Expanding South-South trade

Expanding South-South trade

By Hussain H. Zaidi
On the basis of the economic grouping of trade partners, global trade can be classified into three categories: among developed countries or north-north trade, between developed countries on one hand and developing countries on the other also called North-South trade, and among developing countries or South-South trade. It is the third category of the trade that this write-up is concerned with.

Traditionally developing countries have looked to developed countries as markets for their exports and source of their imports. The reasons for North-South trade are not difficult to see. One is the theory of comparative advantage, according to which countries export goods which they can produce more efficiently and import goods which they either cannot produce or produce only at a cost higher than that of importing them. Developed countries have found it convenient to specialise in the production of capital intensive manufactured goods and import primary goods or labour intensive manufactured goods from developing countries.

A second reason is unilateral preferential tariff treatment that developed countries have offered to imports originating in developing countries. Three, many developing countries until quite recently followed inward-looking, import substitution development and trade policies, which made it difficult for exports originating in other developing countries to have access to their markets.

Though to date developing countries prefer to trade with developed countries, South-South trade is one on the rise. The trend and pattern of South-South trade are summed up as follows:

• During 1970-80 South-South trade accounted for nearly 23 per cent of total merchandise exports of developing countries. The share increased to 30 during 1980-90, 39 per cent during 1990-2000 and 41 per cent during 2000-2003. Thus during last three decades, the share of South-South trade in developing countries’ total exports has gone up by 79 per cent.

• Increase in South-South trade in developing countries’ total exports has occurred in case of both primary and manufactured products. The increase in case of primary products is 87 from 21.2 per cent during 1970-80 to 39.65 per cent during 2000-03. The increase in case of manufactures is 21.44 per cent from 34.5 per cent during 1970-80 to 41.9 per cent during 2000-03. This shows that South-South trade has shown greater dynamism in case of export of primary products than export of manufactures.

• During 1970-80 South-South trade accounted for 26 per cent of total merchandise imports of developing countries. The share increased to 32 during 1980-90, 38 per cent during 1990-2000 and 44 per cent during 2000-2003. Thus during last three decades, the South-South trade in developing countries’ total imports has gone up by 68 per cent.

• Increase in South-South trade in developing countries’ total imports has occurred in case of only manufactured products, as the share of South-South trade in developing countries total import of primary products remains almost the same: 56 per cent during 1970-80 and 55.85 per cent during 2000-03. The share in case of manufactures has more than tripled from 11.6 pc during 1970-80 to 39.8.9 per cent during 2000-03. Why has there been such huge increase in import of manufactures among developing countries?

• According to UNCTAD, this is due to increased production sharing within East Asia—economically and commercially the strongest region among developing countries—resulting in a triangular trade pattern. The pattern works like this. Relatively more advanced countries like South Korea instead of exporting industrial products directly to developed countries export intermediate products to relatively less advanced developing countries from where the finished products are exported to developed countries.

• A deeper look into the composition of South-South trade reveals that electronics are the largest and the most dynamic trading products. Their percentage share in South-South trade has nearly quadrupled from 8.1 per cent in 1980 to 31.1 per cent in 2003, which can be explained by the triangular trade pattern. Mining products are the next most traded products (18.5 per cent) followed by agricultural products (13 per cent). Low technology products make up 9.6 per cent of South-South trade; however their share has gone down from 47 per cent in 1980. Labour intensive products constitute only 5.6 per cent of South-South trade; their share has more than doubled from 1.8 per cent in 1980.

What are the major reasons for the increase in South-South trade? To begin with, in case of several developing countries, there has been a fundamental shift from import substitution to export-led growth trade and development strategies leading to more liberal trade regimes thus widening the scope of South-South trade.

Second, bilateral and regional preferential trading arrangements involving developing countries have proliferated. Though most of these arrangements have yet to come of age, a few of them like Association of South East Asian Nations (Asean) have been a resounding success.

Third, a country’s trade reflects its economic performance. Developing countries like China which have registered strong economic performance during last one and half decade have much to do with increase in South-South trade.

Finally, as relatively more advanced developing countries have moved towards capital intensive value added exports, demand has increased for export of primary goods and labour intensive manufactured goods from other developing countries.

Despite strides in South-South trade, the major players have been the bigger and relatively more advanced countries. According to UNCTAD, the top 10 exporters in south -south trade in 2003 were: China (19.7), Hong Kong (14.2), South Korea (11.1), Singapore (9.4), Taiwan (9.3), Malaysia (6), Thailand (4.1), India (3.4), Brazil (3.3), and Indonesia (3.1). These countries together account for 83.5 per cent of exports in South-South trade.

South-South trade is important for various reasons. First, economic slowdown in developed countries have reduced demand for imports including those from developing countries.

In the absence of surge in demand for imports in fast growing developing countries like China and India, exports from other developing countries would suffer. Two, though developed countries have significantly reduced tariffs, especially on industrial products, the same have been replaced with non-tariff barriers like health and safety standards, which in many cases for several developing countries are difficult to comply with.

Even there continue to be high tariffs in the markets of developed countries for products of export interest to developing countries, such as textile and clothing. Finally, continued dependence on developed country markets exposes developing countries to possible pressure that links improved market access to rapid liberalisation of trade, financial and investment regimes and better protection of intellectual property rights, which may be neither possible nor desirable for many developing countries.

Source: The Dawn Business and Economic Review, http://dawn.com/2007/04/23/ebr16.htm