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South-South Trade as a Source of Developing Countries’ Gains

Nora Dihel (OECD), Przemek Kowalski (OECD) , Felix Eschenbach (Sciences Po) and Ben Shepherd (World Bank)

OECD Global Forum on Trade: A trade policy dialogue on the multiple dimensions of market access and development

Mexico City, 23-24 October 2006

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Overview

What is the magnitude and development potential of South-South trade?

Is South-South trade subject to higher barriers?

What are the gains from South-South trade?

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South-South Goods Trade: Motivation & Background

North-South trade– Comparative advantage– Technological spillovers– Size of Northern markets

South-South trade – Economies of scale and product differentiation – High rates of growth & high trade barriers– Way of breaking into North’s markets for more advanced products

WTO negotiations– Aligned along the North-South divide– Search for derogations from rules and commitments by some

countries in the South Methodology for modelling South-South goods

trade

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South-South Goods Trade: econometric results in a nutshell

Impact of tariffs and distance most negative for trade amongst Low and Lower-Middle Income countries

Policy barriers are more important for South-South trade than for other trade flows– 10% tariffs decrease: 1.6% increase in exports

Growth in South-South trade over the 1985-2002 period not driven by the “death of distance”

Geographical distance tends to impact South-South trade more strongly – 10% distance increase: 10% decrease in North-North trade– 10% distance increase: 17% decrease in South-South trade

Conclusion: considerable scope for reductions in protection and trade costs to bring about further growth in South-South trade

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Simulation results: distribution of welfare gains form a worldwide removal of tariffs

North-North14%

North-South30%

South-North28%

South-South28%

total US$ 68 billion

Notation: South-North indicates the gains that originate in liberalisation by the South and accrue to the North

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Other simulation results

More than 50% of gains from South-South tariff liberalisation captured by developing Asia

68% of the gains from South-South liberalisation in Asia are realised on a regional basis

Exception: China gains more than double as much from liberalisation of trade with Latin America, MENA and Sub Saharan countries

In Latin America and Sub Saharan Africa the regional gains account for 45% and 39% of gains from South-South trade

Conclusion: only a part of gains from South-South trade could be realised through regional agreements, mainly in Asia

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Consumption abroad (Tourism statistics)

North-North57%

South-South20%

North-South9%

South-North14%

Cross border trade and consumption abroad (BOP statistics)

South-North13%

North-North63%

North-South14%

South-South10%

Commercial presence(FDI data)

Services trade flows – the South-South dimension

South-South 36%

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Services barriers – Trade Restrictiveness Index Banking

0.00

0.50

1.00

1.50

2.00

2.50

3.00

ASIA MENA and Africa LATIN AMERICARUSSIA AND SEE BALTIC

STATES

OECD Average 0.29

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Impact of removing services barriers on South-South services trade

Effect of distance on services trade appears less strong than for goods trade

Trade in services increases across all sectors following relaxation of restrictions on foreign establishments

Same determinants of services trade intensity apply to South-South and other types of flows

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Impact of services liberalisation on goods exports

Two-stage link between (i) service sector openness and performance and (ii) service sector performance and goods exports

Performance of backbone services sectors positively associated with total goods exports in developing countries

The impact of services liberalisation on performance increases more than proportionally with the scale of the liberalisation measure

Not enough to liberalise moderately to achieve an impact on performance if initial degree of restrictiveness is high

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South-South Services Trade: Main Conclusions

Services trade between developing countries takes place predominantly at the regional level for all modes of supply

Barriers for numerous developing countries are well above the OECD average in banking, insurance, telecommunication, distribution and engineering

Little evidence of systematic differences between South-South and other types of services trade

If services sectors are closed to foreign competition, the improvement of their performance requires a major rather than a small or moderate liberalisation effort

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Thank you!

przemyslaw.kowalski@oecd.org

nora.dihel@oecd.org