THE EXPORT GROWTH AND REVEALED COMPARATIVE ADVANTAGE OF THAILAND TO INDIA S JEWELRY SECTOR

THE EXPORT GROWTH AND REVEALED COMPARATIVE ADVANTAGE OF THAILAND TO INDIA S JEWELRY SECTOR Karnjana Sanglimsuwan Department of Economics, Bangkok University, Thailand Suthathip Suanmali Veeris Ammarapala School of Management Technology, Sirindhorn International Institute of Technology, Thammasat University, Pathumthani, 12000, THAILAND Abstract India is known as the country with second largest population in the world and is positioned as the third largest overall economic volume in Asia. Its GDP is the 10 th of the world and the economy of India has been expanding quite rapidly during the past 5 years. Thailand and India have established a free trade agreement (FTA) in order to stimulate the imports and exports of goods and services. Under the agreement, certain products will be granted a discount tax rate. One of those goods is the jewelry product. The size of the Indian gems and jewelry market was USD 30.1 billion in 2011 and is expected to be USD 45 billion by 2015. This paper investigates the comparative advantage of Thailand s Jewelry export. It analyses the industry performance in the past five years. It includes a statistical analysis of the development of the industry. Export values by market are reported for the relevant period. Revealed comparative advantage (RCA) methodology is used to determine whether Thailand is a significant exporter in jewelry industry to India. The result suggested that Thailand have some degree of comparative advantage in the jewelry market especially in synthetic or reconstructed precious or semiprecious stones (HS Code-7104). In addition, structured in-depth interview of selected management employees in several leading jewelry exports is performed to obtain detailed information about the process and issues in operating businesses with India. Suggestion and potential policy recommendation are also discussed. Keywords: Free Trade Agreement, Jewelry sector, Revealed Comparative Advantage, Thai-India trades 1. INTRODUCTION Many people might be able to recognize one of the biggest world economic depressions in the year 2008 that was originated from United States of America. The big depression had caused both direct and indirect effects to many regions around the world, especially in many of the western countries. As a result, the strength in terms of economic power is shifting across the Pacific Ocean from the western world to the eastern world. Those countries in Asia who have readiness in terms of natural resources and large amount of the population would become the owner of great economic power instead of the western countries. One of those countries is India. Records from IMF stated that India is a country with continuously growing overall GDP (Gross Domestic Products). From the year 2005-2009, the average growth of India s GDP is figured at 7.9 percent. Moreover, the growth was recorded to be 10.4 percent (IMF, 2011) in the year 2010, which was higher than the world s superpowers, the USA and the EU where both have only 2.9 and 1.8 percent of growth (IMF, 2011) respectively in the same year. 691

With more than 1 billion people of the population, (See figure: 1) India is considered to be one of the world s biggest markets for overall consumption. In addition, about 60 percent of the population is those who are in the labor union with the age of 20-50 years old (IMF, 2011); these people are primarily work forces that drive the economy of India. There are several reasons for this great successful development of India s economy. First of all, Indian government has promoted a free market policy to public, where its people have more chance to show their potential. Second, the government seriously worked on the issues regarding policies that have a direct effect in terms of economic stimulation where overall consumption is being stimulated. Figure 1: India s Population International trading activities between Thailand and India have been expanding impressively. The total trade value between Thailand and India in January-November 2012 was recorded to be US$ 5.068 billion, expanded by 7.46% compared to the year 2011 which was US$4.71. In 2012, Thai exported to India US $2.883, meaning that Thailand has US$ 2.185 trade deficit with India and the export volume of Thailand to India is the 10th largest from all countries that Thailand trade with. In the overview picture, India is also positioned as the 16 th most important trading partner with Thailand (Mumbai office of international trade, 2012). Given that jewelry is a very essential product for most Indian people, the growth of jewelry consumption in India would be followed with the growth of Indian economy. Indian culture has very strong beliefs with wearing gems and jewelry, especially gold. In the past, jewelry is for the royal family, high class people, aristocrats, and governors. Accessories made from various types of jewelry would tell the status of those who are wearing it. In the present, jewelry is a common component in the dressing of most people; not only for beauty and fashion, but also recognized as the storage of value and medium of investment. This indicates that the jewelry market in India has very high potential given that most Indian people needed them. The jewelry market in India has been continuously growing. According to the Free Trade Agreement (FTA) between Thailand and India that was established on 9 th October 2003 and officially activated on 1 September 2004, India has granted a tax reduction to become zero of 4 types of jewelry products from Thailand (result in a lower selling price) including gems, synthetic jewelry, diamond dusts, and gold or some valuable metals such as silver and copper. Out of all the jewelry businesses in Thailand, the main focus of this project is on SME jewelry businesses. There are several reasons that SME size firms are chosen as the main focus. SME or Small and Medium Enterprises play major roles in development and stimulation of the economy. SMEs stimulate higher employment rate, urbanization, and overall country output in terms of goods and services and GDP. In 2011, the overall GDP of Thailand is recorded to be 10.54 trillion baht 692

where GDP generated by SMEs consist of 3.86 trillion baht or 37.64% of the total GDP (Office of SME promotion, 2011). 2. PROBLEM STATEMENT Jewelry production in India used to be made by small family industries that focus on traditional style of jewelry production for the local market. Most of them are handmade and the main focus of those producers is to supply them to people within the country only. Nowadays, India has upgraded its jewelry industry to become at the next level. Much more application of technology and large scale machines are used in the jewelry production. As a result, India has become one of the world s most expert producers of jewelry with very high potential of growth. There are several factors that have made jewelry production become one of the competitive advantages of India, including the readiness of human resource in terms of skills and amount of workers, low labor costs, abundance of natural resources, and supports from the government. There are many types of industries in the jewelry industry. One of them that India has the advantage is the diamond shaping industry. India has up to 800,000 people that are working in the diamond shaping industry. On the other hands, the labor cost of these people is comparatively very low. The wage rate for them is only US$10 for every single carat of diamonds they made. Unlike for Chinese and South African diamond shapers where they would cost US$17 and US$40-60 respectively to shape a carat. (The Diamond Source, 2011) Moreover, India has established Jaipur Jewellery Show Research & Development Centre, which is the colored gems research and development center. The purpose of the center is to support deep research about colored gems and how to change the property and to develop the quality. This illustrates the attempt to increase the competitiveness and improve the potential of colored gem industry in India. As a result, there is a possibility that the value of shaped ruby and sapphire exports would be negatively affected. There is a chance that India would reduce the import of both products from Thailand. In addition, India might also become a direct competitor of the shapes gem market with Thailand. Due to the facts regarding the Thailand India FTA, Thai business owners should raise their core competencies in order to survive and expand. They should consider the current system within the firm such as logistics, finance, marketing, production, costs, price, and knowledge management in order to remain the competitiveness based on the goal of satisfying the needs and wants of customers. There are factors that made the entrance to the Indian jewelry market become difficult for Thai jewelry supplier. There are factors such as understanding of local infrastructures in different areas, tax rates in each area, special characteristics of the demand of customers, as well as sufficient local partners. Although India is a very effective supplier of jewelry products, there are several types of products that Thailand could supply with higher quality compared to local products made in India. Moreover, with our different designs and styling of the accessories, there is a high chance that Thai jewelry supplier could gain this large market from India. This paper proposes the way to evaluate trade comparative advantage of Thailand s jewelry industry after Thailand-India Free Trade Agreement whether Thailand receives benefits. It also discusses the determinants of jewelry products export growth and the major challenges that confront the industry, particularly in the export market. The values of revealed comparative advantage (RCA) that developed by Balassa (1965) are used to determined relative profitability of Thailand and establish whether Thailand has comparative advantage in jewelry production and export. 3. LITERATURE REVIEW: RCA THEORY AND PAST STUDIES Revealed comparative advantage (RCA) was first introduced by Bela Balassa (1965). It is an economists tool that uses the trade pattern to identify the business sectors in which an economy has a comparative advantage, when comparing the country of interests trade profile with the world average. An objective of using RCA is to analyze a competitive advantage of each business section in the country of interest. The study uses information related to an export value and an import value. RCA had been transformed several times by Balassa (1977, 1979,1986). The original RCA measures export performance by country and its industry or commodity. Its formula defined as a country s 693

share of world exports of a commodity divided by its share of total world exports. The index for country i commodity j is calculated as follows: X ij X wj RCA ij, (1) X X where i w th X ij = i country s export of commodity j X wj = world exports of commodity j X i X w = total exports of country i = total world exports There is a note on using RCA that RCA is measured using post-trade data. An interpretation of RCA can be measured by the calculated RCA. If it takes a value greater than one, the country has a revealed comparative advantage in that product. Several studies have been undertaken using the concept of RCA. Dangjun (2007) studied an advantage of exporting computer and electronic components of Thailand over Singapore. He concluded that Thailand has advantages over Singapore. Moreover, Thailand s competitive advantage trends to increase in 2003-2006. Rajkom (2008) used RCA to analyze a competitive advantage between Thailand and Australia during Thai-Australia Free Trade Agreement. A summary of the study was that there were five business sectors which Thailand had advantages over Australia. Those five sectors were vehicles including parts and accessories, natural or cultured precious stone, air conditioning machines and components, articles of iron or steel, and plastic. The RCA also widely uses in other countries. Serin and Civan (2008) studied competitiveness in the tomato, olive oil, and fruit juice industries of Turkey towards the European Union (EU). A conclusion of the research showed that Turkey had a comparative advantage over its main rivals in EU market for all studied sectors except tomato sector. Sheng and Song (2008) also investigated a comparative advantage between Australia and China bilateral trade. The key commodities are agricultural products, iron ore, petroleum, textiles and clothing. As a result, they concluded that the bilateral trade is beneficial for both countries. In 2011, Bhattacharyya did a research on revealed comparative advantage and competitiveness: A case study for India in horticultural products. The paper analyzed the competitiveness of India s horticultural product against its rivals in the Asian, North American and EU markets. India had a comparative advantage in the vegetable and fruit sectors. However, there was a limitation on predicting a future export growth. Bano and Scrimgeour (2012) investigated the growth of New Zealand s kiwifruit production and exports between 1981 and 2011 by using RCA. They found that RCA suggested continuing success for kiwifruit industry. However, there has been no attempt to analyze competitiveness of Thai exportation to India in a jewelry sector. This paper attempts to use revealed comparative advantage to analyze a competitive advantage for jewelry industry concerning with the effect of Thai-India Free Trade Agreement (2004). 4. CONCEPTUAL FRAMEWORK This study proposes the way to evaluate trade facilitation of Thailand s jewelry industry after Thailand-India Free Trade Agreement by applying revealed comparative advantage (RCA) that developed by Balassa (1965). Because there is a limitation in finding information on the world s 694

scale, then the modified formula is developed using the theory about market shares of an importer. Information uses in the new formula is based on country level. The new index is calculated as follows: X jk X j RCA jk, (2) M M where fk fw X jk = exports of commodity k to country j X j = total exports to country j M fk = imports of commodity k of country f or country of interest M fw = total import of country f or country of interest The interpretation of RCA is relatively simple. If RCA is less than unity, that mean the product does not have a comparative advantage and vice versa. The pro of using RCA is that the specific export commodity can be considered. However, the con is that it cannot distinguish the improvement in factor endowments. 5. DATA AND METHODOLOGY The data used in this study is secondary data mainly collected from various Thailand and India official sources. For Thai data, this paper significantly relied on Department of Trade Negotiations (DTN) and Ministry Of Commerce. Yearly trade (both export and import) statistics between Thailand and India and information of India-Thailand Free Trade Area (ITFTA) have been obtained from various publications of DTN and Ministry Of Commerce. Beside this two sources, source of relationship between ASEAN and India have been collected from ASEAN Secretariat. For Indian data, further facts and figures about Indian country have been obtained from the World Bank. Various indicators, Gross Domestic Product per capita (constant LCU) and Population Growth rate, of India nation have also been considered. This paper proposes the way to evaluate trade comparative advantage of Thailand s jewelry industry after Thailand-India Free Trade Agreement whether Thailand receive benefits or not. Data of jewelry products exported from Thailand to India have been gathered from Ministry of Commerce & Industry, Government of India in order to calculate the values of RCA to determined relative profitability of Thailand. Considered jewelry products have been coded according to India-Thailand Free Trade Area (ITFTA) as per the Early harvest scheme (EHS) or HS Code. The selected HS Codes are shown in following table 1 695

Table 1: HS Code and Definition of Selected Jewelry Products HS code Definition Precious Stones (Other Than Diamonds) And Semi-Precious Stones, Whether Or Not 7103 Worked Or Graded But Not Strung, Mounted Or Set; Ungraded Precious Stones (Other Than Diamonds) And Semi-Precious Stones, Temporarily Strung For Convenience Of Transport 7104 Synthetic Or Reconstructed Precious Or Semiprecious Stones, Whether Or Not Worked Or Graded But Not Strung, Mounted Or Set 7106 Silver (Including Silver Plated With Gold Or Platinum), Unwrought Or In Semi- Manufactured Forms, Or In Powder Form 7107 Base Metals Clad With Silver, Not Further Worked Than Semi-Manufactured Articles Of Goldsmiths Or Silversmiths Wares And Parts Thereof, Of Precious Metal Or 7114 Of Metal Clad With Precious Metal Of Precious Metal, Whether Or Not Plated Or Clad With Precious Metal 7115 Other Articles Of Precious Metal Or Of Metal Clad With Precious Metal 7117 Imitation Jewellery Of Base Metal, Whether Or Not Plated With Precious Metal This paper has applied the Balassa s RCA index to calculate, according to the formula (2). The formula can measure the international competitiveness of country i (Thailand) in the production of product j (India). All calculated data have also been consulted from both Thai and Indian Ministry of Commerce. 6. ANALYSIS AND RESULTS The study computes the RCA in order to obtain a comprehensive picture of Thai jewelry Industry s comparative advantage. RCA analysis has been undertaken at both the jewelry sector and jewelry product level that exports to India. The RCA that values more than one indicates that Thai jewelry industry or product has a comparative advantage in exporting to India and vice versa. The RCA indices have been calculated in 7 jewelry product levels of Harmonized System (HS) classification during 2006 to 2010 and they are summarized in table 2. The index of RCA is greater than one for Thai jewelry industry during 2006 to 2010. At the jewelry product level, Thai jewelry under HS classification 7103, 7104, 7114 and 7117 products which are precious stones, synthetic or reconstructed precious stone, goldsmith ware and imitation jewelry hold comparative advantage in exporting to India during 2006 to 2010; meanwhile Thai jewelry products under HS classification 7106, 7107 and 7115 which are silver, base metal, and metal clad have comparative disadvantage in exporting to India. From Figure 2, the result suggests that Thai jewelry industry has faced fluctuating level of comparative advantage over time from 3.32 in 2006 to 9.45 in 2007 and later decrease to 1.87 in 2009. The significantly high of comparative advantage is shown in 2007 since Thailand started to export silver jewelry product (HS code 7106) to India and India also increased its demand for silver. However, Thai jewelry industry faced the significant decrease in the level of comparative advantage in 2009 due to the decrease in exporting silver products from Thailand to India. In addition, precious stone and synthetic or reconstructed precious stone industry should have been promoted to export to India since their RCA indices have been increased during the study period with the average RCA indices at 15.75 and 31.18, respectively. 696

Table 2 Revealed Comparative Advantage of Thai jewelry Industry during 2006-2010 HS Code 7103 7104 7106 7107 7114 7115 7117 RCA Description Aver 2006 2007 2008 2009 2010 age Precious Stones (Other Than Diamonds) And Semi- Precious Stones 12.93 16.41 16.32 17.45 15.67 15.75 Synthetic Or Reconstructed Precious Or Semiprecious Stones 12.35 41.64 28.22 42.64 31.08 31.18 Silver, Unwrought Or In Semi-Manufactured Forms, Or In Powder Form 0.00 3.47 0.71 0.00 0.25 0.89 Base Metals Clad With Silver, Not Further Worked Than Semi-Manufactured 0.00 0.00 0.00 0.00 0.00 0.00 Articles Of Goldsmiths, Of Precious Metal Or Of Metal Clad With Precious Metal Of Precious Metal 0.24 5.13 7.33 2.73 3.78 3.84 Other Articles Of Precious Metal Or Of Metal Clad With Precious Metal 0.55 0.02 0.06 0.09 0.59 0.26 Imitation Jewelry Of Base Metal, Whether Or Not Plated With Precious Metal 3.82 5.00 1.45 1.51 2.82 2.92 Overall Jewelry Industry 3.32 9.45 3.16 1.87 3.45 4.25 10.00 9.00 8.00 7.00 6.00 5.00 4.00 3.00 2.00 1.00 0.00 9.45 3.32 3.16 3.45 1.87 2006 2007 2008 2009 2010 Figure 2 Trends of Revealed Comparative Advantage over Time during 2006 to 2011 7. CONCLUSION AND RECOMMENDATIONS In conclusion, Thailand has several factors that indicate the potential to have rapid growth in jewelry business. The experience of labors and jewelry business owners are competitive for international jewelry market. Moreover, Thailand is at the center of the ASEAN community, therefore Thailand has the potential of becoming the jewelry hub of the community. India is a very interesting market due to the high population density and the high demand for jewelry for different groups of customers and occasions. However, supports from various parties are needed in order to help Thai jewelry business owners to invade this extremely high potential market. Thai jewelry business owners lack the motivation to go to the Indian market. The government should support the knowledge of how can the business promote their jewelry products to the international 697

market. Moreover, the FTA Thai-India has not been fully utilized by jewelry business owners. Lots of benefits are ready to be given to Thai jewelry business owners, especially in terms of tax reduction policies for various types of jewelry. More knowledge about the FTA, both Thai-India and ASEAN- India, should be given to the business owners in order to encourage them to participate in the international market. REFERENCES Asean Secretariat, n.d. ASEANWEB-ASEAN-India Free Trade Area. [Online] Available at: http://www.aseansec.org/22563.htm Bano, S. & Scrimgeour, F., 2012. The Export Growth and Revealed Comparative Advantage of the New Zealand Kiwifruit Industry. International Business Research, 1 February, pp. 73-82. Batra, A. & Khan, Z., 2005. Revealed Comparative Advantage: An Analysis for India and China, s.l.: s.n. Bhattacharyya, R., 2011. Revealed Comparative Advantage and Competitiveness: A Case Study for India in Horticultural Products. s.l., s.n. Dengjan, N., 2007. Revealed Comparative Advantage: A Case Study of Trade between Thailand and Singapore, s.l.: s.n. Department of Commerce, n.d. Department of Commerce, Government of India. [Online] Available at: http://commerce.nic.in/ Department of Trade Negotiations, n.d. Department of Trade Negotiations. [Online] Available at: http://www.dtn.go.th/ Ministry of Commerce, n.d. Ministry of Commerce. [Online] Available at: http://www2.moc.go.th/main.php?filename=index_design4 Ratkorm, N., 2008. Comparative Advantage of Thailand's export product in Australia During Free Trade Agreement Thailand-Australia, s.l.: s.n. Serin, V. & Civan, A., 2008. Revealed Comparative Advantage and Competitiveness: A Case Study for Turkey towards the EU. Journal of Economic and Social Research, pp. 25-41. Seyoum, B., 2007. Revealed Comparative Advantage in sevice: A study with special emphasis on developing countries. Journal of Economic Studies, 34(5), pp. 376-388. Sheng, Y. & Song, L., 2008. Comparative Advantage And Australia-China Bilateral Trade. Economics Papers, March, 27(1), pp. 41-56. The World Bank Group, n.d. Data-The world bank. [Online] Available at: http://data.worldbank.org/ 698

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