination – known as ‘pricing-to-market’ – and their ability to pass on exchange rate changes is far stronger in trade with other emerging markets than with developed economies. That is the main finding of a study on Indian exports by Sushanta Mallick and Helena Marques, presented at the Royal Economic Society’s 2011 annual conference.

Looking at India’s exports of over 1,000 different products during a period of important economic reforms (1992-2005), the study finds that:

·  India’s highest tariff rate was brought down from 150% in 1991 to 30.8% in 2002.

·  India’s total trade as a percentage of GDP went up from 14.1% during 1980-89 to 50.7% in 2008.

·  Indian exporters absorbed exchange rate changes into their profit mark-up when trading with the US and other developed countries, where they face tougher competition. But they fully passed through exchange rate changes into buyers’ prices in emerging markets.

·  In the US market, Indian exporters absorbed around 60% of the variation in the rupee/dollar exchange rate and passed on only 40% of that change.

·  In the Chinese market, Indian exporters absorbed around 20% of the variation in China’s tariffs and passed on 80% of that change.

Over the coming decades the BRICS countries (Brazil, Russia, India, China and South Africa) will become the largest economic group in the world and the influence of their trade patterns on the global economy will be immense. Even today, the debate rages as to the role of China in the global trade imbalances.

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Over the last two decades, a group of large developing countries has been liberalising their economies and taking up an increasingly large share of world markets. Among these emerging countries, the BRICS group (Brazil, Russia, India, China and South Africa) has grown to become the largest economic group after the G3, and China has grown to become the second largest world economy after the US.

As a consequence, these countries are already large enough in some of their export markets to behave as price-makers. If so, one possibility is that they can manipulate the price of their exports in their own currency to remain competitive abroad when facing adverse exchange rate changes or that the exporters can increase their profits when exchange rate changes are favourable. This study shows that exporters from emerging markets do price exports according to the market of destination (pricing-to-market).

This is done for India’s exports of over 1,000 different products during a period of important economic reforms (1992-2005), which comprised a change in the exchange rate regime and extensive trade liberalisation. In the process, India’s highest tariff rate was brought down from 150% in 1991-92 to 30.8% in 2002-03, with India’s total trade as a percentage of GDP going up from 14.1% during 1980-89 to 50.7% in 2008, and the US as India’s leading trade partner.

The researchers compare the behaviour of India’s exports to the G3 and three other emerging markets (Brazil, China and South Africa), finding that Indian exporters absorbed exchange rate changes into their profit mark-up in G3 markets, where they face tougher competition, but fully passed through exchange rate changes into buyers’ prices in emerging markets.

In the US market, for example, Indian exporters absorbed around 60% of the variation in the rupee/dollar exchange rate and passed on only 40% of that change. The lack of response to exchange rate changes in emerging markets was compensated by trade liberalisation, which in the end allowed Indian exporters to increase slightly the rupee price of exports into those markets but not into the G3. In the Chinese market, for example, Indian exporters absorbed around 20% of the variation in China’s tariffs and passed on 80% of that change.

The study further distinguishes India’s exports according to the nature of the products being exported: whether they are homogeneous (say, agricultural commodities and natural resources) or differentiated (say, branded manufacturing products).

In the period under study, differentiated goods represented about 60% of India’s exports to the G3 and the emerging group. In the case of differentiated goods, the effect of trade liberalisation in the destination market on the exporter (rupee) price increase is also present in the G3 markets.

To sum up, this study focusing on exporters’ pricing behaviour confirms that the already well-reported decline in exchange rate sensitivity of import prices is due to export prices becoming more sensitive to exchange rate changes. The pricing of India’s exports is more responsive to differences across export markets than to differences in product type.

So, pricing differences do not exist because of the export basket composition that changes with the level of development, but because of the different conditions faced in the different export markets, particularly the degree of liberalisation and the presence of exporters in the export market.

China, for example, became a WTO member in 2000, opening up new trade possibilities with India. Hence there is still a large scope for gains from liberalising trade among emerging markets leading to a drop in export prices worldwide. The contribution of this drop to worldwide disinflation becomes even more important as the share of intra-BRICS trade in world trade increases.

ENDS

‘Pricing-to-Market with Trade Liberalization: The Role of Market Heterogeneity and Product Differentiation in India’s Exports’ by Sushanta Mallick (Queen Mary, University of London) and Helena Marques (University of the Balearic Islands, Spain)

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Sushanta Mallick

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Helena Marques

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