Barriers to Trade: Recent cases in the News

I am sure snippets relating to import bans, quantitative restrictions on imports have been in the news all this while but perhaps one begins to notice it only when one is in some way associated with the domain. As I am doing some research work in this field (trying to!), have come across the following in the recent past:

1. Firms from Taiwan, Malaysia, US and China have been found guilty of 'Dumping' solar cell panels in India. As investigation in the case has established that this is adversely impacting the domestic Solar Panel Manufacturing sector in India, an import duty levy has been recommended by the Ministry of Commerce. Whether this duty is levied or not remains to be seen. This, because India is looking at expanding its base of power generation through renewable resources. Imposing duty on Solar Panels at this stage could prove detrimental for this cause. Dumping refers to exports at prices lower than what the firms are selling at in the domestic country.

2. Prime Minister of India, Narendra Modi, has announced during his visit to Bhutan that no quantitative restrictions will be imposed on exports of Wheat, non-basmati rice, milk powder, pulses, edible oil from Bhutan to India.

3. European Union has imposed a temporary ban on import of Alphonso Mangoes and four vegetables - snake gourd, eggplant, bitter gourd, taro plant - from India. This, apparently, on account of pest contamination of the previous consignments of imported goods from India.

4. Another product from India that may soon be at the receiving end of an import ban concerns Betel (paan) leaves. Salmonella (a bacteria) contamination is the reason for the proposed ban.

Hindi Film Industry

 Industry Structure

I studied the impact of the structure of production house on box office collections of Hindi films.

There are primarily three categories of prominent producers in the hindi film industry

• Production houses backed by corporates. Eg. UTV, Eros International, Reliance Entertainment (Have been in the business for less than 20 years)
• Companies promoted by actors, for instance, Shah Rukh Khan's Red Chillies Entertainment.
• Traditional producers who have been in the business for generations. Eg. Dharma productions.

Impact of production house structure on first week collections (2011)

 
I considered data for 44 films released in 2011, from the previously mentioned three categories of production houses. An analysis of the data revealed the following information

• Corporates houses and those having been in the business for less than 20 years had average first week collections of 18.7 Crores.
• Traditional production houses had average first week collections more than Corporate houses by about 1.93 Crores.
• While the increase in average revenues for actor-backed production houses was a whopping 23.81 Crores.

Impact of production house structure on first week collections (2013)

(This study was carried out on collections data of 73 films released in 2013)

• Average first week collections for corporate houses and non-traditional producers were about 19.92 Crores.
• The increase observed over this for traditional producers and actor-backed production houses is 19.39 and 51.5 Crores respectively.

 Impact of structure on first day collections (2011)

Analysis of data of those 44 films for first day collections gave the following results:

• Corporates houses and those having been in the business for less than 20 years had average first week collections of 3.8 Crores.
• Traditional production houses had average first week collections more than Corporate houses by about 0.35 Crores.
• While the increase in average revenues for actor-backed production houses was of about 4.18 Crores.

  Impact of structure on first day collections (2013)

An assessment of box office collections of 73 films released in 2013, can be summarized as follows:

• The average first day collections for films released by corporate houses and non-traditional production houses was about 3.75 Crores.
• The increase observed for traditional production houses and actor-backed production houses were 4.44 and 8.88 Crores respectively.

 First weekend collections (2011)

As expected the analysis of data on first weekend collections of the chosen data sample again brings to the fore the dominance of production houses owned by actors. Here are the details:

• Average first weekend collection for Corporate houses was about 12.9 Crores.
• The increase over this for traditional production houses is on average about 0.85 Crores.
• The average number for Actors’ production houses registered a huge increase of about 17.65 Crores, taking the total value to more than 30 Crores.

First weekend collections (2013)

• Average first weekend box-office collection for movies released from Corporate houses and non-traditional production houses is 12.99 Crores.
  Increase over the above average value for traditional production houses is about 12.47 Crores.
• For the first weekend collections in 2013, the average number for movies coming from production houses backed by actors is about 26.13 Crores.

 Fastest 100 Crore Grossers

• 100 Crore in box office collections is considered a milestone for Hindi films these days.
• Out of the 25 fastest 100 Crore grossing movies in Hindi film industry, 44% (11 movies) have come from actor owned production houses.
• Nine movies (36%) have come from traditional production houses.
• Corporates get only 20 percent share of the pie, despite the entertainment sector having been granted industry status more than a decade back.
• Even out of the five films that the Corporate houses like UTV, Ashtavinayak, Eros International, Viacom 18 Motion Pictures have managed in the fastest 25, four involve collaboration with established directors like Sanjay Leela Bhansali, Anurag Basu and Omprakash Mehra.

Verdict: Actor backed production houses have emerged as clear winners in terms of box office collections. Corporate houses have not really emerged as power centres despite the sector having been granted industry status in 2001.

How much did a communist past affect the GDP growth rate among EU member countries in 2009?

I studied the impact of the following factors on the real GDP growth rate in EU member countries in 2009, which incidentally was negative then, depicting a period of recession:

• Geographical location: Location in Central, Eastern, Northern, Southern or Western Europe.
• Whether the country joined the European Community / Union after 1980: The formation of the European Bloc has continued since 1950's from being a community with a few member countries to the 27 member EU that it is now
• The presence of a communist regime in the past
• The country in question being landlocked

Here is a summary of the results:

• The average real GDP growth rate for a country that is landlocked, joined European Union after 1980 and was formerly governed by a communist regime is -11.97.
• The countries that have not had a communist regime in the past, will have, on average, a lower value of negative real GDP growth rate, by 5.56 percent.
• A country that is not landlocked will have a lower value of negative GDP growth rate, by 5.4 percent.

• An EU member in the central region will have lower recession value by 6.18 percent.
• An EU member in the Northern region is observed to have had, on average, a higher value of recession by -7.2 percent.
  
  
  
  
  The actual real GDP growth numbers are as mentioned below:
  
  

  EU Member	Real GDP growth rate in 2009
  Austria	-3.8
  Belgium	-2.8
  Bulgaria	-5.5
  Croatia	-6.9
  Cyprus	-1.9
  Czech Republic	-4.5
  Denmark	-5.7
  Estonia	-14.1
  Finland	-8.5
  France	-3.1
  Germany	-5.1
  Greece	-3.1
  Hungary	-6.8
  Ireland	-6.4
  Italy	-5.5
  Latvia	-17.7
  Lithuania	-14.8
  Luxembourg	-5.6
  Malta	-2.8
  Netherlands	-3.7
  Poland	1.6
  Portugal	-2.9
  Romania	-6.6
  Slovakia	-4.9
  Slovenia	-7.9
  Spain	-3.8
  Sweden	-5
  United Kingdom	-5.2

  
  

Greece: A Snapshot

By the end of 2012, Grexit was a term firmly entrenched in the industry jargon. It meant Greece's exit from the Eurozone. All thanks to the billion dollar bailout packages extended to Greece by its Eurozone partners, this was averted. The worst case scenario being imagined in the above case was that of the collapse of Eurozone. Here's an analysis of the Greek economy.

GDP

As per 2012 data, Greece is a 250 billion dollar economy.  The highest ever GDP for Greece was recorded in 2008 at 343 billion dollars. In nominal terms, the exports in 2012 were about 35 billion dollars in value. Even though the exports have only seen an increasing trend over the years, the gap between exports and imports has widened substantially with imports being the highest in 2009 at $92 billion. In this year, the exports accounted for only about 20 billion dollars. The corresponding number for total imports in 2012 was 67 billion dollars.

Trade-dependence

It is the value of a country's total imports and exports as a percentage of the Gross Domestic Product. It is seen as a measure of an economy's openness in terms of free trade. Trade-dependence from 1980 to 2012 has hovered in the 25 to 35 percentage range. Trade dependence increased to 35 percent in 2009 as imports increased considerably to 92 billion dollars. Sum of imports and exports was about 112 billion dollars, for a GDP of $321 billion. In 2012, the trade dependence was 41 percent as GDP decreased substantially to 249 billion dollars and the sum total of exports and imports did not decrease much, remaining at $102 billion. As the base contracted, the trade dependence number jumped to 41 percent.

What went wrong with the Greek economy?

Greece had been running huge fiscal deficits for long. After the sub-prime crisis in US and the resulting repercussions that were felt around the world, Greece found it difficult to raise money to finance its spending. In fact, investors feared that Greece would default on its debt payments. Before this crisis set in, Greece's economy was growing at more than 4 percent. The Government's expenses had increased by more than 80 percent but the tax revenues had not kept pace, registering an increase of a little over 40 percent. A major chunk of this spending was being done on arms, salaries and pension. Therefore, nothing productive was expected to come out of the money that was being spent. To make matters worse, it emerged later that Greece was under-reporting the information on its fiscal deficit year after year and the number had even gone beyond 10 percent when it was reported to be near 6 percent. Greece was second only to US in its defence spending among all the NATO members. With the ever ballooning Government expenses and little to look forward to in terms of returns from the expenditure, lenders were finding it difficult to keep faith in the Greek economy. As recession hit the world in late 2008, there was little to be expected in terms of better GDP growth. GDP in nominal terms has only seen a downward trend since 2008.

Coming back to Greece's high debt/GDP ratio, it was hovering near 100 percent from 1991 to the early 2000s. Once the financial crisis set in, it was difficult for Greece to finance its spending. The situation deteriorated quickly in the last quarter of 2009. As investors feared a default, Greek debt was relegated to junk status. Other members of Eurozone extended to Greece a bailout package of 110 billion Euros in April 2010. This was followed by another bailout package in 2012 of about 130 billion Euros. These came with some conditions which included austerity measures on the part of the Government and privatization of certain assets in order to finance Govt. spending. It would only be after 2015 or perhaps even 2017 that Greece will be able to get private lenders to lend to it, given that at the time of the second bailout package private lenders had to agree to lower interest rates and a reduction in face value of assets by more than 50 percent.

Industrial analysis

Fuel and mining exports increased, from 4.4 billion dollars in 2010 to 16 billion dollar in 2012. Decrease in wage rates post 2009 may have had a role in this but this industry being capital intensive, investments over the years before the recession set in, have perhaps played a bigger role. Mineral fuels and lubricants are the chief exports in the fuels segment. Greece has huge deposits of Limestone, Gypsum, slate and Alumina. The subject of Gold mining has remained a bit controversial in the region.

Agricultural products continue to be a significant part of the country’s exports. Its share in exports has come down from almost a third in 1980 to 20 percent in 2012. A large decline in the share of agricultural products in exports was seen in the 2010-2012 period, coming down from 27.4 percent in 2010 to 19.4 percent in 2012. This was a reversal of the trend seen in fuel and mining products' exports.

Greece is a part of the European Union. Its major trade partners are European nations. Since 1995, Germany and Italy have been the leading importers of its products. In 1995, 21% of its exports went to Germany and 14 percent to Italy. By 2000, the share of Italy and Germany was 12 percent each. In 2010, it was Italy at 11% and Germany at 10%. Other trade partners of Greece are Cyprus, Turkey, Albania, Romania and United States. Cyprus gets 20 percent of its imports from Greece. The value of imports was 280 million in 2000; 1 billion dollars in 2005, the corresponding values for 2007, 2008, 2009 and 2010 were 1.4, 1.7, 1.5 and 1.4 billion dollars respectively. There was a reduction in exports to Germany, from 2.6 to 2.3 billion dollars in the years 2008 and 2010 respectively.

The pharmaceutical industry in Greece presents an extremely interesting case. In order to push for austerity while ensuring that its citizens get access to medicines, Greece implemented a 25 percent reduction in prices of many medicines. Although, this led to shortage of medicines as some pharma companies preferred not to supply to the country, there were other effects as well. More than 25 percent of the medicinal supplies to the country were being exported to Germany. Greece, then had to resort to an export ban on medicines. If this fact is not taken into account, it may seem that Greece was a major exporter of medicines.

Who decides China's fate?

Over the years, China has emerged not only as a major trade partner for countries across the world but also a major market for organizations, given the amount of money people have at their disposal and the demographic factors that come into play for the most populous nation in the world. The confusion over the path that the Chinese Government will be taking in managing its growth in the future, or even the kind of growth numbers it wants to achieve and the way it will go about doing that has led to speculation on China’s fate. The fall in the Purchasing Manager’s Index (PMI) value to 50.5, an indicator of slowing exports and lack of orders that can keep the engines of China’s growth well-oiled, has only added to the woes of emerging economies that are yet again seeing an outflow of money given the investor fears over their fate, as the ghost of QE tapering  is out to haunt them yet again. (I have written about Quantitative Easing in one of my earlier posts.)

The apparent confusion can be gauged from the fact that policy announcements have not been clear on whether China is going to curb its credit system to reduce the growth of credit which has become a major cause of concern. If efforts are indeed made in this direction, then the growth is going to stand at sub-7 percent levels for at least a few years in the future. While this has been indicated in one of the policy announcements, the information coming out from other quarters in the Chinese establishment has been that of insistence on keeping the growth engines running even at the cost of a spiraling credit demand. Banks have been on a lending spree as availability of cheap credit has been a non-issue with investors making a beeline for making a fortune out of China’s growth. Are the times changing? Well, investors are a worried lot these days. The shocks that China’s inter-bank lending rates experience from time to time, seen in June and even at the end of last year, have given credence to the theory that China’s credit bubble may burst soon and a sub-prime crisis like situation may emerge. The fact remains that sentiment drives investment more than anything else. For now, the sentiment is not in favour of China.

China is implementing long overdue social reforms. Its one-child policy has been tweaked a bit to allow more couples to have a second child. The Hukou system, which is akin to a regional passport or a registration of residence or birth and denies education and medical facilities to those not registered in a region, is being debated upon to bring about a change in the form of some relaxations. Social change is thus on the way. We all know that this was the more difficult of a change to bring about in China than something that concerns trade, banking or investments. If China can look ahead in terms of its society, rebalancing for better growth-management is certainly on the cards. If China has been able to manage its growth for decades, why should there be a question mark on its ability to give a new direction to it now? China’s fate lies in its own hands. No investor can afford to ignore an economy like China. All that is required is a clear indication on policy direction for the future.

Indian policy paralysis and Abenomics: A case in contrast

All policy decisions taken by the Governments around the world when it comes to their economies, invariably focus on 'GDP Growth'. There is speculation that India is unlikely to hit even a modest 5 percent GDP growth number this year. On the other hand, it seems a turnaround is in the offing for Japan, an economy that had been struggling to come out of an economic rut for more than two decades. It took just an year of 'Abenomics' to bring about a sea change in Japan's fortunes. This may well be an year of highest economic growth for Japan in many years.


Before we move any further into this discussion, let me just define GDP here, for the uninitiated. Gross Domestic Product for an economy refers to the market value of all final goods and services produced in the economy during a given period. The stress here is on the word 'final'. These are the ones that are meant for consumption or use by the end consumer and are not subject to any further transformation for sale. GDP at nominal value refers to the Gross Domestic Product at current prices. To facilitate comparison among GDP values across the years, prices from one of the years are taken as a base and the GDP values for the rest are calculated using the prices for that year. This ensures that we assess the real GDP growth which happens on account of increase in production and not just increase in prices.


Getting back to the contrasting fortunes of the Indian and Japanese economies in the last fiscal year, discounting the fact that our problems are completely different, as Japan struggles with deflation and India with the opposite, the Inflation; How much of the turnaround in Japan can be attributed to political vision? Is there anything in this for India to learn? While analysts claim that 'Japan is indeed back', Is India falling off the radar?


Abenomics, as of now, has been about quantitative easing and a surge in spending by the Government in order to boost consumption. India needs to keep interest rates high in order to tame inflation. This is again debatable as our inflation problems are perhaps more due to supply side issues. This holds particularly relevant for food inflation which requires investment in storage capacities to stem the wastage in food supplies emanating from the lack of facilities for storage. Japan took years to figure out what exactly it needs to do to return to the path of growth. With its huge population, Indian can ill-afford to suffer economic stagnation for decades but we can perhaps do with clear policy initiatives in this regard. If it is GDP growth that is required, should we not be boosting consumption? If it is supply side issues that underscore inflation in India, should we not focus on capacity building. Where will the money come from? Well, if we can afford Food Security bill and a myriad other subsidies, Why not something that builds the base for a better economic growth in the future?

The case in contrast comes in the backdrop of dipping fortunes of Ranbaxy, an Indian Pharmaceutical company acquired by a Japanese firm, Daiichi Sankyo, in 2008. US FDA has placed an import ban on a Ranbaxy facility in Punjab, India. Last year as well, some of Ranbaxy's facilities suffered a similar fate. Food for thought?

Flying Geese Pattern of Industrial Development

 


A model that has often been used to describe the industrial growth in South Asian economies, the flying geese pattern, describes the shifting of industries from advanced economies to the developing ones. The dominance of an industrial sector in a region depends on the availability of required resources, including labour, capital and raw materials for the sector, at low costs in comparison to other regions.

This paradigm, proposed in 1960s by Kaname Akamatsu, suggests that an industry shifts from a developed economy to the developing economies as the nature of resources available in an economy changes over a period of time. This is referred to as dynamism in factor endowment. A trickle down effect is observed in terms of technological know-how from advanced economies to the less developed countries. The inverted V-shape of the flying geese pattern depicts a leading economy and others that gain from a trickle-down effect.

For instance, textile industry is a labour-intensive sector that requires unskilled labour. Decades back, Japan was a leader in the textile industry. With technological advancements, Japan gained strength in skilled labour intensive sectors apart from capital intensive sectors. As generations reaped the benefits of industrialization in the form of high wages, cheap unskilled labour was no longer available at a low cost. Such industries thus thrived in Korea, Taiwan and other South Asian economies which were at early stages of industrial development. This is because unskilled labour was available in plenty and at low wages. As these economies developed and diversified to capital intensive sectors, textile industry flourished in countries such as Bangladesh.