Increasing South-South trade has long been touted as a means of driving economic development in Africa and the rest of the developing world.

In the first of a two part look, TradeInvestSA identifies the barriers to South-South trade, the alliances that have already been formed and the effect of the financial crisis on the development of trade.

As the dust begins to settle from the storm of the global credit crunch, only now are the implications of the financial crisis on the developing world finally emerging.

What began as a crisis in the US, spreading rapidly throughout the West, is now affecting Africa and other developing nations, as financial aid and investment dries up, and markets close due to protectionist policies.

In an effort to combat the effect of the decline in demand for exports in the West, which currently equates to the majority of Africa’s exports, there have been calls for increased South-South trade. But is this the right path to follow?

Esperanza Durán, director of the Agency for International Trade Cooperation and Information (AITIC), says that it is, adding that increased South-South trade is one way of sustaining trade in the face of rising protectionism in the West.

“At present, in view of the financial crisis, as developed country markets seem to be closing due to protectionist pressures, South-South trade seems to be a viable alternative, if developing countries keep their markets open,” says Durán.

Dr Mills Soko, senior lecturer at UCT Graduate Schoolof Business and Founding Director of Mthente Research & Consulting Services, argues that South-South trade is something to pursue regardless of a crisis, as all markets, but perhaps developing ones most of all, have a real need to diversify.

“The credit crunch has shown us very clearly the impact that undiversified export markets can have. What we’ve seen as a consequence of the credit crunch is a synchronized catastrophic collapse of export markets,” adds Dr Soko.

Domestic barriers to South-South trade

Much of the criticism regarding trade barriers to developing nations has been levelled at the West, which stands accused of subsidising certain key industries such as agriculture and textiles to the detriment of its developing partners.

However, while this remains the case, there are also other barriers among developing countries themselves to the development of South-South trade. 

Mark Halle, global director of trade and investment with the International Institute for Sustainable Development, cautions that while South-South trade tends to be motivated by political considerations, trade itself is motivated by commercial, with an evident mismatch between the two.

“Where it makes sense to trade South-South, then this trade should be privileged.  The problem is that traders seek the best markets for their goods.  It is relatively infrequent that these markets are more favourable in the South than in the North,” Halle says.

Intra-Africa also trade remains a relatively a small part of the continent’s economic activity, accounting for just 9% of Africa’s total trade in 2007. One of the main reasons for this low level of trade is a lack of appropriate infrastructure across the continent, also known as non-tariff barriers.

“It is not so much about tariff barriers. Overall tariffs have been high, but they’ve been falling. The problem is non-tariff barriers such as poor trade facilitation problems, supply-side constraints, poor railway systems, roads, energy infrastructure and so on,” says Dr Soko.

A major issue holding back trade in Africa, particularly with landlocked countries,  is the cost of exporting goods from one African country to another, which undermines the notion of trade facilitation.

“For example, to ship a car from Abidjan to Addis Ababa costs far more (US$5000) than it does to ship the same car from Japan to Abidjan (US$1500). It’s very expensive, and it’s even worse with landlocked countries like Botswana,” says Dr Soko.

“Foreign investment can help these countries’ infrastructure problems. China has been building roads and ports in several African countries, such as Angola and the Congo. There’s a self-interest there but I think it’s a very practical manifestation of South-South cooperation, not only trade but also in development and financial cooperation,” says Dr Soko

Speaking at a trade and investment conference in Cape Town in March, Jean Louis Ekra, president of Afreximbank, said until recently South-South trade used to be dominated by commodities.

“This fact was considered the bane of South-South trade growth as it was thought that the export-import similarity brought limited complementarity necessary to drive the trade. All that changed as China, India and some others industrialized and became giant manufacturers,” said Ekra.

Building blocks in the developing world

This growth in emerging market powers also led to the formation of the Ibsa dialogue, a tripartite alliance between India, Brazil and South Africa, three of the biggest emerging powers on three developing continents.

Established in 2003, Ibsa was seen as a means of promoting South-South cooperation. The three countries agreed to work together to promote the trilateral exchange of information, technologies and skills, as well as collaborating on key areas such as agriculture, technology and climate change.

In 2007, the Ibsa forum committed itself to increasing trade flows between the three countries to more than R10.2-billion by 2010, and last year discussed the consolidation and expansion of trade among the three countries.

While complementarities have improved between some emerging markets, the problem does remain with the three Ibsa countries. Two large employers in South Africa are the textiles and automotive industries, both of which are also large industries in both India and Brazil.

Perhaps one of the biggest factors in the development of South-South trade, however, is China, given its huge growth rates in recent years and in particular its thirst for natural resources from the developing world.

Trade between China and Africa is already set to surpass the $100-billion mark this year, two years earlier than expected, following China’s insatiable thirst for natural resources from the continent.

The same may soon be true of India as well, after its government said the country was hoping to triple its trade with Africa over the next five years to $100-billion, in spite of the global financial crisis.

These efforts to continue furthering South-South trade in the face of a tough economic climate underline the strength of the emerging superpowers in the developing world, however South Africa, and the wider continent, must remain vigilant.

“President Mbeki once warned about the development of a neo-colonial relationship. We always talk about the neo-colonial relationship between Africa and the West. If we’re not careful, that could develop with China, where all we do is supply raw materials and don’t beneficiate, says Dr Soko.

Ripple effect: The financial crisis and developing countries

The financial crisis has claimed the scalps of many business leaders in the West, however the biggest effect will likely be on developing countries that don’t have the resources to cope with a prolonged downturn.

A report recently published by the AITIC on the effect of the financial crisis on least developed countries (LDCs) quoted an official of the Inter-American Development Bank as saying that the downturn in remittances will be one of the biggest impacts on LDCs.

”Remittances are the single strongest poverty-reduction tool that many countries have. This could translate into a great deal of hardship for a lot of people, which I think is underappreciated,” the official said.

Esperanza Durán, director of the AITIC, says there is little many developing countries can do to lessen the impact of the financial crisis, as the problem did not originate in the developing world. She notes, however, that one of the big problems facing LDCs is the lack of trade finance.

The deterioration in the availability of credit and access to trade finance has seriously undermined trade globally, and not just for the LDCs. Trade finance covers between 80 and 90% of global trade transactions.

The AITIC notes, however, that the lack of trade finance has been felt most acutely by large emerging market exporters such as Brazil, India, South Africa and China.

For LDCs, trade finance is often supplied by other sources such as the World Bank’s International Finance Corporation (IFC) as well as regional development banks. The IFC recently announced that it was doubling its Global Trade Finance Program to $3bn from $1.5bn.

Dr Mills Soko agrees that trade finance is one of the biggest issues currently facing developing countries in the face of the global liquidity squeeze.

“The biggest casualty (from the financial crisis) is the lack of access to trade finance, because international credit has dried up. One of the proposals that have been made for the G20 is that the World Bank should create a trade credit fund, as exporters don’t have the capital to finance their exports,” Soko says.

For an in-depth look at trade in South Africa and the SADC region, and the growing relationship between China and Africa, read our interview with Dr Mills Soko, one of South Africa’s eminent commentators on global trade.

Next month we take a look at the controversial issue of protectionism, the importance of global trade agreements and what else can be done to further develop South-South trade.