Trade in a changing world market
By Shahid Javed Burki
Monday, 27 June, 2011
THOSE who have been arguing that the centre of the global economy is moving from the Atlantic to the Pacific normally focus their attention on the sharp differences in the rates of GDP growth between today’s rich countries and those that have been classified as “large emerging economies”.
After the global economy began to recover from the Great Recession of 2008-9, the rates of economic growth for the BRICS picked up to the levels they had attained before the downturn. However, recovery in the developed world has remained sluggish. Some economists have begun to talk about the possibility of a double dip recession of the type that hit the global economy in 1981, some 30 years ago.
These differences in the rates of economic growth have meant that the bulk of the increase in global product is being produced by the emerging world. With this being the case, the share of the BRICS in global GDP is increasing rapidly. Already China has passed by Japan and become the second largest economy. Some analysts including those working at the IMF believe that within a decade to a decade and half, China will overtake the US and become the world’s largest economy.
While the size of the economy and the share in global product matter, what is even more significant is the development of new trading relations among the more rapidly growing economies. This is happening around the globe and we are approaching the time when the emerging markets will do more trade among themselves than with the United States, Europe and Japan — the three centres of the old economy.
“The greatest show on earth is happening elsewhere: the creation of a southern Silk Road, a network of new ‘SouthSouth’ trading routes connecting Asia, the Middle East, Africa and Latin America,” wrote Stephen King in a recent article. He is the Chief Economist of the HSBC group, a bank that has a large stake in emerging markets, and the author of a recent book, Losing Control: the Emerging Threats to Western Prosperity.
China and now increasingly India are at the centre of the new trading links that are being forged around the globe. While the West would like to use India as a check on the economic rise of China, the Indians have no problem in linking up with China to take advantage of the enormous economic power of their large neighbour. China is now India’s largest trading partner having displaced the United States from that position. The same change has occurred with respect to China’s economic relations with Pakistan, South Asia’s second largest economy. Once again China has replaced the United States as the most dynamic trading partner for Islamabad. Both India and Pakistan are China’s immediate neighbours and the commonly used “gravity model of trade” tells us that large countries that share borders or are not very far from each other should do a great deal of trade with one another.This has begun to happen in the Asian Mainland.
But distance is not discouraging China to develop new trading relations. It is jumping the oceans to get close to Latin America and Africa. These two continents have the natural resources that the Chinese need in order to sustain their present high rate of growth into the future. Brazil is an interesting example of the change that is occurring in the global pattern of trade. For the moment 42 per cent of its trade is with the developed world, another 22 per cent with the countries in Latin America, and the remaining 36 per cent with the rest of the world.
If the present trends hold, it is the last of these three patterns of trade that are set to increase significantly, outstripping the trade with the developed world. By the middle of this century, the share of the intercontinental South-South trade in Brazil’s total is likely to be more than 50 per cent. Most of this increase will come from the decline in the share of the old economies.
Increase in commerce brings other changes. Not only are the large emerging economies looking at each other as potential markets.They are also developing other kinds of relationships. Chinese tourists have begun to travel to Africa and Latin America and see the parts of the world that was not within their reach a few years ago.
New air connections are being made practically every day. Qatar Airways, one of the most rapidly expanding airlines in the world now has more destinations in the emerging world than in Europe and the United States. At the recent air show in Paris, airlines from emerging economies were far more active customers than the carriers from the Western world. A private sector airline from India placed one of the largest orders in aviation history for the purchase of planes manufactured by Europe’s Airbus.
Firms based in the large emerging markets have begun to acquire assets in other countries. For instance, the second largest merger and acquisition deal in Brazil last year was between two oil companies from China and Brazil — China’s Sinopec concluded a $7.1 billion deal to acquire a large share in Brazil’s Repsol-YPF.
When nations develop close economic relations they also establish institutional infrastructure to iron out the wrinkles that may arise. The creation of the Breton Woods system in 1946 following the defeat of Germany and Japan was meant to provide an institutional underpinning for minding the evolving relations among the victors.
However, as the struggle over the choice of the new head of the IMF amply demonstrates, well established clubs don’t like to give management positions to new members. The job is likely to go to the woman who is currently the foreign minister of France. Realising that old institutions will be hard to break into, China and other large emerging economies have begun to create institutions of their own from which the old world is being excluded.
BRICS are holding regular summits; the Shanghai Forum does not have the West represented.That said, this approach should not be seen as replicating the Non-Aligned Movement and the G77 when a group of countries not willing to be associated with the major powers, developed relations among themselves that kept them out of Cold War. This time the effort is not to exclude large powers but to create an institutional base that will help these countries to build firm economic relations within their own ranks.
Trade in a changing world market