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
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