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RCA Analysis with Selected Products to Enhance Prediction Power of

Competitiveness

Article · November 2019

DOI: 10.17977/um002v11i22019p143

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 Jurnal Ekonomi dan Studi Pembangunan, 11 (2), 2019
ISSN 2086-1575 E-ISSN 2502-7115

RCA Analysis with Selected Products to Enhance Prediction

Power of Competitiveness
Jongkers Tampubolon
Agribusiness Department, HKBP Nommensen University, Medan, Indonesia
E-mail: [email protected]

Received: June, 2019; Accepted: October, 2019; Published: November, 2019

Permalink/DOI: http://dx.doi.org/10.17977/um002v11i22019p143

Abstract

Recognition of the competitiveness of various export commodities is

important in the design of industrial policies which shapes a country's
structural transformation. The commonly used approach is the Revealed
Comparative Advantage (RCA) which was introduced by Balassa in 1965.
Over the years, Balassa's RCA has received a lot of criticism with
improvement effort related to its consistency (ranking bias). This study
therefore aims to examine the possibility of improving the RCA prediction
power, while adhering to the principle of simplicity in the calculation as well
as convenience in dealing with data availability. The calculation is conducted
by selecting the products included in the analysis using the two steps
approach. This examination revealed that the selection limited to top 250
export products (from 1,259 products in HS 4-digit), it is able to correct
(restore) the position of Indonesian manufacturing sector. As a competitive
sector (RCA> 1) it reflects the position of the sector as top 10 export, based
on its share (export value). This approach also provided a new hint into
Indonesia's export in Chinese market, especially after the implementation of
the ASEAN-China Free Trade Agreement in 2010.

Keywords: Competitiveness and Competition, Revealed Comparative

Advantage, Indonesian Manufacture Sector, Indonesian Exports
JEL Classification: F11, F14

INTRODUCTION
The transformation of the world trade regulatory agency from GATT
(General Agreement on Tariff and Trade) to WTO (World Trade Organization) in
1995 marked an increase in international trade. At the transition of the millennium,
146 countries became members of WTO accounting to approximately 97% of the
world trade (Crowley, 2003). Despite being challenged with the anti-globalization
movement and various trade disputes among its members (Howse, 2016), many
countries opined that the multilateral trade negotiations under the Doha
Development Round of WTO was sluggish and needed some amendments (Kawai
& Wignaraja, 2014). Therefore, various regional and economic integrations in the
form of Regional Trade Agreements (RTAs) were established. According to
Crawford & Fiorentina (2005), between January 2004 and February 2005, 43 RTAs
were notified by WTO, thereby, making it the most prolific in history. Furthermore,
this number reached 612 RTAs in April 2015, with the formation of 40 free trade
areas in East Asia Countries (Okabe, 2015).

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Regional integration is a free trade process irrespective of the limited

number of the partner countries. Text books on international economics by
Salvatore (2013) and Krugman & Obsfeld (2014), stated that the flow of goods
between countries takes place based on comparative advantages which is measured
by opportunity costs. In this concept to simplify trades between two countries with
two commodities, a trade still takes place notwithstanding the fact that one of the
countries experience absolute disadvantages on both commodities, as long as the
opportunity cost to produce them differ.
Balassa’s Revealed Comparative Advantage (RCA) is the most widely used
index in analyzing comparative advantage. This approach is popular due to its
simple calculation methods and low data requirement which requires export data
(ex post). Its calculations are basically the ratio between the export share of the
exporting country to another region, and the global import share of the destination
country or region for a certain commodity or sector/group. Exportation countries
revealed a comparative advantage if the RCA value is greater than unity.
The Ricardian comparative advantage has been perceived as a useful
pedagogical tool in analyzing theoretical foundations and empirical measures in
international trades (Eaton & Kortum, 2002; Sanidas & Shin, 2010; Costinot,
Donaldson & Komunjer, 2012; Leromain & Orefice, 2014; Nguyen, Pham &
Vallee, 2017; Setyastuti, Adiningsih & Widodo, 2018). The law of comparative
advantage stated that the less efficient nation should specialize in the production
and exportation of commodities with least absolute disadvantage. In other words,
countries tend to increase production capacity in sectors with high comparative
advantages, with reduction in those with low comparative advantages. Logically,
commodities with high export share show a comparative advantage measured in a
high RCA value (greater than 1).
Indonesia as a member of ASEAN is involved in variety of RTAs.
Approximately 90% of its export value in 2016 came from trades within the
framework of RTA, with two-thirds from five main partners such as ASEAN,
China, Japan, USA and EU (15). Therefore, exportation to these trading partner
countries/regions is assumed to have competitiveness measured in comparative
advantage. However, since 2001, the electronics (HS code 85), machinery (HS code
84) and vehicle sectors (HS code 87) experienced anomaly. With the top 10 in terms
of export value, these three sectors contributed to the exportation of revenues
around 10-17% in 2001 – 2017, but RCA for the electronics ranged 0.24 to 0.39,
machinery, 0.67 to 1.17 (twelve years including RCA <1) and vehicle sectors 1.12
to 5.25 respectively (World Bank 2012; Riandi & Pratomo, 2017; Aslam, 2018;
Tampubolon, 2019). This finding is counter intuitive with the theory stated above,
where export value should be derived from commodities with RCA greater than 1,
in addition to the fact that in some provinces manufacture sector had better
influence on local economy (Kresnowati, Ananda & Khusaini, 2016). These
analytical results, occurred in various commodities and countries (Sanidas & Shin,
2010 found similar cases for South Korea, in 2008 HS-82 ranked 2nd in the export
share but the value of RCA was 0.947).
The results of RCA estimation have important policy implications, because
it is used as a reference for the design of industrial policies which shapes the
country’s structural transformation. It is also used to transform labor activities
outside the sector with lower comparative advantage. Coniglio et al. (2018)

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emphasized that defying the initial comparative advantage tends to be a risky policy
decision with high probability of failure.
Although it is widely used, Balassa's RCA received a lot of criticism due to
certain weaknesses in theoretical foundation and empirical distribution (for
example Leromain & Orefice, 2014). Also, the estimation results are often not
comparable across-countries for certain commodity with the RCA ranking not in
accordance with the export share ranking (Yeast, 1985; Ballance, Forstner &
Murray, 1987; Coniglio et al., 2018). The ideal comparative advantage index should
meet the following characteristics: (i) ability to express the ratio actual trade, (ii)
stable distribution, which enables one to compare its value over time, industries,
and countries, (iii) reflect net trade rather than exports only, and (iv) not focused on
a single commodity alone (Gnidchenko & Salnikov, 2015). Therefore, theoretically
trade-cum-production indices become adequate and powerful in estimating
comparative advantage. However, various attempts to challenge the trade-cum-
production approach encountered major disadvantages, due to the fact that trade
and production data are collected at different points of time, using varying
classifications and definitions, which results in unreliable inferences during
analysis (Sanidas & Shin, 2010).
Furthermore, Sanidas & Shin (2010) elaborated on various alternatives in
improving the ability to measure RCAs developed since the 1980s, such as (i)
Lafaye index, (ii) Symetric RCA index, (iii) Weighted RCA index, (iv) Additive
RCA index, and (v) Normalized RCA. They concluded that, although these five
indices overcame the shortcoming of Balassa to some extent, none is called 'the
perfect one' (p. 19). The use of different RCA indices yields varying results,
therefore adequate care is taken to analyze the trade performance, and in
interpreting the result. This means that in measuring the comparative advantage,
different analytical tools are used depending on the purpose of measuring
comparative advantage. The New RCA index introduced by Costinot, Donaldson
& Komunjer (2012) shows a high level of prediction in correcting the biased
rankings verified by Leromain & Orefice (2014).
In an attempt to increase the measuring power of Balassa’s RCA, the
proposed alternative is generally related to two things, namely the introduction of
new variables such as GDP, as well as the import (Lafay Index) and net export
(exports minus imports of commodity traded) popular with the net comparative
index (DFAT-Australia, 2003; Gnidchenko & Salnikov, 2015; Setyastuti,
Adiningsih & Widodo, 2018). In addition, the alternative approach is carrying out
more calibration formulas which aims to produce a symmetry and normal RCA
distribution, on the assumption that it is used for econometrics (regression)
operations. The New RCA Index combines both (Costinot, Donaldson &
Komunjer, 2012; Leromain & Orefice, 2014). In the application, some steps taken
tends to increase the estimated value by grouping (operating regression on several
quantiles e.g. by Sanidas & Shin, 2010) or excluding the zero trade flows from the
analysis sample using HS-4 digit data, and dropping some sectors considered less
relevant in the analysis where the judgments are conducted on a subjective basis
(Leromain & Orefice, 2014).
The availability of global export and import data both by countries and by
regions with high disaggregation levels which are freely accessed, provides
opportunities to exercise an alternative in increasing the prediction power of RCA

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analysis through data selection rather than formula calibration. United Nations
International Trade Statistics Data Based (UN COMTRADE) provides harmonized
export and import data with disaggregated levels up to 6 digits (harmonized system
= HS 6 digits) including 5000 items, which are further aggregated to 1,259 items at
the 4-digit level (HS 4 digits) and grouped into 97 sectors (HS 2 digit). Data is
accessible at trademark.org and in the analysis of international trade, some studies
show that its aggregation level delivers different results (the use of data at different
HS digit levels indicates different results), because on HS-2 level, zero trade flow
problems do not arise. Yihong & Weiwei (2006) stated differences in the
calculation results of the export similarity indices between China and ASEAN using
HS-2 data compared to HS-4 level, where 4-digit data creates smaller value.
Furthermore, Fontage, Freudenberg & Gaulier (2005) suggested that less
disaggregated nomenclature leads to higher shares of Intra-Industry Trade which
for the case of European Union (EU-12) in 2000 produced a significant difference
of 70.7% versus 29.3% respectively.
This study therefore aims to examine possibility of improving the prediction
power of the most popular competitiveness measurement tool (RCA), while
adhering to the principle of calculation simplicity and convenience in dealing with
data availability. The calculation is carried out in stages, starting from the 4-digit
disaggregation level and aggregating to a higher level (2-digit level and grouping).
These steps are applied to analyze Indonesia's export competitiveness globally by
paying more attention to the electronics, machinery and vehicle sectors which many
authors consider as ASEAN's superiority and as a hub for trade in electrical
machinery in form of parts and components (Shujiro & Misa, 2007 ), also known
as the "factory Asia" (Baldwin, 2008; Kawai & Wignaraja, 2014). Furthermore, the
same analytical steps are applied to the calculation of Indonesia’s export
competitiveness in China’s Market, due to the controversial results associated with
a lot of scholar's analysis.

METHOD
This study used the RCA Balassa standard model as a measure of
competitiveness with the following equation:

RCA = (Xij/Xit)/(Xnj/Xnt) = (Xij/Xnj)/(Xit/Xnt) …………………………. (1)

where X represents export, i is referring to country, j refers to commodity, t is a set

of commodity and n is a set of country. In other words:

Xij = Country i’s export of commodity j. Xnj = World export of commodity j.

Xit = Country i’s export of all goods. Xnt = World export of all goods.

Export and imports data were used from the UN Comtrade /International
Trade Statistics Database. The available data consisted of 97 sectors (HS 2-digit)
which is an aggregation of 1,259 items of product (HS 4-digit). Furthermore, the
total of 97 HS double-digit sectors are categorized into 15 commodity groups as
presented in table 1 by Martijn &Tsangarides (2007) and the latest was conducted
by Saqib, Irsahad & Xin (2017).

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Table 1. Classifications of Commodity Groups based on HS 2-digit

01 – 05 Animal and Animal Products 50 – 63 Textiles and clothing
06 – 15 Vegetable Products 64 – 67 Footwear/Headgear
16 – 24 Foodstuffs, Beverage and Tobacco 68 – 71 Stone and Glass
25 – 27 Mineral Products 72 – 83 Metals
28 – 38 Chemicals and Allied Industries 84 – 85 Machinery and Electronic
39 – 40 Plastics and Rubbers 86 – 89 Transportation
41 – 43 Raw Hides, Skin, Leather and Furs 90 – 99 Miscellaneous
44 – 49 Wood/Wood Products
Source: Foreign Trade online, available at https://www.foreign-trade.com/ reference/
hscode.htm

This study took the following steps: (i) sorting export based on the highest
share value according to product (HS 4-digit) with 2016 as the reference year, (ii)
rearranging 250 selected products into sector (HS 2- digits), and (iii) aggregating
sectors into 15 categories of commodity group as classified in table 1. The results
obtained, lowered the total participating sectors from 97 to 62 as presented in table
2. In this paper, the selection was limited to the top 250 Indonesian exports, due to
the contribution of selected product items > 90% to the total export value, which
became a benchmark for the reliability of the results obtained and used as a
reference.

Table 2. Indonesia’s Export with Selected Product Items (HS 4-digit), 2016
All Exports Top 250 Exports
Description
Sectors Products Sectors Products
Animal Product 5 45 2 8
Vegetable Products 10 100 5 16
Foodstuffs 9 56 9 19
Mineral 3 67 3 10
Chemical 11 181 8 31
Plastics & Rubbers 2 43 2 15
Raw Hides 3 25 1 2
Wood 6 68 3 18
Textiles and Clothing 14 153 8 34
Footwear 4 20 2 5
Stone & Glass 4 67 3 8
Metals 11 157 6 20
Machinery & Electrical 2 135 2 44
Transportation 4 38 3 9
Miscellaneous 9 104 5 11
Total 97 1 259 62 250
Contribution to global export value 100 % 94 %
Source: Author’s calculation

This approach is applied to calculate the value of RCA commodity group of

Indonesian global export sector to China as classified in table 1. Furthermore, an
analysis of the top 10 exports is carried out by paying special attention to three
sectors of Indonesia manufacture industry, namely Machinery (HS code 84),
Electronic (HS code 85) and Vehicle (HS code 87). These sectors showed

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incompatibility between export share and RCA with the aggregation data level of
HS-2.

RESULTS AND DISCUSSION

In figure 1, the development of global Indonesian export based on the
commodity group classification is presented. The commodity group of vegetable
products showed the highest average growth (19.25%) between 2001 - 2017,
followed by Transportation (18.71%), Plastics & Rubber (13.24%), Metals
(13.05%) and Stone & Glass (12.54%) respectively. While the top five commodity
group producing the highest export value in 2016 are Mineral, Vegetable,
Machinery & Electronic, Textile and Chemicals Products.

100.000

80.000

60.000

40.000

20.000

Vegetable Mineral
Chemical Plastics&Rubber
Wood Textile
Stone&Glass Metals
Figure 1. Export Value of Commodity Groups, from 2001 – 2017 (in million US$)
Source: author’s calculation
According to the above figure, from eight commodity groups with high
export growth, only four groups showed competitiveness based on RCA calculation
using all data, namely Vegetable Products, Plastics & Rubber, Mineral Products
and Textile. The rest showed high export value growth with low competitiveness
(RCA <1) as seen in table 3.

Table 3. RCA of Commodity Group of Indonesian Global Export, 2001-2016

Commodity All Products
Classification 2001 2004 2007 2010 2013 2016
Animal
1.42 1.24 1.01 0.83 0.96 1.12
Product
Vegetable
1.46 2.86 4.00 3.90 3.78 4.23
Products
Foodstuffs 0.72 0.82 0.88 0.96 1.03 1.26
Mineral 2.68 2.33 1.93 1.99 1.81 1.99
Chemical 0.46 0.50 0.54 0.48 0.63 0.68
Plastics &
1.01 1.45 1.70 1.66 1.52 1.21
Rubbers
Raw Hides 0.86 0.46 0.53 0.41 0.44 0.50
Wood 3.05 2.66 2.42 2.21 2.37 2.65

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Textiles and
2.34 2.10 2.08 1.79 1.87 1.96
Clothing
Footwear 2.98 2.45 2.19 2.30 3.11 3.93
Stone & Glass 0.68 0.51 0.52 0.42 0.42 0.98
Metals 0.59 0.75 0.96 0.87 0.71 0.80
Machinery &
0.53 0.53 0.41 0.38 0.37 0.34
Electrical
Transportation 0.09 0.14 0.26 0.29 0.34 0.43
Miscellaneous 0.47 0.43 0.35 0.32 0.31 0.31
Source: Author’s calculation

Based on the sector, Indonesia's top 10 exports (2016) are spread across nine
commodity groups as classified in table 1. These ten sectors contributed almost
two-thirds (62.28%) of the total export value. Two main sectors (mineral oils and
vegetable accounted for 31.91%, while the machinery, electronics and vehicle
industries, contributed 13.47% (table 4).

Table 4. Top 10 Indonesian Export by Sectors, 2016

Exports in 2016 Export Growth (%)
Sectors* Value Share 2001-2008 2009-2016 Average
(billion US$) (%) 2001-2016
Mineral (HS 27) 27 875 19.29 178.72 - 15.14 7.11
Vegetable oils (15) 18 232 12.62 976.27 49.20 21.86
Electronics (85) 8 148 5.64 39.76 0.00 2.54
Pearl (71) 6 369 4.41 91.22 15.75 5.44
Vehicle (87) 5 868 4.06 565.85 222.53 20.91
Rubbers (40) 5 663 3.92 80.50 434.38 22.01
Machinery (84) 5 451 3.77 517.89 15.28 15.87
Footwear (64) 4 640 3.21 25.23 167.26 8.81
Clothing (62) 3 880 2.69 22.12 23.84 2.54
Wood (44) 3 865 2.67 - 14.13 65.08 1.47
*In bracket is HS code
Source: Author’s calculation

Figure 2 presents Indonesia's export development based on sectors (HS 2-

digit). Natural or cultured pearl (HS code 71) showed the highest average growth
(22%) between 2001 - 2016 followed by successively vegetable fats and oils (HS
code 15), Vehicle excluding railway (HS code 87), Rubbers and article thereof (HS
code 40), Footwear (HS code 64) and Machinery (HS code 84). While the top five
sectors with the highest export value in 2016 were Mineral fuels (HS code 27),
Vegetable fats and oils (HS code 15), Electrical machinery (HS code 85), Rubbers
and article (HS code 40), and Vehicle excluding railway (HS code 87).

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80000
70000
60000
50000
40000
30000
20000
10000
0

27 15 85 71 87
40 84 64 62 44

Figure 2: Export Value of Indonesia Exports by Sector (HS code 2 Digits),

2001-2016 (in million US$)
Source: Author’s calculation

According to the above figure only four sectors out of eight, showed
competitiveness based on the standart RCA calculation, namely Mineral fuels,
Vegetable fats and oils, Rubbers and article, as well as Footwear. The rest showed
high export value growth with low competitiveness (RCA <1) as presented in table
5 below.

Table 5. RCA of Indonesian Global Exports by Sectors, 2001-2016

Top 10 Exports* All Products
2001 2004 2007 2010 2013 2016
Mineral fuels (HS 27) 2.53 2.31 1.85 1.90 1.81 2.04
Vegetable fats and
8.28 15.02 20.17 19.16 20.12 23.07
olis (15)
Electrical Machinery
0.73 0.65 0.49 0.47 0.43 0.37
(85)
Natural or cultured
0.51 0.24 0.40 0.34 0.39 1.08
pearl (71)
Vehicle other than
0.09 0.14 0.22 0.26 0.35 0.48
railway (87)
Rubbers and article
2.46 4.31 5.42 5.31 4.68 3.85
there of (40)
Machinery (84) 0.34 0.40 0.32 0.26 0.29 0.31
Footwear (64) 3.47 2.79 2.39 2.47 3.09 3.79
Clothing accessories
2.88 2.66 2.38 2.03 2.02 2.23
(62)
Wood and article of
5.40 4.19 2.97 2.52 2.75 3.24
wood(44)
*In bracket is HS code
Source: Author’s calculation

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Product items are rearranged by considering the most important products

such as the top 250 in export value which are then aggregated to form sector and
classification of commodity group, as described in table 1. This has the ability to
obtain the RCA calculation with the increase in the concentration of the export
commodities observed (Table 6). The RCA value using the selected products (top
250 exports) was higher than the values of the direct approach (all products). Some
commodity groups show RCA <1 (no competitiveness), such as Metals, Foodstuff,
Machinery and Electronic after it was recalculated with the selective products
approach which showed opposite result of RCA > 1. Data obtained from the
selected approach also revealed the role of commodity group vegetable products
which was dominated by palm oils in the last two decades. These have become
Indonesia's leading export commodities with high growth due to high
competitiveness in world market with RCAs ranging from 10-23.

Table 6: RCA of Indonesian Export with Selected Product Items, 2001-2017

Commodity Top 250 Exports

Classification 2001 2004 2007 2010 2012 2015 2017
Animal Product 3.79 3.62 3.23 2.54 2.95 2.98 3.11
Vegetable 20.47
8.78 15.91 20.17 17.98 18.34 20.07
Products
Foodstuffs 1.11 1.34 1.51 1.53 1.86 2.52 2.40
Mineral 2.91 2.63 2.14 2.22 1.94 2.28 1.12
Chemical 0.72 0.71 0.76 0.71 0.91 0.85 1.02
Plastics & 1.83
1.34 1.96 2.35 2.33 2.11 1.67
Rubbers
Raw Hides 1.49 0.64 0.51 0.47 0.48 0.49 0.65
Wood 4.91 4.40 4.24 3.98 4.17 5.04 5.13
Textiles and 2.25
3.15 2.73 2.52 2.25 2.16 2.31
Clothing
Footwear 3.65 3.03 2.61 2.76 3.28 3.96 3.89
Stone & Glass 1.38 0.82 0.86 0.63 0.54 1.33 1.24
Metals 0.98 1.42 1.92 1.75 1.41 1.58 1.87
Machinery & 1.08
1.29 1.29 1.13 1.17 1.18 1.14
Electrical
Transportation 0.33 0.52 0.90 1.03 1.25 1.53 1.65
Miscellaneous 4.56 4.22 3.47 3.11 2.78 3.05 2.67
Source: Author’s calculation

Based on sector, the RCA calculation showed an increase in the value which is in
line with the concentrated product items included in the analysis. Therefore, the RCA in
the same year tends to produce higher value in analysis using the selected products
compared to standard approach. Exceptions only occurred in sector natural or cultural pearl
(HS code 71) as shown in Table 7 which presents the results of RCA calculation for
Indonesia's top 10 exports.

Table 7. RCA of Indonesian Top 10 Export by Sectors with Selected Products, 2001-2017

Top 10 Exports by Top 250 Product Items

Sectors* 2001 2004 2007 2010 2012 2015 2017
Mineral fuels (HS 27) 2.61 2.42 1.87 1.97 1.85 2.15 1.99

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Vegetable fats and

18.47 30.96 38.96 33.88 34.98 44.73 43.76
olis (15)
Electrical Machinery
1.63 1.37 1.17 1.29 1.26 1.21 1.11
(85)
Pearl (71) 1.21 0.52 0.71 0.55 0.49 1.31 1.24
Vehicle (87) 0.32 0.37 0.75 0.79 1.12 1.46 1.61
Rubbers (40) 3.03 5.36 6.72 6.43 5.39 4.61 5.21
Machinery (84) 0.89 1.17 1.07 0.97 1.06 1.03 1.05
Footwear (64) 3.59 2.94 2.51 2.63 3.15 3.81 3.67
Clothing accessories
3.05 2.73 2.41 2.11 1.90 2.03 1.94
(62)
Wood and article of
11.31 8.41 5.66 5.04 5.32 6.74 6.24
wood (44)
Share of Top 10
57.79 35.55 57.66 68.30 48.38 42.45 41.93
Sectors (%)
Share of Top 250
88.03 89.93 91.28 93.05 93.46 93.87 94.95
Products (%)
*In bracket is HS code
Source: Author’s calculation

The results of the calculation showed that the value of RCA was consistent
with the position of the commodity as a contributor to export value, as well as in
term of commodity group, as the RCA analysis used the selected data. Therefore,
the top 10 exports were a reflection of sectors with competitiveness (RCA > 1).
The results of the study showed that the smaller the number of product (HS
4-digit) involved in the analysis (the highest export value as selection criterion), the
higher the RCA value. This was applied to aggregation at the sector level (HS 2-
digit) and consequently to the classification of commodity group as sector
aggregation. The number of product items with small RCA values which were over
proportional tends to lead to a small RCA value. A total number of 1,009 products
aggregately contributed less than 10% to export value (in 2016 this share is 6.4%)
and approximately 150 items are zero trade. The nature of RCA's formula is very
sensitive to zero trade, because it increases the value of the denominator which
automatically reduces the division result i.e. the value of RCA.
Correlation coefficient between export share and RCA as a whole is + 0.48
and by disaggregating the product group with export share greater and smaller than
0.5%, the correlation coefficient for the first is + 0.36 and for the export share <
0.5% it becomes + 0.42. Therefore, the smaller the exports share, the higher the
correlation between it and so the comparative advantage. The products with export
share <0.5% are 98% of total product in HS-4 digits which is 38 times more than
the product items with export share > 0.5%. Therefore, the addition of samples to
the analysis tend to proportionally suppress the RCA value, due to every additional
item which means adding products with lower export share and positively
correlating with lower RCA value. This was more clearly illustrated by the analysis
in electronic sector which also occurred in the machinery sector. The electronic
sector (code 85, HS 2-digit), consists of 48 products with 10 items having RCA >
1 of Indonesian global trade in 2016. These ten products contributed 46.63% to the
export value of the electronic sector. When the analysis is limited to only ten
products, the RCA of electronics sector becomes 1.38. The analysis is extended by

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15 products, and the 15th item with RCA> 0.60, contributes to export value increase
to 67.07%, however with a drop of RCA to 1.19.
Table 8 presented RCA Indonesia export to China by 15 categories of
commodity classification and three sectors of manufacture industry using standard
approach (all products data). The result has often been stated in various
publications, which stated that Indonesian exports have comparative advantages in
primary resource sector (agriculture and raw material) and labor-intensive
manufacturing (DFAT-Australia, 2003; Nguyen, Pham & Vallee, 2017). In modern
industries such as electronics, mechanical machinery, and vehicle (transportation)
there are comparative disadvantages (Aslam, 2018). Conversely, World Bank
(2012) with reference to export value assessed that Indonesia's automotive export
was well, but the comparative advantages were not reflected in the RCA value.

Table 8. RCA of Indonesia’s Export to China (Standard Approach)

RCA of Indonesian Exports to China (All Products)
Group
2001 2004 2007 2010 2012 2015 2017
Classification
Animal Product 0.83 2.17 0.43 0.81 1.19 1.57 1.40
Vegetable Product 2.66 5.04 6.93 5.51 4.96 5.27 4.07
Foodstuff 1.05 0.82 1.09 1.01 1.13 1.71 1.44
Mineral 3.15 2.34 2.52 2.18 1.96 1.87 1.63
Chemical 1.38 1.86 1.20 1.14 1.10 1.15 1.15
Plastics and Rubber 1.13 1.33 1.56 1.80 1.91 1.02 1.37
Raw Hides and
Leather 0.07 0.14 0.56 0.15 0.25 0.34 0.26
Wood 7.19 6.26 3.95 3.18 3.38 5.54 4.47
Textile 0.88 0.84 0.63 0.90 0.92 2.31 2.08
Footwear 0.78 1.86 4.22 3.64 4.96 11.36 9.73
Stone and Glass 0.85 1.21 0.25 0.17 0.05 0.02 0.04
Metals 0.21 0.50 0.51 0.38 0.33 0.80 2.09
Machinery and
Electronics 0.12 0.17 0.13 0.10 0.08 0.09 0.06
Transportation 0.03 0.16 0.20 0.07 0.08 0.07 0.07
Miscellaneous 0.06 0.05 0.05 0.04 0.04 0.14 0.12
Manufacture Sectors
Machinery (HS
code 84) 0.06 0.17 0.22 0.07 0.06 0.08 0.08
Electronics (HS
code 85) 0.00 0.16 0.08 0.12 0.09 0.09 0.06
Vehicle and Parts
(87) 0.06 0.24 0.29 0.07 0.09 0.09 0.10
Source: Author’s calculation.

The use of selected product in calculating RCA, shows that a new

understanding of Indonesian exports to China have a comparative advantage in
agricultural products and raw materials. In addition, the assumption developed
Indonesian textile products which have lost competitiveness in China turned out to
be wrong (World Bank, 2012). The value of RCA for textile and clothing groups
were greater than unity from 2001 – 2017. Furthermore, since the implementation
of the ASEAN-China Free Trade Agreement has actually increased. The machinery

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sector (HS code 84) and Electronics (HS code 85) showed consistent
competitiveness in the last decade (RCA> 1), while the Vehicle/Transportation
sector (HS code 87) showed a fluctuating comparative advantage. Vegetable
Products which were dominated by palm oil and Wood Products, as well as
furniture, were increasingly prominent in analysis (table 9).

Table 9. RCA of Indonesia’s Export to China (Selected Products)

RCA of Indonesian Top 250 Exports to China
Group Classification 2001 2004 2007 2010 2012 2015 2017
Animal Product 1.42 3.45 0.70 1.65 2.92 4.21 4.00
12.0 24.8 25.4 25.8 23.5 30.1 24.8
Vegetable Product 5 1 3 0 8 3 1
Foodstuff 1.63 0.92 1.02 1.67 3.48 4.77 3.11
Mineral 3.29 2.43 2.44 2.04 1.69 2.01 1.69
Chemical 2.24 2.59 1.66 1.75 1.69 2.00 2.06
Plastics and Rubber 1.18 1.39 1.64 1.89 2.00 1.08 1.45
Raw Hides and Leather 0.05 0.02 0.05 0.23 0.43 0.84 0.56
11.5 11.0 10.5
Wood 5 9 8.53 6.79 6.99 6 6.77
Textile 1.51 1.49 1.02 1.73 1.91 3.63 3.27
14.1 11.9
Footwear 7.40 6.98 8.68 5.76 6.90 9 3
Stone and Glass 1.27 0.75 1.12 0.53 0.33 0.28 1.03
Metals 0.43 1.14 1.09 0.65 0.61 1.65 3.89
Machinery and Electronics 0.13 0.14 0.13 0.11 0.09 0.10 0.07
Transportation 0.06 0.39 0.57 0.18 0.26 0.24 0.26
Miscellaneous 0.16 0.21 0.18 0.20 0.26 0.46 0.35
93.2 92.0 91.1 91.6 89.7 98.7 94.1
Export Share (%) 4 7 5 7 6 7 0
Manufacture Sectors
Machinery (HS code 84) 1.93 0.40 1.78 9.73 1.76 3.30 6.44
Electronics (HS code 85) 5.39 0.36 1.34 6.01 1.05 1.76 3.80
Vehicle and Parts (87) 0.08 1.16 2.04 2.64 0.68 0.74 1.55
Source: Author’s calculation.

RCA calculation in Indonesia’s trade with China using selected products

(Top 250 export only), excluded 1,009 products from the analysis with 513 zero
trade in 2016. Therefore, the distortion of standard RCA analysis was not only due
to the large number of samples with low export values which correlated with small
RCAs but also by the number of zero trades which reached 41% of the total sample
(products listed in HS 4-digit).

CONCLUSION
In conclusion, the RCA Index introduced by Balassa in 1965, has undergone
development to overcome the weaknesses of the method associated with measuring
competitiveness. Furthermore, none of the many variations developed is seen as
"the perfect one". The use of the most appropriate method depended on the purpose
of utilizing the RCA. Likewise, for the first step in assessing the competitiveness
of an item or sector, the Balassa’s RCA index remained the most popular approach
due to its simplicity of calculation and convenience in dealing with the required

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ISSN 2086-1575 E-ISSN 2502-7115

data. In addition, it has the ability to predict competitiveness without conducting

complicated econometrics operation, by product selection based on export share.
This study showed that product selection was limited to the top 250 export
(of 1,259 products in HS 4-digit) which is able to restore the position of Indonesia's
manufacturing sector as a competitive sector (RCA> 1) reflected by the position of
the sector as top 10 exports based on its export share. When this method was applied
to Indonesian exports to China, the RCA value of the machinery and electronics
sector showed a value which was far greater than unity compared to the calculation
results with standard approach (inclusion of all products in the analyses) with a
value of 0.17. In addition, the result highlighted that the textile and clothing sector
still has high competitiveness in Chinese market which showed opposite results in
various previous studies with a competitive and consistent increase since 2011 (the
implementation of the ASEAN China Free Trade Agreements)
The selection of product export is based on export share/value mean
excluding low value products which is positively correlated with RCA from
analysis and an automatic selection process which excludes zero trade from the
analysis. As long as the selected products still contributed to the total export >90%,
the results of RCA calculations remain reliable and useful as a guide in industrial
and trade policy.

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