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INTERNATIONAL BUSINESS ENVIRONMENT – TRADE IN BRIC AND MINT ECONOMY

INTERNATIONAL BUSINESS ENVIRONMENT – TRADE IN BRIC AND MINT ECONOMY

Introduction


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The essay critically analyses the development of trade in the two selected economies, that is a BRICS economy and a MINT economy. The essay scrutinizes the contrasts and the similarities in the two economies. Brazilian economy is the chosen BRICS economy and Indonesian economy is selected from the MINT economies, which are regarded as two of the important economies in the world. According to Cocks (2014), the big, rapidly growing emerging market nations are the BRICs and the MINTs. The acronym directing to the economies of Brazil, Russia, India and China is known as BRIC. It was put forward by Jim O’Neill (former Goldman Sachs economist) in 2001.The acronym directing to the economies of Mexico, Indonesia, Nigeria and Turkey is known as MINT. It was initially put forward by Fidelity Investments (an asset management firm that is Boston based) but was made popular by Jim O’Neill. The acronym’s usage has grown especially in the investment sector.

Brazil holds the seventh position in terms of both the nominal GDP as well as purchasing power parity. The free markets as well as inward oriented economy are the major characteristic features of Brazilian economy. This is considered to be one of the fastest growing economies with a GDP value of around 5%. This is considered to be the largest among the nations of Latin America (OECD, 2013).

Indonesian economy is considered to be one of the largest economies of SouthEast Asia and it also holds the position as one among the many emerging market economies of the world. The nation, which is a member of G 20 major economies, is classed as a newly emerging industrialized country. The governing bodies of the nation play a major role in the market economy through the ownership of state owned enterprises. Through non performing bank loans as well as through debt restructuring processes, the government took custody of private sector assets as well as corporate assets respectively, soon after the economic crisis of mid 1997s. After that the economy has started to grow and this was accelerated to over 4% to 6% in the recent years (OECD, 2013).

Many scholars who did their research on the economy and trade conditions of different nations, consider the economy of Brazil as one of the most important and vibrant economies of South America. Here various aspects such as the balanced progress of the economy, growth-rate and dimension of the economy greatly influence the business operations of the major firms in the country (UN, 2010). The expected growth of the Brazilian economy is another component that influences the trade significantly (Allens, 2012). The growth of GDP, the soaring levels of Foreign Direct Investment (FDI) along with the personal income contribute much to the economy of Brazil and make it a suitable location for the operations of the trade business (BBC, 2012).Nevertheless, along with these advantages there are a few risk factors, according to Baer and Miles (2013). Factors like corruption, black money and lack of transparency add fuel to the increasing rate of poverty which has become a major demerit of the economy, as criticized in Indexmundi (2013). Baer and Miles (2013) point out that, though these elements are not responsible for lack of growth, they indeed cause uneven growth and stand as hindrances before the traders and investors. Inequality in the distribution of wealth in the local regions is another threat for the investors (Indexmundi, 2013). However, the Brazilian government has taken considerable measures to alleviate the situation. Scholars observe that the steps taken by the government to maintain the value of currency have helped to improve the situation to an extent. A highly sophisticated supply chain is another advantage of the economy. As advocated by BBC (2012), the main reason for the whole perfect supply chain is the isolated economy of the Brazil. Deloitte (2013) reveals that prominent organisations chose Brazil for their business operations because of the higher financial cost in Brazilian economy. There are a few major risk factors including the insufficient local funds, country risk, soaring cost of financing, insecure foreign exchange etc (Collins, 2014).

According to the managements of various distinguished business organisations, Indonesian economy has set an example by restructuring and normalizing the economy (Forbes, 2014). Business Insider (2014) has come up with similar results and opines that Indonesia has shown great potential in assimilating in to the miscellaneous variants of a populist Asian administration (The Guardian, 2014). The researchers argue that in spite of the political instability of the economy, major business organizations and investors are ready to put in their capital in the economy, since considerable measures have been taken by the Indonesian government so as to improve the financial aspects. The Telegraph (2014) puts forward a few constructive aspects of these firms’ interest in investing and undertaking in the Indonesian economy. In his opinion, managements of many renowned business organizations and firms decide to invest in the economy of Indonesia, because when compared to other economies in the world, here the involvement of money is less. According to The Spectator (2014) Indonesia can soar up and can serve as one of the powerful and consistent economies in the world if operations are provided with proper focus. Investment (2013) supports this statement by emphasising on the importance of competence and efficiency. According to him efficiency also is a crucial factor while doing trade in the Indonesian economy

Important commodities of Brazil

According to Simpson (2012), there has been high growth in the economy of Brazil for the last 20 years owing to its boom in the commodity and better governance practices. Agriculture, energy and minerals are very important to the economy of Brazil though it has made huge efforts in building its manufacturing sector.

Mining: Simpson (2012) opines that mining is an important industry in Brazil and almost 20% of the exports of the country comprise various metals and minerals. Brazil’s most important commodity is the iron ore and it contributes to above 15% of the export value of Brazil. Around 370 million tons of iron ore was produced in 2010 by Brazil, which made it the world’s third largest producer after Australia and China. It is also an important producer of steel. Brazil also produces niobium, gold, copper, bauxite and aluminium.

Energy: With current discoveries of huge oil and gas reserves off its coast, Brazil is capturing the global energy market. On a global scale, these reserves make Brazil an important oil producer. The usage of ethanol plays a very important part in the energy outlook of Brazil. Brazil has a climate that is very suitable for sugarcane, so it is aggressively involved in promoting the usage of ethanol as a light vehicle fuel and is the globe’s second highest biofuels producer (Simpson, 2012).

Agriculture: Brazil is also an important player in the world’s agricultural production. Brazil’s more than quarter of the export earnings are obtained from agricultural exports. It is the globe’s principal producer of pineapples, coffee, sugarcane, oranges, sisal and cashews. It is also an important producer of other items such as tobacco, soybeans, papayas, corn, palm, chicken and beef (Simpson, 2012).

Import items: Brazil’s imports comprise products such as machinery, computers and electrical equipment. It has made a joint attempt in building sectors like aircraft assembly, but the developments in other industries like heavy machinery and electronics have been slow compared to the attempts of nations like China. Brazil is an important importer of coal and for its agricultural industry it is an important importer of potash. It is also the globe’s seventh highest importer of rubber and third highest importer of wheat (Simpson, 2012).

Important commodities of Indonesia

Indonesia is an important producer of a range of agricultural tropical items due to its rich fertile soils. But the GDP in the share of agriculture has declined considerably for Indonesia for the past five decades. The agricultural sector of Indonesia is predicted to show enhancement in growth but at a lower rate in comparison to the service and industrial sectors, which presently contributes to most of its annual GDP growth. The major sub-divisions of this sector are manufacturing and mining (Indonesia Investments, 2014). According to the report by Simoes (2014), the top 5 commodities exported by Indonesia comprise coal briquettes, petroleum gas, palm oil, crude petroleum and rubber, which accounts for 12%, 9.3%, 8.3%, 5.9% and 4.1% of its exports, and the top 5 commodities imported by Indonesia comprise refined petroleum, crude petroleum, helicopters, planes and/or spacecraft, parts of the vehicles and cars, which accounts for 15%, 5.5%, 2.4%, 1.8% and 1.5% of its imports. Indonesia is the principal exporter of palm oil, soap, margarine, uncoated paper, coconut oil, non-iron and steel slag, raw tin, nickel ore, ash and residues, lignite and aluminium ore.

Trade agreements

In today’s business environment, international trade is very common. Owing to the limited resources and fund, none of the countries can fulfil all the things it requires by itself.  Specially, in this age of globalization, there is a great requirement of collaboration between countries. Through these collaborations countries can export and import its products and services to other countries or from other nations. This is normally achieved through bilateral and multilateral trade agreements, in which two countries develop trade agreements or more than two nations develop trade agreements irrespective of their developmental level. The aim of these agreements is to lower the trade barriers and enhance the movement of production factors such as products, services, investment within nations, etc. (Daniel et al., 2009).

Bilateral and multilateral trade agreements

According to Yilmazkuday and Yilmazkuday (2014), trade agreements between two countries at a time are known as bilateral trade agreements. The objective of this agreement is to give the countries increased access to the markets of each other and enhance the countries’ economic growth. Advantages of bilateral trade agreements include (a) as it involves only two countries these agreements are easier in negotiating, which leads to their coming into effect at a fast rate and deriving quickly the trade benefits. The disadvantage of agreements include these agreements can often activate competing bilateral agreements among other countries. Trade agreements between many countries at a particular time are known as multilateral trade agreements, which make these agreements very complex to negotiate but once the entire parties have signed the agreement, the agreements are very powerful. The main advantage of multilateral trade agreements is that the entire countries get equally treated. The complex nature of these agreements makes them hard and time consuming in negotiating. As these agreements encompass wide variety of countries, these obtain protests and controversy (Yilmazkuday and Yilmazkuday, 2014). According to Daniel et al. (2009), emerging countries prefer bilateral trade agreements than multilateral trade agreements because they prefer quick results. Firstly, bilateral agreements reach agreement quickly than multilateral agreements as they involve fewer participants. Secondly, all tariffs that hinder the trade are removed in bilateral agreements provided the countries share the common goal. Thirdly, these are easier to be followed by countries as it requires solving the issues in small setting as there are no multi-opinions that can lead to misunderstanding.In this paper, one example for each bilateral and multilateral trade agreements have been taken involving Brazil and Indonesia, which are summarized below.

Trade agreements of Brazil

According to the report from European Commission (2013), the biggest economy of Latin America is the Brazil and 34.4% of the total trade of EU with the Latin America is held by the EU’s trade with Brazil. With regard to the investments, 53% of the total EU Investment stocks in Latin America is held by Brazil. Brazil’s foremost trading partner is EU that accounts for 21.4% of the total trade and Brazil holds ninth position as the trading partner of EU that accounts for 2.1% of its total trade (European Commission, 2013).

Highest export of agricultural items to EU is done by Brazil. Brazilian exports to EU mainly comprise of agricultural products, which accounts for 40.4% and fuels and mining product, which accounts for 28.8%. One-fourth of the Brazilian exports to EU comprise manufactured items such as equipment of transport, machinery and miscellaneous manufactured items. The highest foreign investment in Brazil is done by EU with its investments in various industries. According to the report by European Commission (2013), it has been observed that for the last 5 years about 50% of the FDI flows obtained by Brazil came from EU. Brazil’s import from EU comprise basically of manufactured items such as chemicals, machinery and equipment of transport.

EU-Brazil "trade in goods" statistics

Trade in goods 2011-2013, € billions

Year

EU imports

EU exports

Balance

2011

39.1

35.8

-3.3

2012

37.4

39.7

2.2

2013

33.0

40.1

7.0

 

 

EU-Brazil "trade in services" statistics

Trade in services 2010-2012, € billions

Year

EU imports

EU exports

Balance

2010

5.7

10.0

4.3

2011

6.5

11.5

5.1

2012

6.3

13.5

7.1

 

 

 

 

Source: European Commission (2013)

Examples of bilateral and multilateral trade agreements of Brazil

Bilateral trade agreement: Brazil and European Union (EU) have high economic, cultural, historic and political ties. In 2007, at the 1st Brazil-EU summit, a strategic partnership was built between EU and Brazil, that made their ties very strong. The existing relationship between these two countries is governed by EC-Brazil Framework Cooperation Agreement. The EU’s imports from Brazil are basically agricultural products and Brazil’s imports from EU are basically equipment of transport, manufactured machinery and chemicals.

Multilateral trade agreement: MERCOSUR was formed on 1st January 1991 and is an agreement of customs union between Brazil, Argentina, Paraguay and Uruguay with zero tariffs for items that are traded within the bloc of customs union and common external tariffs for items that are imported from other nations; but with some exceptions. The advantages of this agreement can be assessed in terms of access to the market for important agricultural items like oilseeds and wheat (Polaski, et al., 2009).

Trade agreements of Indonesia

Indonesia has attained membership of ASEAN, APEC, G-20 and WTO for promoting international relations and its trade. Indonesia’s principal trading partner and biggest foreign investor is Japan. The two nations signed the Economic Partnership Agreement (EPA) in 2008, which is Indonesia’s first bilateral free trade agreement (Indonesia Investments, 2014). For Australia, the important economic and regional partner is Indonesia. For the fiscal year of 2012-2013, the two-way trade of services and products attained $14.2 billion for Australia, which fetched Indonesia the 11th position for Australia’s export market and 12th position for Australia’s trading partner. In the year 2013, the investment by Australia in Indonesia was estimated to be around $10.9 billion. It is also estimated that more than 400 organizations of Australia are functioning in various sectors of Indonesia such as construction, mining, health care, agriculture, finance, transport, infrastructure, and food and beverage (Australian Government, 2014).

Examples of bilateral and multilateral trade agreements of Indonesia

Bilateral trade agreement: Economic Partnership Agreement (EPA) is a bilateral trade agreement between Indonesia and Japan and is Indonesia’s first bilateral free trade agreement. It was formed in 2008 and according to this agreement, Indonesia is exempted to the range of 90% from the Japanese import duties (Indonesia Investments, 2014). Indonesia-Australia Comprehensive Economic Partnership Agreement (IA-CEPA) seeks to develop and make strong the relationship of investment, trade and economic cooperation between Indonesia and Australia. The negotiations of IA-CEPA began in September 2012 in Jakarta. The benefits of IA-CEPA include (a) an agreement that completely includes all the obstructions in enhancing the Indonesian investment in Australia and Australian investment in Indonesia would improve the relationship between the two nations in a wide range of important aspects, (b) the agreement could tackle obstructions to the bilateral trade that includes charging extra costs on consumers and exporters and (c) the agreement can find ways to improve the economic cooperation in particular areas or sectors that are determined to be the important agents of economic growth (Australian Government, 2014).

Multilateral trade agreement: ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) is the agreement between the members of ASEAN, Australia and New Zealand. ASEAN (Association of Southeast Asian Nations) was formed by Indonesia, the Philippines, Malaysia, Thailand and Singapore to support economic and political cooperation and regional stability. Brunei and Vietnam joined ASEAN in 1984 and 1995, respectively. Laos and Burma attained full membership in 1997 and Cambodia joined ASEAN in 1999 (U.S. Department of State, 2013).It commenced for Indonesia on 10 January 2012. AANZFTA benefits both Indonesia and Australia. Wide span of Indonesian imports from Australia have zero tariffs that enhance the opportunities for market access for the Australian exporters. The AANZFTA agreement also led to the Indonesia receiving duty-free treatment for most of the export items to Australia for which it was initially paying tariffs (Australian Government, 2014).

According to the report by Argentine Beef Packers (2012), Brazil is the globe’s second highest exporter of agricultural products after the US. According to Carlos Ortiz (the head of the rural and retail division of the Brazilian branch of Rabobank International), Indonesia and Brazil have many similarities that include huge domestic market and appropriate topography for planting agricultural crops that must generate appropriate incentives for the stakeholders and government to enhance agribusiness in Indonesia. Ortiz further adds that Brazil’s system of combining important value chains of agriculture, i.e., encouraging the organizations and giving them the incentives to farm, process and trade agricultural products under a single incorporated system, for lowering the cost of production and maximizing the economies of scale could be applied by Indonesia (Argentine Beef Packers, 2012). According to the report by Argentine Beef Packers (2012), Indonesia is the globe’s biggest exporter of palm oil and is in the list of largest exporters of coffee, cocoa and rubber. According to Pawan Kumar (associate director of food and agribusiness research at Rabobank International), Indonesia could utilize its profitable palm oil sector for developing its agricultural industry. He further argues that the increasing demand for palm oil will soon lead to the globe depending on Indonesia for palm oil, which according to him will be the very crucial item in the future to enhance the economy of the country.

The process of globalisation has led the countries to form alliances with each other for trading goods and services as countries cannot satisfy their needs by themselves due to the limited availability of capabilities and resources. This import and export of goods and services are mainly attained through bilateral and multilateral trade agreements. The aim of these agreements is to lower the obstructions involved in trade and enhance the movement of production factors within countries. This paper has attempted to discuss the enhancing role played by trade agreements (bilateral and multilateral trade agreements) for international trade by taking the examples of Brazil and Indonesia. The paper also compares the trade done at international level by Brazil and Indonesia – the two rapidly growing emerging market nations of the world.

References

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