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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This week's column examines the trends and prospects for South- South trade, as I continue to explore the challenges and opportunities for poor countries arising from the new emerging global division of labour, or as some analysts put it, changing 'geography of international trade.' To be clear, while there are many issues to explore, my main task is to enquire in what ways, if any, South-South trading links enhance the prospects of trade serving as a pillar of development for poor countries thereby promoting the Millennium Development Goals (MDGs). The expectation of advocates promoting South-South trade has always been that export of manufactures from poor countries (and particularly high-skilled and technology-intensive manufactures) will more readily develop from the opportunities afforded in South-South trade, as compared to trade with the developed countries. The reason for this is that in the rich countries there is an already well-entrenched industrial sector, with which they cannot at this stage compete. Moreover the rich countries have developed a highly discriminating consuming population, which makes firm entry and gaining market share for new products from the South a very difficult (and high risk) proposition.

The 1970s: The first boom in South-South trade

In the 1970s during the hey-day of import-substituting industrialisation and the promotion of trade-diverting regional cooperation pacts among poor countries, South-South trade achieved significant growth rates. Indeed this trade grew faster than both North-North trade and world trade, and as a result there was a rising proportion of South-South trade in world trade. This growth however faltered for at least two major reasons. One was that much of the growth arose out of the short-lived 'boom' in commodity prices. If readers recall the 1970s was the period where oil prices reached the phenomenal level of US$25 per barrel, which in real terms still considerably exceeds even today's high price of oil. The other is that as a result of a host of difficulties (including pressures from the World Bank and IMF for poor countries to abandon import-replacement strategies at the regional level), assumed inefficiencies and distortions to global trade, have forced regional cooperation schemes to retreat from their efforts at seeking to reconfigure the existing global division of labour.

South-South trade on the rise again

Since then in more recent times South-South trade has been reported by the WTO to be growing once again at significant rates. The result is that, according to UNCTAD, in 2003 South-South exports represented 43 per cent of developing countries' total exports as compared to four decades ago in 1965 when this figure was 25 per cent. The counterpart to this occurrence has been that developing countries' exports to the rich countries fell from 69 per cent of their total exports in 1965 to 54 per cent over the same period (in 2003). The data on the composition of this trade is also revealing. While the share of manufactures in South-South trade hardly changed over the period 1965 to 2003 (remaining constant at 44 per cent), the share of primary commodities rose from 22 per cent in 1965 to 41 per cent in 2003. Meanwhile the exports of the developing countries to the rich countries, which was heavily concentrated in primary commodities in 1965 (72 per cent) fell to just over one-half (53 per cent) by 2003.

The bulk of this increase in trade from the developing countries, however, can be attributed to China and the Newly Industrialising Asia Countries (NIACs) of Hong Kong, Korea, Singapore and Taiwan. Thus, for example, the share of these countries in developing countries' imports in 2003 was nearly two-thirds, and their share in developing countries' exports to developed countries was nearly 50 per cent!

On close examination of the trade data UNCTAD has found that exports of manufactures from China and the NIACs, are mainly responsible for the apparently rapid growth in South-South trade. Indeed, further examination reveals some interesting observations, which will form the basis of the rest of this article and next week's as well. One of these observations is that much of South-South trade, which is measured on the basis of trade statistics from developing countries, involves double-counting. This is because of the intra-regional production-sharing arrangements of the transnational corporations (TNCs) for products in the East Asia region, which are eventually exported to developed countries. Also, both Hong Kong and Singapore are major transhipment ports, much as Barbados operates in this way for the OECS within Caricom. Where such regional hub ports are concerned, one needs to distinguish carefully between domestic exports and transhipment. In this case transhipment has caused the deceptively high rate of growth of South-South trade in that region.

More of the same or change: China and East Asia

Clearly China and the NIACs have emerged as major markets for primary products. Indeed they are largely held responsible (China in particular) for the rise in oil prices. To the extent that this influence is there, these countries contribute to the growth of exports from poor countries both in terms of volume and price. This development, unfortunately, still mires the poor countries in a global division of labour in which their primary function is to supply primary commodities to countries better off. To this extent, therefore, the new geography of trade may have turned a complete circle and reinforced the traditional global division of labour, only this time with new players. Apart from primary commodities playing a prominent role in the newly emerging South-South trade, it has been found also that among the exports of manufactures from the developing countries, most of these tended to be less skill and technology-intensive than exports of developing countries as a whole to the rich countries. And, in those cases where the exports of manufactures are indeed skill and technology-intensive these tended to be supplied by the NIACs. These interesting issues we continue to discuss next week as we ponder the paradox that more the global market economy changes, the more it remains the same!

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.