INVISIBLE HAND: South-south on the up'n'up

By bne IntelliNews May 25, 2015

Liam Halligan in London -


International commerce used to be dominated by flows of goods and services between the big Western economies and the developing world – with the “advanced nations” generally dictating the terms. Over recent decades, though, there’s been a surge in trade between the developing countries and emerging markets themselves, bypassing the “leading countries” altogether.

As the developing and emerging economies’ share of the global economy has surged from one-third to more than a half of global GDP over the last ten years, they’ve done increasing amounts of business with each other. Such “south-south” flows, just a few percentage points of world trade as recently as 1990, rose to a fifth by 2004 and now account for almost a third of all cross-border commerce.

There was $18,500bn of international trade in 2014, the World Trade Organization estimates, of which around $6,000bn was south-south. It’s a similar story when it comes to foreign direct investment (FDI), with the developing and emerging economies receiving some 52% of the annual total on the latest (2013) numbers, and south-south FDI accounting for the largest chunk. While America, the big European economies and Japan still see themselves as the engine rooms of global commerce, nations elsewhere are increasingly generating many trillions of dollars of trade flows between them that don’t involve the West.

And the world’s biggest economy could soon be in recession. Preliminary estimates for US GDP show annualized growth dropping to just 0.2% in January to March, compared to 2.4% in 2014. Subsequent survey data suggests this figure will be revised down into negative territory, with the second quarter also likely to disappoint.

Between 1990 and 2007, after the Berlin Wall came crashing down and globalization began in earnest, world trade flows expanded on average by a buoyant 6.2% a year. Since the 2008 financial crisis, though, with both America and Western Europe failing to stage a convincing recovery, international commerce has been a lot more sluggish, growing at just 2.4% annually from 2011 to 2013.

To put that in context, there’s been just one other three-year period since World War II when global trade has been so flat – from 1980 to 1982, in the aftermath of a huge oil price shock, when a 12-month tripling of crude prices sparked double-digit US inflation and 20% interest rates, decimating consumer confidence. Were it not for the extremely fast growth of south-south trade over the last two decades then, a development that’s continued and even accelerated since 2008, international commercial would now be at its weakest in 70 years. The emerging markets have picked up the global growth baton – not least by developing massive south-south flows – and in doing so have prevented a debilitating global slump.


This burgeoning of south-south trade loomed large when I was in Tbilisi in mid-May, at the annual meeting of the European Bank of Reconstruction and Development. “Countries within our region have recently attracted significant capital from other emerging markets,” said Sir Suma Chakrabarti, the EBRD's president.

Across the EBRD’s 36 countries of operation, stretching from Poland to Turkey and Central Asia, from the Baltics to North Africa, Sir Suma highlighted that investment and trade is being increasingly conducted with other emerging markets. “Many of our member states are now receiving inflows not just from Western Europe and North America, as they should, but also from the Gulf, India and China”, he said. “The EBRD wants to see considerably more south-south trade and investment activity where we operate, with the big emerging markets stepping up to the plate”.

During the Tbilisi summit, the EBRD was keen to point to sizeable south-south inflows even into smaller countries, not least Georgia, an economy less than one thirtieth the size of Poland. “Georgia has won considerable business from India, with both Tata and Jindal Steel & Power investing heavily,” said Sir Suma. “A new EBRD project with Tata Power of India is creating a fantastic hydro-power facility at Shuakhevi [in south-west Georgia] that will export energy to Turkey”./p>

China, of course, is the big beast in the south-south trade and investment story – to an extent that has unsettled some Western governments. “You see growing Chinese links with both Eastern Europe and Central Asia,” said Sir Suma. “The EBRD’s approach is to face reality and work with Chinese companies and the Chinese government”.

Perhaps the most important south-south trend is the growth of Chinese trade with Brazil and Latin America more generally. The natural “fit” between China’s export-focused industrialized economy and Brazilian commodities has driven bilateral trade from $6bn to $90bn during the decade from 2003, with China replacing the US as Brazil’s biggest trading partner as long ago as 2009. Cooperation between them also encompasses education, biofuels, and satellite and nanotechnology, with Brazil now a major destination for Chinese FDI.

During a visit in May, Chinese Premier Li Keqiang announced over $50bn of investment agreements – welcome news for Latin America’s largest economy, which has lately been flagging. While an $8bn deal with Brazil’s state-owned oil firm Petrobras was the centre-piece, there were also deals on airlines and iron ore, along with further infrastructure projects as Rio de Janeiro prepares to host South America’s first Olympics in 2016.

Premier Li then went on to Peru, where bilateral trade with China has burgeoned from almost nothing to a chunky $15bn in just five years. Peru is vital to Beijing, given China’s plans to bankroll a 3,500km trans-Andean railway from the Brazilian port of Santos to the Peruvian Pacific port of Ilo. Consider, also, that work has begun on a $50bn Chinese-led waterway across Nicaragua, to rival the US-built/operated Panama canal. These two infrastructure projects, while no doubt set for delays and setbacks, are now highly likely to be built.

Trade between China and Latin America as a whole exploded from barely $10bn in 2000 to $280bn in 2013. Over the last decade, the share of Latin America’s trade with the US has fallen from a third to a fifth, while the share with China has surged from one tenth to a third. And this pattern of south-south trade, with the Western world losing ground in the world’s fastest-growing and increasingly populous markets, is being repeated across the Bric economies.

China and Russia have overcome deep historic suspicions in recent years, with annual trade flows now reaching $100bn, up seven-fold since 2002. While revolving, again, around a commodities-for-manufactured goods exchange, the Sino-Russian trade axis increasingly extends to technology, defense and finance.

Then there’s the growing trade between India and Russia, with President Vladimir Putin signing a $50bn oil-and-gas agreement and $40bn of other deals from nuclear energy to fertilizers and space travel during a recent trip to Delhi. Prime Minister Narendra Modi even mooted the idea of India joining the Russo-Chinese Shanghai Cooperation Organization. That would secure India extensive trading links with Central Asia – rich, of course, in hydrocarbons and minerals.


Even China and India are adding to this south-south trade growth, despite historic enmities. While India and Russia are Cold War allies, with deep cultural and political ties, Modi’s attempts to transform relations with Beijing are more complex – not least given ongoing disputes over the Himalayan border and China’s refusal to back India’s bid to join the United Nations Security Council. Despite that, bilateral trade has swollen from $35bn to $50bn since Modi took office in 2014, and China has also agreed that an Indian banker will become the first president of the $100bn Shanghai-based BRICS bank, the New Development Bank.

Many Western observers, their knowledge limited to mainstream headlines and share indices, like to downplay the importance of emerging markets. “Decoupling” is a myth, they say – and, it’s true, global markets are increasingly correlated, not least because market sentiment everywhere is dominated by the money-printing of Western central banks.

The current lack of “financial decoupling”, though, shouldn’t detract from massive “economic decoupling” that’s happening anyway – a far more fundamental concept involving the polarization of on-the-ground commercial activity that continues apace, as the big emerging markets develop south-south trade flows that have little to do with the West.

In 2013, Chinese trade with and investment in Sub-Saharan Africa topped $200bn. That trend is now widely understood. Less recognized, almost hiding in plain sight, is the reality that the biggest emerging markets are getting their collective trading act together. Some of the recently announced Chinese-led deals and investments may not happen. And of course intra-BRICS trade certainly won’t always run smooth. But it’s already clear, to those willing to look, that south-south trade is the economic mega-trend of our time.

Liam Halligan is Editor-at-Large of Business New Europe. Follow him on Twitter @liamhalligan

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