This post has been authored by Punyaa Juneja and Purujit Dash, Economic Analyst Interns at Arthashastra Intelligence

If one day, the world becomes incapable of producing rubber and the production and trade would run to an exact value of zero, how do you think it would affect the economy? Many would think the impact would be minimal, well they might be wrong, and reason is pretty simple, natural rubber is possibly the most widely used commodity in the world every single industry in the world is dependent upon rubber in some or the other way, be it electronics, shoes, medical equipments, manufacturing most importantly tires. The automobile industry was the first industry that majorly created the rubber boom in the 19th century. And now, lives and breathes on natural rubber, it is used as a component in tires because of its anti-vibration, resistance to wear and tear properties, and its ability to handle pressure that extends its utility to airlines and aerospace industries. Not just tires, natural rubber has played a vital role in the Covid-19 pandemic, as rubber gloves industry specifically played an paramount role in tightening the supply and demand while increasing the prices of natural rubber.

The chart above shows a riveting picture of the concentrated trade of natural rubber. The entire production and the largest exporters are concentrated in South-East Asia amounting to 95% of global production while 5% is centered in Ivory Coast, the last surviving producer in the west. A similar high concentration of natural rubber was seen in the 1850’s rubber production started booming as the process of vulcanization was discovered. Natural rubber became an essential component of the industrial revolution which led businessmen and entrepreneurs to Brazilian Amazons where a large concentration of rubber was found. Rubber being a principal commodity in Brazil, made the export of rubber seeds or seedlings forbidden, this was until H. A. Wickham managed to smuggle 70,000 rubber seeds to England, from which only 1900 seeds survived and were then exported to Malaysia. As the Amazonian natural rubber exports crippled to below 1% in the 1930\’s South-East Asia became the prime exporters of rubber.

Imports are concentrated primarily in China, which has the largest automobile and consumer goods market while being the largest exporter of end-consumer goods, with the United States of America, Japan, and astonishingly India and Malaysia. There has been a tug of war between the USA and Japan that was first identified during the Second World War when Japan grew its presence along with the South-East Asian Nations. The USA feared its rubber imports would be constrained as Japan strategically occupied all the major rubber-producing nations.

Many importing countries shifted their attention towards synthetic rubber around 1964 because of difficult access to the concentrated market in South-East Asian but in 1970 the year of oil crisis led to drastic inflation in the prices of synthetic rubber, with the innovation of radial tires natural rubber again saw a steep rise in demand. This demand still lives on as 100% of aircraft tires and 50% of automobile tires are made of natural rubber.

Countries like India and Malaysia are showing a contradictory stance, where the nations are both major importers and exporters. Reasons for this could be inferred from the chart below. Trade Specialization Index compares the net flow of trade to the total flow of trade and to study the trends of natural rubber trade in major exporting, major importing, and countries that show a volatile shift from export to imports we used TSI.

Our analysis explained though Malaysia is one of the top exporters in the world. But over the years the Trade Specialisation Index for Malaysia has dropped majorly due to industrial production being inclined towards Palm oil. The shift in production took place due to low rubber prices in the global market, despite having production concentration and labor-intensive extraction process. Another country showing a drastic shift in Specialisation Index is India. India as well is among the top exporters but its trade Specialisation Index of India has fluctuated a lot, only in 2001 and 2006 the Index went beyond 0. However, since 2011 the index has slipped towards -1 in 2019. Possible reasons for such a drop in index could be the rising domestic production of tires and untapped production potential in the Himalayas. Having said that, China, Japan, USA, Korea, Turkey, Brazil are the major importer countries. Once China’s buying started it never stopped. China has stockpiled rubber mainly from Vietnam for decades, as in the event of a crash its domestic industries are protected. China being the biggest buying market, its demand regulates the international price. However, the USA, Japan, and Korea’s tremendous demand is highly correlated with automobile industry demand. The concentrated production of natural rubber is majorly due to environmental conditions. But in the last two decades, we observed countries that Africa is catching up with the global demand. Cote d’Ivoire is the leading Non-Asian Exporter, which is why it has attained  TSI value of 1 meaning all of its production is exported. While Cambodia showed promising growth in the first decade. But a disruption in exports was observed in recent years because labourers migrated from Cambodia to Thailand in search of better working conditions, which wasn\’t satisfied in Thailand but was relatively better than Cambodia.

The word “concentrated” has been used several times to describe the production of rubber, and this particular word is a boon for rubber-associated industries and rubber farmers, as the rubber plantations are prone to a fungal disease called “leaf blight”. This particular disease can be called Covid-19 for the trees on a catastrophic scale. And these particular spores can be transmitted to the trees by practically anything from the sole of your shoe to an airplane flying above the plantation. Fungal Spores spread so aggressively that before even the farmer knows about the disease the entire plantation is on the verge of being wiped out. This is what led to the apocalyptic death of Amazonian rubber trees in 1910-30 where there were enough protection measures taken from cutting or burning the tree to cultivating other plantations in between, but the disease proved to be inevitable. It wouldn’t be a surprise if something like this happens in South-East Asia. This is one of the reasons why rubber farmers in recent times are demotivated and prefer shifting to other less risky industries, even though countries like Thailand, Malaysia are providing subsidiaries to rubber producers. Apart from this, other natural factors like drought, flood, etc, amalgamated with entangled structural problems associated with rubber industries, they suffer from consistently low prices, while the production cost stays high and planting more trees hardly helped the farmers, and binge buying nations like US and China, cause supply chain disruptions throughout the industry, tightening the supply so much that distributors are unable to fulfill their obligations. The financial markets are only contributing to the immense volatility of the supply chain. This entangled ruckus changed the belief of demand and capitalism always being there, that is not applicable to natural emergencies when everyone is pulling at a time. This gave rise to alternatives of rubber-like guayule and Russian Dandelions, but none of them have been proven to be effective enough to replace this indispensable vulnerable commodity.

References

• Bloomberg. 2021. Rubber scarcity creates new headache for beleaguered automakers. April. https://auto.economictimes.indiatimes.com/news/tyres/rubber-scarcity-creates-new-headache-for-beleaguered-automakers/82061229.
• Goods, Industrial Rubber. n.d. Brief History of Rubber. http://www.industrialrubbergoods.com/brief-history-of-rubber.html.
• Mongabay, Based on Wade Davis, One River 1996. n.d. A Brief History of Rubber. https://rainforests.mongabay.com/10rubber.htm.
• Unctad. 2013. New addition to UNCTADstat: Merchandise trade specialization and correlation indices. March. https://unctad.org/news/new-addition-unctadstat-merchandise-trade-specialization-and-correlation-indices.