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

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? 1. Measurement issues Services trade flows – the South-South dimension 2. GATS commitments Barriers to trade in services: differences between developing and developed countries 3. Impact of removing services barriers on South-South services trade using a gravity model Impact of services liberalisation on goods exports

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 The main objective of the research on SS trade in goods as well as services is to understand the evolution of this trade and to assess the benefits of SS liberalisation. Economic (and in particular trade) theory is helpful in thinking of SS trade as compared to NS and NN trade but its different strands often contain conflicting predictions that have to be verified empirically. For example the neo-classical trade models predict gains from trade among economies that are different in some respect – e.g. in technology (Ricardo) or their endowment in productive factors (HOS). This suggest a higher potential for gains to accrue from North-South trade. There is also the plausible argument that it is through North-South trade that technology is being transferred and this is where the gains from trade for southern countries are highest. Last but not least the sheer sizes of the Northern markets indicate that even removal of small distortions could have large impacts on countries in the South. Gains from South-South trade may more easily seen in the contributions of new trade theory which based on assumptions of increasing returns to scale however predicts that trade between relatively similar countries will occur and bring about gains. Additionally, the high rates of growth of some less developed countries and indeed the expansion of SS trade observed in the data suggest that in fact Southern markets matter more and more as destination markets for other Southern markets and the potential of the reform of SS trade policies is increasing. Finally, there is an argument that SS trade may be a necessary step for Southern producers to learn by doing and break into the more competitive markets of the North. In all this there is also a question of whether services in the context of SS versus NS debate. Services has got certain distinguishing characteristics, notably very often the requirement for factor mobility (mode 3 and 4). This does not mean that the same economic theory cannot be applied to services trade but rather that these factors suggest. Finally the policy motivation for this work is to assess what may be at stake with different scenarios regarding the agreed depth of liberalisation the countries in the South.

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 The paper on SS goods employs two main types of methodology. First, a gravity type analysis is employed to study the past trends in SS trade. They are reported in detail in the paper and the previous version of these findings has been presented to the working party of the trade committee last autumn. Distance related trade costs – transport costs have not significantly increased and still have a comparatively greater impact on South-South trade than on North-North trade. This is contrasted for example with the impact of common language where we find statistical evidence for increasing importance of common language for South-South trade flows.

Simulation results: distribution of welfare gains form a worldwide removal of tariffs total US$ 68 billion North-North liberalisation accounts for around 14% of the global gains. The North can gain twice as much—approximately 28% of global welfare gains—from liberalisation by the South. Approximately 57% of global gains from tariff removal accrue to countries in the South of which as much as half (28% of global gains) are obtained from South-South liberalisation. South-South tariff liberalisation is indeed at least as important a scenario for the countries in the South. The scenario of complete removal of tariffs worldwide results in total welfare gains of approximately US$68 billion of which around US$29 billion accrue to countries in the North and approximately US$39 billion to countries in the South. Gains from liberalisation of manufacturing amount to 33 billion and interestingly the bulk originates from liberalisation in the South. Gains from agricultural tariffs amount to 35 billion and the bulk is generated in the North. Notation: South-North indicates the gains that originate in liberalisation by the South and accrue to the North

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

Services trade flows – the South-South dimension 36%

Services barriers – Trade Restrictiveness Index Banking

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

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

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

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