In Focus 87, Thomas Englebert explores the increasing prioritisation of South-South trade by developing countries.
South-South trade: the issue
In 2007, the Democratic Republic of Congo (DRC) made a deal with China: a €6.3 billion investment was to be spent by China to build infrastructure and foster the mining sector in the DRC. For the work, two Chinese companies were chosen (China Railway Engineering Corporation and Synohydro Corporation). They were engaged to build, among other things, 31 hospitals and 4 universities. In exchange, DRC gave China access to 10 million tons of copper, 200 000 tons of cobalt, and 372 tons of gold.
This deal is one example of the increase of South-South trade, and the complexities involved among many of the emerging trend towards South- South trade, and the complexities involved. South- South trade refers to trade between countries from the Global South (also called developing countries). These countries have more similar economies and therefore are often more suited to trade with each other than with Western countries. Such trade could be more economically and politically beneficial to them than trade with richer countries.
Indeed, the economic growth of the Global South has been linked to trade, which has usually relied on the growth of developed countries to whom Southern countries predominantly export their goods. As some developing countries are currently experiencing a marked increase in growth rates (and thus an increased need for raw materials etc.), trading with them will be more and more economically attractive for other countries from the Global South. South-South trade could also help countries reduce their dependence on access to the markets of developed countries. Thus, it might strengthen countries from the Global South in their political, financial and economic negotiations with the Global North, as they gain more economic independence from the wealthiest countries in the world.
The evolution of South-South trade
In the last decade, South- South trade increased in value from $222 billion in 1995, to $562 billion in 2004. For Africa, total trade with non-African developing countries increased from $34 billion in 1995 to $283 billion in 2008. Also, South- South investment has increased significantly in recent years. Foreign direct investment from developing countries to other developing countries grew from $14 billion in 1995 to $47 billion in 2003.
In Africa, Foreign Direct Investment from India increased by 837% between 2000 and 2007. Numerous factors have contributed to these changing trade patterns. The opening of markets in developing countries has facilitated an increase in trade. A multiplication of regional trade agreements and a diminution in transport costs have also contributed. More important, there has been significant growth in a number of small but economically strong countries in East Asia, like Malaysia and Thailand, which has strengthened the demand for goods. Finally, in the past decades, countries of the South have become convinced that there is a need to focus on trade amongst themselves rather than prioritising trade with the rich countries of the Global North.
As Mark Halle, from the International Institute for Sustainable Development (IISD), has noted ‘‘the principal reason for promoting it [South-South trade] tends to be politically motivated – to replace inequitable market relationships between the North and South with fairer ones between Southern countries”. But even if trade between countries from the Global South has increased, it has a long way to go before it reaches the level of trade of developed countries. South Centre, a Southern think tank points out, that “as the economies of the industrialized countries of the North continue to dominate the global economy, accounting for 55.7% of global output and for about three quarters of world trade”. Nevertheless, South- South trade has increased substantially during the last decade, and continues to grow.
Political leaders are aware of the changing global dynamics, and see opportunities. Rob Davies, Trade and Industry Minister for South Africa, said in June 2010: “We now see a huge number of possibilities from South-South trade and a lot of our effort is being deployed there. […]. We do now have alternatives and that is we can diversify and there are other poles of growth, and that will be one of the real consequences of this situation [the current economic situation]”. UNCTAD Secretary- General Supachai Panitchpakdi (a former head of the World Trade Organisation (WTO) and deputy Thai prime minister) noted that the financial crisis had shaken the economic foundations of the Global North and was threatening to shatter the growth and development aspirations of the Global South. “The timing, therefore, is right to explore how greater South-South cooperation can help developing countries to cope with the crisis”.
Toward more intense political collaboration?
As well as more trade collaboration, greater political cooperation is occurring between countries from the Global South. The G-3 (Brazil, South Africa and India) are challenging the domination of international institutions such as the WTO by the wealthiest nations. These three emerging powers are changing the global power dynamic by taking independent positions, investing in other countries and making ambitious trade deals, sometimes in competition with developed countries. Another interesting Southern coalition is ALBA (Bolivarian Alternative for the Americas). Like the G-3, it aims to challenge the domination of the rich countries. The members of this coalition (Antigua and Barbuda, Cuba, Bolivia, Dominica, Ecuador, Nicaragua, Saint Vincent and the Grenadines and Venezuela) have agreed guiding principles that go against the current economic model. Led by oil-rich Venezuela, the coalition is based on guiding principles of complementarity, solidarity and state sovereignty.
The central aim is to achieve development, with a focus on human rights, and an increase of state intervention mostly in the energy sector, for example by nationalising various companies. Trade between members is fostered, with recognition of the strengths and weaknesses of each country, and recognition of the complementarity of each. For example Cuban doctors are “exchanged” for Venezuelan oil. These initiatives, among others, try to challenge the Northern domination of the globe – politically and economically. In 1999, at WTO negotiations in Seattle, countries from the Global South were denied participation in the decision-making process. Since then they have been challenging the domination of Northern countries in international institutions and in setting the rules and terms of global trade. The Global South is demanding more “policy space”, i.e. the ability to make their own decisions, and trying to enact different economic and trading policies.
Conclusion: Can South-South trade contribute to development in the Global South?
Trade within the Global South is not a magic bullet. If some poor countries change the destination of their goods but continue to be locked into the role of exporters of raw materials, never progressing to develop industries and thus earning more from their trade, little will change. If the G-3 challenges the current system just to become more dominant themselves, without any fairer rules, things will not improve in poorer countries.
Another problem is that there are big differences in the level of development among countries of the Global South. If it is to bring real change, as well as addressing global economic power dynamics, South-South trade needs to address other structural problems, such as weak infrastructure and industrial capacity. Many African leaders have acknowledged the opportunities that Chineseinvestment represents for their countries, and find the straightforwardapproach of the Chinese, who are less inclined to use developmentrhetoric, refreshing. However, concern has also been raised about China’s commitment to labour and environmental standards, and that China might abuse its economic power to secure unfair deals, thus reproducing the structural problems without addressing them.
“The principal reason for promoting South-South trade tends to be politically motivated – to replace inequitable market relationships between the North and South with fairer ones between Southern countries”
South- South trade could help to reduce the dependence of the Global South on the Global North. Reducing economic dependence onNorthern economies, in the context of the current economic climate,might help the Global South to foster development and pursue tradepolicies that better suit their stage of economic development. Andreducing political dependence, as they gain a stronger negotiationpower through having more trading options and possibilities, could help the Global South to ensure trade deals that respect their sovereignty and policy space. The possibilities of South-South trade are many, and it will be fascinating to see how global trading patterns change in the decades to come as countries of the South explore alternatives to the current global trading paradigm.