With the formation of new trade and capital market connections between the nations of Asia and the Southern hemisphere, South-South trade growth is about to become turbocharged…
7 Jul 2011:
As the US fades, emerging nations trade
Knowing that China, India and other emerging nations are growing quickly is not enough to understand fully the revolution taking place in world economic affairs. We are witnessing the creation of new economic and financial connections that will fundamentally change patterns of economic endeavour around the world.
Today, it’s the US but, in twenty or thirty years’ time, China’s biggest trading partner might be India. Brazil and Russia, in combination, will likely be threatening to overtake the US as important destinations for Chinese exporters. And it’s not just China’s relations with its trading partners that will re-shape the global economy. The scope for India, Brazil and Russia to trade with each other is big enough to eclipse trading relations with the US and Europe. And what’s true of the BRICs is also true at the continental level: we believe linkages between Asia, Latin America and Africa are set to expand at an exponential rate.
As South-South trade picks up, so should South-South capital flows, undermining the US dollar’s reserve currency status and fostering the development of major new financial centres, notably in Asia.
Changes on this scale would be truly remarkable, taking us back hundreds of years to when world trade was centred not on Europe and North America but, instead, on Asia and Africa.
Yet, today, China, India, Brazil and Russia account for only a fraction of each other’s trade. So how can we make such claims with any degree of credibility? Recent history provides part of the answer. In the 1950s and 1960s, rapid growth in what is now known as the developed world was not just a story about post-war reconstruction. Expansion was also, importantly, driven by the opening up of trade between nations. While the 1970s provided an awkward interruption, the 1980s and 1990s provided a second leg to the story, this time supported by the free flow of capital across borders. These “new connections” led to turbocharged growth in developed world trade.
The same patterns of turbocharged growth are now within reach for the emerging nations. To date, their growth has been unusually dependent on exports to the developed world. The western nations, however, are simply not growing fast enough to enable this model to be sustained. If the emerging nations are ever going to experience living standards approaching those now taken for granted in the developed world, they will increasingly have to trade with each other.
Dismantling the barriers
To a degree, it’s already beginning to happen. India and Brazil export more to the emerging world than they do to the developed world. China is, slowly, heading in the same direction. But there are huge hurdles in the way, notably the existence of thick “economic borders” throughout the emerging world.
Tariffs, restrictions on migration, linguistic variations, conflict and disease all reduce the opportunities to trade. The open relationships taken for granted in the developed world are still but a distant dream across many parts of the emerging world. If economic borders remain “thick”, south-south trade will struggle to take off. Yet the incentive to change is enormous. By reducing the chances to trade with the rest of the world, thick borders discourage capital inflows, keep people trapped in rural poverty and leave economies persistently underperforming.
So far, those emerging nations which have opened up have done so either internally (allowing economic linkages between regions to expand) or by connecting with the developed world. Only if they can connect with each other will emerging nations be able to turbocharge their own economic futures.
New linkages
To do so, they’ll need to expand their infrastructure linkages. China shows what can be achieved. Today, mainland China accounts for five out of the world’s top ten container seaports. Twenty years ago, there wasn’t a single Chinese port in the top twenty.
China’s physical ability to connect with the rest of the world has been instrumental in driving its own economic development. It also underscores an important change in political attitude. China’s economic development over the last thirty years has only been possible by encouraging some areas to grow much more quickly than others: neither China nor the Soviet Union would have willingly tolerated such regional inequality under earlier regimes.
Elsewhere in the emerging world, however, linkages remain fragile. Outside Asia, only four container seaports are in the global “top 50”: three of those are big only because they happen to be at one end or the other of two of the world’s most impressive man-made waterways: the Suez and Panama Canals. That’s all beginning to change. Beyond shipping, new linkages are taking hold via rail, air and the electronic ether. Indeed, growth of air travel (passenger and freight) and telecoms will increasingly be dominated by the emerging world in the years to come: incomes per capita across the emerging world have now reached levels where transport and communications demand should surge.
Chasing cars
Relative to other emerging nations, both China and India have the huge advantage of size. Like the US before them, they have the opportunity to create massive internal markets. These markets will work best if the products on offer are appropriate for people on low incomes compared with levels more typical in the developed world. And, as those internal markets develop, so the opportunity to sell the same products to people in other emerging nations will only increase.
Car production provides a fabulous example. Cars in the developed world have become bigger and heavier over the last thirty years partly because their occupants have become bigger and fatter and partly because of enhanced safety requirements. The Chinese and Indians are, on average, shorter and a lot lighter than their developed world cousins and even the simplest car represents a step-up in terms of
safety for the Indian family previously perched precariously atop a moped in downtown Mumbai. Chinese and Indian car companies are, thus, building small and cheap cars appropriate to their domestic markets. By implication, they are also building cars that can be sold elsewhere in the emerging world.
It’s no coincidence, for example, that Chery, a major Chinese car producer, now has 16 production facilities in foreign markets including Russia, Ukraine, Egypt, Iran, Indonesia, Uruguay and Brazil, not countries renowned for their high per capita incomes.
Joining up the dots
South-South trade won’t take off automatically. It needs to be nurtured, most obviously through state interventions of one sort or another. Yet these interventions may lead to unexpected dividends for the countries involved.
Seeking to protect its Middle Eastern energy supplies, China is investing heavily – both politically and financially – in the construction of major ports in Pakistan, Myanmar and Bangladesh (the so-called “string of pearls”). By doing so, China will be able to expand its naval presence in the Indian Ocean, raising big questions about a potential shift in both regional and global power. At the same time, however, the construction of ports will also create opportunities for some of the poorest nations in Asia to trade more easily with the rest of the world.
While China’s deep pockets of savings have been mostly invested in pieces of US dollar paper, the opportunity to invest China’s savings in other parts of the emerging world is increasing rapidly, helped by China’s thirst for a wide range of raw materials. Proposing the funding and construction of a railway across Colombia is but one example of China’s rising interest in Latin America and, indeed, Latin
America’s rising interest in China. Similar projects are taking place in Africa, recreating the linkages that made Mogadishu and Mombassa centres of world trade a thousand years ago. India, like China, is busily acquiring Western assets replete with technologies which can be “downloaded” into domestic production platforms: Tata’s acquisition of Jaguar is but one of many examples.
As these (sometimes state-sponsored) trade and capital flows increase, so the financial oil that lubricates their growth will change. While the US dollar will remain the world’s pre-eminent currency for the foreseeable future, we see every reason to believe that South-South connections may be funded in other currencies, most obviously the renminbi. This is likely to go hand-in-hand with the development of new capital markets: if, over the last twenty years, China has managed to develop huge physical infrastructure, the next twenty years are likely to see the massive growth of China’s financial infrastructure.
The missing link
South-South trade is the missing link in the global economy. If the dots can be joined, we may be on the verge of an economic revolution. Admittedly, things may still go wrong. China and India may regard each other as rivals rather than partners. Nations in Latin America and Africa may view China’s involvement in their affairs as a form of economic colonisation rather than as a mutually-beneficial relationship. Commodity producers may find their currencies driven ever higher as “southern capital” pours in, reducing their ability to diversify into manufacturing and services. Conflicts are still, sadly, a regular occurrence in Africa and Asia even as they have fallen away in the developed world. Nevertheless, the opportunity is there. If connections can be established, the global economy has the potential to deliver outstanding performance in the years ahead even if the developed nations play only the most negligible of roles.
That, however, would be fitting: the Southern Silk Road is no more than a modern day incarnation of the original Silk Road, signalling the return of the world economy’s centre of gravity to its origins.
Read the full report here