When Asian exports collapsed in the wake of the global financial crisis, the severity of the fall put paid to the punditry that had, until then, portrayed Asia’s economic fortunes as somehow independent from those of the West.
Almost every economy in the region slowed sharply, with many falling into recession. But this should hardly have been surprising: when crisis struck, emerging Asia’s export share of output stood at roughly 45% of pan-regional GDP, with the vast bulk of those exports heading to the US and Europe.
In the months that followed, policymakers queued for the soapbox to make grand calls for a new Asian growth model, one that relied less on demand from the developed world.
Almost three years later, those calls are once again growing louder as the recovery in advanced economies remains bogged down by falling consumption and ever more severe fiscal woes. After a 2.6% rebound last year, the US, eurozone and Japan are together expected to expand by 2.1% this year and next.
Though Asia today is posting nearly 8% growth, an increasing number of economists believe this rate will drop as economies reach the limits of their output.
Against this backdrop, the Asian Development Bank has sought to identify new sources of Asian growth – ones it thinks could allow for a greater degree of economic autonomy from the West. In its annual report released last month, the bank says the answer still lies chiefly in trade – but specifically in south-south trade, i.e. between developing countries.
Given the enduring slump in the West, “the natural question is where the new source of aggregate demand will come from for global economy growth and especially for Asian growth to be maintained at a high level,” says Changyong Rhee, the ADB’s chief economist. “That’s why we’re looking at a south-south economy link.”
Rhee points out that the share of world goods trade among developing countries has more than doubled in the past two decades, from 7% in 1990 to 17% in 2009. Asia accounts for roughly three-quarters of that. And China comprises 40% of all south-south commerce.
But the surge in trade between developing countries is largely down to the rise of Asia as the world’s manufacturing hub – or “factory Asia” – where parts and components are assembled then shipped to western markets. To that extent, today’s production arrangements still hinge on final demand in industrial countries.
“Growing these links does not necessarily translate into growing independence,” Rhee says. “We are arguing that south-south economic links have potential, but in order to become an autonomous source of aggregate demand for the global economy, many structural issues have to be addressed.”
INEXORABLE RISE
South-south trade will continue to grow so long as economies grow. As Homi Kharas, deputy director of the global economy and governance at the Brookings Institution, puts it: “South-south trade will happen inexorably because trade growth is linked to GDP growth, and most [of that] growth is happening in Asia.”
The share of south-south trade in global trade is likely to double in the next two decades, according to the ADB. But despite the natural expansion of trade that will happen whether or not policy adapts to boost its growth, the question remains whether developing countries are willing in practice to breathe fresh life into this dynamic.
Much of the concern centres around China. The country is raising hackles among many emerging economies – Brazil and India among them – who fear their export competitiveness is being eroded by its undervalued currency and cheap goods.
At the same time many commodity exporting countries bemoan the fact that China’s hunger for oil and other raw materials has increased their dependence on natural resource production and exports.
TRADE BARRIERS
Another, more fundamental, issue is that barriers among developing countries are still vastly higher than those imposed by the developed world. The ADB points out that import duties on goods traded between southern countries is on average 6.1%, compared to 2.5% in the West.
Gary Hufbauer, a trade specialist at the Peterson Institute for International Economics, notes that trade barriers for manufactured goods in southern countries remain stubbornly high.
Tariff barriers are high especially compared to profit margins of typical manufacturers. “The successful southern countries – India, Brazil, Indonesia and so on – have cut their applied tariff levels significantly, but they seem to have come to a resting point, and they’re not really willing to cut much more,” says Hufbauer.
“Most of the manufacturing firms doing business in traded goods – are just deathly afraid of Chinese competition. So they’re quite resistant, and it flows through to the politics of being unwilling to cut their existing barriers.
If policy is going to mean anything, it’s got to mean cutting those barriers and opening that up. But unless China leads the way quite dramatically, the other countries are pretty reluctant. And even if China did lead they might still remain reluctant.”
Non-tariff barriers are also much higher for south-south trade than for trade between developed and developing countries. “We are discriminating against each other,” says Rhee.
The ADB is urging policies that lower trade barriers and put in place initiatives that promote final goods trade across the South. The resulting expansion in trade will also allow developing economies to move away from labour-intensive, high value-added manufacturing “setting them on a higher growth profile.”
MORE WORK NEEDED
But reorienting north-south supply chain trade away from North America and Europe for consumer goods may prove less than straightforward.
Says Hufbauer: “This dimension of trade is not easily reorganized to a south-south pattern and needs a lot of help to get in that direction. First of all, the kind of products that are sold – coming out of ‘factory China’ or other factories in Asia – typically they’re geared for a much higher income market than the markets of south countries.”
He says supply chains will have to be refashioned to focus on marketing products to an emerging middle class with substantially less purchasing power than their developed world peers.
For exporters, this will mean “maybe a third of the income of the markets they’re accustomed to” – a fact which will mean different design standards for consumer goods.
POLITICAL PROBLEMS
The political economy of south-south trade is also vastly more complicated than might first meet the eye. Kevin Gallagher, associate professor of international relations at Boston University, says the benefits of the phenomenon have been overblown.
“Some observers have been too quick to leap to conclusions on the significance of what we are seeing. On south-south trade – be careful what you wish for. More than half of the global economy is still in the North and you still need to export and get financing from them. So talk of south-south solidarity is a little naïve; it’s mostly rhetoric.”
The very notion of south-south trade itself also carries ideological baggage. The notion is also sometimes used as a political rallying cry. Venezuela’s firebrand president Hugo Chavez, for example, has built up trade and political ties with a number of big emerging countries, including China, says Michal Meidan, Asia analyst at the Eurasia Group,
“Chavez’ desire to use China as leverage against the US and to play the south-south card is very strong. But the Chinese look at Chavez with a lot of distrust; they’re not bound by what he’s saying. They simply see it as getting a lot of oil at a good price.”
Rhee admits that “there are lots of ideological connotations” to the term. But he says: “Emerging economies are already important players [in the global economy]. The weakest point at this moment in the global economy is the south-south link, not the north-south link. This is a global problem.”
He says criticism of China over its natural resource demand is misplaced. “Many advanced economies criticized [Chinese] trade saying it’s motivated by natural resources; they criticized Chinese investment in Africa, for example.” But he says that investment follows trade and, over time, a more sophisticated economic relationship is likely to develop. Commodities trade “is a starting point,” he adds.
“If we do not have these initial stages [of commercial partnership] it will be hard to see the second stages,” says Rhee. “That’s why we are emphasising more final goods trade between southern countries as well as more investment, manufacturing and industrial migration.”
According to the ADB, simply lowering barriers to south-south trade to north-south levels would bring three-quarters of the gains to developing countries as would freeing all countries’ goods trade. If this happened, south-south trade would account for 23% of world trade.
REBALANCING
The renewed focus on south-south trade serves another purpose: it’s also an attempt to chart another course towards rebalancing the global economy.
The IMF warned last month that the imbalances in the world economy – which many single out as an underlying cause of the 2008 financial crisis – are about to get dramatically worse. The global economic slowdown may have shrunk current-account deficits and surpluses alike since the crisis, but the Fund has said the trend will go into reverse this year.
Chinese current account surplus will rise to 6.8% of GDP in 2013 and roughly 8% by 2016, while the corresponding US deficit will swell by 70% over the next five years, the Fund said in its 2011 World Economic Outlook.
Meanwhile supposed solutions to the problem – an appreciation of China’s currency and dramatic fiscal consolidation in the US – appear further off than ever.
For Rhee, the long-standing solutions to global payments imbalances – a rapid rise in China’s currency and domestic consumption alongside a resolution to the US fiscal crisis – are hardly straightforward.
“If we focus on the US and China alone, it’s going to cause a lot of political tension without any good answers. But when we talk about south-south [economic] relations together, it could be a supplementary solution which alleviates this kind of tension,” says Rhee.
But just as with the traditional formula for unwinding global imbalances, the actions of China remain key. Hufbauer says that for south-south trade to explode, the impetus must come principally from Beijing.
“China really is the driver of all this. In order for the south-south story to really continue taking off apart from just GDP growth, China will have to change it’s own policies and become receptive to inward imports of manufacturing, bring tariffs down to zero and get rid of a lot of non-tariff barriers which are high.
“Although rhetorically they talk in that direction in terms of their bilateral trade agreements, whether they’re willing to do that remains to be seen.”