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

1. 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

2. 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?

3. 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

4. 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

5. Simulation results: distribution of welfare gains form a worldwide removal of tariffs total US$ 68 billion Notation: South-North indicates the gains that originate in liberalisation by the South and accrue to the North

6. 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

7. Services trade flows – the South-South dimension South-South 36%

8. Services barriers – Trade Restrictiveness Index Banking

9. 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

10. 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

11. 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

12. Thank you! przemyslaw.kowalski@oecd.org nora.dihel@oecd.org