Trade winds November 2014 Edition

November 2014

An Indo-GCC focus edition

September Edition

Dear Reader,

Trade Winds is an initiative by the student community at Indian

Institute Of Foreign Trade to provide an enriching and learning

experience for everyone. With articles by our faculty and

interviews from the EU economic counsellor, this special edition

focuses on GCC trade relations.

IIFT has been the premier B-school in India for disseminating

trade knowledge and even being involved in trade policy

formulation for India. Thus the views of faculty, alumni and

industrial personalities along with the students is aimed at pushing

the limits higher.

Along with the focus theme on GCC trade relations, this editions

focuses on future potential of trade by India by improving its

infrastructure and ties with South America. A commodity analysis

of Crude oil and its downstream product of plastics is also in the

offering.

We, at Team Trade Winds hope to provide an enriching reading

experience to all. Happy Reading!

Team Trade WindsTrade Winds, the bi-monthly magazine of International Trade Club of IIFT is the result of contribution of

various stakeholders. We would like to thank Dr. Tammana Chaturvedi, all the contributors of articles and

BLASH – The Trade Club at IIFT.

Team Trade Winds is also involved in the fortnightly publication of the Trade Digest newsletter. The team

comprises of the following:

Senior Editors: Ujjwal Bhatia & Gautam Guliani MBA(IB) 2013-15

Junior Editors: Priyanaka Keshavdas Iyengar & Nitesh Singh MBA(IB) 2014-16

Yours sincerely,

Team Trade Winds“We are planning to give more market-linked export sops to

different products this time instead of incentivizing products

and markets separately. We can then plan our promotion and

marketing drive better. There will also be focus on promoting

services exports”- DGFT

Trade Winds | Special Edition

Indian Institute of Foreign Trade

SECTION PAGE NUMBER

Focus Theme

Inward introspection

World of Trade

Trade Blocks

Commodity Watch

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Dubai Trade Conclave 54

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Dubai Trade Conclave

This edition of Trade Winds was released

during the Dubai International Trade Conclave.The conclave saw Mr. Anurag Bhushan, theConsul General of India in Dubai as thehonourable chief guest.

IIFT has successfully organised trade conclavesin the past. Since last year the conclave hasshifted from Singapore to Dubai and the trendcontinued this year as well. Major reason beingthe growing trade relations between India andGulf Cooperation Council (GCC) Countries andDubai is also emerging as a global trading hubas it connects markets from across the globe.

“For India, Dubai is emerging as a gateway to

Africa as they require cost effective products.There is a great deal of synergy for both UAEand India to tap these markets as Dubai is alsoemerging as a global trading hub as it connectsmarkets from across the globe. In qualitativeterms there is a great momentum betweentwo countries which will b sustained in longrun. We have decided to concentrate on UAEas it really enjoys good trading infrastructure,”said Dr Surajit Mitra, director and vice-chancellor, Indian Institute of Foreign Trade.

This special edition of Trade Winds aligns itselfwith the theme of the conclave ,focuses onvarious aspects of the trade relations betweenIndia and GCC Countries and variousopportunities.

Indian Institute of Foreign Trade

Picture from Left to Right: Dr. Jaydeep Mukherjee – Assistant Professor, IIFT, Mr. Anurag Bhushan –Consul General of India in Dubai, Dr. Surajit Mitra – Director, IIFT, Mr. Ajay Mathur – President of DubaiAlumni Chapter.

4

This special edition of Trade Winds on GCC trade relations was released during the InternationalTrade Conclave in Dubai. The theme of the International Trade Conclave was “RevolutionisingTrade by Unlocking the Potentials of the Global Value Chain”.

Trade Winds | Special EditionFo

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This special edition focuses on various aspects of the India – GCC trade relations and variousopportunities for both. India has traditionally been a big trading partner of GCC and identifyingfuture potential will create further opportunities

India-GCC Trade Relations

By Ujjwal Bhatia

MBA (IB) 2013-15

Traditionally, India has enjoyed cordial relations

with GCC with cooperation in the areas of

economic, political and security domains.

Against the backdrop of an evolving global

economic scenario and changed politicallandscape in India, the Gulf CooperationCouncil (GCC) assumes great significance asIndia’s trade partner. GCC is an economic andpolitical union of Arab states bordering thePersian Gulf; Bahrain, Kuwait, Oman, Qatar,Saudi Arabia, and the United Arab Emirates(UAE). Traditionally, India has enjoyed cordialrelations with GCC with cooperation in theareas of economic, political and securitydomains. With the increasing instability in theLevant region and spreading out of thereverberations to adjoining areas, India’sconcerns of security and stability in the regionhave found resonance with GCC’s views.

Also, as the Gulf enjoys geographic proximity toIndia, separated only by the Arabian Sea, it hashuge potential as India’s trade and investmentpartner for the future.The GCC has had strong cultural and historicallinkages with India. The GCC-India traderelationship has flourished after Indiaundertook the path of liberalization in the 90s.The complementary nature of both aninterdependent economic profile and the fastgrowth rate of domestic economies serve asstrong underpinning to the future trade andinvestment ties between the two regions. Withthe transition in the India’s economic mindsetwith the arrival of a new government at thecentre, the need for energy resources andinfrastructure funding is at an all-time high. Atthe same time, diversification of the domesticeconomy, job creation and food securitycontinue to be the major concerns of GCCcountries. Recently, India has taken severalsteps to open up foreign investment in certainsectors. There are vast opportunities forinvestors hailing from the GCC countries toinvest in India’s growth story and also India canprove itself as an attractive investmentdestination by easing some of the existent

Indian Institute of Foreign Trade 5


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regulatory hurdles. India has taken numeroussteps in this regard and several more areunderway to improve the ease of doingbusiness in India. Establishment of economiczones and incentives for various sectors inIndia’s Foreign Trade Policy (FTP) are steps inthe same direction. It has also signed severalbilateral trade agreements with GCC but theIndia-GCC Free Trade Agreement (FTA) is stillelusive with the negotiations about to enterinto the third round after a temporarynegotiation freeze from GCC’s end of thetable.

India’s trade with GCC partners haswitnessed a tremendous growth in the pastfew years and is slated to increase furtheragainst the backdrop of rising urbanizationand consumption in the GCC countries. Also,Indian businesses have made extensive useof Dubai’s location as an east meets westdestination i.e. a transshipment hub andhave leveraged on the basis of costcompetitiveness through savings in logisticscosts. There is still lack of awareness aboutthe attractiveness of GCC countries in Indiaand hence there is a huge potential forgrowth in bilateral trade and investmentflows between India and GCC provided bothparties work cohesively keeping in mind longterm strategic goals.Top 10’s (India’s top 10 exports and imports from the region)

Source: ITC TrademapExports- India to GCC

46

49

52

42

44

46

48

50

52

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2011 2012 2013

India's exports to GCC ($ bn)

HS Code ProductValue (in

US$ mn)

271012Light petroleum oils

and preparations6,966

271019Other petroleum oils

and preparations6,377

711319Articles of jewelry &

parts thereof5,823

710239

Diamonds non-

industrial nes

excluding mounted

or set diamonds

4,978

710812 Gold in unwrought

forms non-monetary2,439

100630

Rice, semi-milled or

wholly milled,

whether or not

polished or glazed

1,898

270799

Oils & other products

of the distillation of

high temp coal tar

etc.

1,130

710231

Diamonds unworked

or simply sawn,

cleaved or bruted

758

880240 Aircraft 693

851712 Telephones 633



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Imports-India from GCCAs far as bilateral trade with GCC isconcerned India’s export basket to GCC isrelatively more diversified than its importbasket. This is substantiated from the factthat the top 10 export categories from Indiato the GCC account for about 80% of thetotal exports of India to the region. Thenumber of categories of products exportedfrom India to GCC is approximately 100.GCC’s exports to India grew at a CAGR of46.2% in the millennial decade of 2001-10.UAE and Saudi Arabia are the majorexporters from the region. Mineral fuel, oilsand distillation products continue to be thebiggest export from GCC to India withdemand driven by the increasingindustrialization activity and the expansion ofrefining capacity in India.

Trade in Services

India has a comparative advantage over GCCin the services sector due to a service-basedeconomy with services contributing around55% to India’s annual Gross DomesticProduct (GDP) and vast availability ofknowledge capital. On the other hand, theGCC countries have an underdevelopedservices sector and are largely dependentupon imports. As the region aims to diversifyits economy beyond oil, the demand forservices in the domains of informationtechnology, education, training andhealthcare services, telecommunications,software development, banking and financialservices and tourism and hospitality is onlygoing to increase. All these developmentsprovide huge opportunity to India. India cancapitalize on its twin advantage of low-costskilled labour and English proficiency to takeadvantage of these opportunities. On anaverage, India offers 50-80% lower costs thantheir source locations and 10-30% lowercosts than other low-cost destinations.Hence, this is an opportunity not to bemissed.

HS Code ProductValue (in

US$ mn)

270900

Petroleum oils and

oils obtained from

bituminous

minerals, crude

59,041

999999Commodities not

elsewhere

specified

13,794

710812Gold in unwrought

forms non-

monetary

7,208

710239

Diamonds non-

industrial nes

excluding mounted

or set diamonds

7,136

710231

Diamonds non-

industrial

unworked or

simply sawn,

cleaved or bruted

2,878

271113 Butanes, liquefied 1,910

271112 Propane, liquefied 1,180

290531Ethylene glycol

(ethanediol)698

271012

Light petroleum

oils and

preparations

656

271119

Petroleum gases

and other gases,

liquefied

622



Trade Breakup

Source: ITC Trademap

Growth drivers for bilateral trade

• Apart from the oil sector, there is hugeuntapped potential in areas such asmanufacturing, healthcare, financialservices, agriculture, food processing,mining and minerals, tourism andhospitality.

• In order to promote trade andinvestments, the regulatory regimes inboth the countries are being liberalized.

• India’s bid to boost consumption andGCC’s initiatives for diversification of theirexport markets can result in strongbilateral trade synergies.

• Numerous bilateral trade agreementshave been signed and both the regionshave prioritized the development of freeeconomic zones. However, the free tradeagreement (India-GCC FTA) is yet to besigned and has gone through two roundsof negotiations.

Challenges

• Tariff and non-tariff barriers in India and GCC

• Poor infrastructure in India• Red-tapism and cumbersome regulatory

procedures in India and GCC• Internal political conflicts and geopolitical

instability in GCC• Lack of official publications and databases

in GCC

Opportunities for India with GCC

• Manufacturing in energy-intensivedomains: Both the regions can upgradetheir present commercial relationship inenergy sector to manufacture value-addedproducts such as petrochemicals, plasticsand fertilizers. Abundance and cheapsupply of natural gas also makes GCC animportant investment destination forIndian conglomerates in other energy-intensive manufacturing domains likealuminium and steel.

• Oil and Gas engineering services: SeveralIndian behemoths like Reliance IndustriesLtd. (RIL) and Larsen and Toubro (L&T)have shown keen interest in explorationactivities in the Gulf region.

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13.27%

11.59%

11.41%

6.76%5.61%

51.35%

GCC's imports (2013)

China India US Germany UK Others

17.53%

12.37%

12.00%

10.27%8.43%

39.38%

GCC's exports (2013)

Japan India South Korea China USA Others



• Minerals and mining: Although the globalfinancial crisis derailed Dubai’s push forinfrastructure slightly, the momentum isbuilding up again with huge improvementsplanned in the region’s rail, road and seanetwork. This presents a huge opportunityto Indian construction giants. In 2012, PunjLloyd was given a contract for theconstruction of a bulk oil terminal at theJebel Ali port in Dubai.

• Healthcare: Increase in disposableincomes, surge in lifestyle diseases andimproved awareness about personalhealthcare are going to be the majordrivers for healthcare expenditure in GCC.Therefore, the GCC provides an attractivedestination to the Indian healthcarecompanies to benefit from the increasingprivate and public healthcare expenditure.

• Financial Services: As GCC boasts of a hugepopulation of Indian expats, India can takeadvantage of its sound banking andfinancial sector and expand into thesecountries.

• Agriculture and Food processing: Due toharsh soil and climatic conditions and waterscarcity, the GCC countries primarilydepend on imports to meet their needs foragricultural and food products. India’scompetitiveness in agriculture andproximity to GCC makes it an ideal sourcingpartner for agro-based value chain in theGCC region.

Opportunities for GCC with India

• Oil Sector: For the foreseeable future,GCC’s relationship with India is primarilygoing to be hinged around the oil sector. In

terms of energy consumption, India ranksfourth in the world after US, China andRussia. Thus, GCC would continue to playthe key role of a strategic supply partner forIndia’s energy needs.

• Infrastructure: With the push of theincumbent government for Public-Private-Partnership (PPP) based model ofinfrastructure development, there is hugeopportunity to be explored from theinvestors based in GCC. In 2012, Indiangovernment invited the Abu-Dhabiinvestment authority to invest in the Delhi-Mumbai Industrial Corridor.

• Downstream sector: With limited scopefor investments in the upstream sector,India has positioned itself as a competitivedownstream player with proven capabilityin the refining sector. In 2011, Qatar basedConsolidated Gulf Company bagged its firstcontract from the India-based Oil andNatural Gas Corporation (ONGC). Thedownstream sector presents a significantopportunity to GCC’s refiners and oil giants.

Conclusion

GCC and India continue to play a pivotal rolemutually in terms of growing trade andinvestment volume between the two regions.Innovative ways to expand the relationshipbeyond the conventional import-exportrelationship and improvement of businessenvironment in the two regions can go a longway in boosting bilateral merchandise,services and capital flows. A lot has beenachieved over the past and a lot remains to beachieved in the future.●

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Gulf Cooperation Council (GCC) is a political

and economic alliance of six Middle Easterncountries—Saudi Arabia, Kuwait, the UnitedArab Emirates, Qatar, Bahrain, and Oman.Established in Riyadh, Saudi Arabia, in May1981, the purpose of the GCC is to achieveunity among its members based on theircommon objectives and their similar politicaland cultural identities, which are rooted inIslamic beliefs. Presidency of the council isrotated annually; Kuwait holds the currentPresidency position with Abdullatif bin RashidAl Zayani as the secretary General since April1, 2011. He is the fifth GCC secretary generaland the first with military background sincethe GCC established.The GCC was established in view of the specialrelations between them, their similar politicalsystems based on Islamic beliefs, joint destinyand common objectives. The GCC is a regionalcommon market with a defense planning

council as well. The geographic proximity ofthese countries and their general adoption offree trade economic policies are factors thatencouraged them to establish the GCC.Based on their conviction about theconnected nature of their security and that anaggression against any one of them is deemedan aggression against all of them, cooperationin the military field has received the attentionof the GCC states. Such conviction stems fromthe facts of geopolitics and faith in onedestiny. Moreover, the security challenges inan unstable regional environment, like theGulf area, impose on the GCC Statescoordination of their policies and mobilizationof their capabilities. In 1981, the immediateobjective of the formation of the GCC was toprotect themselves from the threat posed bythe Iran-Iraq War and Iranian-inspired activistIslamism. In a series of meetings, chiefs ofstaff and defense ministers of the Gulf States

GCC and EU: Potential of Economic Collaboration

By Amitabh Anand

MBA (IB) 2013-15

An analysis of the GCC-EU trade relations and what

the future holds, identifying opportunities for both

sides.



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developed plans for mutual defense andlaunched efforts to form a joint command anda joint defense network.

GCC and its Economic Potential

The combined GDP of the GCC in 2013 wasUSD 1642 billion and is expected to grow toUSD 1699 billion in 2014, according to IMFestimates. The oil deposits in and around theregion have been driving growth andinvestment in the region over many years.Though the region is still heavily dependenton oil and oil exports, the non-oil GDP of theGCC region has started showing positivetrends after the fall in 2008. Investments inthe real estate sector and manufacturing areexpected to be major growth drivers for thisregion. There has been considerable clamoracross the region over the need to make theGovernment policies in the region moreemigrants friendly as this region attracts alarge number of foreign workers.

Source: Economist Intelligence Unit, The GCC in 2020: The Gulfand its People, September 2009

Besides, the GCC also has immensedemographic advantage in the fact that thisregion would have grown to 53 million by2020 as against 29 million just decades back.This has made this region a wonderfulinvestment destination for investors all across

the globe. This growth in population hascontributed to a burgeoning middle class thatalso provides an excellent market for the saleof a number of goods. This has made the GCCregion the topic of hot discussion in businesscircles. This region has been attracting healthyinvestment in the manufacturing sector andthe petrochemicals industry. Europe has beenpaying close attention to the GCC regionengaging it in a sizeable bilateral tradearrangement. Throughout this article, we willexamine at the current GCC-EU businessrelations and the potentials of the future.

EU-GCC: Current Trade Interaction

The EU has been a very active trade partner ofthe GCC region. The Gulf Cooperation Councilcountries account for 4.2% of total EU trade.They are currently EU’s fifth largest exportmarket worldwide.EU is the first trading partner for the Gulfcountries covering 13.8% of their total trade in

goods. EU-GCC total trade in goods amountedto USD 197 billion in 2013, a significantincrease from USD 140 billion in 2008 whichhad dipped to USD 104 billion in 2009.Among the multiple trade partners that GCChas, imports from EU stand highest at 26.1%.

GCC population growth – Population (in million)

2000 2005 2010 2015 2020

Saudi Arabia 20.47 23.12 26.18 29.59 33.34

Kuwait 2.23 2.99 3.58 4.4 5.2

UAE 3.24 4.61 5.57 6.44 7.06

Bahrain 0.64 0.89 1.18 1.45 1.66

Oman 2.4 2.51 3.11 3.32 3.53

Qatar 0.64 0.97 1.82 2.33 2.79

Total 29.62 35.09 41.44 47.53 53.58



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Source: Eurostat Comext

However, when it comes to exports, GCC hasnot exploited the European market fully as itsexports to EU are merely $64 billion or 7.4%of a total of $663 billion.EU exports to Gulf Cooperation Council arediverse but focused on industrial products(91.9%) such as power generation plants,Source: Eurostat IMF

railway locomotives and aircraft as well aselectrical machinery and mechanicalappliances. Machinery and transportequipment (44.6%), manufactured goods andarticles (collectively 23.6%) and chemicals(11%) were the main categories of productsexported in 2013. EU imports from GulfCooperation Council are mainly fuel (75.8% oftotal EU imports from the region in 2013).

Period Imports Exports

Balance ($ mn)

Total Trade ($

mn)Value$mn

Growth (%)

Share in Extra-EU

(%)

Value $mn

Growth (%)

Share in Extra-EU

(%)

2008 48836 17.6 2.4 91179 14.5 5.4 42344 140015

2009 29618 -39.4 1.8 75193 -17.5 5.3 45575 104813

2010 45612 54 2.3 85138 13.2 4.8 39527 130751

2011 74666 63.7 3.3 94962 11.5 4.7 20296 169628

2012 79652 6.7 3.4 108840 14.6 5 29188 188491

2013 73997 -7.1 3.4 123592 13.6 5.5 49595 197590

Partner

Imports

Partner

Export

Partner

Total Trade

Value $mn

World Share %

Value $mn

World Share %

Value $mn

World Share %

EU 122147 26.1 Japan 134882 15.3 EU 186623 13.8

China 65410 14 S.Korea 95852 10.9 China 161032 11.9

USA 58851 12.6 China 95622 10.9 Japan 159458 11.8

India 53875 11.5 India 95510 10.9 India 149383 11.1

Japan 24577 5.3 EU 64476 7.3 USA 122815 9.1

S.Korea 19509 4.2 USA 63964 7.3 S.Korea 115361 8.6

Turkey 10209 2.2 Singapore 38983 4.4 Singapore 47575 3.5

Singapore 8592 1.8 Thailand 30048 3.4 Thailand 38490 2.9

Thailand 8442 1.8 Iran 28573 3.2 Iran 31742 2.4

Switzerland 8225 1.8 Pakistan 15400 1.8 Pakistan 19729 1.5



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Source: Eurostat Comext

Inward investment is likely to be concentratedin the export-oriented industries and inservices sectors that cater to the growingresident population, including power, water,transport, education and healthcare.“Petroleum and petrochemicals are the GCC’smost competitive industries,” says ProfessorHosoi, “but the shortage of infrastructure inthe region, particularly related to water andpower, make this another key investmentsector.” There is little public transport in theGCC and the potential for railways and urbanlight rail is strong. There is also scope for more

Source: World Investment Report 2014, UNCTAD

public-private partnerships in the provision ofservices, notably healthcare. Foreignparticipation in education may slow followinga surge in recent years, as universities pauseto assess the success of recent entrants. Someinstitutions will also be deterred by concernsabout political constraints and censorship ofthe press and the internet in parts of the GCC.Lending to real estate projects may besubdued for some time following the recentboom. However, there is scope for greaterinvestment in some property subsectors, sinceinvestment in recent years has focused heavilyon high-end property at the expense ofaffordable housing.

SITC Selection Imports (%) Exports (%)

Food & Live animals 0.1 6.3

Beverages & Tobacco 0 1.6

Crude materials, inedible, except fuel 0.5 1.5

Mineral fuels, lubricants & related materials 75.8 3.1

Animal & Vegetable oils, fats & waxes 0.1 0.1

Chemical & related products 10.1 11

Manufactured goods classified chiefly by material 7 11.8

Machinery & Transport equipment 4.4 44.6

Miscellaneous manufactured articles 1.1 11.8

Commodities & Transactions n.c.e. 0.7 6.4

Other 0.4 2

FDI outflows from GCC over the years ($ mn)

Region/Economy 2008 2009 2010 2011 2012 2013

Bahrain 1620 -1791 334 894 922 1052

Kuwait 9100 8584 3663 4434 3231 8377

Oman 585 109 1498 1233 877 1384

Qatar 3658 3215 1863 6027 1840 8021

Saudi Arabia 3498 2177 3907 3430 4402 4943

UAE 15820 2723 2015 2178 2536 2905



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combine the traditional and the new. Due tothe maturity of the markets, Europe and theUS will continue to be major investmentdestinations for the GCC but China and Indiawill gain importance as well as agricultural-based economies.

EU-GCC Free Trade Agreement

The six countries of the GCC and the 28member states of the EU have been talking forover two decades, and in the current trend ofglobalization or increased economic andpolitical interdependence between states andcountries, it is remarkable that they have stillnot developed the EU-GCC Co-operationAgreement of the late 1980s.The EU-GCC negotiations for a Free TradeAgreement seek the progressive andreciprocal liberalization of trade in goods andservices. They aim to ensure a comparablelevel of market access opportunities, takinginto account the countries' level ofdevelopment.The current framework for economic andpolitical cooperation is the 1988 EU-GCC cooperation agreement that seeks to“help strengthen the process of economicdevelopment and diversification of the GCCcountries”. The Cooperation Agreementcovers such varied areas as economy, scienceand technology, agriculture, energy andinvestments. The agreement created a JointCouncil and a Joint Co-operation Committeewhich meets annually. At the 2010 JointCouncil, an EU-GCC Joint Action Programmefor the years 2010-2013 was agreed. The EU-GCC Invest project is part of the EU-GCCCooperation Agreement.The mutually welcomed idea to sign an EU-GCC Free-Trade Agreement, providingprogressive and reciprocal liberalization oftrade between the EU and the GCC, hasbecome suspended by the GCC since late 2008

for reasons of feelings that trade talks held sofar had delivered only scant results.

EU GCC FTA Impasse

The GCC and the EU should break the currentimpasse and explore ways to re-engage.It is important to take into account thoughthat the balance of power between the tworegional-blocs has changed: the ever morerising status of the GCC in the Gulf and thewider Middle-East, and the bail-out role oftheir Sovereign Wealth Funds in economiesaffected by the repercussions of the globalfinancial breakdown, has led to GCC statesbecoming more assertive in their relation withthe EU.The imposition of energy-taxes by the EU onfossil fuels should not be seen asprotectionism, for this is the result ofinternational commitments, or the attainmentof agreed reductions in carbon-dioxideemissions for environmental reasons proper.International competitiveness of GCCcompanies in petro-chemicals and aluminumis, on the other hand, the result of fair andlower production costs, or strategicallycombining the limited absolute andcomparative advantages of economies undereconomic development as such. Taking intoaccount the different levels of economicadvancement between the two blocs remainstherefore important.A future EU-GCC agreement has been subjectto a public sustainability impact assessment.Insisting on trade concessions to be reciprocalis not realistic, for GCC states have, apart fromoil and natural-gas, only few products whichcan be exported in significant quantities to theEU in comparison with the ship-loads offinished and semi-finished EU products thatthe envisaged EU-GCC Free Trade Agreementis likely to make more competitive within GCCmarkets.



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a more realistic/flexible game of give and take,for the conclusion of a sound, mutuallybeneficial trade agreement requires aworkable consensus.Establishing and fostering deeper economicand political relations with the GCC via abilateral free-trade agreement has proven tobe different from the trade agreements withother commercial partners around the world:GCC states cannot be pulled-into by theprospect of EU-accession, for none of thembelongs geographically to Europe nor can theybecome tempted by financial-aid, for all ofthem are wealthy.In terms of pushing for democratization andrespect for human rights, has it become clearthat the EU has no leverage over the GCC asan organization neither over GCC statesindividually.It is expected that the EU will not change itsposition on democratic principles, goodgovernance and human rights, for the reasonthat it cannot make an exception to what itinternationally stands for.It has been possible to say that with both theUS and Asia willing to do business in the Gulf,the GCC has enjoyed a somewhat strongerbargaining position.

Implications of failed talks

Indeed, it appears the GCC and the EU is onceagain on the brink of reaching a free-tradeagreement (FTA) after 20 years of on-and-offnegotiations. Previously the talks have brokendown because of the disputes over trade inpetrochemicals as well as political differences.This time the major sticking point is alsolinked to petrochemicals.If the two sides fail to clinch a deal yet again,the GCC will go into 2014 without anypreferential trading arrangement with the EUat all. On 1 January 2014 the EU startsimplementing a new Generalized Scheme ofPreferences (GSP), under which the GCC and

other developing countries are no longergiven preferential access to the EU marketwith reduced tariffs.The GCC states will be excluded from the newscheme because they are all categorized ashigh in- come countries with levels of percapita GDP higher than many of the EUmember states. With some individualcountries – Qatar, UAE and Kuwait – the levelis higher than any EU country.From next year, the EU will apply normalcustoms duties to all products from GCCcountries. The duties on products that the EUimports from GCC countries – minerals, oiland plastics – are low or non-existent. Overall,GCC countries will pay average duties of 1.0-1.5% instead of 0%.GPCA points out, however, that the GSP tariffon petrochemicals averages between 2.2%and 3.5% and it will be increased to 6.5%effective January 2014.An FTA, however, will not just cover tariffs,ensuring that GCC products enter the EU duty-free, but also will deal with non-tariff issues.The remaining differences between the twosides center on the GCC’s system for pricingpetro- chemical feedstocks, mainly natural gasliquids. Also, from the point of view of someGCC states, the dispute about petrochemicalfeedstock pricing is linked to the issue of howfar the FTA should be able to limit theirfreedom to take decisions on future trademeasures. In line with its policy against exportrestrictions, the EU is insisting that in any FTAor other trade deals made with non-EUcountries there should be an undertaking bythe prospective partners not to introduceexport duties.In the trade negotiations with the GCC, the EUhas apparently softened its stance on exportduties by agreeing to allow them to use on acertain proportion of products. But SaudiArabia is reported to be opposing anyprohibition in the free-trade agreement ofexport duties, particularly forpetrochemicals.●


Trade Winds | Special EditionIn

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Inward Introspection

International trade will be facilitated in India only if there is coordinated approach to remove all the obstacles. Inward Introspection analyzes the current issues concerning international trade in India with an analysis and future outlook.

India’s Export Infrastructure

By Nikhil Indla

MBA (IB) 2013-15

Indian ports have not been able to achieve an

optimum level of cargo-handling due to multiple

constraints related to handling of cargo which has

increased evacuation time at ports.

India’s export infrastructure is inadequate.

Although this statement is very harsh but alsotrue. We will analyze the different issuesplaguing our export infrastructure.

Rail: India’s rail network is a vestige of Britishrule. Over 80 per cent of the current networkwas built before the country’s independence in1947. India therefore has a network developedby over 40 different railway entities. Further,many independent kingdoms had their ownrailway networks. Soon after partition, around40 per cent of the network became a part ofBangladesh (most of the Bengal-Assam railwaylines) and Pakistan (the North-Western railwaylines). The remaining tracks were amalgamatedinto the Indian Railways. While traffic on railhas grown more than 10-fold between 1951and 2007, rail track length has only grown 1.4times in the same period. Despite theovercapacity in 1950 and the efficiencyimprovements like gauge conversion andelectrification since then this stark gapbetween traffic and infrastructure growth hasresulted in capacity constraints on key portionsof the network with high traffic. Furthermore,

traffic growth will continue at high rates,requiring a step increase in the rate of networkbuild-up.

Road: Road infrastructure has high importancefor the growth of India’s economy, sincearound 60% of freight and 85% of passengertraffic is carried by road. The country has aroad network spanning 41.09 million km11 andranks among the largest in the world.Although India has a large road network,12 incomparison with other countries (142), itstands at a low rank of 85 in terms of thequality of its roads.13 Only half the roads arepaved, as compared to more than 100% in theUK and 67% in the US. The share of high-capacity roads is less, as compared to those inother countries. The National Highways onlyconstitute around 1.7% of the road network,but carry 40% of the total road traffic. Yet only24% of the National Highways are four-laneand meet international standards. For acountry aspiring to grow at 8.0%, India needsextensive highways and expressways to preventroads from becoming bottlenecks in its growth.



Waterways: Growth in waterways has beenhampered by limited investments and the lossof key routes following partition. Prior to theFifth Five-Year Plan, developing inlandwaterways was accorded low priority with acumulative investment of under INR 35 crore.This was partly due to the prioritization ofirrigation, and limited viability of inlandwaterways owing to deforestation and silting.Further, the partition of the country renderedseveral routes unviable. For example, theKarachi-Rangoon stretch via Colombo was akey coastal route but following partition, thisstretch was significantly shortened, resultingin lower traffic. Similarly, the Karnafuli andKolodyne river routes connecting the north-eastern states to Bangladesh and Burma arenot used as extensively as beforeindependence.

Ports: In India about 95% of volume (and 70%of value) of nation’s merchandise trade ishandled by Indian ports. Obviously portinfrastructure and its hinterland linkages willbe a critical component of Indian economicdevelopment process. There are manyproblems facing the port sector. Port capacityis inadequate for the requirements of thefuture. India does not have a continuouschannel linking its eastern and western ports.Labour productivity of port workers is low.Greater investment is needed especiallyforeign investment. National security concernswhich have held back foreign investment inthe port sector.

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Tariff setting is another major issue, whichlimits private sector investments in the sector.The Ports Regulatory Authority Bill 2011 haspotential to overhaul the regulatory structureof ports and the tariff-setting process butconcerns of private sector need to beaddressed.

Indian ports have not been able to achievean optimum level of cargo-handling due tomultiple constraints related to handling ofcargo, the level of containerization, customprocedures and insufficient hinterlandconnectivity, which has increased evacuationtime at ports. As a result, they lag behind theirInternational counterparts on key operating orproductive metrics.

There are several reasons why the requisiteinfrastructure has not been developed. Landacquisition is the single largest roadblock forinfrastructure development because ofmultiple reasons. Inadequate compensationand poorly planned rehabilitation packageshave led to this issue. To address it, a new Bill,the Land Acquisition and Rehabilitation &Resettlement Bill (LARR), has been proposed.This Bill, in its current form, includes improvedprovisions for compensation andrehabilitation, and is expected to streamlinethe land acquisition process and reduce thenumber of litigations in the country. However,the cost of acquiring land will increasesignificantly, which could affect the viability ofprojects in the long term.

Regulatory approvals and environmentalclearances are the major hindrance forsuccessful delivery of projects. Multipleagencies are involved and various approvalsrequired across the different stages of theproject cycle.

Another major roadblock is the approach ofthe sponsoring agency to project planning orpre-tendering activities. The relevantauthorities often side-step crucial project

milestones such as land acquisition andprepare poorly planned projects in their rushto announce projects.

Funding is another major roadblock, with anincreased reliance on the private sector todevelop and maintain infrastructure projectsthat are capital-intensive and have a longgestation period. Currently, developers andbanks have exhausted their exposure limits tothe infrastructure sector, respectively. Equitymarkets are also not favourable dueregulatory requirements, forcing mostinfrastructure companies to dilute their equityin public markets to whatever extent possible.

Another emerging challenge relates to thecapacity of the private sector to executeinfrastructure projects. The sector hasfinancial and manpower constraints. Mostlarge companies in India are now integratedplayers that execute projects as developersand EPC contractors. However, the totalnumber of such players is low and they havealready secured several projects, which limitstheir capacity to take up new projects.

Lack of skilled manpower and shortage ofconstruction equipment further compoundsthe problem.

Infrastructure development is a criticalenabler to economic growth. Logisticsinfrastructure, covering the road, rail,waterways and air network of a country, is thebackbone on which the nation marchesahead. Although the urgency to developIndia’s logistics infrastructure has beenrealized in the past decade, the task at hand isdaunting. India’s logistics infrastructure isinsufficient, ill-equipped and ill-designed tosupport the expected growth rates of 7 to 8per cent over the next decade. This expected2.5-fold growth in freight traffic will furtherincrease the pressure on India’s infrastructure.India has the opportunity to address thisissue.

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Over two-thirds of the infrastructure networkcapacity of the future has not yet been built.Learning from the past and adopting globalbest practices, India should pursue a logisticsinfrastructure strategy that minimizesinvestment, maximizes cost efficiency, reduceslosses for users and is energy efficient. Thiswill need India to build its freightinfrastructure.

Some recommendations to improve India’sinfrastructure are as follows:

Rail dedicated freight corridors: This programshould have a dual focus. First accelerating thespecial purpose vehicles (SPVs) for the twoplanned DFCs—Delhi-Kolkata, Delhi-Mumbaiand simultaneously incorporating SPVs forthree additional DFCs.

Coastal freight corridors: The objective of thisprogram must be to strengthen the West i.e.,Kandla to Kochi and East i.e., Kolkata toChennai coastal freight corridors throughintegrated projects that include last-mile railand road programs, transshipment hubs,proactive marketing and accelerated portdevelopment.

National expressways: This includesconstructing expressways of 100 to 300 kmstretches that factor in expected increases intraffic by 2020. While currently 5 to 7expressways are likely to be built by 2020,ideally, the number of expressways should beincreased to over 20 by 2020.

Last-mile roads: Creating a dedicated last mileprogram with over 750 last-mile links toconnect in particular port and railwayterminals to production and distributioncenters.

Last-mile rail: This should ensure last mile railinfrastructure in many of the last 750 milelinks. It will include developing track and rail

head infrastructure to support 8 to 10 criticalcoal corridors in mineral rich states.

Multi-modal logistics parks: This program willpredominantly focus on demarcating land forlogistics parks at 15 to 20 key points wheredifferent modes overlap, near major cities, oralong proposed DFC routes.

Technology adoption like national electronictolling: This entails standardizing technologyfor nationwide electronic toll collection (ETC)in future contracts and establishing anationwide clearing house with set norms andservice standards to facilitate transactions.

Apart from streamlining the land acquisitionprocess through LARR, the Governmentshould also issue clear guidelines forsponsoring agencies on land acquisition, e.g.,mandatory acquisition of 90% of the total landor 70% of the contiguous land, before offeringprojects for bidding. This will help agencies tobe more rigorous in their project planning anddiligence processes before initiating bidding.

Dispute resolution process needs to be moreeffective and expeditious. The Governmentmay consider setting up a single quasi-judicialauthority for all infrastructure sectors, whichwould have statutory powers to resolvedisputes between the authorities and privatedevelopers.

The private sector is finding it difficult toraise funds for infrastructure due to theaggressive investment targets set in theTwelfth Plan. Setting up of Infrastructure DebtFunds (IDFs) and the reduction in WithholdingTax is expected to facilitate the flow of long-term debt into infrastructure projects. TheGovernment can also infuse additional capitalin major public sector banks to augmentfunding in short-term.●

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The fulcrum of world economy has shifted

from US and Europe to Asia with China andIndia leading the way. The global financialcrisis post 2007-08 recession and the strongrecovery posted by both the countries is atestimony to the fact that both countries arethe future of world economy. The setting up ofBRICS bank is another example of how Chinaand India are ready to take things under theircontrol .Trade being an engine of growthnaturally assumes much more significance forthese countries in this scenario. Lookingforward, the emerging economies of SouthAmerica with their growing middle classpresent an opportunity which will bebeneficial for both the countries. While Chinahas already embarked on boosting trade withthe region, clocking over $255 billion andemerging as its third largest trading partner,India has gotten off to a slow start. This articlewill look at the trade and investmentopportunities between India and SouthAmerica.

Common Ground

India and South America have both beencolonized by European powers. Although thetwo regions do not share much in terms ofhistory, trade relations were established in17th century with Portuguese colonization ofBrazil and Goa. The most notable trade itemwas cow which was sent from India to Braziland chillies were sent the other way round.India and South American economies such asArgentina, Brazil and Chile have a growing

middle class and have evolved as agriculturebased economies. Stronger linkage betweendeveloping and emerging economies will helpthem find common ground on internationalforums like UN and WTO.

Current Trade Volume

India’s trade with South America wasnegligible until the beginning of the pastdecade. Since then, trade with the SouthAmerican countries has burgeoned. Accordingto the official statistics of the countries of theregion, two-way trade between India and LatinAmerican countries has reached $47 Billion inthe fiscal year 2012-13. India has become animportant trading partner for the region as awhole. India’s share in Latin American andCaribbean trade with Asia-Pacific is still at anincipient stage; its 6.2 % share in the SouthAmerican region’s exports to Asia-Pacific isbelow the 8.8% share of Republic of Korea andthe 12.9% share of ASEAN. India’s share in theregion’s imports from Asia-Pacific is evenlower, at 5.1%. There is significant potentialfor boosting trade in the coming years, giventhe new growth paradigm of Latin Americaand the Caribbean and the favorable mindsetof Latin Americans towards India.

Some of the official statistics regarding thetrade between the Latin countries and Indiaare:

• According to India’s official statistics for thefiscal years 2012 to 2013, the India’s totalexports to Latin American countries is

India and South America – Opportunities for trade expansion and investment

By Anmol Garg & Suryanarayan Panda

MBA (IB) 2014-16

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America with their growing middle class present an

opportunity which will be beneficial for both the

countries.



$14.3 Billion with exports to Brazil being$5.043 Billion, Colombia being $1.042Billion, Peru being $ 742 million and Chilebeing $658 million in the fiscal year 2012-2013. At the same time imports from theLatin American countries constitute about$33.315 Billion.

• Brazil is the largest export destination,accounting for almost 40% of total exportsto the region. The combined share of thetop seven destination countries (Brazil,Bahamas, Mexico, Colombia, Chile, Peruand Argentina) represented 86% of totalexports to the region.

• With respect to imports, the BolivarianRepublic of Venezuela and Brazil led the list,with a combined share of 61%. Chile,Mexico, Argentina and Colombia were alsoimportant sources of Indian imports.

Key Areas

EnergyIndian trade with South America, especiallyBrazil comprises mainly of crude oil andagricultural commodities like soya oil and rawsugar. Brazil has emerged as a major source ofoil for India as it seeks to diversify its imports.ONGC through its overseas arm ONGC VideshLtd has already acquired blocks in the highpotential deep-water blocks of Brazil. It hasacquired blocks in Venezuela, Colombia andCuba along with other Indian companies likeOil India Limited and IOCL.

South American AdvantageSouth America is also a major source ofcopper and iron ore for India.

Figure 1 Indian copper imports from MERCOSUR (Value in US$ Million)

Figure 2 Indian soya-bean oil imports from Argentina(Quantity in tons)

Countries like Argentina and Paraguay whichhave an agriculture based export orientedeconomies can find opportunity in Indianmiddle classes’ growing consumption. LatinAmerican countries can leverage theirexpertise in agricultural and farmcommodities to dip into the market in India.Both regions can benefit from this trade asthey focus on food security.

Indian Edge

The main interests for Indian businesses lie inthe investment potential of the area.Argentina which often suffers from cycles ofgrowth and slowdown is a huge consumermarket while Chile is one of the mostdeveloped countries of the region about tojoin OECD. Indian companies like Tata Motorsand Mahindra and Mahindra are alreadyselling cars in several Latin Americancountries. TVS and Bajaj Auto have alreadyentered the markets in partnership with localplayers. Hero Motocorp has startedconstruction of its wholly owned two wheelermanufacturing plant in Colombia.

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Indian firms have invested sizably in the IT,pharmaceuticals and mining sector in SouthAmerica. One of the key differences betweenIndian and Chinese FDI apart from the sectorsis that Indian investment is driven by privatecompanies while Chinese investment isbacked by their government. Other highlighthas been that unlike the Chinese, Indiancompanies haven’t encountered resistancefrom host governments. Companies like TCS,Infosys, Aegis etc. have set up their centers incountries like Brazil and Argentina and employquite a lot of locals.

Figure 3 Infosys BPO Belo Horizonte Delivery Centre

Indian pharmaceutical companies have beenexpanding their presence through acquisitionof local companies. Ranbaxy, later acquired bySun Pharmaceuticals had set up a plant inBrazil in 2000 and was the sixth largest genericdrug maker in the country. An untappedopportunity in trade lies in the export ofjewellery from India. Indian jewellery makerscan expand their markets beyond Europe andUSA and tap on the rising consumer demandin countries like Chile and Argentina.

Opportunities and Challenges

Despite some recent improvements on manyfronts, both India and the countries of LatinAmerica face some formidable challenges.Both the regions together account for some ofthe highest inequality indices in the world, aswell as serious shortcomings in infrastructure,technology, innovation and competitiveness.India and the Latin American region, together

with their main partners, could approachthese profound challenges as opportunities toforge new partnerships to promote growthand development through increased trade andinvestment.Increasing trade between Latin America andthe Asia-Pacific region has been doneprimarily by China, while India still remains anunexploited potential export market as well asan untapped but high potential source ofimports for the majority of countries in theLatin America. Furthermore, despite thehigher interest shown by Indian firms forinvesting in the Latin America countries, theregion’s share of India’s overseas foreigndirect investment (FDI) remains quite small.The South American region’s trade andinvestment relations with India are still at anascent stage, so there is a need to identifyand take advantage of complementarities andpromote business alliances. Tradedevelopment needs to be promoted at theintra-industry level with an emphasis onexport diversification through businessinitiatives that draw on the competitiveadvantage of each region and promoteincreased investment flows centered on valuechains involving both Indian and LatinAmerican firms.Moreover the establishment of BRICS bank ofwhich India as well as Brazil are a part couldfurther help in giving a boost to thesentiments of investors in both the countries.This poses as a tremendous opportunity tothe South Asian as well as South Americancountries to turn a page of trade andcommerce between the two large regions.Both the regions are also discussing the startof direct, non-stop flights as well as shorteningthe sea route time (from 45 days to 30 days)taken by ships to travel between the regions.Although the trade between India and SouthAmerica has developed in the 21st Centuryonly, it has the potential of shaping up thedestinies of both regions and the worldeconomy in the days to come.●

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Trade Winds | Special EditionW

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World of Trade

An increasing globalized world was facilitated by the formation of WTO. World of Trade covers topics pertaining to WTO – issues, potential for growth, opportunities and threats.

International Trade and Environment: Past, Present and Future

By Nitesh Singh

MBA (IB) 2014-16

On December 6th (2013) the World Trade

Organization concluded the first multilateraltrade agreement. At the heart of the deal is anagreement on “trade facilitation”, or measuresto reduce trade costs by cutting red tape incustoms procedures. Disagreement spannedupon on several issues. But one importantaspect of the Doha round, which didn’t gainmuch limelight was the WTO’s stance on theenvironment by launching multilateralenvironment negotiations.

Environmental Impact of Trade

Trade is a vital element of the global economy.We have a come a long way in terms ofinternational trade .The total internationaltrade of goods in the year 1995(WTOestablished) was US$ 6 trillion which increasedto US$ 36.6 trillion at the end of 2012. Worldtrade is expected to grow by a modest 4.7% in2014 and at a slightly faster rate of 5.3% in2015.Developed countries continue to constitute themain players in international trade, howeverdeveloping countries account for an increasing

share. As of 2011 almost half of world tradehas originated from developing countries (upfrom about one-third in 2002). Although tradegrowth (both import and export) has beenhigher for developing countries during the lastdecade, this trend is slowly abating. Inaddition, merchandise and commercial servicesexports provide an increasingly importantshare of world gross domestic product (GDP),rising from 14 per cent in 1970 to 29.3 per centin 2011. In developing countries, this sharereached peaks of 45 per cent before thefinancial and economic crisis of 2008.

World trade expansion has raised the issue of the

relationship between trade and the environment. Is

trade good or bad for the environment?

0

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2000 2005 2010

GLOBAL RESOURCE TRADE

BY VALUE(trillion $)

Forestry products Agricultural products

Fossil fuels Metals and ores

Figure 1. Global resource trade by value (2000-2010)



This increasing volumes of trade have also putadditional stress on environment. Climatechange is one of the foremost challengesfacing the global community today andintersects with international trade innumerous ways. The rising need for naturalresources by emerging and developedeconomies has resulted in surge inconsumption and trade. Greenhouse gasemissions are at all-time high. Emissions frominternational maritime and aviation transportas also increased significantly in last 3 decadesby 88 per cent.

Complexity of the Problem

World trade expansion has raised the issue ofthe relationship between trade and theenvironment. Is trade good or bad for theenvironment? But the problem doesn’t endhere. The problem intensifies in the case ofglobal problems, such as ozone depletion orglobal warming. These require globalagreements, yet each country has an incentiveto free-ride on others' efforts.

Efforts so Far Role of WTOWTO has recognised sustainable developmentand protection and preservation of theenvironment as fundamental goals of theWTO, but its principal objective has remainedto foster international trade and environmenthas generally taken a back seat.

Doha Agreement came as a breath of fresh airand environmental prospects of trade wasalso discussed elaborately. Few WTOagreements permit members to availexceptions, for example;

• Agreement on Technical Barriers to Trade(TBT) and Sanitary and PhytosanitaryMeasures (SPS)

Rules such as the TBT Agreement, dealing withtechnical regulations and product standards,and the SPS Agreement, dealing with foodsafety and human, animal and plant health,provide scope for WTO members to put inplace regulatory measures to protect theenvironment.

• Agreement on Subsidies andCountervailing Measures (SCM)

Provided certain basic disciplines arerespected, the agreement leaves memberswith policy space for, among other things,supporting the deployment and diffusion ofgreen technologies.

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Figure 2. Exports-to-GDP ratio, 2000-2010

Figure 3. WTO members and Observes 2013



• Agreement on Trade-Related Aspects ofIntellectual Property Rights (TRIPS)

The TRIPS Agreement provides a frameworkfor applying the intellectual property systemto promote access to and dissemination ofgreen technologies, and provides policy spaceto promote public interest in sectors of vitalimportance to socio-economic andtechnological development, as well as specificincentives for technology transfer andexclusions of environmentally damagingtechnologies from intellectual property (IP)protection.

• Plurilateral Agreement on GovernmentProcurement (GPA)

The plurilateral GPA applies only to the WTOmembers who agree with upon it. Under theagreement, parties and their procuringentities may prepare, adopt or apply technicalspecifications aimed at promoting greenprocurement.

Rio+20

Rio+20 (United Nations Conference onSustainable Development) took place in Rio,Brazil in June 2012 – twenty years after the1992 Earth Summit in Rio. The officialdiscussions focused on two main themes: howto build a green economy to achievesustainable development and lift people outof poverty; and how to improve internationalcoordination for sustainable development.The outcome document setsrecommendations that define the role thattrade can play in this context. It stresses theimportance of several factors, including:• Trade in environmental goods and services

providing incentives and subsidies• Establishing enabling environments for the

development, adaptation, dissemination,and transfer of environmentally-soundtechnologies, while noting the role offoreign direct investment, internationaltrade and international cooperation in the

transfer of environmentally soundtechnologies

Green Goods Initiative

Green Goods are the products, services andtechnologies that contribute to green growth,environmental protection, climate action andsustainable development. In July 2014 the EUand 13 other members of the WTO launchednegotiations to liberalise global trade ofenvironmental goods. This ’green goodsinitiative’ aims to remove barriers to trade andinvestment in ’green’ goods, services andtechnologies. Initiative attempts to achieve:• Removing tariffs on a list of 54 products on

which the member countries of APEC (Asia-Pacific Economic Cooperation) have agreedto reduce their tariffs to 5% or less by 2015,and a broad range of additional products

• Aim is to create a 'living agreement' whichcan respond to new technologies and addnew products in the future

• Include environment-related services andtackle non-tariff barriers, such as localcontent requirements or restrictions oninvestment

At this stage, only some WTO members havechosen to take part in the talks. But in thenear future green goods are expected to gainmuch more popularity.

ISO StandardsISO has developed several green economy-relevant standards. Examples of suchstandards include:• ISO 19011 on auditing of environmental

management systems• ISO 14031 on the evaluation of

environmental performance• ISO 14020 on environmental labels and

declarations• ISO 14064 on greenhouse gas accounting

and verification• ISO 14001 on environmental management

systems

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In last decade, ISO 14001 certifications issuedhave increased significantly. Properlyimplemented standards can facilitatesustainable trade by contributing the use ofenvironment friendly techniques andprocesses. But consumers will have to play avery important role and choose products withsuch certifications, large manufacturers andretailers will then only put pressure onsuppliers worldwide through the introductionof voluntary standards, and thus transformbusiness practices.

ConclusionThere are positive signs that trade-relatedpractices are moving towards moreenvironmental, social and economicsustainability. But it is obvious that, as far asclimate change and trade obligations areconcerned, the rules are yet to be clearlydefined. The debate and discussions havealready begun. These trends have to beencouraged and formal standards need to bedefined. A meaningful transition towards asustainable trade will require cooperationamong all the countries around the worldalong with technological innovation.●

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Figure 4. Total number of ISO 14001 certifications issues


Trade Winds | Special EditionR

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Regional Trade Blocks

The rise in number of agreements between different blocks of late is raising questions on even the future of WTO. Regional Trade Blocks analyses the past, present and future of these trade blocks.

SAFTA: All you need to know

By Shatabdi Banerjee

MBA (IB) 2014-16

Trade camaraderie has been redefined by

RTAs across the globe and regional tradeintegration is one of the most importantfactors affecting global trade scenario.Currently, 585 RTAs have been notified to WTO,of which 379 are in force and the numberswould continue to increase in the future.Majority of the WTO members have signedmore than one RTA and it is estimated that anaverage WTO member now has agreementswith more than 15 countries. The basic tenetsof trade facilitation and levelling the playingfield that led to ratification of GATT and laterformation of WTO has indirectly propelled theconception of RTAs. Most notable RTAs includethe North American Free Trade Agreement(NAFTA), European Union, European Free TradeAssociation (EFTA), Association of SoutheastAsian Nations (ASEAN), Common Market ofEastern and Southern Africa (COMESA) andSouthern Common Market (MERCOSUR).

Drivers

Allowance by GATT and later WTO to pursuetrade liberalization as an exception to the

fundamental principle of non-discrimination,provided the RTA doesn’t raise trade barriersfor other non RTA -WTO members, led toenforcement of a number of RTAs. Moreover,for majority of trade issues position of differentregions vary - making the trade negotiationsdifficult. Also, as the countries are realizingthat having trade partners makes it easier forthem to face the global competition and unitefor their common interests, they are signingRTAs .Thus the global economic scenario isbeing influenced not only by globalization butby regionalization too .

Why SAFTA?

History of regional integration can be tracedback to European Communities ( early 1950s ),followed by a wave of regional integration the1960s in Africa, Latin America and otherdeveloping countries. ASEAN –Association ofSouth East Asian Nations was established in1967 with an objective to prevent the spreadof communism in its member countries.Subsequently as the political equationschanged, economic rationale prevailed and its

Majority of the WTO members have signed more

than one RTA and it is estimated that an average

WTO member now has agreements with more than

15 countries.



founding members signed AFTA (ASEAN FreeTrade Agreement) in 1992. Majority ofregional blocs with subsequent RTAs wereconceived in 1980-90s propelled by theexisting geopolitical scenario. EuropeanUnion was formed in 1993 and Euro Zone withcommon currency denomination in 1999.North American Free Trade Agreement(NAFTA) came into effect in 1994. Currently EUis negotiating free trade agreement withMERCOSUR.

South Asian Countries i.e. India and itsimmediate neighbors witnessed politicalunrest and turmoil during the 1960-1970s beit the Indo- Pak wars , independence ofBangladesh or rise of LTTE in Sri Lanka.SAARC(South Asian Association for regionalCooperation )was conceived as emulation ofNWFZ( Nuclear Weapon Free Zone –LatinAmerica) and as a political .Following severalrounds of negotiation that lasted from 1980-83, SAARC declaration was formally adoptedin 1983 and first SAARC summit was held on7-8th Dec 1985,Dhaka .This was followed bysigning of SAPTA(SAARC Preferential TradeAgreement)on 11 April 1993 andimplementation in 1995. However desiredoutcome couldn’t be achieved as intra-regional trade did not flourish be it tradecreation or diversion .The reasons includelimited product coverage and tariffpreferences. Thus the agreement on SouthAsian Free Trade Area was signed in 2004 andcame into effect in 2006, replacing the SAPTA.

Framework:Member Nations:

Objectives (Article-3):

The Objectives of this Agreement are topromote and enhance mutual trade andeconomic cooperation among ContractingStates by, inter-alia:a) Eliminating barriers to trade in, andfacilitating the cross-border movement ofgoods between the territories of theContracting States;b) promoting conditions of fair competition inthe free trade area, and ensuring equitablebenefits to all Contracting States, taking intoaccount their respective levels and pattern ofeconomic development;c) Creating effective mechanism for theimplementation and application of thisAgreement, for its joint administration and forthe resolution of disputes; andd) Establishing a framework for furtherregional cooperation to expand and enhancethe mutual benefits of this Agreement.

Instruments of SAFTA: (Article-4):The SAFTA Agreement will be implementedthrough the following instruments:-1. Trade Liberalization Programme2. Rules of Origin3. Institutional Arrangements4. Consultations and Dispute SettlementProcedures5. Safeguard Measures6. Any other instrument that may be agreedupon.The Trade liberalization programme:(Article7) – Within 2 years:

NDLC –Non Least

Developing

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LDC-Least

Developing

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India Maldives

Pakistan Nepal

Sri Lanka Bhutan

Bangladesh

Afghanistan

NDLC LDC

Reduction from

existing tariff rate to

20%

For countries <20%

rates annual

reduction on a Margin

of Preference basis of

10% on actual tariff

rates for both years

Reduction from existing

tariff rate to 30%

For countries <30%

rates annual reduction

on a Margin of

Preference basis of 5%

on actual tariff rates for

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The Journey so FarFor a region, which once had the lowest levelof intra-regional trade anywhere in the world(just 4.4 percent, compared to 65 percent inEU and 42 percent in NAFTA prior to SAFTA),SAFTA seemed to be a solution for regionalintegration. Progress in terms of trade isevident from the graphs given below.Though SAFTA was seen as improvement overSAPTA it didn’t achieve the desired outcomes.Many barriers are responsible for its dismalperformance which need to be overcome.Moreover, SAARC adopted commodity-by-commodity approach to regional tradeliberalisation which contributed to negativelyThese include:• Political Hurdles• Retention of Sensitivity List• Trade through Bilateral Agreements• Trade taking place outside the ambit of

SAFTA

Political Hurdles:

Denial of granting the Most Favored Nation(MFN) status by Pakistan to India when Indiahas already granted Pakistan the same is anexample of political differences among theblocks.The region has suffered from repeated terrorattacks be it India, Pakistan, Bangladesh or Sri

Lanka. Moreover the alleged involvement ofnations in supporting terror groups has led topolitical tensions in the region. ConsideringIndia’s context, relationships with all thenations except for Bhutan haven’t been alwayscordial in past .This has significantly affectedSAFTA, as India is the largest economy ofSAARC.

Retention of Sensitivity List:

The SAFTA nations need to review theirsensitive list in order to liberalize trade.Currently, Nepal maintains 25.5% of totalproduct lines in sensitive list, Pakistan -22.6%.Sri Lanka’s list contains 20.3%, Maldives12.8%, India 16.9% and Bhutan 3% of totalproduct lines. Shifting these to generalcategory will reduce duties and revive trade.

Trade through Bilateral Agreements:

A major portion of trade takes place throughbilateral agreements between nations ratherthan SAFTA. Considering the Indian context,India has bilateral free trade agreements withSri Lanka, Nepal and Bhutan.

Trade taking place outside the ambit ofSAFTA:A large chunk of trade takes place outside theambit of SAFTA through smuggling.

ConclusionSAFTA is an ambitious project which isn’tachieving the desired outcomes owing tovarious barriers. A joint effort by all SAARCnations is essential to overcome these andboost trade and prove itself as a strategicregional trade union.●

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Trade Winds | Special EditionC

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Commodity Watch

International Trade has been propelled by the search of commodities and meet the demands of raw materials. Commodity Watch analyzes the dynamics of the commodity prices and also the factors influencing the supply and demand.

CRUDE OIL

By Priyanka Keshavdas Iyengar

MBA (IB) 2014-16

Crude oil is a mixture of hydrocarbons found

in underground reservoirs. It is liquid in naturein the natural state and remains liquid atatmospheric pressure after passing throughseparating facilities. Depending upon thecharacteristics of the crude stream, it may alsoinclude:

A) Hydrocarbons: Depending on the nature ofhydrocarbons they contain, crude oil isclassified into three groups:

a) Paraffin-Base Crude Oils: They have highmolecular weight. Hence, are solid atnormal room temperature. They also donot contain asphaltic (bituminous) matter.These crude oils are useful to produce high-grade lubricating oils.

b) Asphaltic-Base Crude Oils: They containfind huge proportions of asphaltic matterwith little or no Paraffin. Some of them arepredominantly Naphthenes (cycloalkanes).Hence it produces lubricating oil which ismore sensitive to temperature compare toparaffin-base crudes.

c) Mixed-Base Crude Oils: Both paraffins andnaphthenes are found in this crude. Also

some amount of aromatic hydrocarbons ismixed with them. Most crudes fit into thiscategory.

B) Specific Gravity or API: In petroleumbusiness the standard scientific measure ofspecific gravity is altered by a standard formulato yield American Petroleum Institute (API)gravity. API moves opposite to standard specificgravity, means the higher the API gravity, thelighter or less dense the crude oil:

a) Light Crude Oil: Light crude oil is liquidpetroleum. It has a low density and flowsfreely at the room temperature. It has lowwax content, viscosity and specific gravitybut high API gravity due to presence of ahuge proportion of light hydrocarbonfractions. Light crude oil gets a higher pricethan heavy crude oil on commoditymarkets because it produces a higherpercentage of gasoline and diesel fuelwhen refined. Crude oil having an APIgravity more than 31.1 degrees is taken aslight crude oil.

b) Heavy Crude Oil: Heavy crude oil does notflow easily and is referred to as "heavy"because of its specific gravity is higher thanthat of light crude oil. Activities like

Oil market does not follow the basics of demand

and supply, and the control of oil prices is an

international game.



production, transportation and refining ofheavy crude oil present huge challenges ascompared to light crude oil. Crude oil of APIgravity less than 21.5 degrees is considered asheavy crude oil.c) Medium Crude Oil: Crudes with a grade

between 21.5 and 31.1 is known asmedium crude oil.

C) Sulfur: Crude oils contain certain amount ofsulfur as an impurity. Crudes can be divided onthe basis of percentage of sulfur content.

a) Sweet Crude Oil: It is termed sweetbecause of the low level of sulfur of 0.5%which provides it a mild sweet taste andpleasant smell. They contain very smallamounts of hydrogen sulfide and carbondioxide. High quality (low sulfur) crude oilis used for processing into gasoline. It is inhigh demand, particularly in theindustrialized nations. Light sweet crudeoil is the most demanded version of crudeoil.

b) Sour Crude Oil: If the total sulfur level inthe oil is greater than 0.5 % the oil isconsidered "sour". Impurities need to beremoved before this lower quality crudecan be refined into gasoline increasing theprocessing cost. This produces a higher-priced gasoline than that made fromsweet crude oil. Thus sour crude isprocessed into heavy oil such as diesel andfuel oil rather than gasoline to reduce theprocessing cost.

Crude Oil BenchmarkCrude oil benchmarks are the reference pointsfor various types of oil that are available in themarket. These were introduced in the 1980shaving the aim of setting a standard for theworld's most actively-traded product.

WTI: (light sweet crude in the US). WTI crudeoil has sulfur content of 0.24%. It has an APIgravity of 39.6 and the specific gravity is

0.827. WTI crude is considered as high quality.The primary use is in the production ofgasoline.Brent Blend: (Light sweet crude found in theNorth Sea) Its sulfur content is about 0.37%,with an API of 38.06. It is good for producinggasoline.Dubai Crude: (for light sour crude obtainedfrom the Persian Gulf) Its sulfur content is of2% and the API is 31. It is used for pricing thecrude which is exported to Asia.Isthmus: (for Mexican light crude). Its sulfurcontent is around 1.45% and the API gravity is33.74.OPEC Basket: It is the pricing data which isformed by collection of seven crude oils fromthe OPEC nations (except Mexico). OPECintroduced it on June 16, 2005. It is currentlymade up of the following: Kuwait Export(Kuwait), Qatar Marine (Qatar), Basra Light(Iraq), Es Sider (Libya), Saharan Blend (Algeria),Iran Heavy (Islamic Republic of Iran), Girassol(Angola), Oriente (Ecuador), Bonny Light(Nigeria), Arab Light (Saudi Arabia), Murban(UAE), and Merey (Venezuela).

Global EconomyEven though the global economy sees agrowing trend, the growth remains slow anduneven. The estimated world GDP growth in2014 is 3.1% and in 2015 is 3.4%. In thedeveloping and emerging economies sluggishgrowth has been observed in the current yearalso. Major developing countries are expectedto grow at a lower rate in 2014 than last year,except for India which is expected to grow at5.5% in 2014 and 5.8% in 2015. Geopoliticalissues, monetary supply measures in the UScombined with the sluggish growth in theeconomy will lead to imbalance in the supplydemand equations of crude oil inventorieswhich are at comfortable levels. Resolution inthe geopolitical concerns can help improveconsumer sentiments, leading to higher oildemand growth in the near future.

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Indian Economy

India is the seventh largest country in theworld, and the second largest in terms ofpopulation – with 1.2 billion people. Indiacomes under top ten economies when GDP isconsidered. India experienced the fastestgrowth in two years at 5.7% in 2Q14.Construction and manufacturing sectorsrecovered with support from growth in servicesector. Although making progress in cuttingthe twin deficits, the Indian economy remainsvulnerable to capital outflows due to domesticor external shocks, such as tighter monetarypolicy in the US.India is the third largest energy consumerafter United States of America and Chinaconsuming to 3.86 million barrels-per-day ofcrude oil in the year 2013. Indian oil demandgrowth remains within a normal range in2014. Data for July 2014 suggests oil demandgrowth of 2.9%, y-o-y with growthdecelerating from June’s remarkable 5.2%.Both gasoline and LPG demand grew by morethan 5.4% and 4.7%, respectively. Car salesrose for the third consecutive month, lendingsupport to gasoline. Passenger car salesincreased by 5% y-o-y, with 14% growth in thetwo-wheeler segment, the prime consumerfor gasoline. Total vehicle sales improved by12%. The residential and petrochemicalsectors supported LPG consumption.Jet fuel demand was firm at 1%, y-o-ymatching improvements in air travel. Diesel

demand recorded its strongest gains sinceJanuary 2013, growing for the third successivemonth. Diesel consumption was higher by6.3%, y-o-y mostly due to generalimprovements in the economy, as well as arainfall shortage during the monsoon seasonand a coal shortage, which prompted higherdiesel consumption.The fuel oil demand weakened by around 60tb/d y-o-y despite an increase in demand inthe power sector in the southern region. Oildemand was well supported by a improvedsentiment in India's economy. This wasconfirmed by encouraging macroeconomicindicators led by a GDP growth rate of 5.3% inthe 1Q of the current fiscal year (April 2014 -March 2015), up from 4.6% in the 4Q of theprevious fiscal year.The growth in energy suggests that theconsumption has doubled since 1990 and it isfurther expected to double by 2035 indicatingthe fact that over 91% of the country’s energyneeds will need to be imported. The fact thatover 44% of Indian homes do not receiveelectricity and more than 90% of them rely onbiomass such as wood, waste and gas makethe situation direr.The country enjoys an abundance oftraditional and non-traditional energy sources,but these sources are insufficient to meetIndia’s growing needs. Therefore it importsmost of its crude oil from abroad, especiallyfrom Middle East.

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Mill

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Top importers of crude oil

Source: ITC



Issues faced by IndiaThe subject of oil imports has come to theforefront due to the country's spiraling currentaccount deficit. Demand of petroleumproducts during 2016-17 is estimated to be at186.2 million metric tonnes.

Price Volatility

Oil market does not follow the basics ofdemand and supply, and the control of oilprices is an international game. The dominantprice controller in the oil markets is USAbecause majority transactions are in terms ofUS Dollar only. This is termed as oil-dollarstandard holding. The short term concernsrelates to a sudden disruption of supply and ahigher risk of a diminution in the cushionprovided by Saudi Arabia which provides thebulk of surplus capacity.Hence, to cushion the high impact ofinternational oil prices and domesticinflationary conditions, India is diversifying itssources of crude oil imports. This will reduceIndia’s dependence on any one region. Of the189.24 million tonnes total crude oil importedby India in 2013-14, 115.86 million tonnes ofoil was bought from Middle East (i.e. 61%).Latin America has emerged as its secondbiggest supplier region, supplying 31.73million tonnes of oil and Africa at thirdprovided 30.39 million tonnes of oil in 2013-14. India has also allowed for ONGC andReliance's extensive oil exploration,specifically on its coasts. In addition, foreigncompanies, including Canadian company Kern,have been allowed to explore for oil,especially in the desert state of Rajasthan,which is similar to Arab countries that produceoil, and the Krishna Godavari Basin in SouthIndia as well as areas in north-east India,around the state of Assam, where oil wasdiscovered in 1889.

Barter arrangementTo protect the Indian consumers theGovernment has modulated the retail sellingprice of diesel and has subsidized domesticLPG (refined oil), resulting in incidence ofunder-recovery on sale of these products.This has lead the Indian Government toexplore possibilities for a barter arrangementof oil imports against refined petroleumproducts export resulting in saving of foreignexchange and export promotion.To tackle the issue of possible supplydisruption caused by calamities or politicalcrises abroad India is building two storagefacilities at the country's west coast scheduledto be finished by the second half of 2015. Theoil reserve will set India closer to the Paris-based International Energy Agency standards,mandating its members to hold crude stocksequivalent to 90 days of imports.

ConclusionIndia is currently responsible for producingaround 1% of total crude oil whereas when itcomes to consumption of crude oil, it’sapproximately 3.9% of global production.Making India a largely import dependentnation, which is a major challenge in a numberof ways. It makes India more prone tointernational crude price shocks. Also, it isbecoming increasing difficult for the Indianeconomy to cope with domestic demandincreases at heavily subsidized petroleumproducts. However, Indian Government hasrealized the gravity of the situation and hasintroduced measures like diversification ofcrude oil imports, petroleum storage facilitiesand making arraignments for a barter system.Further consolidation methods to curbconsumption and look forward towardsalternatives are also expected from thegovernment in coming years.●

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A look at the trade figures for the HS code

for plastics shows up some interesting facts.India is a net importer of plastics. This shouldnot be surprising as we are a country of onebillion plus people. Packaging is a major sectorwhere plastic is an important input. Anothermajor sector for plastics’ consumption isautomobiles. Hyundai makes i20 and i30 inIndia and exports them to Europe but it hasn’tlaunched i30 in India which shows that India isan important manufacturing hub for thecompany. Construction, transportation,medical devices, and electrical goods othersectors where plastics consumption will be onthe rise.India has a relatively meagre share of 1.1% inworld exports and 1.7% share in worldimports. Looking at the trade balances inplastics items, one finds that India importsraw materials and export finished goods. In2013, India had a negative trade balance of145 million USD in scraps showing India’spotential of processing plastics. But largely weconsume a lot, leaving little for exports.

But what might surprise you that in 2013, 55%of export value in plastics was in primaryform. While we are net importers of theprimary forms of plastics, polypropylenestands out to be an exception. There is apositive trade balance of 314 million USD inpolypropylene in 2013. IOC, HCPL, RIL, andBPCL are the major producers in India. Withcapacity expansion and new players planningto enter the market, India’s production ofpolypropylene is set to increase.

Global Suppliers of PolypropyleneAn analysis shows that the global markets canbe segmented in two parts: the volumeplayers and innovators.

The Volume PlayersWhen crude oil undergoes fractionaldistillation, polypropylene is formed. Hencelogically the countries endowed with crude oil

Global markets for Polypropylene and Plastics

By Devansh Doshi

MBA (IB) 2013-15

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Packaging is a major sector where plastic is an

important input. Another major sector for plastics’

consumption is automobiles.

11%10%

9%

8%

7%7%7%

40%

0%0%0%0%0%0%0%0%0%..11 0.2%

World Top Exporters of Polypropylene in 2012

Saudi ArabiaBelgiumKorea, Rep.United StatesEuropean UnionGermanySingaporeRoW

3.17 3.19

4.37

5.72

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

Korea,Rep.

Singapore Belgium SaudiArabia

RCA of The Volume Players in 2012



reserves are bound to be the top exporters inthis category. Hence Saudi Arabia continues toenjoy high relative comparative advantage inpolypropylene exports. Other countries SouthKorea, Belgium, and Singapore have largeproduction capacity and low domesticdemand propelling a high comparativeadvantage for themThe Innovators

USA, Germany, and France are the topexporters besides having relatively lowercomparative advantage than the volumeplayers. The polypropylene industries in thesecountries are on the decline. But what keepstheir plastics exports high is their ability toinnovate and use polypropylene formanufacturing other plastic items. Thesecountries also find it profitable to market theirsurplus production.

Global Markets for Plastics

A simple analysis of global trade balances ofvarious countries in plastics reveals that thereare four segments of players: consumers,processors, suppliers, and exporters. Thesefour segments tell us about these countriesrespective capacities and demand in thissector.

ExportersThese are the countries that have positivetrade balance in primary and processed forms.

These countries have access to raw materialsand sufficiently large production capacity. Themajor countries in this segment are Belgium,Netherlands, Japan, South Korea, and UnitedStates of America. They are the biggestcompetitors for India in the global markets.

ProcessorsThese countries have established capacitiesfor processing of primary forms of plastics.The major countries in this segment are China,Germany, India, and Italy. China and India havehuge internal demand for plastics since theyhave a large population. Their oil resourcesare used for production of plastics. Germanyand Italy have huge processing capacities andgenerally supply processed plastics to otherEU members.

ConsumersThese are the countries that have hugeinternal demand for plastics and inadequateproduction and processing capacities. Themajor countries within this segment are Brazil,Indonesia, Mexico, Myanmar, Norway, andYemen. Huge internal demand results inimports of raw material and finished goods.Their production capacities are utilized to themaximum. These countries have a negativetrade balance in primary and processed forms

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1

1.41

1

0

0.5

1

1.5

Germany France USA

RCA of The Innovators in 2012

Suppliers Exporters

Consumer Processor

Positive Balance of Primary Form

Negative Balance of Primary Form

Po

sitive Balan

ce o

f Pro

cessed

Form



trade balance in primary and processed formsof plastics. India should be looking at thesemarkets because of low competition fromdomestic players in these countries.Except South Africa, all African countries fallunder this category. Low level of developmentand manufacturing competitiveness is thereason for this trend. Niger, Sao Tome andPrincipe, Botswana, Burundi, Cape Verde,Namibia, Rwanda, Mauritius, Mauritania,South Africa, and Mozambique are some ofthe African countries that have less than 0.5value of RCA. This opens up an opportunity forIndia to export to these countries.

SuppliersThese countries have huge capacities forproduction of plastics in primary forms butlack processing capabilities. This results inlarge exports of primary forms of plastics andimport of processed plastics. The majorcountries are France, Japan, Kuwait, SaudiArabia, Singapore, and UAE. As we can seemost of these countries have access to crudeoil which makes production cheaper. But lackof processing capability makes them pay morefor processed products.

India’s Polypropylene ExportsAn interesting observation in this graph is thatdespite importing a major share of crude oil,we still manage to export polypropylene atthe lowest price as compared to other topexporters. This exemplifies our operationalexpertise.

The graph below shows that our exportmarket concentration index has been quitelow. But the rise needs to be kept undercheck.

As discussed earlier in this article, Indiaexports polypropylene. Conventional wisdomsays that more processed products fetch ahigher value and hence higher profit. Hencewe should focus on developing capacity forinnovative and micro targeted products thatwill boost our image in the global market.3D printing can be seen as the biggest threatto processed plastic products trade. With theproliferation of 3D printers and advancementof the technology, it might sound a death knellfor processed plastics exports. They lower thecost of producing these processed plasticgoods and are capable of mass production aswell. Hence, future developments in this areaof technology are going to be a major inhibitorin the global trade of processed plastics.Keeping this in view, expanding production ofprimary forms of plastics seems to ensure longterm sustainability. As this technology willbecome more widespread, the demand forplastics in primary forms is bound toincrease.●

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0500

1000150020002500

Sau

di…

Bel

giu

m

Ko

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…

Un

ited

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Ger

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Sin

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Fran

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Net

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Thai

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Ho

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Taip

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Ind

ia

Unit Price of Polypropylene in USD per ton

0.0755

0.152

0.1167 0.1256

0.1795

0

0.05

0.1

0.15

0.2

2008 2009 2010 2011 2012

HH Market Concentration Index for Polypropylene


Documents

Trade winds November 2014 Edition