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The
future direction of South-South Trade and Cooperation is examined
by Barbara R. Kotschwar, Johns Hopkins School for Advanced International
Studies (SAIS)
The
increasing globalization and liberalization of trade witnessed over
the past few decades has been especially marked in developing economies.
The early success of the East Asian Newly Industrializing Countries
(NICs), followed by the liberalization of formerly firmly inwardly-oriented
economies which have changed their policies of import substitution
industrialization (ISI) to more liberal, export-oriented economies
has led to a trade explosion in the developed world. Many developing
economies, most notably those in the Latin American and Caribbean
region, have implemented trade policy reforms, reducing price and
exchange controls, removing export taxes and controls, and lowering
and unifying tariffs, jumping on the free trade bandwagon. This
bandwagon, however, has not proved to be always a smooth ride: resistance
to free trade in the form of nontariff barriers in the developed
countries presents a poor precedent for developing country liberalization.
Given
the decline in aid from the developed countries over the course
of the last decade, and the improbability that new markets will
develop in the industrialized world for developing country exports,
developing countries are increasingly turning towards each other.
Rather than turning toward the North, these countries are forming
intra-regional trade pacts which both encourage trade among members
as well as cooperatively foster the growth of a more stable and
trade-oriented economic environment in each country. More and more,
developing economies are joining in regional trade arrangements.
Currently, trade among the developing countries comprises about
a quarter of total world trade: in 1990 figures, south-south trade
made up $186.7 billion out of $740 billion worldwide. With the implementation
of the Uruguay Round of the GATT multilateral trade negotiations,
this figure is expected to become even smaller. According to the
World Bank, developing country non-oil exports to OECD markets covered
by nontariff barriers will fall from just over 18% to less than
4%.1 At the Group of 15 (G-15) caucus of developing countries, an
official stated that although "GATT claims to foster free trade,
the pact does not appear to extend to areas where the developing
world have an advantage such as textiles."
Developing
economies continue to face severe impediments to effective and expansive
trade, both within the international arena and among each other.
A major obstacle limiting developing countries' potential and capacity
in international trade is that many are still at a primary level
of production, and that many countries export goods similar to those
of their neighbours. Economic theory of trade is predicated upon
the principle of comparative advantage: each country specializes
in the production of a good which it can produce at a low cost relative
to other products, and to the costs of producing that same good
in other countries. By trading the good in which it has comparative
advantage, a country experiences gains, both from specialization
and exchange. One of the greatest difficulties in south-south trade
is that neighbouring countries often produce the same goods for
export. Explains Zimbabwean President Robert Mugabe, "...Zimbabwe
produces identical goods to Kenya and so it is difficult to trade
with Kenya. That is one of the major impediments to south-south
trade."
The
solution, according to Tony Hawkins, an economist at the University
of Zimbabwe, is a matter of quality enhancement and industrial development.
"What we basically need to do is improve our products if south-south
trade is to survive....".2 Prime Minister of Malaysia, Mathmir bin
Mohamed adds the importance of information sharing and cooperation.
" Developing countries should get to know each others' capabilities.
Information and contacts are very important if we are to overcome
these obstacles."3
Against
this background has emerged a "new regionalism", a move of developing
countries to gather themselves together in regional trade arrangements.
The history of regional trade arrangements is not one of much success
in the developing world with war, border conflicts, nationalistic
rivalries, policies protecting domestic producers with high tariffs,
and foreign debt obstructing attempts at integration. The new regional
integration, however, is being carried out in a climate of increased
liberalization, with integration occurring among countries which
are simultaneously lowering extra-regional trade barriers, thus
enabling countries to capture more of the benefits of trade. The
new arrangements fit with the twin objectives set out at the G-15
summit, South-South cooperation and North-South partnership, by
fostering the development of the less-developed countries within
the regions, while creating regional bodies with the latitude and
leverage to more effectively work with the Northern countries.
Trade
theory, based upon the assumptions of the Hecksher-Olin model, holds
that forming a free trade area can have both positive and negative
effects. When a small country accedes to a free trade arrangement
or to a customs union, in which the barriers to the flow of goods
and services are lowered or eliminated among members, while maintaining
external barriers to the rest of the world as a group, benefits
are gained when the price of goods imported from the members is
lower than the pre-free trade arrangement cost of imports which
included the cost of the tariff. This effect is trade-creating,
and improves efficiency within the economy. However, this is accompanied
by trade diversion, if the imports which the country now purchases
at a lower, non-tariff price, come from a country which is a higher-cost
producer than a country which is not in the arrangement. This can
be illustrated by an example. Countries A, B, and C, all small,
developing countries, enter into a free trade arrangement, lowering
or eliminating their trade barriers to each other. Previously, country
A imported automobiles from an external country, country X, at a
price of Px(1 + tariff), lower than Pc(1 + tariff), the price charged
by country C. With the removal of import barriers among A, B, and
C, Pc is now lower than Px(1 + tariff), so country A buys its automobiles
from country C. Country A gains by offering automobiles to country
A's consumers at a lower price than previously charged. Country
C will benefit by the increased demand for its exports. However,
there will be a loss to country A in the form of trade diversion:
rather than purchasing automobiles form the lowest cost producer,
country X (Px < Pc) country A will, in fact, be paying the difference
of production between country X and country C. As well, the government
will be losing the tariff revenues previously earned on imports
from country X. Logically, then, it is rational for countries to
enter into a free trade arrangement with common external tariffs
only if the lowest cost producer is a member of the union. Many
of the trade arrangements seen in Africa and Latin America do not
fit this requirement in the major categories of goods imported.
This
model, however, presents a static view of the gains from trade.
Countries may in fact join a customs union even if the short-term
gains may be negative, that is, if the trade diversion initially
overshadows the trade creation. Compelling arguments for long-term
gains from regional trade arrangements exist, which have more bearing
on the circumstances of modern-day developing countries than does
the static two-country/two-goods model of the benefits of unrestricted
trade:
- economies
of scale: the members of the arrangements gain efficiency benefits
from the enlarged market over time. Comparative advantage will
determine the establishment and development of industries within
the region. The goal of regional cooperation is to lower all trade
barriers in order that each economy is able to fully pursue its
comparative advantage, which will stimulate trade and draw in
investment. Economies of scale resulting from the formation of
the free trade region will attract new investment and help to
spur the development of the economies of the region.
- the political economy argument: a group of small countries may
be able, in the international arena, to act as a large entity
in interest articulation, especially in multilateral negotiations.
Greater engagement in the world economy by developing countries
has led to increasing levels of participation in each subsequent
round of GATT negotiations. Membership in regional blocks comprised
of countries with similar interests vis-a-vis the North gives
smaller countries' interests more of a voice in these international
negotiations.
- the
rationalization of industrialization, or the regional infant industry
argument. Small developing countries bind together their economies,
allowing substantial trade diversion, for the purpose of fostering
industrialization among their members. In a recent article published
in Finance and Development, Patrick Low and John Nash argue that
"regional integration through trade policy is an economic sideshow"4;
that regional cooperation through trade integration would be most
beneficial through spillover into areas in which unilateral action
would be more costly than cooperative. These areas include infrastructure,
education, and environmental projects.
These
arguments for regional trade arrangements, for purposes other than
the explicit promotion of the free trade efficiency goals set forth
in the traditional arguments of trade theory, will be explored in
two contexts: the first two through an examination of emerging Latin
American free trade agreements, and the third through a look at African
regional economic cooperation arrangements.
The
most vibrant example of south-south regional trade integration currently
available is Mercosul ---- the only major customs union outside
of the European Union. The Southern Common Market came into being
this year on January 1, 1995, with the beginning of a zero-tariff
trade block among Argentina, Brazil, Paraguay, and Uruguay. With
a combined population of nearly 200 million, and a combined GDP
in 1994 of around $800 billion, with exports of $61.5 billion and
$56 billion in imports, Mercosul boasts a market larger than Europe,
and the potential to capture large economies of scale, attracting
foreign investment, most notably from Japan.
Since
1991, when the Mercosul countries began to lower their tariffs with
each other, at a rate of 7% every six months, trade among the four
has grown from $2.7 billion to an estimated $12 billion a year.
Common external tariffs range from zero to 20% (averaging about
14%), and cover all but 15% of imports from the rest of the world.
Over the next ten years, as the tariff schedule becomes harmonized,
Mercosul will begin to seek harmonization in monetary, exchange,
labour tax, and other policies.
In
South America, Mercosul is largely seen as an example of how free
trade can help developing countries. According to Alieto Aldo Guadagni,
Argentina's ambassador to Brazil, "it's a catalyst for economic
reforms," in that such an arrangement spurs developing countries,
in order to be able to participate, to liberalize their economies,
increase efficiency, and open up to international competition. The
larger market, with its economies of scale, will attract greater
capital investment, which will help the area to become more competitive
in the international market.
The
Mercosul is negotiating with other Latin American countries, predominantly
Chile and Bolivia, to extend free trade across Latin America, and
eventually to enact a Latin American Free Trade Area (LAFTA).
As
well, the Andean Pact, South America's other Free Trade Area and
the Mercosul are meeting to discuss a merger.
Mercosul
has also begun trade negotiations with the European Union: more
than a quarter of the member countries' trade is with the EU. The
Mercosur countries anticipate greater bargaining power with regard
to such sensitive issues as the EU's agricultural policy, in which
all members have an interest, as a unit than the countries would
have individually.
The
infant industry argument refers to young or unestablished industries
which are unable to develop due to intense foreign competition.
Sectors, such as manufacturing, in which developing countries have
a potential comparative advantage, cannot initially compete with
well-established manufacturing in the North. Thus, the argument
is that these industries should be allowed to develop under the
protection of the government until they are able to compete internationally.
Extending this microeconomic argument to the international trading
sphere, regional trade arrangements among developing countries can
offer developing industries, or weaker countries the chance to develop
underneath the umbrella of the larger trade organization. The same
caveat applies here as in the nation-level argument: protection
must end as soon as the sector, or the nation, is able to viably
perform. The rationale for this sort of cooperation and protection
within the African case is the same externalities argument made
in trade theory to justify the protection of an industry: protection
may be justified when a public good exists for which the initial
investors may not be able to directly regain their initial investment.
The argument is as follows: the development of the Southern African
region is good for all of the members. The weakest members are initially
unable to provide the investment which could stimulate their development,
and the larger economies would be unwilling to make the investments
in these economies which could, in the longer run, prevent negative
externalities, such as conflict, immigration of unskilled labour,
environmental degradation, and ineffective use of common resources.
As balanced development benefits all, a cooperative south-south
free trade area with a protective barrier to the rest of the world
could stimulate the development of the weaker sectors and members
in order to promote the growth of profitable foci of comparative
advantage in the long run.
In
Africa, regional trade arrangements are evolving which posit communication
and coordination as a priority for regional cooperation. The Preferential
Trade Area of Eastern and Southern Africa (PTA), which is undergoing
a ratification process to become the Community of East and Southern
Africa (COMESA), is a market of 300 million people, and includes
the large economy of South Africa. The goal of this group is to
break the traditional links which bind developing exporters exclusively
to developed country markets and promote cooperation and capacity
among the nations of the region based upon shared goals and characteristics
(for example, a common need for hard currency).
Also
affiliated with the PTA, the Southern African Development Coordination
Committee (SADCC) was originally created by the nine independent
Southern African countries in 1980 in opposition to South Africa.
Upon formation, the SADCC joined the PTA, with the assertion that
building infrastructure and cooperation in the agricultural sector
is basic to creating trade. Renamed the Southern African Development
Community (SADC) in 1992, this body, to which South Africa formally
acceded last August, was organized to deal with problems of equitable
industrial development as well as trade. Bearing in mind previous
failures of regional integration efforts in Africa, the framers
of the SADCC called for a 'development integration' approach, in
which close political cooperation runs in parallel with economic
integration, smaller members are compensated for transactions which
may adversely affect them, and trade strategies are predicated on
regional industrial planning.5 Another major component of the SADC
is conflict management and negotiation of political and economic
disagreement. Fears on the part of its neighbours that South Africa's
global reemergence would divert aid and investment from its economically
weaker neighbours have been allayed by the South African government,
which has placed regional cooperation on the forefront of its agenda.
The
premise of the SADC is to establish competitive, export-oriented
industries in the region through the establishment of a regional
trade treaty which will ultimately allow the free movement of goods,
services, and capital across all member states. SADC's pursuits
are predicated on the principle that effective cooperation occurs
when national interests coincide with regional goals. All members
of the integration arrangement benefit from natural resource mobilization,
cooperative agricultural research, and training. Regional integration
through the SADC will occur through the stimulus of economies throughout
the region, not through the favouring of the most competitive sectors
or countries. In response to worries about the effects of South
Africa's membership on the weaker economies, spokesman Kgosinkwe
Moesi stated that "...you must bear in mind that with the SADC approach
to integration, the interests of the weaker countries will be taken
care of."6
In
order for the regional cooperative institutions of the PTA (to become
COMESA) and the SADC to work effectively, however, caution must
also be taken that the two do not begin to compete. The SADC's initiation
of sectoral promotion and project coordination should guide this
aspect of integration, while the PTA should continue with its mandate
of setting the agenda for trade, guiding the economies of the area
toward liberalization and the evolution of a balanced common market.
The
new approach to regional integration and cooperative development
holds that short-term efficiency losses will be more than compensated
by the longer-term strengthening of the economies of the region,
which will ultimately benefit all. Rather than initiating regional
integration efforts based upon traditional free trade theory of
static efficiency gains, developing countries have begun to enter
into wider and deeper development efforts based upon trade expansion,
with a view to enhancing the benefits for all members. This shift
away from individual static gains means that the focus of these
regional trade arrangements will be first on investment in production
and infrastructure for the region, and second on the liberalization
of trade. Through South-South cooperation within regional trade
regimes, less-developed countries can in the long-term increase
their welfare by developing appropriate infrastructure in areas
such as transportation, communication, and finance which could foster
the international competitiveness of the developing economies on
an international scale. The new wave of regional integration offers
a hope for a more long-term and more balanced progression toward
economic development for the member countries. Despite the criticisms
of traditional trade theory regarding South-South free trade areas
and customs union, the alternative, given the current international
system, of inward orientation, offers no superior solutions.
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