The Role of the Economic and Mathematical Modeling in the Sustainable Development of the Foreign Trade Policy of Modern Countries

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1 ISSN : available at http: Serials Publications Pvt. Ltd. Volume 15 Number The Role of the Economic and Mathematical Modeling in the Sustainable Development of the Foreign Trade Policy of Modern Countries Mihail Nikolayevich Dudin 1 Alexander Sergeevich Senin 1 Evgenia Evgenevna Frolova 2 Aslan Huseynovich Abashidze 2 and Ekaterina Petrovna Rusakova 2 1 Russian Presidential Academy of National Economy and Public Administration (RANEPA), 82, Vernadsky prosp., Moscow, , Russian Federation 2 Peoples Friendship University of Russia (RUDN University); Miklouho-Maclay str., 6, Moscow, , Russian Federation ABSTRACT This paper is a summary of the empirical, scientific and methodological experience in construction of the economic and mathematical models to improve the Russian trade policy with the key partners, which are the interstate institutional associations (the European Union, BRICS, and the Commonwealth of Independent States CIS). As a result of the study, the following conclusions were obtained: The foreign economic cooperation with the European Union, as well as with the countries included in BRICS and CIS associations, is a multi-vector commercial space, diversified by product lines and regions for Russia; Bearing in mind the active cooperation of Russia with the interstate associations different by the levels of economic development and institutional integration within the framework of the foreign economic cooperation, a certain update of the methodological approaches to the assessment of the efficiency and effectiveness of this cooperation is required; A nonlinear economic-mathematical model, allowing to assess the mutual influence of the Russia s foreign economic relations with the countries included in the CIS, BRICS and the European Union, as well as to investigate the trade flows between Russia and these associations from the perspective of export and import of goods, works and services, is presented in this paper. Keywords: Economic and mathematical modeling, foreign economic activity, trade partnerships, regional economy, BRICS, Russia, the European Union and CIS. 43

2 Mihail Nikolayevich Dudin, Alexander Sergeevich Senin, Evgenia Evgenevna Frolova, Aslan Huseynovich Abashidze INTRODUCTION The development of the foreign trade relations between the countries and the regions of the world in terms of the final stage of globalization is influenced by many factors, among which the main ones are geopolitical factors (Herzfeld, 2015; Helpman, 2014). The influence of the politics and the geopolitics in the formation of the global economic area during the last two three decades has significantly increased due to the following objective reasons: Firstly, many of the tenets of classical and neo-classical political economy (Kuznets, 1953) are no longer certainly true largely, as the market equilibrium models do not develop only under the influence of the economic activity of the economic entities and the interaction between them (Kono, & Montinola, 2015); Secondly, each country is interested in obtaining the most favorable competitive position in foreign markets and optimal business activity of domestic enterprises in the domestic markets, which implies the implementation of those or other protectionist measures (Dudin et al., 2015); Thirdly, the destabilization of the socio-political processes in some regions of the world is a threat to a sustainable global economic system, which requires a combination of the political efforts of the governments of the countries, interested in the preservation and development of the foreign economic relations (Hayes, 2016; Li et al., 2016). It should be understood that the final phase of globalization coincided with the change of a great economic cycle and the technological structure (Hirooka, 2006; Sadovnichiy et al., 2012). The new scientific and managerial economic paradigm is being formed (Dudin et al., 2015) based on the fact that the satisfaction of the needs of the current generation can not be implemented to the detriment of the needs of the future generations and at the same time the current generation must preserve the global ecosystem in an acceptable condition for the normal life of the future generations. Thus, at this stage it can be said that the concept of sustainable development is complemented by the concept of environmental responsibility of the economic and welfare sector (Pearce et al., 1997; Chapple, 2008; United Nations Environment Programme, 2014). Therefore, the relevance of the optimal management of the foreign economic relations between the countries and the world regions is coming to the fore, since each subject engaged in the foreign and domestic markets must be focused on maintaining of the sustainable and environmentally responsible trend of development, which provides a global synergy, and economic, social and political, and technological benefits. 2. METHODS New scientific and managerial paradigm understands the global economy and the economies of certain regions of the world as a complex, deterministic and nonlinear developing system. Therefore, the mathematical methods in general, and the method of mathematical regression, in particular, are optimal to describe the most macroeconomic processes (Alexander et al., 2000; Taeranoh et al., 1993; Popov, & Sotnikov, 2012, Akaev et al., 2012). Given that the regression models are typically the multivariate models, the authors believe it appropriate to use the regression analysis to describe the patterns and specificity of the trade relations between Russia, the European Union, BRICS and CIS countries. The following economic and mathematical model, describing the foreign trade relations of Russia with the key foreign, partners is proposed by the authors: 44

3 The Role of the Economic and Mathematical Modeling in the Sustainable Development of the Foreign Trade Policy... ln Where : FT i = ln ln S i + 2 ln GDP i + 3 B + 4 EU + 5 I + 6 BRICS + ln e FT i is the foreign trade turnover between Russia and the i-th trade partner (in value terms); S i is the distance between Moscow and the capital of the i-th trade partner, km; GDP i is the gross domestic product of the i-th trade partner of Russia (in value terms); B i is the introduced dummy variable, taking the value of 1 on the condition that the i-th trade partner has a common land border with Russia; EU is the introduced dummy variable, taking the value of 1 on the condition that the i-th trade partner is integrated into the European Union; I is the introduced dummy variable, taking the value of 1 on the condition that the i-th trade partner is integrated into the Commonwealth of Independent States (CIS); BRICS is the introduced dummy variable, taking the value of 1 on the condition that the i-th trade partner is integrated into the group of five countries under the acronym of BRICS. This regression model should reflect a positive relationship between the variables of the Russia s foreign trade turnover with the i-th trade partner, its gross domestic product in the presence of the common border between the two countries. But on the other hand, a negative correlation between the variables of the foreign trade turnover and the distance between Moscow and the capital of the i-th trade partner should be expected. The structural factors for the introduced dummy variables is the main field of study, which will reflect the presence of the trade barriers (their impact on the national economy), the orientation and the deviation of the foreign trade turnover of Russia and its trade partners, participating in a particular interstate integration association (the European Union, the Commonwealth of Independent States, or BRICS). 3. RESULTS The foreign trade in modern conditions is not only a source of benefits for the national economy, but at the same time, one of the main conditions, forming the competitive positions of the national economies on the external markets. This implies that a developed and diversified foreign trade is a competitive advantage of the national economies (McConnell, & Brue, 2009). At the same time, it should be noted that along with the diversification of the foreign trade, many countries also use the focusing (the specialization in two or three trends). In some cases, this approach can not be considered optimal because it affects not only the economic benefits, but also the effectiveness of the social and economic development of the country. For example, the Russian foreign trade is characterized by the extractive specialization, respectively, the volatility of the prices of raw (especially, the hydrocarbon) resources, as well as the sanction pressure on the Russian economy performed by the European and North American countries have had a negative impact on volumes and dynamics of the country s foreign trade turnover (see Table 4.1). Obviously, all the components of the Russian foreign trade turnover for the last three years have shown a declining trend by 14-16% (in 2015 relative to 2013). At the same time, if you look at Russia s foreign trade turnover structure at the regional level, it is worth noting that the bulk volume of the foreign trade is not accounted for the nearest regional partners (the countries-members of the Commonwealth of Independent States), but by the partners-members of the CIS (Europe, Latin America countries, integrated into the BRICS group, etc.) (see Fig. 4.1). 45

4 Mihail Nikolayevich Dudin, Alexander Sergeevich Senin, Evgenia Evgenevna Frolova, Aslan Huseynovich Abashidze... Table 4.1 Changes in Russia s foreign trade turnover for (Rosstat, 2015) Parameters of the foreign trade turnover Dynamics of changes in the last Period, bln USD three years (+, ) in % The volume of foreign trade turnover, total Including exports from Russia Including imports to Russia With CIS With foreign countries 100% 90% 80% 70% 60% 50% 85.6% 87.0% 85.7% 40% 30% 20% 10% 0% Figure 4.1: The structure of the Russian foreign trade for in the macro-regional context (Rosstat, 2015) It is obvious that despite the sanction standoff between Russia and the non-cis countries (mainly, the European countries) due to the geopolitical changes, the bulk of Russia s foreign trade is accounted for these countries. As for the commodity structure of the Russian foreign trade, it may be noted that for the last three years more than 60% of exports to the average were generated by the sale of mineral products (raw materials), while imports consist of high-tech products (machines, equipment, vehicles) by more than 48% (Rosstat, 2015). Therefore, the Russian economy is facing one of the most important tasks it requires the diversification of export and import flows, which also means the need for a reorientation of the national economy from the exploitation of the natural rent to the creation of goods and high value-added services. It also means that it is necessary to intensify the innovation activity of the economic entities of the Russian economy and to ensure the formation of high-tech industrial fields on the domestic market. The second important task is the definition of the regional priorities in Russia s foreign trade. It is necessary to determine the countries, world regions and interstate integration associations, most advantageous from the economic and political point of view. 46

5 The Role of the Economic and Mathematical Modeling in the Sustainable Development of the Foreign Trade Policy... For example, the most important foreign trade partner in the European Union is Germany, in the BRICS group China, in CIS Belarus. About 36% of Russia s foreign trade turnover are accounted for these three countries (see Fig. 4.2). 20.8% 63.% 10.9% 4.8% China Germany Belarus Other countries and regions Figure 4.2: The structure of the Russian foreign trade turnover with the key partners (as of 2015) (Rosstat, 2015) It should be noted that the restrictive measures in the form of sanctions in respect of the key sectors of the Russian economy, followed by a group of countries, and the introduction of the food embargo by Russia have violated the balance of interests between the two countries and world regions (the balance of interests in ensuring the economic and food security is detailed in the study carried on by Fyodorov and Kuzmin (Fyodorov, & Kuzmin, 2013; Kuzmin, 2012)), which also resulted in the abolition of a number of the key international infrastructure projects. If study the markets of the world regions, potentially attractive for the Russian non-resource exports, it may be noted that the markets of Western and Eastern Europe, North America should be considered problematic in this case (see Table 4.2). Table 4.2 The characteristics of potentially attractive regional markets for non-resource exports World region Countries in the region Characteristics of the market Commonwealth of Independent States (CIS) East Asia South America Africa (North) and the Middle East Western and Eastern Europe North America Belarus, Uzbekistan, Kazakhstan, Azerbaijan, Turkmenistan China, Hong Kong, Japan, South Korea, Taiwan Brazil, Argentina, Peru, Colombia, Venezuela, Cuba Turkey, Iran, Saudi Arabia, United Arab Emirates, Israel, Egypt, Algeria Germany, Netherlands, UK, Italy, France, Poland, Finland, Czech Republic, Estonia, Hungary, Latvia, Lithuania US, Mexico, Canada Potentially attractive markets of the countries, the non-resource trade with which can be carried out even now Potentially attractive markets of the countries, the nonresource exports to which is quite complicated in the short-term prospective 47

6 Mihail Nikolayevich Dudin, Alexander Sergeevich Senin, Evgenia Evgenevna Frolova, Aslan Huseynovich Abashidze... At the same time, if you pay attention to the import of goods, works and services in Russia, it may be noted that about 36-38% of the total import flows are coming from Western and Eastern Europe and North America, about % more of the imports come from the outside trade with China (Figure 4.3). Western and Eastern Europe and North America China CIS and former USSR republics Other countries 35.8% 18.1% 10.4% 35.7% 36.8% 17.7% 10.6% 34.9% 38.0% 16.8% 11.4% 33.8% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Figure 4.3: The structure of imports to Russia from certain regions of the world in (Rosstat, 2015) Thus, it becomes obvious that for the purposes of further economic benefits, the diversification of export and import flows, as well as the implementation of the national economic potential, it is necessary to ensure the improvement of Russia s foreign trade policy. As shown in the methodological section of this paper, the most appropriate methods for modeling the trends and priorities in the foreign trade (including in the regional context) are the economic-mathematical methods, embodied in the logarithmic regression model, formed by the authors. 4. DISCUSSION At present, in the course of foreign economic cooperation with the countries-members of various associations, Russia is forming its own regional multi-vector trade space. In general, the regional multi-vector space is a foreign trade space, formed within the various concluded regional trade agreements, existing alongside other fragments of the total foreign space. Therefore, in the course of modeling the trends and the priorities of Russia s foreign trade, it is necessary to take into account the multiregional and multi-vector aspect of its foreign trade cooperation. As above, the main priorities for development of Russia s foreign trade are the countries-members of the European Union, the Commonwealth of Independent States and the countries of the BRICS group. Using the formula (1), proposed in the methodological part of this paper, let us introduce the basic conditions for the modeling (Table 4.3). Thus, according to Table 4.3, it can be concluded that under the free trade the foreign trade turnover between the conditional country Z and Russia will be 92 units of production, 7 of which will be import units and 85 will be export ones for Russia and vice versa for the conditional country Z (85 units will be import and 7 units will be the export). In the presence of protectionism in the foreign trade (for example, by limiting the exports by 10%), in the foreign trade turnover between the conditional country Z and Russia the following changes take place: 48

7 The Role of the Economic and Mathematical Modeling in the Sustainable Development of the Foreign Trade Policy... Table 4.3 Basic conditions for economic and mathematical modeling of Russia s foreign trade with a conditional country Z, a member of the European Union Modeling Parameter Administrative-territorial characteristic of Z country Administrative-territorial characteristic of Russia Parameter Value 7 regions (administrative territorial units) 85 regions (administrative territorial units) Export performance of the gross domestic product of each administrative-territorial unit of Z and Russia According to one unit of production exported The foreign trade turnover between the two countries 92 units of production Mutual trade restrictions on exports 10% Russia exports 8.5 units less to the conditional country Z ; Russia imports 0.7 units less from the conditional country Z. If we extrapolate the situation with the restriction of exports from Russia to the conditional country Z over all regions of the country, the domestic economic potential of this country can be increased by 1.2 unit of production within the framework of import substitution. Also the social benefits (creation of new jobs, increased employment in the economy, resulting in the reduction of the social tension and provision of the sustainability) are created for the conditional country Z. On the contrary, if we extrapolate the situation with the restriction of export from the conditional country Z to Russia over all Russian regions, the economic potential of Russia can be increased only by units in the framework of import substitution. At the same time, it is necessary to take into account that the conditional country Z will be able to ensure domestic consumption of 0.7 unit of production that could be exported to Russia. But at the same time, the volume of export of this country is reduced, which may adversely affect the development of the export-oriented industries and sectors of the economy. Russia, in turn, may have problems with the provision of domestic consumption of the products intended, but not sold, via export channels, since the physical volume of export from Russia is significantly higher. It is obvious that the presence of the trade barriers that currently exist between the European Union and Russia can have a negative effect on the Russian economy and the economy of the European trade partners. In this case, if the European trade partners will be able to neutralize partly the negative impact of the trade barriers through the development of domestic production and domestic consumption, no significant increase in domestic production will be required for the Russian economy, but it will require only an increase in domestic consumption, which means a strategic gap between the pace of growth of demand and offer in the domestic market. Thus, it is obvious that in order to maintain the physical and value volumes of export the European Union countries and Russia require new trade partnerships. But it should be understood that in the institutional and economic context the regional structure of the export and import flows is largely characterized by stability. The search for new partnerships means the high rate of growth of the transaction costs, which is not beneficial to any of the cooperating countries. In the current economic conditions, the regular dynamic diversification of exports and imports simultaneously with the deepening and expanding of the foreign trade relations between all potentially promising regions seems to be the optimal solution. At the same time, Russia needs to find the internal resources to change the export and import structure by bringing foreign direct investment in the national economy (especially in high-tech areas of production). 49

8 Mihail Nikolayevich Dudin, Alexander Sergeevich Senin, Evgenia Evgenevna Frolova, Aslan Huseynovich Abashidze CONCLUSIONS The key methodological approaches to the modeling of the trends and priorities in the development of the foreign economic relations of countries in terms of imposed restrictions (sanctions) were studied in this paper. According to the study, the presence of trade barriers has a negative impact on the economic potential and the rate of development of the foreign trade of all trade partners, regardless of which partner was the initiator of the introduction of trade barriers. Given that the foreign trade relations of the countries and regions of the world are largely characterized institutionally and economically by the relative stability and mutual benefit, it can be supposed that, respectively, a radical change of the external trade partners is not an optimal solution. Therefore, in this paper the authors suggest a compromise solution for the optimization and dynamic diversification of the export and import flows between the countries, based on the deepening and strengthening of the foreign economic relations at the same time. This thesis was confirmed methodically on the basis of the regression logarithmic mathematical model proposed in this paper, which indicates that a balanced and predictable growth in foreign trade creates more benefits for two or more interacting economies than the imposition of trade (protectionism) barriers resulting from political and geopolitical contradictions. The issues related to the methodology of valuation of trade barriers in the regional and global economy haven t been studied in this paper, they will be the subject of our further research. References Alexander, G.J., Sharpe, W.F., and Bailey, J.V. (2000) Fundamentals of Investments, Prentice Hall. Chapple, K. (2008) Defining the Green Economy: A Primer on Green Economic Development, Berkeley: The Center for Community Innovation (CCI) at UC-Berkeley. Dudin, M.N., Frolova, E.E., Gryzunova, N.V., and Shuvalova, E.B. (2015) The Triple Helix Model as a Mechanism for Partnership between the State, Business, and the Scientific-Educational Community in the Area of Organizing National Innovation Development Asian Social Science 1(1), Dudin, M.N., Sepiashvili, E.N., Smirnova, O.O., Frolova, E.E., and Voykova, N.A. (2015) Neo-Schumpeterian Knowledge Funnel and Foresight Project Development in the System of Establishing Stability of the Competitive Advantages of Enterprises Journal of Advanced Research in Law and Economics 6.1(11), Federal State Statistics Service (Rosstat) (2015) Vneshnyaya torgovlya Rossii [Foreign Trade of Russia]. Retrieved November 24, 2016, from Fyodorov, M.V., and Kuzmin, E.A. (2013) Agriculture and Economic Security of Russia: Retrospective Research Journal of International Scientific Researches 5(1-2), Hayes, J.P. (2016) Making Trade Policy in the European Community, Springer. Helpman, E. (2014) Foreign Trade and Investment: Firm-level Perspectives Economica 81(32), Herzfeld, K.F. (2015) Price and Quantity Trends in the Foreign Trade of the United States, Princeton University Press. Hirooka, M. (2006) Innovation Dynamism and Economic Growth. A Nonlinear Perspective, Chettenham, UK; Northampton, MA, Edward Elgar. 50

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