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    South-South Cooperation


    International Trade Forum - Issue 2/2010

    In the aftermath of the global financial crisis, the driving forces of economic growth, international trade and finance will shift even more rapidly towards developing countries in Asia and the emerging economies, underscoring the importance of South-South cooperation. The countries of Latin America and the Caribbean will need to form trade and investment partnerships that go beyond free trade agreements in order to further integrate Asian production and export chains. There is a need to reduce the marked asymmetry between large volumes of trade and small reciprocal levels of investment.

    The power of Developing and Emerging Economies

    The crisis has raised even more the profile of emerging economies, not only in world production and trade, but also in international finance and its governance. Longer-term forecasts suggest that today's developing and emerging countries are likely to account for nearly 60% of world gross domestic product (GDP) by 2030. The combined GDP of the four emerging economies commonly known as the BRICs (Brazil, China, India and the Russian Federation) accounted for 15% and 22% of world GDP in 2008, in terms of, respectively, current prices and purchasing power parity. Developing countries' share in both world trade and foreign direct investment (FDI) inflows reached almost 39% in 2009. At present, foreign reserves in the hands of developing countries amount to more than 1.5 times that held by developed countries. The BRICs together hold 39% of international reserves while Latin America and the Caribbean, including Brazil, account for 6% of world reserves.

    South-South trade grew at an average annual rate of 13% during the period from 1990 to 2008 amounting to US$ 2.9 trillion in 2008. The share of South-South trade in total world trade jumped from 9% in 1990 to 18% in 2009. In short, almost 40% of world trade is conducted by developing countries and it is estimated that roughly 40% of this can be categorized as South-South trade.

    Shifting Demand

    Though South-South FDI flows are still limited, intra-regional FDI in Asian developing countries and Latin America and the Caribbean (LAC) has been quite dynamic. In the case of the latter, almost 10% of FDI inflows originate in its own region, increasing the importance of the 'Translatins'. More FDI from Asian countries such as China and India is expected.

    Against the dynamic South-South trade of LAC, the importance of developed countries as export destinations has been declining. In the last ten years, the share of the United States has declined drastically from 60% in 2000 to 40% in 2009, while that of the European Union has stalled at 13%. Among Asian countries, in contrast to China's surge, Japan's share has suffered a drastic decline.

    South-South trade already constitutes an important segment of LAC trade, accounting for almost 29% of its total exports. Among the developing country export destinations for LAC countries, the most important is its own region, which accounts for more than 18% of total exports, followed by developing countries in Asia, with a 6% share. Africa, the Middle East and Central Europe still remain minor export destinations for the region as a whole. Trade between developing Asian countries and the Middle East, based principally on petroleum, has been growing, while intra-South-South Asia trade has been the best example of world productive complementarities. The relative importance of South-South trade in Latin America is much higher when Mexico is excluded from the picture. Almost half of the region's exports are of a South-South nature. The region's South-South trade is split almost evenly between intra- and inter-regional trade.

    The Asian Connection

    Developing countries in Asia, China in particular, have become significant trading partners for several Latin American economies. China is the largest export market for Brazil and Chile and the second largest for Argentina, Costa Rica, Cuba and Peru. Strong Chinese demand for food, energy, metals and minerals has benefited the countries that export these products, improving their terms of trade and spurring their growth. In fact, LAC exports to China increased 5% during the crisis when the region's exports to other regions decreased by 27%. In this way, China's economic dynamism has come to the rescue of the region's exports.

    However, as for other regions of the South, developing Asian countries are still an underexploited export market for LAC. LAC's trade with these countries exhibits the same limitations that the region has in international trade in general. Its exports are mostly primary and semi-manufactured goods. LAC needs to find ways to increase the degree of processing of these natural resource-based export products and seek new outlets in Asia for more value-added, differentiated products.

    The countries of the region also urgently need to make the most of the current dynamism in the Asia-Pacific region and develop new linkages to improve innovation and competitiveness (a weak link in the Latin American regional experience), strengthen links between trade and investment, and consolidate productive and technological linkages. Developing Asian countries offer investments that could provide complementary financing for major initiatives, especially in the areas of infrastructure and energy. An interesting challenge would be to identify the infrastructure and energy projects where Asian investment might be needed most and to speed up works implementation, which would not only make it possible to strengthen the trade facilitation and investments link with Asia-Pacific but also would generate externalities for Latin America's own regional integration process. It would thus be advisable to link the strategic partnership with that region to an updating of regional integration, to achieve unified markets supporting increasingly common standards and providing greater legal certainty.

    In order to further integrate Asian production and export chains, countries in the region will need to form trade and investment partnerships that go beyond free trade agreements. Although these agreements may be important, they are not enough to generate the scale and critical mass needed to encourage trade and technology partnerships between the two regions, or to reduce the marked asymmetry between the large volumes of trade and small reciprocal levels of investment. The foregoing, however, does not deny the importance of careful analysis on possible effects of the proliferation of trade agreements in the Asia-Pacific region, which might generate trade and investment diversion of Latin America and the Caribbean in developing countries in Asia.

    Average percentage shares of SST in regions of the South (1995-2008)

    Latin America & Caribbean (LAC) 18.4 1.3 1.7 1.1 6.4 28.9
    Central & Eastern Europe (CEE) 1.6 19.4 1.4 3.2 7.5 33.1
    Africa (AFR) 1.7 0.3 10.0 2.4 15.5 29.9
    Middle East (ME) 0.2 0.9 3.8 12.2 33.6 50.7
    Developing Asia (DA) 2.4 2.1 2.6 2.9 37.4 47.4
    All South regions (SST) 4.2 3.5 3.1 4.5 27.8 43.1

    Source: ECLAC, International Trade and Integration Division, based on WTO data and United Nations COMTRADE database