Sunday, November 9, 2008

India, Brazil, SA: Trilateral trade surging, but economic relations still well below potential

By: Keith Campbell , 07/11/2008

The figures are undoubtedly impressive. A total combined gross domestic product (GDP) in purchasing power parity (PPP) terms of more than $5,28- trillion, or 8% of the total global PPP GDP of over $65,6-trillion.

A total population of more than 1,39-billion people, or just under 21% of the global population of more than 6,7-billion.

These numbers show the combined weight of India, Brazil and South Africa (Ibsa), the three member countries of the Ibsa Dialogue Forum. Indeed, in PPP terms, India ranks as the world’s fifth-largest economy, Brazil as the tenth, and South Africa as the twenty-sixth – two global top ten economies in a group composed of only three countries.

Yet the trade between the three countries does not reflect this at all. According to a report commissioned by the Confederation of Indian Industries (CII), South Africa absorbed 1,78% of Indian exports last year, while Brazil took only 1,2%. In the other direction, South Africa provided 1,33% of Indian imports and Brazil, just 0,53%. South Africa ranked fifteenth as a destination for Indian exports, and Brazil, twentieth.

India’s main exports to South Africa are petroleum-related compounds, automotive parts and components, iron and steel, cereals, pharmaceuticals, and machinery parts and components, while its main imports from this country are diamonds, chemicals, iron and steel, gold, aluminium and nickel. The Asian giant’s main exports to Brazil are petroleum-related compounds, chemicals, pharmaceuticals, textiles and fibres, machinery parts and components, and iron and steel, while its main imports are metal ores and slag, processed vegetable oils, nickel, iron and steel, chemicals, and machinery parts and components.

Brazil’s National Confederation of Industry (CNI) also published a report on Ibsa this year, stating that, on average, some 66% of Brazilian exports to South Africa are manufactured goods, although last year the single biggest export to this country was sugar, with frozen chickens in second place. Other major Brazilian exports to South Africa are trucks, vehicle chassis fitted with engines, vehicle bodies, vehicle engines, and automotive parts and accessories. South African exports to Brazil are also dominated by manufactured products – over the period 1998 to 2007, this category accounted for an average of 53,5% of Brazilian imports from this country, while semimanufactured products added another 26,5% and basic products accounted for only 20%.

Little wonder that South African Trade and Industry Minister Mandisi Mpahlwa, speaking at the Ministerial Session of the Ibsa Business Summit in New Delhi, on October 14, stated, “South–South agreements provide the opportunity to promote value-added exports.” However, it is also little wonder that CNI executive manager José Frederico Alvares admits that trilateral trade within Ibsa “is still very small if you take the overall trade of each country”.

Not that this trade has been static. According to the CII, South African exports to India have grown by 121% and to Brazil by 45% (presumably between the creation of Ibsa and the end of last year), while Indian exports to South Africa jumped 125% and to Brazil increased by 48%, and Brazilian exports to South Africa rose 84% and to India rocketed by 284%.

Opportunities

“If you look at the three countries – Brazil, India and South Africa – in terms of their populations, buying power, and as gateways to their regions, the potential of these economies, individually in their regions and collectively, offers great opportunities for investment and trade,” highlights Business Unity South Africa (Busa) CEO Jerry Vilakazi. “For South Africa, India is a huge market, Brazil is a huge market. There are lots of areas that are still untapped.”

“I would say that Ibsa is important,” argues Alvares. Referring to the Ibsa Business Summit (the third was held on October 13 and 14 in New Delhi), he affirms: “It is a very important initiative, to put businesspeople together so [that] they can assess opportunities and define and deal with the challenges to increasing trade. The trade is increasing rapidly. A lot of cooperation can be established.”

“To me, there is going to be a change in the dynamics of Indian trade,” explains CII director-general Chandrajit Banerjee. “India has had its traditional markets for many years. I find that India is going to have new markets to suit its own competences and competitive advantage as it is emerging today. And in the new emerging order of trade today, India will be engaging more and more with Latin America, and, therefore, Brazil, and Africa, and, therefore, South Africa, as well as other regions. South Africa and Brazil would be two of the most important engagements for trade for India.

“I’ve just come back from South Africa and I have been closely following Brazil,” elucidates Banerjee. “India is going to engage with these two countries through investment-led trade. India is already investing in South Africa and Brazil, and good stories are emerging. I see more and more Indian companies investing in South Africa and Brazil, so developing trade. Indians invest across the world. The current financial crisis will have an impact. India needs to find trade and investment partners outside its traditional trade partners. South Africa and Brazil are natural partners for India.”

In his organisation’s recent report on Ibsa, Associated Chambers of Commerce and Industry of India (Assocham) secretary- general DS Rawat wrote: “The coming together of India, Brazil and South Africa to strengthen [their] trilateral economic partnership is a major development in the area of South–South cooperation.

There are signifi- cant synergies between these countries as they have developed substantial capabilities in different sectors over many years . . . . The grouping holds out a bright future for the business community of the three countries to enhance their economic activities and cooperation in trade as huge opportunities exist in agribusiness, pharmaceuticals- biotech and healthcare, energy, biofuels, IT & ITeS (information technology and information technology-enabled services), infrastructure, mining, tourism and skills development.”

(Assocham, the CII, and the CNI all released reports on Ibsa trilateral trade and related issues, for release at the Third Ibsa Business Summit last month.)

The CII has also identified certain areas in which opportunities are emerging, or could emerge soon, for cooperation and integrated production between the three Ibsa economies. These are metallurgy and mining, steel, oil (including oil shales) and natural gas and biofuels, agriculture and processed foods, textiles and yarn, chemicals (including petrochemicals), pharmaceuticals, heavy engineering, automotive and aviation, IT and IT-enabled services, education and health.

The Ibsa countries are also expected to be relatively insulated from the current inter- national financial and (increasingly) economic crisis, continuing to display economic growth, although at a slower rate. This should stimulate the development of trade and investment between the three countries, as developed world markets go into recession (see Engineering News October 24, 2008).

Obstacles

These opportunities are far from being realised, however. “While all are in agreement that there is political will to develop Ibsa, the political leadership must do more,” asserts Vilakazi. “There are still substantial barriers to South African companies entering especially the Indian market. It’s taking South African banks seeking to enter India a long time to obtain licences. The political leadership must implement their policies and remove the barriers to trade and investment. It is the policymakers who can, and must, facilitate trade between the three countries.”

“I would like to see easier visa regimes, especially for work permits,” suggests Banerjee. “I would also like to have much more sharing of knowledge about opportunities. And, very importantly, we need cultural exchanges. People-to-people ties will be very important. We lack this at the moment.”

In the eyes of organised business in all three countries, the single most important problem is ‘connectivity’ (transport links) – or, rather, the lack of it – within Ibsa. “What keeps trade down is the lack of connectivity,” states Vilakazi. “Links between the three countries still leave much to be desired. Often, to get from India to Brazil, you have to fly via Europe. Shipping between the two countries also sometimes goes via Europe.” “To speed up our trade, we need more marine lines on our sea routes, and more air travel routes for our business people,” adds Banerjee. “We should be looking at the transport issue,” agrees Alvares.

“We have discussed, in all our meetings, connectivity,” Brazilian Foreign Trade, Industry and Development Minister Miguel Jorge assured the assembled business leaders at the Ministerial Session of the Ibsa Business Summit.

“We need to have marine lines between Brazil, South Africa and India. We need airlines to link our countries.”

And at the press conference that marked the end of the Ibsa political summit (on October 15), South African President Kgalema Motlanthe pointed out that the leaders of the three countries had “discussed consolidation and expansion of trade among our countries”, while Indian Prime Minister Manmohan Singh reported that the trade representatives of the Ibsa countries would pursue the development of trade agreements and of increasing trade between the three partners.

Brazilian President Luiz Inácio Lula da Silva affirmed that “we should establish much greater trade flows”, highlighting that “we are still far away from fulfilling all the potential between South Africa, India, and Brazil”.

The CNI has calculated that, in 2002, transport costs accounted for 12,24% of the total value of Brazilian exports to India and 10% of Brazilian exports to South Africa. They accounted for 10% of the total value of South African exports to Brazil and 8,78% of South African exports to India. For Indian exports to Brazil, transport costs came to 11,73% of the total value, and to South Africa, 9,2%. With a total trilateral trade of some $4,5-billion in that year, $440-million of this was spent on transport.

The CNI estimates that 95% of intra-Ibsa cargo is carried by sea. The largest Ibsa container port is India’s Jawaharlal Nehru, near Mumbai, with the movement of 2,65 MTEU in 2007, followed by Brazil’s Santos (2,27 MTEU) and South Africa’s Durban (2,07 MTEU). However, none of the three countries has a sizeable merchant marine – ships flying the flags of South Africa, India, and Brazil, combined, amount to just over 2% of the total global merchant fleet.

There are no bulk shipping routes linking the three Ibsa countries, although there are routes linking Brazil and South Africa, and South Africa and India. (Bulk carriers on the Brazil–South Africa route carry iron-ore to South Africa and return to Brazil with coal.) The major part of bulk transport between Brazil and India is through Europe, requiring more than one carrier, and increasing the time and cost involved.

Regarding containerised shipping, in 2007, for the first time, a route linking the three Ibsa countries, and designated the Vasco Express, was introduced by CMA. This operates on a weekly basis, visiting ten ports in six countries – because it originates in the Persian Gulf, in the United Arab Emirates (UAE), stopping also in Saudi Arabia and Iran, before moving on to India, then South Africa, and Brazil.

The route takes 56 days to traverse, and currently involves eight container ships, each with a capacity of between 1 713 TEUs and 2 556 TEUs. There are also direct Brazil–South Africa and South Africa–India routes, and containers from India to Brazil (and vice versa) can be transhipped through Durban (sometimes Cape Town), although it is more usual for Brazil–India container trade to go through the Middle East (UAE or Oman).

Regarding air routes, South African Airways (SAA) flies from Johannesburg to both Mumbai and São Paulo, linking the main Ibsa business centres. The Mumbai route sees eight flights a week (four in each direction), each flight with a capacity for 236 passengers (42 of them in business class) and with a duration of eight hours. The São Paulo route has 14 flights a week (seven in each direction), each with a capacity of 269 passengers (38 in business class) and a duration of ten hours. There is no active route from Brazil to India (although there is one on paper).

It should be noted that the air transport agreement between South Africa and Brazil allows for up to 28 flights a week between the two countries (half for a Brazilian airline); the agreement between South Africa and India also allows for 28 flights a week (again, half should be assigned to an Indian airline) and the agreement between Brazil and India, yet again, allows for 28 flights each week (again, to be split 50:50). So there is no regulatory restriction hobbling the development of greater air traffic links between the three countries.

Interestingly, to fly SAA from São Paulo to Mumbai would take 22 hours, including the transit time in Johannesburg, while the reverse trip would take 20 hours and 30 minutes. In comparison, São Paulo to Mumbai on Lufthansa through Frankfurt would take 22 hours and ten minutes, although the return leg would consume 29 hours and 30 minutes.

The key problem, as the CNI admits, is a lack of demand. “The more we promote the opportunities, the more trade is developed, and direct routes will be established,” argues Vilakazi. Significantly, two of the agreements signed at the end of the Ibsa Summit were concerned with connectivity – the five-year (2008 to 2013) action plan for civil aviation, and the five-year (also 2008 to 2013) action plan on maritime projects. Also intended to facilitate trade was a memorandum of understand-ing on standards, technical regulations, and conformity assessment, which was also signed at the conclusion of the summit.

All sides, businesspeople as well as politicians, also urged the continuance and completion of negotiations to create at least a preferrential trade agreement (PTA) between the Southern African Customs Union (which includes South Africa), the Common Market of the South (Mercosur, which includes Brazil) and India.

“It is very important to push these PTA trade negotiations forward,” emphasises Vilakazi. “We need to ensure the regional blocs pursue these deals.”

The process is complicated by the fact that what Brazil and South Africa desire to achieve and what their regional bloc partners desire are not identical, requiring difficult intrabloc as well as interbloc negotiations.