Download emerging market exporters price exports according to their destination

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.
More…
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)
Contacts:
Sushanta Mallick
Email: [email protected]
Helena Marques
Email: [email protected]