Trade of Electronic Goods and Their Effects on Trade Deficit

Cases from US, the UK, India and with extra focus from Turkey

 

Figure1

Figure 1

Developed and developing countries have different trade balance structures and dynamics. With regards to international electric and electronic related trade there is a similarity amongst many countries in terms of their trade deficit. Trade deficits pose numerous challenges to a national economy, while controlling they may have some benefits.

Piana (2006) briefly explains that a persistent trade deficit may lead to foreign debt, which if badly managed, can pave the way to a currency crisis.[1] On the other hand, trade deficits could keep prices lower, a certain extent enabling a competitive environment. As well as the monetary issues, long-lasting trade deficit has the potential to cause failure of local firms leading, so job loss due to outsourcing to other countries.[2] Concerning the speed of technological advancement, and the disproportionate balance between the cost and profit of technological and basic consumer goods, a national economy must embark on journey of understanding how to improve its own produce as well as its rules on trade to be able to cope with the trade deficit. However, Figure 1, indicates a trend for a higher deficit with total imports being double than the total exports cumulatively in the US, the UK, India and Turkey. This article will seek to analyse the effects of electronic goods on the international trade balance while especially examining the situation in the US, the UK, India and Turkey. It will also include short overview of Turkish policy regarding electric and electronics trade.

Figure2

Figure 23

The trade deficit of the US rose to $45.2 billion as of November 2016.[3] Moreover, in 2016 statistics indicate that a deficit of $168 million was due to the trade of electrics and electronics (Figure 2[4]). The gap has been increasing for the last 5 years with exports only constituting 35% of the electrics and electronics trade flow (Figure 3[5]).

figure3

Figure 3

According to an article on Wall Street Journal, in 2013 electronics imports had a portion of 15.8% of the trade deficit for the US economy.[6] These numbers highlight that importing cheaper electronic goods like devices for communication and computer materials, have been causing a severe damage to the US based producers and to the nations’ trade balance. More precisely, the US growth in value of electronics has only shown a 1.76% increase between the period of 2005 and 2008. The highest loss was observed in consumer electronics with 4.22%, while the US medical & industry electronics have grown by 4.30% during this period.[7] A conclusion that can be drawn from these figures is that the American electronics sector remained weak vis-à-vis the foreign products and imports. The supply of electronics produced overseas surpassed the value of American production, especially in the areas of consumption electronics. More advanced subsectors such as medical & industry products maintained an upward trend and the national produce was able to develop in these areas. Finally, graph above, indicated that we have witnessed an upward trend in the value of American exports in recent years as a result of technological leverage against the low cost foreign products. We may speculate that the recovery of the American electronics industry after the 2008 crisis may have been the main initiative of this growth, which has shown another worrying $2 billion fall in 2015.

The situation for the UK is not much different. In 2015, the annual trade deficit accounted to £36.6 billion.[8] Based all exports, electronic equipment trade accounted for 8% with EU and 7% with non-EU countries, while imports constitued a bigger portion, comprising 10% with EU, and 11% with non-EU partners.[9] However, over the period of 2005 to 2008, the value of English ICT products experienced a decline of 1.34%. Of all ICT sectors, the loss in consumer electronics went up to 7.60%, while the biggest loss was experienced in office equipment with 15%. The telecommunications sub sector remained at a 2.64% growth value, while the biggest achievement was in medical & industrial products with a 7.34% growth.[10] Furthermore, the trade deficit seems to be stable at around $30 Billion for 3 years (Figure 4[11]).

Figure 4

Figure 4

These results are very similar to those of the US. The overall tendency of these two developed economies exhibits a loss of domestic market share to foreign goods and companies. Within the sector of electronics, the advanced material production still remains at a higher value as the necessary equipment and human capital would are still supplied more effectively by these developed economies. Following this trend, British electronics have been at a continuous fall in value. As seen in the comparative table above, in spite of the American recovery, the UK’s exports in electronics have either been devalued or remained at a halt.

India is also another country with a sizeable trade deficit. The year-on-year trade gap has widened by 25.9% in November 2016, yielding a $13 billion deficit.[12] Although India has developed itself as a software and technology giant, with software export accounting for 91% of its ICT exports, Indian exports in ICT sector have been dwarfed by its imports with a figure of $18 billion to $1.8 billion over the course of 1997-2007.[13] Recent data indicate a greater deficit in the electrics and electronics sector, reaching $ 28.8 billion in 2016 (Figure 5[14]).

Figure 5

Figure 5

The growth of the ICT sector is due to the increase in the consumption levels for local or re-exported products. In the period between 2005 and 2008, Indian electronics sector experienced an annual growth in value by 19.93%, coming in 3rd place after Slovakia and Brazil.[15] This promising figure proves that Indian policy makers have been able to obtain a clear vision of future technology and communications and have affectively directed investment to these areas. Perhaps, regarding its status as a developing BRICS power, India’s progress in the software sector demonstrates an exemplary path for other developing powers to follow. Indian specialization in software and product development offers a comparative advantage to the nation’s growing economy, while opening up job opportunities for the Indian youth. As a developing economy, when compared to the examples of the UK and the US, the progress of India progress in the electronics sector demonstrates a need to trickle down the strength of the software sector to other segments of the electrics and electronics industry.

The Turkish economy yielded a trade deficit of $4.1 billion in November 2016. In 2014, Turkish exports in machinery and electronics ($25.8 billion) were dwarfed by the imports which were almost double the volume ($46.7 billion).[16] Moreover, between 2005 and 2008, which we dwelled upon in the other cases, the Turkish electronics sector remained mostly at a halt. Office equipment lost a growth value of 5.80%, while components gained 6.73% and medical & industrial products gained 3.98%. The remaining subsectors could not surpass above a percentage of 1.64%, and overall value growth was only 2.01%.[17] For a country in the league of developing economies, these figures are worrying for the economic future growth.

Following these figures, in the period of 2011 and 2016 Turkish exports have been at a steady fall in value regarding Electrics and electronics industry (Figure 6[18]).

Figure 6

Figure 6

Indeed, t this day Turkish policy makers seem to not prioritise the electronics sector. When compared to value growth in the same period in other developing countries like India, Korea or Slovakia (See Figure 7), the Turkish electronics sector is far behind. In addition, instead of focusing on sector improving policies Turkish officials have applied a tax raise for the import of electronic products.[19] One major issue here is in the basic mentality of protecting the domestic economy vis-à-vis the foreign competition. It is a well-known however that the import substitution methods in the 70’s left the country crippled and economically behind in comparison to the export oriented economies the South Asian countries. While at a same level of development in those years, South Asian economies managed to flourish in following decades, thanks to competitive, export oriented policies.

Figure 7

Figure 7 

To give an example, South Korea, which was an aid receiving country, that lacked economic possibilities or opportunities only 50 years ago, has managed to become a donor country at the end of this period. South Korea’s success was due its strategic investment and incentive policy in the beginning of the 80’s, focusing especially in the areas of IT and technology.[20] Consequently, South Korea was ranked as the 5th largest export economy in 2014 and in the same year it yielded a $75 billion trade surplus.[21] Moreover, South Korea has experienced a continuous positive trade balance since 1998.  The trend of continuous surplus is stable in terms of the all electrics and electronics industry( See Figure 8).

Figure 8

Figure 8

Mobile phones constituted a 2.7% of all exports in this period with a total value of $15.6 billion.[22] Samsung, South Korea’s technology giant, corresponds to the country’s 60% of all mobile phone exports.[23] Interpreting the data, looking at this data, we may estimate that Samsung mobile phones correspond to approximately 1.5% of the country’s total exports. This is an incredible portion of the country’s exports to hold for a single product line of a company. The creation of such a global giant was certainly a breakthrough for the South Korean economy, and is a result of its development strategy that is known to foster an internationally competitive spirit, rather than a protection oriented ‘inward-ism’.

As seen from the data and the policy choices as well, Turkey’s electronics industry should be supported and incentives must be given to stimulate the production of high value added items, rather than protective measures. This way the Turkish electronics sector may obtain a positive future and may experience steady growth. Compared to South Korean strategies, Turkish policies lack long term vision instead they concentrate on short term tax gains. Thus, Turkish consumers experience a growing increase in prices, which is not supported by secondary local products that can supply the domestic market. That is the indication of the weak policy that vitalizes a domestic technology industry.

 

 

 


[1] http://www.economicswebinstitute.org/glossary/tradebalance.htm

[2] https://www.thebalance.com/trade-deficit-definition-causes-effects-role-in-bop-3305898

[3] US Census Bureau, 2017

 Link: https://www.census.gov/foreign-trade/data/index.html

[4] Consilience Consulting UK Elaboration with data from United Nations Statistics Division, 2017

[5] Consilience Consulting UK Elaboration with data from United Nations Statistics Division, 2017

[6] Mitchell, J. (2013). Electronics imports drive 15.8% growth in trade gap. The Wall Street Journal Eastern Edition. p. 2.

[7] Organisation for Economic Co-operation and Development (OECD), Link: https://www.oecd.org/sti/ieconomy/45576760.pdf

[8] Office for National Statistics UK, Link: https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/january2016

[9] HM Revenue & Customs (HMRC) Trade Statistics Unit, Link: https://www.uktradeinfo.com/Statistics/OverseasTradeStatistics/Pages/Commodities.aspx

[10] Organisation for Economic Co-operation and Development (OECD), Link: https://www.oecd.org/sti/ieconomy/45576760.pdf

[11] Consilience Consulting UK Elaboration with data from United Nations Statistics Division, 2017

[12] Trading Economics, http://www.tradingeconomics.com/india/balance-of-trade

[13] Organisation for Economic Co-operation and Development (OECD),

Link: https://www.oecd.org/sti/ieconomy/45576760.pdf

[14] Consilience Consulting UK Elaboration with data from United Nations Statistics Division, 2017

[15] Ibid.

[16] The Observatory of Economic Complexity, Link: http://atlas.media.mit.edu/en/profile/country/tur/

[17] Organisation for Economic Co-operation and Development (OECD), Link: https://www.oecd.org/sti/ieconomy/45576760.pdf

[18] Consilience Consulting UK Elaboration with data from United Nations Statistics Division, 2017

[19] Hurriyet Daily News, Link: http://www.hurriyetdailynews.com/turkey-to-put-additional-import-tax-on-electronic-goods-minister.aspx?pageID=238&nID=84867&NewsCatID=344

[20] Planet Earth Institute, Link: http://planetearthinstitute.org.uk/south-korea-a-true-development-success-story/

[21] The Observatory of Economic Complexity, Link: http://atlas.media.mit.edu/en/profile/country/kor/

[22] The Observatory of Economic Complexity, Link: http://atlas.media.mit.edu/en/profile/country/kor/#Exports

[23] Bloomberg, Link: https://www.bloomberg.com/news/articles/2016-10-14/woes-at-giants-samsung-hyundai-weigh-on-south-korean-exports

 

 

Russia and Turkey: the future of economic relations after the downed plane

The Prospect Of Trade Flows Between Both Countries

Turkey is generally pro-western in its approach to Russia. Adam Balcer (2014) in his article Dances with the Bear: Turkey and Russia After Crimea[1], argues that the two countries should never be considered as real partners as they are both rivals in all major regional conflicts. For Turkey the EU and US are far more significant partners in terms of trade, politics and security than Russia.

However, sometimes that is not clear as it has been observed during in the Ukrainian crisis. The complexity of relations between Russia and Turkey, limit both countries’ moves. The two nations referred to each other as strategic partners in multiple occasions. However, following the plane incident on Novermber 24th 2015, in which the Turkish Army downed a Russian SU-24 warplane, Russia reacted immediately. They imposed economic, political and academic sanctions on Turkey. The political and economic measures taken by Russia was publicly declared by Prime Minister Medvedev on Thursday 26th, just two days after of the incident. His declarations were accompanied by a serious of measures announced by Russia’s Federal Agency for Tourism and Minister for Agriculture Alexander Tkachev. Actions were taken instantly leading to the cancelation of the visa free regime, holiday packages and charter flights to Turkey and banning certain import products. (Click for the official list of banned products from Turkey in Russian). The conflict seems to continue as both countries’ governments are more focused on geopolitics than macroeconomic gains.

ConsilienceRussiaTurkey11.png

Turkey is Russia’s 5th biggest trade partner (See Figure: 1). The trade volume is constituted by Russia’s $24 billion exports, which mainly constitutes of natural resources, while for Turkey Russia is its 6th biggest export destination with over $7 billion in 2014[1]. Russia is cumulatively the biggest exporter to Turkey for the last 5 years with an approximate volume of $140 billion (See Figure: 2). Top Russian exports include, from highest to the lowest volume; oil and oil products, wheat and grains, aluminium, scrap metal and gas products.

ConsilienceRussiaTurkey2Additionally, Turkey is the second biggest of natural gas customer after Germany, importing 55% of its gas from Russia (See Figure: 3). Turkey also accounts for nearly a quarter of food imports in Russia with Russia being the second biggest export destination for food products following Iraq (See Figure: 4). Significantly, most citrus fruits and tomatoes imported come from Turkey, an area that further developed following the EU sanctions. As a result both the previous EU sanction and current bans are already causing inflation in food prices in Russia.

On the other hand, there is a general misconception that both countries’ trade partnership in agribusiness is limited to a one-way flow, from Turkey to Russia. However, the trade volume is not only based on Turkish food imports. Turkey is one of the largest wheat importers from Russia, which is why Russian agricultural imports will be affected as well as Turkish food producers (See Figure: 5).

ConsilienceRussiaTurkey3Another sector that will be strongly affected is tourism. Which is already hit by the cancellation of holiday packages and charter flights, which were the main means of transport for tourists from Russia. The effects will be mostly felt when the holiday season will start towards the summer of 2016. Turkey is the 6th most visited country in the world, hosting over 39 million tourists following Italy with over 48 million tourists with Turkey ranking 12th in tourism receipts[2]. This is an indicator that Turkey has opportunity to increase its ConsilienceRussiaTurkey4income by increasing revenue made from existing arrivals. In this case Russian tourist arrivals were approximately 4.5 million in 2014[3], which can be translated as an income of $4.2 billion.

All developments mentioned earlier in this article indicate that the recent conflict will affect the Turkish small to medium size enterprises and Russian consumers in their day-to-day life. However, the effects of the conflict will be felt more slowly on corporations. Russian businesses will be affected less as the trade volume will mainly be constituted by giant corporations like Gazprom, Sberbank and Severstal.

Recent developments in businesses operating in Consilience’s circles indicates similar effects, which can be summarised as a clear bust in the two countries’ trade relations and overall hardship in delivering day-to-day business activities. This will not only be felt by Turkish businesses but also by international companies, which utilise both countries in a highly integrated way in their supply chain. For instance, recent production interruptions of the Bosch Siemens Home Appliances factory and the interruption of the construction project of the US Embassy in Moscow by Turkish conglomerate Enka, stand out as clear examples of the difficulties that companies face day to day. Both aforementioned incidents were caused by the in ability to mobilise Turkish technicians or materials from Turkey as planned.

Consequently, both countries are limited in their manoeuvres based on gas exports and mutual dependency on gas trade. However, these measures will do permanent damage on bilateral relations, which were constructed progressively since the earlier 1990s, after the collapse of the Soviet Union.

Turkish small businesses initially will be initially hit to a certain extent on in micro levels with their day-to-day operations being effected, while macro level businesses will continue with a smaller momentum given the huge trade relation on energy. However, other Turkish micro level businesses are likely to seek new markets and improve current commodity trade with Germany, UK, Italy, France and the Netherlands.

Russia will continue to have many immature industries like banking, automotive, construction, home ware, textile, food and beverages, which present huge opportunities. But it’s not always easy to keep up with the obstacles the market imposes. For instance recent developments in the banking sector are a good example. For instance, the sale agreement between the Royal Bank of Scotland and Expobank LLC after a year of sanctions is not a surprise. In addition, other international banks like HSBC and Santander already relocated their staff with an unclear next step.

Turkish conglomerates will act similarly to diversify their risks, while staying in Russian market at minimum costs. The companies which are the strongest in the Russian market are: Zorlu Enerji, Enka, Anadolu Grubu, Koç Holding , Şişe Cam, Denizbank, Arçelik (Beko), Vestel Erdemoğlu Holding, Ant Yapı, Rönesans, Gama, Soyak, Tepe, Alarko Holding.

Russian conglomerates are likely to continue business as usual as they are not bureaucratically involved in the Turkish market in comparison to Turkish companies in Russia. Significant Russian businesses in Turkey are: Gazprom, Sberbank, Severstal, Aeroflot, Lukoil and Yandex.

Amongst these companies Sberbank bought Denizbank from Dexian, a French and Belgian bank in 2012 and experienced significant growth as much as 40% in 2013 and currently with over 12,9% return in equity in 2015. Yandex on the other hand, became the first company to gain over 8% of the market share in a country dominated by Google.

Even though there is no significant change expected, the Turkish government started to look into other gas suppliers like Azerbaijan, continuing projects like TANAP and Leviathan pipeline.

On the Russian side, nothing seems to be changing as Russia is obliged to show supplier credibility by continuing gas supplies to Turkey while keeping Gazprom’s price monopoly protected amongst other companies. The protection is provided within the government, through members of the energy ministry such as deputy minister Kirill Molodtstov, by keeping locally successful competitors like Noavetek and Rosneft out of international trade.

Food imports would likely cause similar effects on the market as previously experienced in the case of the Russian ban of European food products in certain types of food and beverages. These were counter-sanction measures after its European counterparts sanctioned the country, an effect the Europeans did not expect when the sanctions took place, on August 7th, 2014. When the impact was felt throughout the sector in June 2015, European Commission for Agriculture and Rural Development had to help farmers decrease the negative effects of the sanctions. According to these developments new supply routes were explored and different solutions such as re-exporting from non-sanctioned countries like Serbia, Belarus or Azerbaijan were not enough to replace the traditional trade routes. During a recent event, December 10th, 2015, at Chatham House, London, Adam Szubin, acting undersecretary of the U.S. Treasury Department for Terrorism and Financial Intelligence, said that Russian sanction will be renewed as long as Minsk Agreement is not implemented. This means that Russian consumers will notice the inflation until Russia replaces current suppliers. On the other hand, while Turkish and EU exporters will need to explore different markets, Turkish authorities might implement aid structures similar to those devised by the European Commission for Agriculture and Rural Development. Russia will not do much regarding import bans as it already have established suppliers of fruits and vegetables such as Azerbaijan, Armenia, Kazakhstan, Uzbekistan, Iran, Algeria, Morocco, South Africa, Brazil and Argentina. However, replacing Turkey in the tomato and citrus fruit imports will take a while and cause significant inflation after the implementation of the Russian governments new measures on January 1st, 2016.

So, food exports from Russia to Turkey will likely change their destination. The slump of wheat production in Saudi Arabia in order to preserve its drinking water reserves creates a significant opportunity opportunity in Russia to redirect its wheat exports to Saudi Arabia and neighbouring countries, which used to heavily depend on Saudi wheat. This provides a significant commodity flow opportunity, given that the world’s former biggest wheat exporter will be a net importer towards the end of the 2016.

Regarding tourism in Turkey, cities like Antalya, which receives nearly 80% of the 4.5 million Russian tourists will be effected. The authorities and the businesses should immediately look into channels to diversify its tourist country of origin mix while increasing high value adding commercial activities to generate more revenue from visitors.

The developments analysed above indicate a slow recovery and the persistent influence of the conflict on bilateral relations. From small enterprises to large corporations, this conflict again proves the importance of market diversification for continuous growth an element mentioned by scholars like Jean-Emile Denis (1985)[4] for the last 30 years. In the future it is obvious that enterprises belonging to both countries will diversify their destination markets and suppliers. In any circumstances, it is evident that Russia has the leverage over Turkey in various sectors either as provider of gas or wheat and forming the majority of tourists in certain provinces. However, both countries need to find a common ground between geopolitical ambitions and macroeconomic gains as the positive effects of macroeconomic activities are clear and significant in the daily lives of Russians and Turks, while geopolitical ambiguities are less significant and impossible to predict.


[1] Euromonitor, 2015

[1] Aydin-Düzgit, Senem. Global Turkey In Europe III. Roma: Nuova cultura, 2014. Print.

[2] UNWTO Tourism Highlights, 2015

[3] TurkStat International Trade Statistics, 2015

[4] Denis, Jean-Emile, and Daniel Depelteau. “Market Knowledge, Diversification And Export Expansion”. Journal of International Business Studies 16.3 (1985): 77-89. Web.