Monday, May 14, 2007

Policy Note: How to Improve South-South Trade

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May 14, 2007


INTRODUCTION

The importance of South-South trade in the last twenty years has grown considerably. There are many factors that have influenced South-South trade, but principally three of them should be mentioned:
  • An upswing following the huge reduction in this kind of trade during the 1980s.
  • The adoption by "South" states of a more outward-oriented development strategy.
  •  Trade reforms and some new regional trade agreements.


Moreover, it is also of paramount importance to mention the fast growth of some big developing countries, like China, and the increasing intra-regional specialization and production sharing.

Promotion and improvement of South-South trade is a very important target for three reasons:
  • A slow-moving growth in developed countries coupled with the trade barriers that these countries still maintain do not provide sufficient markets for developing countries.
  • Asian economies are growing fast and this reduces the need for developing countries to look only for developed-country markets in order to achieve a sustained economic growth.
  • An excessive dependence on developed countries brings developing countries to be subjected to pressures to undertake inappropriate trade policies, which are negative for their real growth.


ANALYSIS OF SOUTH-SOUTH TRADE

In general, international trade should be a tool for South countries to achieve development and poverty reduction. Today, we can easily affirm that South countries should agree on improved market access as defined by the Doha Round talks.  In fact, liberalizing markets access can provide better results to developing countries than implementing policies based on economic assistance.

A fundamental element in order to increase developing countries’ economic growth is the access for South countries to O.E.C.D. markets (rich markets), but this is only a part of the issue. In fact, trade between developing countries is of paramount importance as well. If South countries want to obtain better results from multilateral trade liberalization, they have to open up their markets and support trade between them. In the last 20 years South-South trade has expanded consistently, but there is a lot of road still to run. In 1985, South-South trade was just 3 percent of world trade, while today it is around 6 percent. A big hurdle is that tariff barriers are among developing countries still at an average level of 11.1 percent while North-North trade has an average level of tariff barriers around 4.3 percent.  On the one hand, recently some analyses conducted by the O.E.C.D. have showed how lowering the barriers among developing countries could provide the same gains as giving to South countries a better access to the markets of North countries. On the other hand, it is important to understand that focusing only on the barriers related to South-South trade is not correct, given the still persisting protectionism utilized by North countries.  


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Since the 1980s, South-South trade has increased its share of the trade involving South countries (from 10 percent to 14 percent), but this trade is only a minimum part of the South-North trade. And South-South trade involves only upper-middle and lower-middle countries, in fact, nowadays, South low-income countries are basically excluded from this trade flow and on a world basis they account for only 1 percent of world trade.


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This negative trend for the so-called Least Developed Countries (L.D.C.s, also called Fourth World) will continue in the next years given the fact that their growth rate is very low. L.D.C.s are countries that on the basis of United Nations (U.N.) parameters show the lowest socioeconomic development, with the lowest Human Development Index (H.D.I.) rating among all the countries in the world. There are 34 L.D.Cs in Africa, 10 in Asia, 5 in Oceania and 2 in North America. The least developed country in 2006 was Niger.  Because there are big differences in the size and level of development of South countries, a complete liberalization of South-South trade is not the best policy. For example, the small African countries (like Senegal, which is an L.D.C.) cannot completely open up their markets to Brazilian agricultural exports or to the Chinese clothing factory because otherwise they would see their nascent agricultural products and clothes become completely uncompetitive. South countries, and L.D.C.s in particular, have to open up their markets progressively, otherwise their economic tissue, already inexistent, would never progress. In addition, with reference to the products traded, South-South trade regards primarily raw materials and/or goods that do not required skilled workers. South-South trade in commodities has always been a component of the trade exchange but never at relevant levels. Instead, South countries’ producers of commodities have always competed with one another in order to sell their commodities to North countries.

Diversification of the economy for South countries may have controversial effects. While it may be good for countries like Brazil or China, which have sufficiently developed domestic markets (although with very low levels in comparison to North countries), the process of diversification may be really dangerous, especially but not only, for Fourth-World small economies, which do not have  a real domestic market. If these countries diversify, they perhaps have a sort of protection versus volatility (the more goods and services a country produces the less the country is subjected to volatility), but in the majority of cases not a single sector of their economy will be competitive domestically or internationally.   

The majority of trade between developing countries involves today Asian countries. Specifically, half of the gains from South-South trade liberalization will pertain to Asian middle-income countries. In addition, a part of this new trade in Asia will be on a regional basis. This means that the liberalization will permit these countries to increase the trade with their neighbors. China, already today a global player will be an exception. South-South trade will be strongly reinforced by regional agreements especially in Asia, but for low- and middle-income countries liberalizing trade will permit them to trade with other South countries belonging to different regional areas. The best tool in order to achieve this result is via multilateral negotiations. Apart from Asia, intra-Latin American trade strongly had grown during the 1990s. Instead, Africa has always participated in a reduced manner to the expansion of South-South trade. African countries have progressed in the economic liberalization process and the fact that results have not been sufficiently positive should be related to supply-side constraints. Today, it is clear that especially in Africa every step on the path toward liberalization should be done on a country-by-country basis.

Another point that should be considered is related to transportation costs. In general, between the 1980s and the 1990s transportation costs really dropped, someone spoke of the “death of distance”, but while this phenomenon had a very strong impact on North-North trade, with reference to South-South trade it never really happened. Principally, this is due to the big infrastructural and technological gap that exists between North countries and South countries. If with reference to North-South trade there is an infrastructural gap only on one side, with reference to South-South trade it may happen to have infrastructural gaps on both sides. These infrastructural gaps create an important hurdle to the development of trade relations. In dealing with South-South trade in services the so-called distance effect is less strong than the distance effect related to dealing with raw materials and goods. In fact, with services the main cost is the information cost and not the transportation cost. This is very useful to South countries because services liberalization will have a very positive impact on goods exports (cheaper transportation cost, improved communications and a reliable financial infrastructure). These considerations are important for developing countries where a good performance of the services sector brings about an increase of the trade of material goods. In particular, manufactured activities will improve a lot both the amount and the quality of production if they are supported by a powerful services sector.

South countries have to work a lot about domestic reforms in banking, telecommunications, insurance and constructionsThe differences between the quality these sectors have in North countries and the quality they have in South countries well explain the difficulties South countries have to face when they trade especially with another South country as a partner.


G.S.T.P. AND BILATERAL/REGIONAL AGREEMENTS

In 2004, in Sao Paulo, with UNCTAD XI, a group of developing countries proposed to start a new round of South-South trade liberalization to be obtained under the Agreement on the Global System of Trade Preferences Between Developing Countries (G.S.T.P.). This agreement was established in 1988 with the goal of providing a framework for the exchange of trade preferences between South countries in order to increase intra-developing-country trade. Differently from the W.T.O., member states are not required to extend the benefits they give one another to North countries. This agreement was at the beginning an initiative of the Group of 77. It entered into force in 1989, but was ratified only by 41 countries and never became a real forum for South-South trade liberalization. At UNCTAD XI, the members of the initial agreement — including China and other countries of the Group of 77 — tried to revive the G.S.T.P. agreement. Recently, on October 2, 2006, MERCOSUR acceded to the G.S.T.P. agreement. In the following table are summed up the principal features of G.S.T.P. that the participants of UNCTAD XI would like to achieve.

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This trade platform is a real menace to the W.T.O. multilateral trade system. Until today the agreements concerning market access negotiated under G.S.T.P. have not been very relevant. In South countries all the reduction in tariff barriers happened through both unilateral action (given the efforts of the I.M.F. and the World Bank) and multilateral and regional agreements. Still today, the G.S.T.P. is not really effective and its future success (which of course the W.T.O. does not support) will depend on the political will of the member states.   
 
Apart from the G.S.T.P. initiative, since the stop of the Doha Round in 2006 (but also before) many developing countries have negotiated bilateral or regional integration agreements, which will reduce trade barriers. This tendency may be considered a blow to the “most favored nation” (M.F.N.) principle that is one of the cornerstones of the W.T.O. South countries when negotiate with developed countries have the expectation of receiving some preferential trade benefits as well as other non-trade benefits. In reality, preferential trade agreements especially when involve South countries “can lead to the diversion of trade among partners if imports from an economically inefficient regional trade agreement partner displace more competitive imports produced elsewhere”[i].

A preferential trade agreement may create political alliances where a developing country in order to sign a regional trade agreement with a developed country has to support totally the policy stance of the developed country inside the W.T.O. or in another forum. In the majority of cases trade imbalances will never be caught up.

The W.T.O. should impose three substantial conditions for regional agreements in order to be consistent with the W.T.O. requirements:
  • Respect to the overall impact of the regional trade agreements vis-à-vis other members.
  • External requirement: A free trade agreement cannot lead to higher imports duties for its members while a customs union has as principal aims to harmonize the external trade policies of its members and compensate the affected non-members.
  • Internal dimension: Both tariffs and other restrictive regulations of commerce should be phased out on all trade. 


DOHA ROUND AND SOUTH-SOUTH TRADE

In 2006, the stop of the Doha Round negotiations was a real step back in the promotion of South-South trade development. With reference to agriculture the Doha negotiations have the target of improving the market access with a reduction of export subsidies (with the idea of getting a complete elimination) and of domestic trade-distorting support. A special and differential treatment for South countries shall be an integral part of all the negotiating process. In other words, it should be absolutely considered the development needs of these countries, including needs like food security and rural development. Instead, with reference to non-agricultural products the goal of the W.T.O. is to reduce or eliminate tariffs, including: tariff peaks; high tariffs; tariff escalation; as well as non-tariff barriers (giving particular focus to products of export interest to developing countries). Also in this case the negotiations shall consider in a proper manner the special needs and interests of developing countries and L.D.C.s. Similarly, for what concerns trade in services, the Doha Round pushes for a policy that promotes the economic growth of all the trading partners with a particular attention to developing countries.

Obviously, it is important not to overestimate the relevance of the Doha Round, but it is true that trade can do more than development aid to help developing countries. The Doha Round is important for South countries' development and for the increase of South-South trade, but unrealistic expectations of the gains and a partial comprehension that developing countries have all a different condition may bring the implementation of  wrong and inappropriate policies. The following table[ii] explains how to consider the interests of South countries in the framework of the Doha Round .

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RECOMMENDATIONS

In order to get the best results in order to improve South-South trade, the W.T.O. should put into action a strategy to support Fourth World countries based on two different pillars: one focusing on the public level and the other one on the private level.
 

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At the public level, the economic implications of the Doha Development Agenda are really important. The process of economic integration is absolutely not completed and the countries that can get more from increased multilateral tariff liberalization are with no doubt developing countries. In general, the more these countries will open up their markets, the more they will gain, but it should be added that every country is a particular case and especially with reference to South countries this process should be done gradually. In particular, a possible agreement that will liberalize the sector of services could benefit all the W.T.O. members. The meaning of the Doha Development Agenda is to convince the political elites of the W.T.O. members to find a common idea to implement and to strengthen common international trade rules in a way that economic growth and development, poverty eradication, job and social security may all be improved. Given the continued increase in South-South trade principally with reference to merchandise and services, developing countries have an always more and more important role to play, but they have first of all to reform their trade policies that for the moment are not sustaining in a proper way their economic development. The hope is to have more low- and middle-income countries participating in a dynamic way to the multilateral trading system.

With reference to regional agreements, the W.T.O. must authorize regional trade agreements that will not create situations where non-regional trade agreement members will pay the price of internal preferences. In particular, the so-called enabling clause permits to have for regional trade agreements between developing countries less stringent disciplines compared to the ones envisaged by the W.T.O.

At the private level, the W.T.O. together with Unctad at the level of Intracen should reinforce the South-South Trade Program. This program is targeted to business associations and national, regional and intergovernmental organizations that promote economic opportunities for developing countries and economies in transition. So the program works at the level of enterprises. This program is a key tool in order to increase South-South trade because it permits to identify new business opportunities and to transform them into new transactions. The principal tools that the program uses are:
 
  • Trade and flow analysis. Identification of import, export and related investment opportunities across groups of countries.
  • Supply and demand surveys. Documenting market characteristics and identifying opportunities and beneficiaries through field research on a product and country basis.
  • Buyers-sellers meetings. Platforms for companies to conduct business transactions and take advantage of the identified opportunities.  


The process of expanding South-South trade will be possible only with the clear participation of all the actors involved: government structures, private and public trade partners and the international organization principally the W.T.O. and Unctad. This process will not be fast and probably in the short run we will assist to an increase of North-South trade, but this is absolutely normal given the infrastructural situation of many South countries. It is of paramount importance to insist on the multilateral trade system based on the W.T.O. rules. The W.T.O. is today the only real instrument capable of contrasting the creation of a world more and more divided in different trade blocs, which will implement again trade barriers and protectionist policies between them.                               
   




[i]LAMY, P. Multilaterals and Bilaterals – Friends or Foes, Lecture at Columbia University, October 2006, in http://sipa.columbia.edu/news_events/special_events/silver_lecture/Lamy_SIPASilverLecture.pdf, accessed on May 20, 2007.
[ii]POLASKI, S., Winners and Losers, Carnegie Endowment for International Peace, 2006.





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