Trade Mapping of India’s Cotton Export

Sadiq, M. S.^*1&2, Singh, I. P.² and Ahmad, M. M.³

¹Department of Agricultural Economic & Extensions, FUD, Dutse, Nigeria
²Department of Agricultural Economics, SKRAU, Bikaner, India
³Department of Agricultural Economics, BUK, Kano, Nigeria
^*Corresponding author: sadiqsanusi30@gmail.com

Abstract: The present research empirically investigated the export comparative advantage of India’s cotton products and determined the potential target importing cotton markets using annual dated data sourced from FAO database, spanning from 2000 to 2013.The collected data were analyzed using the static revealed comparative indexes, neoclassical comparative index (Trade mapping analysis), market structure index (Herfindahl-Hirschman Index) and prioritization index models. The results of the findings showed that India has poor comparative advantages with the exception of cotton lint in the exportation of its cotton products due to specialization in the production of lint. However, from the sector point of view the country had revealed comparative advantage in the exportation of cotton. Furthermore, empirical evidence showed that the cotton lint been the major export earning India emerged in the export market over the study period despite commanding small share in the market, and is among the winner groups. Though, for the overall sector, the country is at a threshold in the export market and among the winner groups. Therefore, study recommends the need for increase productivity and production cut-costs in order to improve the position of its products export amongst the commercial competitors. In addition, the commercial production status and behavior of the major competing exporting countries (China and USA) need to be fully tracked or monitored by the major participants in the cotton value chain in other to deal with the effects of externalities. The research will help to breach the gap of India’s cotton share in the global market by exploring potential target markets for its product, thus enhancing its cotton foreign exchange earnings.

Keywords: Cotton export, comparative advantage; India, target market, trade mapping

1. Introduction

Cotton is one of the most important textile fibers in the world, accounting for 35% of the world fiber use. Cotton was first cultivated in the old world about 7,000 years ago, by the inhabitants of the Indus Valley Civilization. This civilization covered a huge swath of the north-western part of the India subcontinent, comprising today parts of eastern Pakistan and north-western India (Samuel et al., 2015).

Among the countries in which cotton is an important contributor to rural livelihoods are China, India and Pakistan where millions of rural households are engaged in cotton production and more than two- thirds of the world’s cotton is produced in the developing countries (Baffes, 2005). Despite that India is the second largest producer of cotton in the world after China with world share contribution of 22% (International Trade Centre, 2013); the country has been more or less non-existent in the world cotton market.

Recognizing potential target markets and prioritizing them for a particular product can eventually be useful in developing efficient marketing strategies related to policy makers. Due to the manifold and profitability of global transactions, benefits of joining the globalization process cannot be over-emphasized. To enter this stream, evaluation of competitiveness levels is necessary. Batra and Khan (2009) reported that there is an emerging concern and ongoing discussion among the less developed countries about the threats of increasing exports share of some robust economies and the consequent intensification of competition among manufactures. Therefore, taking steps to keep and even increase the market performance by identifying and prioritizing the potential target markets is an important matter. Literature review of similar studies (Sharma and Bugalya, 2014; Kumar and Singh, 2015; Samuel et al., 2015; Dhima and Sharma, 2017; Gupta and Khan, 2017) showed no comprehensive study on the current status of importing potential target markets for India's cotton. Hence, identifying potential target markets and prioritizing them for export direction of India’s cotton export can help to find the best strategies for companies that export India’s cotton. Furthermore, policymakers can make use of the business information strategies, especially in bilateral trade negotiations. Therefore, the objectives of this research are to determine India’s cotton export growth and competitiveness in the global cotton markets; compare India’s cotton export growth to global demand; and, to identify and prioritize the potential target importing cotton markets for India’s cotton export.

2. Research Methodology

The study used annual dated time series data sourced from the FAO database, spanning from 2000 to 2013. The data covered export value of all the cotton products sub-sectors viz. cotton lint, cotton linter, cotton waste, cotton carded/combed and cotton seeds. The first objective was achieved using revealed comparative advantage (RCA) index, revealed symmetric comparative advantage (RSCA), export competitiveness index (XCI) and revealed trade advantage (RTA). The second objective was achieved using Trade mapping analysis (TMA); the third objective was achieved using prioritization index; and, the last objective was achieved using Herfindahl-Hirschman Index (HHI). The empirical models are given below.

2.1. Indexes of export’s revealed comparative advantage

Following Balassa (1965) as cited by Astaneh et al. (2014); Gupta and Khan (2017); Navghan et al. (2017) the revealed comparative advantage (RCA) was calculated following the equation below.

Where,

RCA_ij = revealed comparative advantage of ith commodity by country j
X_ij = Export of ith commodity by country j
∑X_ij = Total export of ith commodity class by country j
X_iw = Export of ith commodity by the world
∑X_iw = Total export of ith commodity class by the world

The numerator represents the commodity structure of the exports from jth country and the denominator represents the product structure of the global market. The range of RCA is between 0 to . RCA> 1 shows sectors in which a country is relatively more specialized and vice versa (the more the value of the index, the greater reliability and the better the given position). In other words, if RCA >1, then the state has a revealed comparative advantage in the commodity; if RCA <1, then the state has a revealed comparative disadvantage in the commodity; and, RCA=1, implies comparative neutrality.
The benefit of comparative advantage index is that it takes into consideration the intrinsic advantage of a particular export commodity as well as the consistency with changes (Batra and Khan, 2009). However, one of the main disadvantages of RCA index is its wide range such that it is too wide to determine the degree of comparative advantage properly (Astaneh et al., 2014). To solve the above problem, Laursen (1998) introduced another form of RCA index using a symmetric or normalized index by a homogeneous transformation called revealed symmetric comparative advantage (RSCA) as indicated below.

RSCA_ij=(RCA_ij-1)⁄(RCA_ij+1)                 [2]

These changes range between -1 and +1 so that negative values indicate no advantage and positive values indicate that there is an advantage.

The mentioned indexes are static. New indexes are expanded which have more consistency with new conception of competitive advantages. One of them is Trade Map (TM) introduced by International Trade Centre (ITC) and United Nations Conference on Trade and Development (UNCAD) and compares export growth to global demand growth. The groups of export commodities are classified into winners and losers based on TM and defined in Table 1. Based on the information in Table 1, if the global growth rate of import of commodity i(r_i) is bigger (less)than the growth rate of aggregated imports, the market of this commodity is identified as emerging (declining) market. If the export growth rate of country j for commodity i^th(d_ij)is bigger (less) that the import growth rate of this commodity (r_i), the country is winner (looser) on that commodity.

2.2. Export Competitiveness Index (XCI)

The export competitiveness pertains to the ability and performance of any product, firm, industry, or country to export in given market comparative to ability and performance of other product, firm, industry, or country. Export competitiveness of cotton products in India was used to determine its changes in the world cotton market share. Changes in Indian’s cotton export share in the world cotton market over time can indicate the long-term comparative advantage of the product. It neutralizes cyclic fluctuations to large extent which showed sustained trends in the shifting of market forces toward the new center of gravity. Following Navghan et al. (2017) the XCI developed by Fertö and Hubbard (2002) is used to calculate export competitiveness index.

Where,

XCI_ij = Export competitive index of ith product by country j at time ‘t’
X_ijt = Export of ith product by country j at time ‘t’
X_iwt = Export of ith product by the world at time ‘t’
X_ijt-1 = Export of ith product by country j at time ‘t-1’
X_iwt-1 = Export of ith product by the world by at time ‘t-1’

If the XCI is >1 then it can be said that the country has competitiveness in the export of i^th product.

2.3. Relative Trade Advantage (RTA)

Besides using the exports as a factor, as in Balassa index, RTA has also been taken into consideration. Following Navghan et al. (2017) the RTA index was calculated using the formula below.

RTA = RXA – RMA                 [4]

Where,

RTA = relative trade advantage
RXA = RCA or Balassa index
RMA = Relative import advantage
M_ij = Import of ith commodity by country j
∑M_ij = Total Import of ith commodity class by country j
M_iw = Import of ith commodity by the world
∑M_iw = Total Import of ith commodity class by the world

2.4. Prioritization of target export markets

Following Brewer (2001), the importing countries were prioritized according to potential indices of imports using six indices.

The average imports i^th commodity by country j

The ratio of imports of the i^th commodity by country j to total world imports of the commodity

The ratio of imports of i^th commodity by country j to total imports of country j

The index of disadvantage of country j for i^th commodity

The average growth of imports of i^th commodity by country j

Where,

m_kj= Index kth for country j,
δ_i= Standard deviation of indices for country j
H_j = Simple average of the standardized indices of the above

Using this method, specified and limited number of countries, whose H_j index is relatively the highest were selected in the final prioritization.

2.5. Herfindahl–Hirschman Index (HHI)

Herfindahl-Hirschman index is calculated by the summation of the squares of market shares of all active firms in the industry. This index is very similar to Hirschman index except for the square root (Hirschman, 1964).

Where,

Si = market share of ith sub-sector in the sector;
n = number of sub-sectors.

Types of market structure and characteristics as reported by Williams and Rosen (1999) are presented in Table 2.

2.6. Diversification Index

However, literature has shown various methods used to measure level and degree of diversification but for the present empirical examination, Berry's index and Theil's Entropy index were used.

Where,

P_it= Share contribution of ith sub-sector to the main sector at time ‘t’
A_it= ith Export value of ith sub-sector at time ‘t’
∑ⁿ_i=1A_it = Export value of cotton sector at time ‘t’

The value of Berry's index varies between zero and one. It is one (1) in case of perfect diversification and zero in case of perfect specialization.

The value of Entropy index (E) varies from zero to log n. 'EID' takes the value of zero in case of perfect specialization and log n when there is perfect diversification.

The actual degree of diversification to maximum diversification for a given sector was measured through Berry's index below.

Where,

n = number of sub-sectors in the agriculture sector

Rule of Thumb:

0 = specialization
0.01-0.19 = Very low diversification
0.20- 0.39 = Low diversification
0.40-0.59 = Moderate diversification
0.60-0.79 = High diversification
0.80-0.99 = Very high diversification
1.00 = Perfect diversification

3. Results and Discussion

3.1. India’s cotton export status

Presented in Table 3 are the export values of India’s cotton sub-sectors along with their respective growth rates for the period 2000 to 2013. A perusal of the Table showed that cotton lint accounted for the highest contribution of the total export value of Indian cotton sector with a share contribution of 96.58%; an equivalent approximately export value of $21.5 billon. The contributions of the other cotton products were very marginal with the sum share contribution been 4.42%, thus negligible. Therefore, it can be inferred that cotton lint is the main export earning of India’s cotton sector which is driven by wide mismatch between demand and supply in the global fabric trade market. Furthermore, it was observed that the export growth rate of the main sector and the sub-sectors were plagued or accompanied by fluctuation with the fluctuations been more pronounced in the cotton carded/combed, cotton seeds and cotton linter in descending order. However, empirical evidence showed mild fluctuation rate in the lint and waste sub-sectors and the main sector during the period under study.

The average annual growth rate of cotton carded/combed was found highest despite been poor in the share contribution of India’s cotton export value and accompanied high level of fluctuation. However, evidence showed that export value recorded for the sub-sector during the year 2003 was responsible for the heightened annual average growth rate. The average share of India’s cotton in the total world cotton to the tune of 10.03% is low and this may be attributed to high domestic consumption as well as subsidies devised by the competitive major exporters (China and USA) which dampen the price of India’s cotton products.

3.2. RCA and RSCA indices of India’s cotton export

The year-wise results of export’s revealed comparative advantage of India’s cotton sector calculated by RCA and RSCA indices over time indicated that India had good and fair export revealed comparative advantage in the exportation of cotton lint and cotton linter respectively over the study periods (Table 4). However, it was observed that the country had no revealed comparative advantage in the exportation of cotton waste, cotton carded and cotton seeds. The results showed positive and negative systematic pattern of changes for the RCA and RSCA respectively, across the years under consideration. However, when the average export’s relative comparative advantage was considered for the overall period for each of the products, it was observed that the country only had revealed comparative advantage in the exportation of cotton linter while the remaining sub-sectors indicate negative advantage in the exportation of these products. Furthermore, the year-wise results for the cotton sector indicated that India had revealed comparative export advantage owing to growth trend in the export performance of the country in the global cotton trade markets.

India's share of global exports of cotton products indicate that RCA and RSCA changes are related to the changes of exports values. Consequently, India's share of global exports is such that whenever its’ share of global exports inclines (or declines), the mentioned indices inclines (declines) as well. Thus, India can increase its revealed comparative advantage by subsidizing the prices of its products at international cotton market, thus enhancing its’ world share export. But cautious need to be applied at the production level in order not to put the producers, value chain actors and the economy at disadvantage or peril.

The reason for India’s revealed non-comparative advantage in the exportation of carded, cotton waste and seeds may be due to specialization in the production of lint and linter thereby affecting the supply quantities of cotton waste, carded and seeds whose share contribution to the cotton sector are minimal. Therefore, India needs to strengthen the sector to maximize sector benefit by devising a cost-cut mechanism in the production of their cotton products in order to enable them have a major breakthrough in the market and compete favorable with the cartel cotton giants whose production and quality stands are not better than that of India.

3.3. Export competitiveness (XCI) of India’s cotton

Furthermore, year-wise empirical evidence showed that the country had export competitiveness in almost all the cotton products except cotton carded/combed which indicated relatively poor export competitive position in the global cotton market over the study period (Table 4). Investigating export competitiveness of India’s cotton products illustrates the fact that India has the potential to achieve the comparative advantage in cotton exportation as evidenced by its advantages in the exportation of cotton lint and linter during the years under study. Furthermore, the year-wise results of the cotton sector indicated that the country had positive competitive export status over the study periods except for the years 2001, 2004, 2005, 2007 and 2008.

3.4. Relative trade advantage of India’s cotton export

The results of the relative trade advantage (RTA) which reflects the real competitiveness and efficiency of trade of a country as it incorporates both exports and imports showed that India has positive trade advantage in the exportation of cotton linter and seeds throughout the study years. For cotton linter, the highest and lowest positive trade advantage years were 2001 and 2006 respectively, while for the cotton seeds, the highest and lowest positive trade advantage years were 2002 and year 2007 respectively. In addition, the country recorded positive RTA in the exportation of cotton as a whole across the study periods except from the year 2000 to 2005. However, the country recorded mostly negative RTA in the exportation of cotton lint, cotton waste and cotton carded/combed over the study period (Table 4). Therefore, it can be inferred that the country had a very negligible import advantage in cotton linter and cotton seeds indicating that it has been gaining competitiveness and the pace of growth was fast. However, the country had a very negligible export advantage in cotton lint, cotton waste and cotton carded, revealing poor competitiveness and pace of growth during the study period. The poor competitiveness and pace of growth in the India’s cotton lint is associated to the price subsidies on lint offered by China and USA who are the major cotton exporting economies.

3.5. Trade mapping index

A perusal of Table 5 showed the Trade Mapping and competition situation of India’s cotton sector in the global markets. The exogenous factor that may cause reduction or loss of the comparative advantage of exports includes price subsidies offered by other major exporting countries and increase in the production of other countries. In addition, trade agreements of other countries with the recipient countries for reducing trade barriers thereby increasing the export share, and the problems due to the entry of these goods in the importing countries.

Trade mapping analysis for export markets of India’s cotton sector indicates a threshold in the export market of cotton products during the studied period, having low market share and the country is among the winner groups. Furthermore, the decomposition analysis of the Trade mapping analysis for the cotton products showed that the export markets for cotton linter and carded declined during the studied period with the market shares been poor. The export market of India’s cotton seeds was at a threshold between decline and increase; and has low market share. However, the export markets of cotton lint and waste declined during the studied period with low market shares. Furthermore, it was observed that India is among the winner groups for cotton lint, cotton waste and cotton linter; and among the loser groups for cotton carded and seeds.

3.6. Prioritization of export target’s market for India’s cotton

To introduce the best potential target markets the major India’s cotton importing economies were identified and based on the market potential indicator the countries were prioritized. The results of the market attractiveness indicators placed only two countries namely China and Malaysia out of the seven importing countries as the potential export markets for India’s cotton (Table 6). Thus, with regard to prioritization in the exportation of cotton, India should endeavor to adopt some important policies.

3.7. Market structure of India’s cotton export

The year-wise cursory review of the results showed that the market structure of India’s cotton export in the year 2000 and 2001 was characterized by closed oligopoly, and beyond these periods the exportation market was characterized by monopoly structure (Table 7). This indicates that government of India was the only channel of exportation of cotton to the global market. This outcome is not surprise as government intervention is very essential to protect India’s cotton producers from the imperfect market situation that prevails in the cotton global market due to bear raid in the market by China and USA. However, government of India should devise a marketing means of being efficient in the global trade market as this intervention is likely not to be sustainable in the long-run. Furthermore, it was observed that the sector was highly diversified in the first two years, suddenly plummeted to very low diversification in the year 2002and the slightly rise to low diversification across the year 2003 to 2004. Thereafter, it plummeted to very low diversification receding towards specialization across the remaining periods.

4. Conclusion and Recommendation

The present research empirically examined the export competitiveness of India’s cotton products in the global cotton trade markets. The empirical evidence revealed that India’s cotton products with the exception of cotton lint did not have revealed export comparative advantage in the international cotton markets during the study period. However, based on the trade mapping analysis the export of cotton lint, the major export earning of India emerged in the global trade market during the study period despite having small share and the country is found to be among the winner group. Furthermore, for the cotton sector as a whole, the export market has been at a threshold with the country share been small, and it is among the winner groups.

Hence, in order for India to have a comparative advantage for cotton in the export market and its continuing presence in the world markets, the following recommendations are suggested:

• Special attention towards increasing productivity and minimizing costs via improved varieties, proper mechanization, enhanced quality and production methods should be considered as appropriate actions or solutions to improve the position of exporting products amongst commercial competitors.
• The commercial production status and behavior of the competing countries especially China and USA need to be fully monitored by manufacturers, exporters, and domestic decision makers to deal with the effects of externalities. Furthermore, timely and appropriate responses should be done to improve the competitive position of these products in the target importing markets.
• Since not all the countries qualify as target importing market, effort should be made to penetrate these markets by accurate systematic plan coupled with increasing competition and competitiveness. For this purpose, the exporter of various cotton products should select the proper number of the priority markets and infiltrate them by awareness of the competitors, rules and regulations of marketing, and by having a coherent marketing plan.

References