Coming full circle: South-South trade and the continued dependence of poor countries on commodity exports
Guyana and the wider world
By Dr Clive Thomas
Stabroek News
November 6, 2005
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South-South trade as a pillar of growth: Miracle or mirage
Last week I gave more than a hint that readers need to re-think the positive way in which they might have embraced the view that a new global division of labour or 'geography of world trade' has emerged. In earlier contributions in this series I had shared some of the general enthusiasm about the rapidly growing role and importance of South-South trade in the global economy. This new role has been touted as an unprecedented if not 'miraculous' outcome, given our pessimism over the problems facing the poor countries of the South.
Closer examination of the trade data put out by UNCTAD this year has, however, led me to be very cautious about predicting the emergence of dramatically new trends and patterns to global trade, particularly those which would seem to favour trade as a pillar of growth in the poor countries. Certainly new trends have emerged, but the conclusions to be derived from the data are to my mind considerably less encouraging than I had hoped originally. Strikingly, re-examination of the data shows the dependence of the poor countries on primary commodity exports remains one of the key striking features of the 'new' South-South trade. Several readers have asked me to expand/clarify this observation, which I made last week as they have found it disquieting. In this week's article I shall respond to this request to do this.
Illusion or reality
UNCTAD's data suggest that much of the improved South-South trade is illusory because it is derived from aggregate statistics on trade, which hide more than they reveal. As I pointed out last week much of the South-South trade really reflects production-sharing arrangements within the organization of the production chains of the large global transnational corporations (TNCs). Thus we find that Asian countries ship their exports of components and other merchandise to other Asian countries, which add further value to these products that are then passed on to yet other countries along the production chain and eventually these reach the markets of the rich countries, where in fact the dominant global TNCs are located. These exported items are therefore really the results of production-sharing arrangements within the global structure of the value chains of the major TNCs. They are not traded items in the conventional sense of this term.
On reflection, this phenomenon should have been anticipated and we should have been more cautious about accepting the aggregate trade data given the transshipment roles of some East Asian countries, particularly those benefiting from the phenomenal boom in exports. Thus Hong Kong does little manufacturing on its own territory but nevertheless depends heavily on the commercial services derived from the export of manufactures out of mainland China to other Asian countries, and also to the markets of the rich countries of the North.
These considerations apart, however, one of the most disquieting features of South-South trade is the predominant role of the export of primary commodities from the poor countries to the East Asia countries, which transform these into exports of manufactures that are then exported to the rich countries.
These primary commodities include fuel, other natural resources, agricultural products and food. Today, East Asian countries consume a substantial amount of the world demand for such products as sugar, oil, bauxite-alumina and forest resources, all of which we produce in the region.
The central dynamic: business as usual
In light of this circumstance, the rapid growth of the Asian countries and their recent wave of industrialization would seem to confirm, rather than challenge, the reliance of the poor countries on the export of primary products. In light of the adverse trend in the terms of trade of primary prices relative to manufactures and services over this period of their emergence, there is nothing here to suggest that the growth in East Asian demand means anything other than 'business as usual' in the global economy. In other words, despite the rapid growth of the East Asian economies, the central trade dynamic between rapid industrialization and growth in manufactures on the one hand and primary products has remained basically intact.
Where, as we saw last week, poor countries do manage to shift their merchandise exports from primary products to manufactures within the South-South trading nexus, UNCTAD's data found that these exports are heavily concentrated in low-skilled, low-technology products. At the same time, however, aggregate exports of high-skilled, high-technology products from the South to the North have also grown rapidly. But, here again, these exports are overwhelmingly from China and the newly industrialized Asian countries (NIACs). Such exports are not widely distributed among poor countries.
Is there really a change with Asia's insertion?
Given these facts, the new geography of global trade is basically little more than a reflection of the strong insertion of the continent of Asia into global trade. This development has been led by China and the NIACs, and to a lesser extent India. A 'new pole of growth' has emerged in Asia, but this new pole essentially represents an additional layer to the hierarchical structure of world trade; it does not alter that structure fundamentally. The triangular pattern of the trade is very clear. Thus China and the NIACs export high-skilled technology products to the rich countries. In turn these exports depend on the input of national resources, fuel, other raw materials and food from the poor countries, which they transform based on their recently established manufacturing capacity. The global demand fuelling this process is still, however, the growth of output in the rich countries. When this growth falters the process runs the risk of going into reverse.
As we shall see in more detail next week, China's growth in particular has been phenomenal, outperforming that of all previous experiences in history, including the phenomenal growth of Japan after its own take-off towards the end of the 1950s. The growth of China, the NIACs (and India also) is projected to maintain this trajectory as their industrialization still has a considerable way to go. This suggests continued buoyancy in the demand for primary products. The problem, remains however, as to how to ensure this demand sustains a rise in real commodity prices. In the absence of an organized response by suppliers in the South it is difficult to see how this can happen on its own, based on past experiences.
In conclusion it should be noted also that high trade barriers and significant entry costs into rich countries' markets are likely to remain long-lasting features of the global trading environment. To this extent one can expect that opportunities for broad-based growth for the exports of poor countries will not reside here. When these circumstances are taken in conjunction with the situation in East Asia trade, the outlook does not favour the rapid development of the poor countries and the achievement of the Millennium Development Goals as the UNDP would have hoped; trade as a pillar of growth remains on shaky foundations.