Chapter: Export Potential Assessment Diversifying the economy and broadening the export base towards high growth sectors is critical for future development and poverty alleviation in many developing countries. Governments often complement general (“horizontal”) policies that improve the overall business environment by more targeted, sector-specific policies. In times of increasing competition for limited public resources, policymakers need to know which sectors are most likely to succeed and where trade advisors can best help to realise export opportunities. ITC has developed a methodology that prioritises sectors and markets for trade development activities based on detailed trade and market access data. Depending on the situation of the country, two different approaches are available to identify products with high potential for exports the Export Potential Indicator and the Product Diversification Indicator. ITC’s Export Potential Assessments start with screening the needs of the beneficiary country. While small developing countries have the interest to diversify into new export products, larger countries may want to focus on finding new markets for their existing export products. These issues are taken into consideration when defining the criteria to be used in the identification of priority sectors and markets.
Chart 1: Export Potential Assessment Flow Chart
Methodology: Export Potential Assessment (EPA) methodology is to help countries assess their export opportunities and increase their share in world trade by; (1) Export Potential Index: Identification of priority products (2) Market Attractiveness Index: Selection of target markets
Picture 1: Competitive Sectors: Export Potential Index
Picture 2: Target Markets: Market Attractiveness Index
(1) Export Potential Index: (a) Export Performance Index (for Harmonized System-HS 4): How much of the product a country can export/supply at a certain price. For this, we calculate the export performance index. (i) RCA Indicator: Revealed Comparative Advantage (RCA) is to assess how competitive the country is in exporting a certain product as compared to the world. RCA (Balassa Index) = Xij/Xin ÷ Xwj/Xwn Where, Xij is the export of country i for j commodity and n is a set of all exported commodities of country i, while Xwj represents the world export of same commodity j and Xwn is a world export of all n commodities.
For Example RCA= RCA [1;
=2
] : A country has a revealed comparative advantage in exporting a good
RCA [0; ] : A country has a revealed comparative disadvantage RCA Log transfer: For some products, the RCA can be relatively low in comparison with the others. In this case, RCA log transformation can avoid having sectors with extreme export values dominate the distribution and to make the distribution more normal. (ii) Growth of RCA Indicator: Growth of Revealed Comparative Advantage (RCA) indicator is to assess if a certain product has increased its share in a particular country’s exports faster than the world exports of the product have increased in terms of their share of world exports. Mid-point growth rate (G) =
*100; G = [ -100,+100]
Index Normalization Formula: Min-max normalization (Xindex) =
; [0,100]
(b) World Demand Index (for HS 4): Ever if a country may be able to produce large quantities of goods at a comparatively low price, the export prospects will not be very promising if there is not sufficient demand for that product in the marketplace. Demand: How much of the product countries are willing to import at a certain price. For this, we calculate the world demand index. What quantity of the product will be exported if demand contrast? In the picture below we see that even if the export supply curve remains unchanged but the demand for exports decreases, the country exports less (q1 instead of q2) at a lower price (p1 instead of p2). Price
Export supply curve
p1 p2 Import demand curve 1
Import demand curve 2 Quantity q2
q1
Figure 2: Demand and Supply of Import and Export (i) Share of World Exports Indicator: This indicator is to assess how big the market for a given product is in relation to the entire world market. Share in world exports =
*100
(ii) Growth of Share of World Exports Indicator: Growth (G) (Mid-point growth rate) =
Export Performance Index (for HS 6): World exports data for products at the HS 6 level can produce misleading results because of non-matching codes and calculation RCA at the HS 6 level would be unreliable. Market access conditions may vary a lot within one HS 4-digit level product group. Table 1: Harmonized System (HS) 4 and 6 Digit Level HS Code 610423 610463
Product Ensembles Trousers & shirts
Average tariff (%) 0 19
Why 4-digit level? Product codes remain mostly the same across different versions of the HS nomenclature. Why 6 digit level? Codes differ a lot from one HS nomenclature revision to another, we would see many nonmatching codes when combining Bangladesh’s trade data and world trade data. Version: HS 2002 up to 2008 and HS 2007 up to 2008-2011 (And there are many more 6-digit codes introduced in the HS 2007 revision) (i) Average export: Average export = Since the average export value can have highly skewed distributions, we transform it into logarithms. Instead of the RCA here we calculate average export indicator because world exports data for products at the HS 6 level can produce misleading results because of non-matching codes and calculation of RCA at the HS 6 level would be unreliable. (ii) Growth of Exports: Growth (G) (mid-point growth rate) = Why do we calculate the absolute change instead of calculating the mid-point growth rate? We used the mid-point growth rate for positive values only.
(b) World Demand Index (for HS 6): (i) Trade balance as a share of total trade: The export value does not always reflect the reality. To do so trade balance as a share of total trade is used to guidance on trade support for sectors that have a significant production based by controlling for pure re-exports.
Trade balance as share of total trade= (ii) Change in trade balance as a share of total trade: Change in the trade balance is to account for the improvements in the trade balance.
Change in trade balance = (2) Market Attractiveness Index: (a) Market Demand Index: With the necessary data at our disposal, we can start the calculation of the first sub-index the market demand index. It contains five normalised trade indicators that are related to the market demand for the selected product regardless of the exporter. The higher the index for the country, the higher is the demand for the product of this country and the more attractive is the market for exporters. (i) Market Size (import value): The demand for a product can be an important criterion for the selection of attractive markets as it indicates the product’s sales potential in different markets. Large markets that able to consume more often prefer to import in large quantities that small exporters are not always able to provide. Furthermore, competition is sometimes tough in these markets. Small markets, by contrast, may have less consumption power but can be easier to enter due to a limited number of competing suppliers. Annual Average import value= (ii) Market Growth (import growth): In contrast to the static market size indicator, the market growth indicator shows the dynamics of the market and thus gives a rough indication of its future sales potential. Fast growing markets are potentially more attractive to exporters as they provide more space for increasing the country’s exports to that market. Slow growing markets are less dynamic but can offer stable and reliable conditions. Import growth= (iii) Trade Balance: In using this indicator, we are looking for markets that have a large trade deficit in a product, other things being equal. A strongly positive trade balance signifies that the country exports more of the product than it imports. The trade balance indicator is thus employed to avoid giving high ranking to large importers which in fact only import in order to re-export the product without or with small modifications. Exporters have an interest in selling directly to the country where the product’s end users are located as this allows them to make the product better suited to the needs and preferences of the country and to potentially negotiate a high margin. Trade balance as a share of total trade= (iv) Change in Trade Balance: The change in the trade balance is a dynamic indicator that complements the static trade balance indicator. It can be useful for countries that are just
building up production capacities in certain sectors and are therefore constantly reducing their trade deficits. Change in trade balance=
(v) Market Prospects (GDP growth forecast): The forecasted GDP growth rate reflects the future prospects of the market in general, regardless of product. A low expected GDP growth means less purchasing power and indicates that present export opportunities may fade over the next years. A high GDP growth rate, by contrast, shows that the market is dynamic and that there is plenty for augmenting imports. GDP growth rate= [ The GDP forecast can be downloaded once and updated whenever a new forecast is available on the IMF website. Visit: www.imf.org The GDP growth rate is a macroeconomic indicator that we use to identify the prospects of the markets in the future. (b) Market Access Index: (i) Distance Advantage: Go to http://cepii.fr/anglaisgraph/bdd/distances.htm Download dist_cepii.xls Delete all the columns leaving only the column with the country names and the column named “distwces”. Distance Advantage=Average distance of supplying countries (km) - Bilateral Distance (ii) Relative Preferential Tariff Margin: To get customs tariff indicator you can email:
[email protected] Preferential tariff margin=average weighted tariff applied to all other suppliers to the marketcustoms tariff applied to suppliers (iii) Total Exports from the Country to the Market:
Chart 2: Export Flow Chart from the Country to the Market It is a very complex process to show all the steps for exporting a product through because it depends on the exporting product. But the simple business process is shown in the above export flow chart from the exporting country to the destination market.
Chart 3: Trade Relations Building Blocs It is difficult to include all the factor to calculate trade relations of a country but the proxy variable like export trend can be better representative to define trade relations. Here trade relations represent the sum of total exports from the country to the market. Trade relations= Sum of total exports from the country to the market
For Example Data Requirement: For Export Potential Index: 1. Data download: Level of aggregation of the Harmonized System (HS) used: HS 4-digit level Time period: Export performance index: from 2007 to 2011 (5 years) World demand index: from 2008 to 2012 (5 years) Download the following data: The value of Bangladesh’s exports (2007-2011)/ (5 years) The value of the world exports (2007-2012)/ (6 years): Even if the world demand index will be based on the years 2008-2012, we still need the world exports data for the year 2007 as world export data will be used to calculate not only the world demand index but the export performance index as well, and the export performance index is based on the period 2007-2011. 2. Level of aggregation of the Harmonized System used: HS 6-digit level (product wise)
For identification of products at the HS 6-digit level, we will use Bangladesh’s trade data for the period from 2008 to 2011 (The range of years may vary depending on the particular situation of the country that is being studied. The value of Bangladesh’s exports (2008-2011) The value of Bangladesh’s imports (2008-2011) For Market Attractiveness Index: 3. The value of export of the product HS (6) 610462 (2007-2011) 4. The value of import of the product HS (6) 610462 (2007-2011) 5. Download the file with average distances from Trade Map (in the selection menu choose imports, product code 610462, trade indicators) 6. Relative Preferential Tariff Margin: To get customs tariff indicator you can email:
[email protected] Sample email format: Subject: Tariff margin data required for Bangladesh for product HS code 610462 Dear Concern, Please send me the tariff margin data for my analysis of Bangladeshi exporting product HS 610462. Best regards Rashedul Kabir Senior Assistant Secretary Research & Development (R&D) Email:
[email protected] iART, BKMEA Dhaka Office, Bangladesh 7. Distance Advantage: Go to http://cepii.fr/anglaisgraph/bdd/distances.htm Download dist_cepii.xls Delete all the columns leaving only the column with the country names and the column named “distwces”. 8. The value of Bangladesh’s exports (2007-2011): Country wise
Advanced Market Analysis E-Learning: Export Potential Index (Identifying Products); Market Attractiveness Index (Identifying Markets): http://www.itclearning.org/course/view.php?id=38
