Trade intensity and revealed comparative advantage: an analysis of Intra-BRICS trade


Purpose
In the recent international scenario, the rise of emerging economies, in particular, Brazil, Russia, India, China and South Africa (BRICS) has gained ample of attention. The global trade flows of the BRICS countries have significantly increased during the last one-and-a-half decade. The purpose of this paper is to examine the intra-BRICS and BRICS–EU trade flows.


Design/methodology/approach
To study the intensity of trade among BRICS countries and with EU, the Trade Intensity Index is employed for the period 2001–2015. Balassa’s revealed comparative advantage (RCA) index is computed for the assessment of comparative advantages of exports by BRICS countries in the year 2015 in the global markets. A comparative analysis of export similarity is done for India and other BRICS countries in EU.


Findings
The findings of trade intensity showed large bilateral trade flows among BRICS member. Russia has emerged as the main trading partner with EU in BRICS. For the year 2015, the comparative study of RCA at HS-two digits and HS-four digits classification highlights marginal structural changes in the export composition of these countries. The analysis revealed that Brazil and Russia have comparative advantages in natural resource-based products, while India and China possessed comparative advantages in manufactured and processed products. The export similarity index shows the presence of competition between India and China in EU.


Practical implications
This paper highlights the need for closer cooperation to promote intra-BRICS trade and to make structural transformations in the basket of trading products by them to have trade benefits at large.


Originality/value
Numerous studies are available on bilateral trade of BRICS members. However, limited studies are available to get a holistic view of intra-BRICS trade. This paper is an attempt to examine the BRICS countries trade profile both at global levels and within the group.



Introduction
In the recent years, the contribution of developing countries in the regional and global economic growth has increased significantly. BRICS (Brazil, Russia, India, China and South Africa) the group of five emerging economies from the continents of Asia and Latin America has emerged as a significant group in the recent global engagements. In 2001, Jim O Neil coined the term BRICs acronym for Brazil, Russia, India, and China as the emerging economies with the potential to replace the European economy in terms of market size. South Africa has joined the group in 2010. BRICS countries represent more than a quarter of the world's land area, 41 percent of the world's population. On almost every scale, these economies are in line to be the largest group at the global level. BRICS has emerged as an important representative sample for the decision-making at the international level, Truman (2006).
The role of BRICS is vital at the global stage in terms of increasing productivity, foreign investment inflows and creating a potential consumer market. With a cumulative global trade of 20 percent and generating more than 40 percent of global economic growth, the BRICS countries are poised to strengthen the intra-BRICS relationship and with the rest of the world. The BRICS has made significant progress in integrating with the world economy. Table 1 provides the BRICS member countries' exports and imports to the world in the year 2015. As can be followed from table 1, China is the largest importer and exporter both in the world markets and intra-BRICS. Russia and India hold second and and third place as exporters to intra-BRICS. At international levels, these economies of BRICS are important exporters and importers. The ascending cooperation among BRICS countries can be jointly beneficial for each member country. As Brazil and Russia are the major producer and exporter of natural resources, and importers of manufactured and processed goods. While India and China are the major importer of natural resources and main exporters of manufactured and processed goods. On the other, South Africa provides as an important route for India-Brazil trade.
Given the rising importance of trade between BRICS countries, this paper assesses the intensity of merchandise trade among BRICS countries to determine the deepening cooperation among them. To make a comparative study, trade intensity between European Union (28) and BRICS member countries is analyzed. The revealed comparative advantage (RCA index) of the top ten products of Brazil, Russia, China, and South Africa are calculated both at the aggregate and disaggregate levels. We made comparisons of the RCA values between countries to know the similarities in trade. Further, the degrees of similarity in the export structure (Finger Krenin Index) are computed to understand the comparative strengths and weaknesses of BRCS (Brazil, Russia, China and South Africa) with respect to India in EU markets.
The remainder of the paper is organized as follows. Section 2, provides brief reviews of the literature followed by methodology and data sources in section 3. The findings and interpretations are presented in section 4 and concluding remarks in Section 5.

Methodology and Data sources
The paper has adopted three methodologies-trade intensity index (TII), revealed comparative advantage (RCA) and Finger-Krenin Index (FKI). The term BRICs coined in the year 2001 by Jim O'Neill, therefore we have selected the period 2001-2015 to analyse the status of BRICS merchandise trade. For the analysis, the secondary data sets are obtained from the online database of ITC trade map, UNCOMTRADE.

Formulas 3.1.1 Trade Intensity Index
To determine whether the value of trade between two countries exceeds or falls behind what would have expected based on their relative importance in world trade this index is used (World Bank, 2016c). In this paper, WITS (2013) trade intensity index is used, which is defined as the share of one country's exports going to a partner divided by the share of world exports to the same partner country. The Trade Intensity Index is calculated as: Where TII ij is the trade intensity index of country i with the country j. X ij and X wj are the values of country i's export and world exports to country j and X it and X wt are the values of the country i's total exports and world's total exports respectively. The value of the index lies between zero and infinity (+∞). If the index value is less than one, it indicates the lower degree of bilateral trade between the partner countries. The index with a value greater than one indicates the high intensity of trade between the partner countries.

Revealed Comparative Advantage
To measure the comparative advantage of a country in products the Balassa's Index of revealed comparative advantage (1965) is most widely accepted approach. The revealed comparative advantage (RCA) index is defined as: Where, X ij and X wj are the values of country i's exports of product j and world exports of product j and X it and X wt are country's total exports and world's total exports. If the value of RCA index is greater than one, the country has revealed comparative advantage in that product and viceversa. The advantage of using comparative advantage is that it considers an intrinsic advantage of a particular export commodity and is consistent with changes in an economy's relative factor endowment and productivity, Batra (2005).

Finger Krenin Index
Finger Krenin (1979) gave the formula to measure the export similarity between the two countries or group of countries in the third market. The FKI is defined as: This is a measure of export similarity of export patterns of two countries i and j to market k.
Here, X denotes the exports of commodity 1. So, (X 1 ik / X tik ) is the share of commodity 1 in country i's export to country k and (X 1 jk / X tjk ) is the share of country j's export to country k. The value of index ranges from zero to hundred. If the index value is zero, it implies complete dissimilar export pattern between two countries. However, the index with hundred values shows the complete export similarity between the two countries. If the index value between two countries rises over times, it indicates convergence of the two countries export structure with a rise in competition between them (Song 2000).

BRICS Trade Intensity Estimates and Analysis
BRICS together nominal GDP is similar to EU and USA and predicted to overtake EU and USA in the coming years. The BRICs' role in the world trade is expanding faster than the world trade overall, also the trade within BRICs has accelerated sharply, Jim O' Neill (2011). The latest trade statistics shows China as the main trading partner with the BRICS countries. In Brazil, China is the largest trading partner with surpassing the economies like USA, Argentina, Japan, etc. In Russia, along with the European countries, China is the part of the major trading partners. Similarly, for India and South Africa, China is the part of the top trading partners list. One of the main reasons for BRICS formation is to discuss global challenges and coordinate actions without the interference of groups like the OECD. The trade intensities for intra-BRICS computed to observe how far BRICS as a group has emerged over the span of fifteen year. To make a comparative assessment, the results of BRICS-EU trade intensity are also given in the following section.

Revealed Comparative Advantage
In this section, the structure of comparative advantage of BRICS countries in the global market is examined. The pattern of comparative advantage is captured by using Balassa (1965) index of comparative advantage for the two and four digit level of HS classification in the year 2015. The top ten products (HS-two digit level) based on higher RCA values for the year 2015 RCA are given in table 2. The RCA analysis revealed that each individual country of BRICS has different products of comparative advantages. Brazil has shown the comparative advantage in agriculture and allied products such as products of the milling industry; malt; starches; insulin; wheat gluten, Meat, Fish, seafood, manufacture of plaiting materials, edible fruit, nuts, etc. The study reveals that Russia's pattern of comparative advantages is in products like fertilizers, mineral fuels, mineral oils, nickel articles, arms and ammunition, and others [table 2]. The analysis for Brazil and Russia at the two digits of HS classifications illustrates these countries has comparative advantage in natural resources products. The products lac, gums, resins, cotton, carpets, cereals and other agricultural and allied products along with some manufacturing and processed products are among the top ten products for India with higher comparative advantages. China has a far better comparative advantage mainly in the manufacturing sector in products like headgear, umbrellas, printed books, newspapers, footwear, cement, asbestos, furniture and others as shown in table 2. South Africa holds the higher comparative advantage in products like ores, slag, edible fruits, nuts, explosives, wool, animal hair, pulp of woods, etc. The analysis of RCA at HS-two digit highlights that Brazil, India,  As the pattern of comparative advantage varies at different levels of aggregations, in this study we also computed the revealed comparative advantage index for these counties at HS-four digits in the year 2015 as given in table 3. The values of RCA index value for Brazil are found higher at the disaggregate levels comparative to aggregate levels in the year 2015. Brazil still holds comparative advantages in agricultural product categories at disaggregate levels. However, the new products are added in Brazil's top ten products of comparative advantage at HS-four such as mate, soya beans, articles of the gut, gold beater's skin, bladders or tendons, flexible tubing of base metal, with or without fittings, vegetable waxes, and others. The analysis for Russia revealed advantages in products like iron ores, asbestos, nuclear reactors, pig iron, and others non-metallic products. Russia holds higher RCA index values at HS-four digits. Most of the top ten products at the HS-two digit retain their places at HS-four digit for Russia. India's comparative advantage pattern has changed at HS-four digit levels. From the agricultural products, the manufacturing products like organic compounds, woven fabrics, etc., get a place in top ten products with higher comparative advantages [table 3], with higher RCA values. China enjoyed high comparative advantages at disaggregate levels in manufacturing sectors. New products are added to top ten products list for China. Similarly, South Africa's comparative advantage patterns are in similar products categories of HS-two, but with higher RCA values. South Africa has got higher comparative advantages in the export of minerals in world markets. The findings of comparative advantage reveal higher index value at the disaggregate levels for BRICS countries in the global market. However, the structures show similarity at the aggregate and disaggregate levels for all countries, except India. The comparisons of comparative advantage between HS-two digit and HS-four digit levels show the pattern of comparative advantage are in different product categories for each country, highlighting less competition among them in global markets. The comparative advantage findings highlight the specialization in the world market by BRICS countries in different products.

Finger Krenin Index
As the EU is a significant trade partner with BRICS countries, we tried looking at the pattern of export similarity in EU for BRICS countries individually and compared with India. The analysis is conducted for the period 2001-15 by employing Finger Krenin Index (FKI) as it is widely used to measure the extent of export similarity. The FKI values for India and Brazil is between 0.31and 0.38, indicating low similarity of exports between India and Brazil to EU. This means that at the aggregate levels Brazil and India are not competing much in EU at any significant level. The FKI values for India-Russia are substantially low, indicating the diversified exports by both countries in EU. The index value for India-China is high in comparison to other countries in the EU. The FKI values remained from 0.46 to 0.52, showing moderate export competitiveness between both countries in the EU's market. The FKI in Table 4 varied between 0.36 to 0.42 for India and South Africa, showing a slow tendency to increase over time. This means that export similarity between India and South Africa in the EU's market was moderate and receding after the year 2009.

Conclusions
In this paper, the analysis of trade intensity index highlighted Brazil and South Africa's trade intensity with BRICS has improved since 2001, while China, India and Russia , have deteriorated. The country-wise analysis of bilateral trade intensity reveals that there are larger trade flows from Brazil to South Africa, India to South Africa, and China to Russia. However, the Russian trade intensity is found lower in BRICS countries, but large with the European Union. The value of trade intensity index is moderate between BRICS member countries and the EU. The findings of trade intensity analysis reflect the need for closer cooperation to promote more intra-BRICS trade. Revealed Comparative Advantage (RCA) has been analysed both at the two and at the four digits level of HS classifications for BRICS countries for the year 2015. The results assert that the pattern of comparative advantage varies at a different level of disaggregation of products. The products that are ranked in top ten based on the higher RCA values at HS-two are not necessarily been able to retain their place at the HS-four digit levels. Brazil enjoys comparative advantage in agriculture and allied products, while India has higher comparative advantages in products like lac, gum, silk, cotton, etc. The analysis for Russia shows a comparative advantage in products like Nickel, fertilizers, arms, and ammunition, and others. For China, the manufacturing products such as apparels, footwear, toys, are the top products with higher RCA values. South Africa reveals the comparative advantage mainly in mineral resource based products in the global markets. The RCA analysis shows the specialization by BRICS countries in different product categories in the world markets. As the EU is a significant trade partner with BRICS countries, we tried to look at the pattern of export similarity in EU for the BRICS countries with reference to India. The findings illustrate that the exports of Brazil, Russia and South Africa are quite diversified in the EU as compared to India. On the other, the FKI values for India and China show the moderate export competitiveness between them in the EU, with a rising export similarity pattern. The findings of this paper show that over the years the trade flow among the BRICS has improved with exception to Russia. One reason of lower Russian trade with BRICS may be its stronger trade relations with EU. This study highlight the need to take essential steps by BRICS countries to make structural transformations in the basket of trading products to gain trade benefits at large. To promote the trade ties and to strengthen the relationships, BRICS countries must consider a free trade agreement.