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India’s exports to the US cover 155.1 per cent of its imports from the world’s largest economy.
In contrast, the world’s largest economy’s earnings from exports to India can only service 52.3 per cent of the goods and services it imports from the world’s largest democracy.
Terms of trade
On the other hand, India’s exports to China can only service 33.5 per cent of its import bill from that country, whereas China can import twice as much from India while still maintaining a trade surplus. This and other interesting trends can be discerned from an analysis of the terms of trade (TOT) between bilateral trading partners worldwide.
Terms of trade essentially refers to the quantity of imports that can be purchased through exports. This can be calculated in terms of the price of exportable goods as a percentage of the price of importable goods. In the BRICS grouping, India enjoys favourable terms of trade only with Brazil – with exports capable of servicing 118.1 per cent of its import bill from that country – whereas shipments to China, Russia and South Africa are only capable of covering less than half of the imports from these trading partners.
But earnings from exports to the UK can facilitate a nearly 15 per cent increase in the current level of imports.
Among other countries, it emerges that Saudi Arabia enjoys favourable terms of trade with most of the world’s leading economies, thanks to its massive oil economy. Its exports to India can service nearly four times the quantity of goods and services that it currently imports and TOT are nearly six times in its favour in the case of Japan.
But countries like Germany, Australia, the UK and Japan have managed to keep exports at a level that ensures a trading surplus.
Nigeria is an emerging economy that also has significant terms of trade advantages over its bilateral partners. The country’s earnings from exports to India could enable a nearly three-fold rise in the current level of imports and in the case of Australia, its terms of trade permit it to buy near 38 times more goods and services from the island continent. This is mainly due to crude oil being its major export. Terms of trade are sometimes used as a proxy of the relative social welfare of a country, but the usefulness is subject to debate. In case of an improvement in a nation’s terms of trade with respect to a partner, this helps buy more imports for a given level of exports.
In this regard, currency exchange rates play a large role in terms of trade, because a rise in the value of a country’s currency lowers the domestic price of its imports, but makes its exports more expensive, eroding competitiveness.
arvind.jayaram@thehindu.co.in
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