South-South Trade and Its Implications for the World Economy

By Shishir Priyadarshi, Director, Development Division, World Trade Organisation, Geneva

Developing countries’ joint trade profile has changed drastically in the last two decades. Developing economies accounted for almost half of the world’s merchandise exports in 2014, as compared to less than a third in 2000, and even less in the late 90s. Large emerging economies, in particular China and to a lesser extent India, have been the main engines of this growth. China almost tripled its share of world exports between 2000 and 2012.

A key element of this increasing share of developing countries in international trade has been the rapid growth in South-South trade—that is, trade with and amongst developing countries. In the last decade, South-South trade has outperformed both world trade and South-North trade. South-South trade in goods amounted to about US$5 trillion in 2013, which corresponded to about a quarter of world goods trade. It has been an important element in the overall growth of trade in the last decade, especially in helping revive the global economy after the financial crisis of 2009.

The significance of South-South trade in services is slightly less. Services exports from developing countries are still marked by a dominant South-North pattern, even though South-South trade has been catching up rapidly in recent years. Available estimates show that the share of South-South trade in developing countries’ services exports has risen from 16.5 percent in 2000 to about a third in 2010.

The rising importance of South-South trade is mostly related to the trade performances of East Asian economies. In 2013, more than 75 percent of South-South merchandise trade was shipped to, or from, countries in the East Asian region. Of course, China, which is the world´s biggest merchandise exporter, is also the dominating player in South-South trade. In 2014, China alone accounted for 21 percent of exports and 27 percent of imports of all South-South trade.

The increasing importance of developing countries and South-South relationships is also reflected in foreign direct investment (FDI). FDI flows to developing economies reached a record high of US$681 billion in 2014, constituting 55 percent of world FDI flows, as compared to less than 20 percent in 2000.

Interestingly, developing economies are increasingly gaining importance as sources of outward FDI flows. In 2013, more than a third of global outward FDI flows had their origins in developing economies, up from less than 10 percent in 2000. South-South FDI stocks grew by two-thirds from US$1.7 trillion in 2009 to US$2.9 trillion in 2013, thereby becoming bigger than South-North FDI stocks and accounting for about 11 percent of global outward FDI stocks.

The surge in South-South trade and related investment is closely linked to another significant development in world trade, namely the international fragmentation of production in the context of global value chains (GVCs). Technological progress, particularly in information and communication technology, and falling trade costs have fostered the slicing up of the production process into ever-finer tasks and its geographic fragmentation across the globe.

As a consequence, trade within global value chains, which is typically measured in terms of either trade in value-added or in intermediate goods, has increased dramatically over the last decade. Here, too, the contribution and participation of developing economies has been significant. When measured in value-added terms, more than half of goods and services exports took place within value chains.

Developing countries have significantly increased their participation in GVCs in the last two decades. While in 1995 only about 40 percent of developing countries’ exports were related to global value chains, in 2008 54 percent of developing countries’ exports were traded within value chains.

In terms of trade in intermediate goods, the prevalence of GVCs becomes even more visible. Intermediate-goods trade accounted for more than US$7 trillion in 2013, representing a share of about 40 percent of goods traded, whereas primary, capital and consumer goods each accounted for slightly less than US$3 trillion.

If one looks at the role that South-South trade plays in GVCs, it is possible to highlight two features. First, a large part of the participation of South-South trade within GVCs is because of participation in regional value chains in East Asia that serve final demand in developed markets. Intermediate goods account for more than 40 percent of South-South trade, while final goods constitute less than 10 percent.

In manufacturing, South-South trade is largest in communications equipment, chemicals, electric and other machinery, and basic metals. For instance, in communication equipment, South-South trade accounts for about half of world trade, which, again, reflects the presence of regional value chains in East Asia.

The second feature of South-South trade in GVCs, and also in Southern exports more generally, is their continuing reliance on primary commodities, in particular oil, gas and coal, and petroleum products. This is particularly the case for developing countries in Latin America, Africa and the Middle East. Primary products account for about a third of exports in both South-South and South-North trade.

Apart from China and a few other developing economies in East Asia, developing economies in other parts of the world are mainly exporting primary products to developed markets or, as part of South-South trade, to China. Commodity-exporting countries such as Brazil, Nigeria or South Africa have benefitted from strong growth in China and the boom in commodity prices.

Given the dependence on East Asian economies, particularly China, and the continuing reliance on primary commodities in the export basket of many developing economies, South-South trade is currently facing some challenges. The slowing of economic growth in China and the related fall in prices of primary commodities pose challenges to exporting developing countries, in particular to the exporters of primary commodities.

Table 1 shows the evolution of export prices for primary commodities since 2011. Energy prices, including oil, have been hit hardest. Prices have fallen by around 40 percent since the beginning of 2014. The decline in the prices of minerals and metals was slower, but they were also quoting 40 percent lower in 2015 as compared to 2011.

Table 1: Export prices of primary commodities, 2011-2015

Source: WTO Secretariat based on IMF data
Note: Period averages calculated from IMF indices based on dollar prices. The quarterly figures are not seasonally adjusted.

After riding the wave of increasing prices in the last decade, commodity-rich developing economies now face the challenge of keeping exports up. Figure 1 shows the development of quarterly exports of five commodity-exporting developing countries during the last four years. The exports of all five countries fell by more than 20 percent during the last four years, with oil-exporting economies such as Nigeria and Saudi Arabia taking the hardest hit due to the price plunge in oil since the second half of 2014.

Figure 1: Evolution of merchandise export values since 2011

Note: Data are not seasonally adjusted.
Source: WTO Secretariat, short term trade statistics: https://www.wto.org/english/res_e/statis_e/short_term_stats_e.htm

An interconnected world, while hugely advantageous, also comes with its share of problems. For instance, the economic slowdown in China is being transmitted to other countries, including developing countries, because of the increasing interdependence of trade through value chains. There is a certain risk that a prolonged Chinese slowdown and its transmission effect on other developing countries will have a negative impact on the world economy.

Policymakers in developing countries, therefore, face the difficult question of how to sustain their exports. When it comes to trade policy, policymakers should, at least, pursue the following four avenues to bolster South-South trade, and trade more generally.

(a)    An important element that could significantly contribute to helping sustain trade growth is the implementation of the WTO Trade Facilitation Agreement (TFA). The TFA, which was agreed upon by WTO members at the Bali Ministerial Conference in 2013, aims at lowering the costs of shipping goods across borders by simplifying customs procedures. According to estimates by the OECD (Organisation for Economic Co-operation and Development), the implementation of the TFA can reduce worldwide trade costs by between 12.5 and 17.5 percent. The gains from the implementation of the TFA in terms of trade-cost reductions and increases in exports are generally estimated to be highest for developing countries. Since the implementation of the TFA will lower the fixed costs associated with trading, it can help developing countries diversify their exports in terms of both products and markets. For instance, recent research estimates that countries in Sub-Saharan Africa could experience an increase of up to 16 percent in the number of products exported by destination and an increase of up to 35 percent in the number of export destinations by product.

(b)    Another area with great potential for developing countries is the further development of e-commerce—that is, the sale of goods or services over the Internet. E-commerce can benefit firms from developing countries and South-South trade in a number of ways. E-commerce can facilitate and increase the participation of firms from developing countries in GVCs. It increases market access and the reach of small firms and improves market efficiency. While the goods still need to be physically shipped, e-commerce drastically lowers the information and transaction costs of international trade. However, in order to foster electronic commerce, policymakers in developing countries will need to upgrade ICT (information and communications technology) infrastructure and improve regulatory frameworks, including that relating to online payments and financial transactions.

(c)     Regional integration and the development of regional value chains is another major factor in sustaining trade growth for developing countries. As discussed earlier, South-South trade has been driven by regional value chains in East Asia. Even though lacking China as a nearby production hub, developing economies in Africa, South Asia and also Latin America should pursue regional integration and trade liberalization to create stronger production and trade linkages among themselves.

(d)    Finally, a significant outcome at the forthcoming Tenth WTO Ministerial Conference in Nairobi on December 15-18 would further strengthen the multilateral trading system and create new market-access opportunities, which, too, would bolster South-South trade. It is the first time that a WTO Ministerial Conference is being held on the African continent, making it all the more important to progress on the development dimension of the multilateral-trading system, including steps that would help South-South trade.

Clearly, South-South trade has been a driver of world-trade growth for more than a decade and is today a very important component of world trade. The recent economic slowdown in some emerging economies, however, also reveals the dependencies and limitations of trade among developing economies. In order to continue to grow, South-South trade needs to become more diversified in terms of both markets and products. Governments should not miss out on the policy options they have on hand to make South-South trade a more stable engine of trade and economic growth.

References: 

Beverelli, C., S. Neumueller and R. Teh (2015), “Export Diversification Effects of the WTO Trade Facilitation Agreement”, World Development Vol. 76.

OECD (2015), Implementation of the WTO Trade Facilitation Agreement: The Potential Impact on Trade Costs.

UNCTAD (2015), Key Statistics and Trends in International Trade 2014.

UNCTAD (2015), Information Economy Report 2015: Unlocking the Potential of E-commerce for Developing Countries.

UNCTAD (2015), World Investment Report 2015: Reforming International Investment Governance.

WTO (2014), World Trade Report 2014: Trade and development: recent trends and the role of the WTO.