Major Trade Areas And Trade Partners Of UAE: An Analysis Of Balance Of Payment And Comparative Advantage

A brief introduction of your country’s major trade areas and trade partners.
Theories and principles on balance of payment and comparative advantage.
Analyze the balance of trade using export and import data available for the last few years, depict a surplus or deficit as appropriate. Also, analyze current, capital and official reserves accounts using the ledgers showing debit and credit entries.
Evaluate the gains made by your country from comparative advantage by engaging in international trade, using Ricardian Model of Comparative Advantage.

Balance of Payment (BOP)

United Arab Emirates (UAE) is highly involved in international trade. UAE ranks 61 as per world Economic Complexity Index. In addition, in the world economy its rank is 30 on thew basis of its export. The goods that the country exported include Crude Petroleum, Gold, Petroleum Gas, Refined Petroleum and diamonds. Among the exported goods Crude petroleum constitutes major share having an export earnings of $46.8 billion. The country imports mostly Broadcasting Equipment, Jewellery, Planes, Space craft or helicopter, Gold and Cars. The major trading partners of UAE are Japan, China, Saudi Arabia, India, United States, Oman, United Kingdom and Germany. UAE provides a significant export markets to United States. It plays a crucial role in serving countries like those in Middle East, South Asia and Africa where it re-export a significant share of its imports (Al-Shayeb et al., 2016).

Balance of Payment (BOP) Summarizes accounting statement of all transactions in which the country involves with other nations in a particular year (Iyengar, 2014). Balance of Payment account comprises of three sub accounts namely Current account, Capital account and Official reserve account. Each account is made up of credit and debit entries. Any money receipt from external sources is recorded in the credit side whereas payment made abroad by the domestic country is included in debit entry. The Current account of BOP keeps records of export and import activities and transfer payment or transfer receipt. Capital account of BOP records Capital inflows and outflows of the country (Basu & Nag, 2017).

In context of economic theory, Balance of Payment is related to exchange rate policy of a country in terms of external policy goals. Such objectives are attaining equilibrium in BOP account, expansion of international trade and maintain stability exchange rate. There are three approaches related to Balance of Payment theories- Elasticity approach of balance of trade, Absorption approach of balance of trade and the monetary approach of Balance of Payment (Gopinath, Helpman & Rogoff, 2014). BOP runs in principles of double entry book keeping where total receipts equal total payments. Surplus or deficit of one account offsets deficit or surplus of any other account ( Nshi, 2017). Thus, maintaining balance in BOP.

The theory of comparative advantage was proposed by David Ricardo. Before that the principle of international trade was based on Adam Smith’s theory of Absolute advantage. Principle of Comparative advantage suggests that a country should export the good in which it enjoys a comparative advantage driven by lower opportunity cost (Costinot et al., 2015). While the goods in which it faces a higher opportunity cost should be imported.

Trade Balance in UAE

Trend analysis of Balance of Trade

UAE economy has managed to maintain surplus in its trade balance. Country’s dependency on petroleum and oil product is decreasing. Still these products have significant contribution in raising government revenue. Import cost of UAE mainly consists of payment for machines import, import of transport equipment, chemical product and food items (Hussain & Saaed, 2015). Here, India, Japan, Countries in European Union and China are major trading partners. The surplus in trade balance is mainly due to export earnings from oil and petroleum product. Otherwise net export for the country would be negative.

Analysis of Balance of Trade

Trade balances for past ten years (2005-2014) are considered. Trade balance more or less increases in every year with exception in 2009, 2011 and 2013. During these years trade balance fell from the previous year. Country’s trade relation with its partners is improving. For example, in the first quarter of 2009 trade balance between India and UAE was negative with a worth of 7.3 billion AED. The deficit account has turned to a surplus account in 2010. The country is now successful to develop as a diversified economy and gives more weight to non-oil product export.

( Source: "Quandl", 2017)

Current account balance of UAE in 2015 was US $ 13.545. Billion, Current account includes external transactions except capital and financial item. Positive account balance means a surplus in the account. The surplus Current account balance gives the nation world rank of 17. Current account balance during this year was even greater than the world’s average which was US dollar 7.04. Current account balance in UAE had gone to a considerable lower level in 2008-2009 (Gnimassoun, 2015). The depression in current account balance has resulted from a sudden rise in gross domestic product and massive funds outflow.

Capital account in balance of payment records capital and financial transaction that takes place between the domestic residents and foreigners in the accounting year. In UAE the financial account of BOP mostly runs in deficit. Current account surplus helps the country to maintain balance in its BOP account. Capital account in UAE accounted a deficit of 145.8 billion AED in 2012. The downturn continues also in 2013 with a negative accou8nt balance of 163.7 billion AED. This gives a clear indication of heavy capital outflow from the country. During this time, transfer of funds from private sectors increases. In addition, outflow of fund in public sectors also increased from 115.0 billion to 118.9 billion in the next year.

Official reserve account does adjustment in balance of payment after all the adjustment done in the remaining two account. This account comprises assets that are denominated in terms of foreign currency (Melvin & Norrbin, 2017). The monetary authority controls this account to make necessary adjustment. In 2012, overall balance in BOP account was 36,305 AED. Hence, an adjustment of -36,305AED was done. In 2013, the adjusted amount of -77,106 AED. Adjustment increased due to increase in deficit in capital account.

 The theory of Comparative Advantage in international trade is one of the crucial theories in support of free trade. Before that, it was believed that countries engaged in free trade as per their absolute advantage. However, the problem arose when there is a situation in which two countries have absolute advantage in the same goods. Then, came the concept of opportunity cost in determining comparative advantages. The basic model is developed in a 2 country 2 goods framework. The model indicates that in autarky situation that is before trade both countries have to produce both the goods. Technology difference in countries results in a different relative price for same good (Levchenko, & Zhang, 2016). However, the country faces a lower price for the goods with comparative advantage as compared to others. This price difference triggers trade between countries. Thus, in the model technology difference is the key factor for trade. Country by selling goods with comparative advantage can achieve a high price than that received in home country. Domestic firms support trade to raise their price. The world price is set in between of prices prevail in the country. Therefore, free trade benefits both the nations by providing them necessary goods at a lower price than in autarky situation.

Current Account

International trade is one of the prosperity indicators of nation’s economy. In UAE also trade plays a crucial role. In order to participate in international trade country should possess comparative advantage in producing at least one good. In case of UAE the product it can produce efficiently is crude oil (Esmaeili, 2014). One major factor to have an edge in oil export is its huge reserves of oil. 97.6 billion barrels oil production is done every day on an average. However, national consumption of oil is only 500 barrels per day leaving a huge supply of export. Supply of export without its demand is meaningless. There is massive export demand for oil because few countries posses oil reserves and others though having reserves are unable to produce it in their own country. Thus UAE maintains almost monopoly in export market because of its comparative advantages. Other products in which the country has trade advantages are Perfume (Ajmal) and Cement production (Vinatoru, 2015).

 UAE enjoys significant comparative advantages because of its geographical position. UAE government uses this advantage in favor of creating a profitable business environment (Bartlett, 2017). The location advantage of UAE has turned to a strategic advantage. Because of its geographical location the country has invested huge amount to develop its infrastructure. Investments made in building roads across countries, airports, seaports and cargo hubs. With world class infrastructural facilities UAE further has an competitive edge in international trade in terms of possessing an efficient trade structure.

Conclusion

The evaluation of Balance of Payment account in UAE reveals that the country maintains more or less a surplus in its BOP account. Despite deficit in capital account, positive BOP has resulted from a positive balance in current account. Again current account surplus is realized due to surplus in trade balance account. Export earnings exceed import cost making net export positive. Apart from exporting oil and petroleum product focus is also given on exporting non-oil products. UAE is trying to improve its trade relation with its trade partners. Trade relation between UAE and India has improved in last few years.

Huge stock of natural oil gives the nation comparative advantage in exporting oil product. Apart from oil the country captures a large share of export market in producing perfume of a specific kind and in cement production.  In addition to have an advantage in oil and other product UAE enjoys additional comparative advantage due to advantageous geographical position.

References

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Bartlett, W., Ker-Lindsay, J., Alexander, K., & Prelec, T. (2017). The UAE as an Emerging Actor in the Western Balkans: The Case of Strategic Investment in Serbia. Journal of Arabian Studies, 7(1), 94-112.

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Melvin, M., & Norrbin, S. (2017). International money and finance. Academic Press.

Nshi, K. (2017). Macro Accounting and General Equilibrium.

Quandl. (2017). Quandl.com. Retrieved 4 July 2017, from https://www.quandl.com/data/ODA/ARE_BCA-United-Arab-Emirates-Current-Account-Balance-USD-Billions

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