South-South trade

South-South trade: Vertical Division of Labor and Extensive Margin of Trade

South-South trade: The Gravity Puzzle

South-South trade (SST) refers to trade between developing countries,which represent a limited share of theworld economy in terms of supply capacity and markets. Trade between developing countries has been steadily limited despite the supposed gains associated with bettermatching of supply and demand characteristics and easier access due to less stringent standards, which should promote regional integration. Contrary to the common perception, however, in recent years SST has been a major contributor to the growth ofworld trade.Trade between developing countries accounted for 18 percent of world trade in 2005, an increase of 5 percentage points within five years. In contrast, the share of North-North shipments in world trade has been reduced by 5 percentage points over the same period.

China is the most prominent country in this regard. On the import side, China has become in 2005 the second largestmarket for exports fromthe South behind the United States, but ahead of Japan or Germany. Moreover the pace of growth is impressive, with a 232 percent increase of Chinese imports from other developing countries within five years, excluding oil. Besides China, a series of developing countries contribute to SST by offering buoyant markets: essentially Asia (Hong Kong, Singapore, Korea, Taiwan,Malaysia, Thailand, India, etc.) and Mexico.

Still, a large number of developing countries have been missing this general trend, in particular the least-developed countries, and a key pattern of the recent increase is that it has been very unevenly distributed among countries in the South. The sectoral pattern of exports very much reproduces the general pattern of specialization of the developing countries. It does not come as a surprise, therefore, to seeChina importing natural resources from other developing countries.

Explanations of a deficit of South-South trade (SST) range from geography, institutions, and trade costs to the difficulty of pursuing regional integration in the South. The asymmetric nature of trade liberalizationmay have played a role too: preferences have been conceded by the North on a nonreciprocal basis, without requesting access tomarkets in the South. This approach has made it more appealing for the South to trade with the North than with the South (Boue¨t, Fontagne´, and Jean 2006).

See also gravity models; Mercosur; North-South trade; trade and economic development, international

FURTHER READING

• Anderson, James, and Eric van Wincoop. 2003. ‘‘Gravity with Gravitas: A Solution to the Border Puzzle.’’ Amer ican EconomicReview93 (1): 170 92.The seminal paper regarding the right formulationof the augmented gravity equation.
• Baier, Scott L., and Jeffrey Bergstrand. 2006. ‘‘Do Free Trade Agreements Actually Increase Members’ Inter national Trade?’’ Journal of International Economics 71 (1): 72 95. Correctly addresses endogeneity issues in assessing the trade impact of PTAS.
•  Boue¨t,Antoine, Lionel Fontagne´, and Se´bastien Jean. 2006. ‘‘Is Erosion of Preferences a Serious Concern?’’ In Agri cultural TradeReformand theDohaDevelopment Agenda, edited by KimAnderson and WillMartin.Washington, DC: Oxford University Press and The World Bank, 161 92. First exhaustive examination of the impact of conceded preferences, using detailed data.
• Cheptea,Angela,GuillaumeGaulier, and Soledad Zignago. 2005. ‘‘World Trade Competitiveness: A Disaggregated View by Shift Share Analysis.’’ CEPII Working Paper 2005 23. World trade at a glance for some 5,000 products.
•  Coulibaly, Souleymane, and Lionel Fontagne´. 2006. ‘‘South South Trade: Geography Matters.’’ Journal of African Economies 15(2):313 41.Derives andestimates a model highlighting the impact of geography and in frastructures on bilateral trade flows within the West African Economic andMonetary Union.
• Feenstra, Robert C. 1998. ‘‘Integration of Trade and Dis integration of Production in the Global Economy.’’ Journal of Economic Perspectives 12 (4): 31 50. How the value added chain is decomposed internationally.
• Fontagne´, Lionel, and Soledad Zignago. 2007. ‘‘A Re Evaluation of the Impact of Regional Agreements on Trade Patterns.’’ Economie internationale 109: 31 51. Estimates the impact of regional agreements using a panel of 135 countries trading in 26 industries over the period 1976 2000.
• Francois, Joseph, Hans vanMeijl, and Frank van Tongeren. 2005. ‘‘Trade Liberalization in the Doha Development Round.’’ Economic Policy 20 (42): 349 91. The round from a development perspective at a glance.
• Hummels, David, Jun Ishii, and Kei Mu Yi. 2001. ‘‘The Nature and Growth of Vertical Specialization inWorld Trade.’’ Journal of International Economics 54 (1): 75 96. Quantifying the role of trade in intermediate goods in the observed world trade growth.
•  Hummels, David, and Peter J.Klenow. 2005. ‘‘TheVariety and Quality of a Nation’s Exports.’’ American Economic Review 95 (3): 704 23. Do countries allocate their new resources to increase the quantity of exports of existing products or to enlarge the portfolio of their exported products?
• Martin, Philippe, Thierry Mayer, and Mathias Thoenig. 2007. ‘‘Make Trade not War?’’ Mimeo. Paris School of Economics. Available at http://team.univ paris1.fr/ teamperso/martinp/war april2007.pdf. New evidence explaining why globalization has not lived up to its promise of decreasing conflict.
•  Mayer, Thierry, and Soledad Zignago. 2005. ‘‘Market Ac cess in Global and Regional Trade.’’ CEPII Working Paper 2005 02. Border effects, the direction of trade flows, and the trade impact of PTAs.
•  Melitz, Marc J. 2003. ‘‘The Impact of Trade on Intra Industry Reallocations and Aggregate Industry Produc tivity.’’ Econometrica 71 (6): 1695 725. The seminal paper distinguishing between intensive and extensive margins of trade.

LIONEL FONTAGNE