How can BRICS improve its bargaining position in international trade?

Mehdi Shafaeddin

In my previous blog piece I mentioned that although the member countries of BRICS have exchanged views a number of times to cooperate on trade issues, so far they have taken little concrete measures. The press in the West so far has argued that “big is not the same as cohesive,” rather than discussing how BRICS can mobilize their bargaining power to strengthen their position in trade relations with developed countries.

BRICS need to enhance access to markets for their actual and potential export products, and to obtain access to technology for developing comparative advantage in new products. In both cases, they need to enhance their negotiating/bargaining capacity. I have also shown that together they account for a significant proportion of world trade, and are a significant market for exports and source of imports for developed countries. Imports and exports can be regarded as bargaining assets as well as bargaining liabilities.  While bargaining is a complicated issue involving multiple factors, I will confine myself here to the use of trade itself as a means of bargaining. In this piece, I will briefly explain how the net bargaining position of BRICS could be improved by mobilizing their bargaining assets and minimizing their bargaining liabilities. The question then is how trade itself can be used as a means of bargaining: what sort of measures can be taken? How can they shift demand and supply (not through trade restrictions) from one source of supply to another as a tool of bargaining?

Such ability for maneuvering depends not only on the size of their trade (discussed in the previous blog piece), but more importantly on the structure of their trade, the products involved and the availability of alternative sources of supply and markets. The issue is whether the shift of imports/exports of a product, or a few products, by BRICS  from a developed country to another country would inflict losses on the latter and would involve no, or minimal, negative impact on the BRICS itself.

Imports are the main element in the bargaining position of BRICS. For a given volume of imports of BRICS from a developed country, the following characteristics of a product of the developed country contribute to the bargaining assets of BRICS positively: the degree of export orientation, labor intensity, profitability and the geographical concentration of the related industry. For example, the aerospace industry of England is concentrated in Bristol area, and the technology industry of the USA is concentrated mainly in Boston. Further, the size and the political power of companies and other vested interests involved (such as those involved in related back-up services) are also important.

The timing of negotiation, or import procurement, is also an important factor. The ability of the developed country exporter(s) to find alternative markets, or expand their domestic market, depends on their economic situation, and thus, on the extent of capacity utilization in the industries concerned. During the recession, it is more difficult for the exporter(s) to find alternative markets. Moreover, the extent of the recession may vary from one country/region to another. So does the capacity utilization from one industry to another within a country. Currently the recession is more severe in Europe than in the USA. In developed countries, industries with large excess capacity are more vulnerable to shifts in demand. Typical examples are steel, ship building, automobiles, textiles, clothing and leather industries, some of which are also labour intensive and alternative sources are amply available in developing countries. For example, the capacity utilization in the steel industry is 69.1% for EU (27) as compared to 74% for OECD as a whole and 75.6% in non-OECD, where the production capacity is 87% higher than the OECD. Also, capital goods industries are more affected by the recession than the consumer goods industries.

Imports are, however, bargaining liabilities for BRICS as well. Attempts to shift imports from one source to another may involve losses due to higher prices of alternative sources, unless alternative sources are easily available at competitive prices or other goods can be replaced for the product(s) concerned, or BRICS can dispense with them. (Basic foods, essential intermediate inputs, and raw materials are difficult to dispense with; by contrast, luxury goods can be dispensed with easily, or at least temporarily.) Such losses can include consumer surplus foregone, loss of jobs, or consequent sociopolitical unrest or upheaval.

Exports of BRICS are also bargaining assets as well as liabilities. Exports of petroleum and raw materials are bargaining assets of BRICS to the extent that developed countries cannot easily find alternative sources of supply. Brazil, Russia and South Africa are important exporters of some raw materials. One has look into the data on their relative importance in the world export market to determine their potential as bargaining assets. Regarding exports of manufactured goods, it may not be easily possible to shift them from one market to another. Moreover, their loss would involve the loss of income and employment.

In my next blog piece I will provide some data on various factors outlined above to discuss the issue in more detail.

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