South-south trade flows come of age

Despite pessimism over global growth prospects in recent years, increasing trade flows is a reason for cheer.

In 2012, global trade figures reached $18 trillion, according to the United Nations Conference on Trade and Development (UNCTAD) Handbook of Statistics 2013. Of this sum, $4.7 trillion comprised trades between two given emerging market (EM) nations, termed as south-south trade.

While making up only a relatively small portion of all trade, south-south trade looks set to be a more important part of global flows. Figures from Standard Chartered forecast that by 2030 the south-south corridors will account for 40% of global trade flows, up from the present level of 18%.

EM flows are potentially the driving factor for global economic growth in the coming years.

The widely held perception of south-south trade is that it still needs to have a cross-continental slant. The flows of trade between Asia and Africa is a well-documented trend, but it is not the only direction which south-south trade can take.

As trade channels grow within continents, the strength of the intra-regional corridors is increasing. The Latin American market presents a strong case in point, and a direct route to Asia.

Juan Pablo Cuevas, head of global transaction services for Latin America and the Caribbean at Bank of America Merrill Lynch, says: “Across the region there are a lot of natural resources, minerals, fuels and metals. There are some manufacturers, such as large consumer electronics companies, exporting from Mexico. There is a lot of foreign direct investment into Peru and Argentina.”

The emerging middle classes and their demand for consumer goods is also helping manufacturing firms, whether they are producing electronics or apparel. Trade levels have been slowly on the increase for several years – up from 22% of international trade levels in 1995 to 30% in 2012, according to the UNCTAD handbook.

“Latin America suffered less than other areas in the crisis,” says Cuevas. “Yes, it is still emerging, but over the last six years has seen a 4% growth rate – far higher than the rest of the world.”

The Pacific Alliance has brought together the Latin American nations and allows for the free flow of trade and labour, and intra-national immigration. Comprising Mexico, Chile, Colombia and Peru, the group works together in a combined effort for the expansion of the four-member nations.

Across Latin America and the Caribbean, the group accounts for 36% of GDP, and a combined population of 212 million.

As Cuevas points out, the region is perfectly placed facing the EMs of Asia, as well as the developed countries of Australia, Japan and South Korea, to pick up the trade flows. And the flows are not just related to natural resources coming out, as manufacturing is also heading to the continent in search of the best-value labour costs.

“There is manufacturing in Mexico that is coming a back from Asia. China is no longer the cheapest place for labour,” says Cuevas.

The emerging nations are also looking for ways to expand their economies and support their own exporter base without having to look to the western nations for financial assistance.

The Brics nations of Brazil, Russia, India, China and South Africa have joined together to create the Brics Bank, a development bank to rival the World Bank and provide a strong focus on supporting their member nations.

However, the sums the bank has to offer initially are reasonably small at $50 billion – and rising to $100 billion – compared with the $232 billion the World Bank can provide. And as Cuevas notes, only time will tell if this new financial institution proves to be anything more than political.

Yet the importance of trading with emerged economies will not disappear any time soon. Cuevas notes that Latin America’s trade routes with the US are still one of its most essential corridors, and as the country’s economy returns to full strength, more exporters across the continent will be looking to see how they can capitalize on the demand for their products.

He also notes this exposure to the American market means a large portion of trade is conducted in dollars, reducing the risk of volatile currencies and fluctuations in foreign-exchange rates.

While trade will need to become more broad-based across south-south corridors to reach its forecast $33 trillion target in the next six years, maintaining the existing flows between the developed nations, and the north-south flows, will still be essential for global growth.