Introduction

The discussion on promoting South-South trade dates back to the 1940s, when the development of countries emerging from the colonial era began to gain importance as an international policy objective. Efforts to promote trade amongst developing countries surfaced during the drafting of the Charter of the International Trade Organisation (ITO), when participating developing countries pushed for a clause that would allow them to deviate from the principle of Most-Favoured Nation (MFN) in order to agree to preferential tariff rates with each other. These efforts ended with the collapse of the ITO in 1950, but the discussion picked up pace during the 1960s and 1970s as measures to rebalance the trading system in favour of developing countries were pursued more vigorously at the regional and multilateral levels.

Since the start of the millennium, the emergence of new growth poles in the South, along with a fledgling political architecture at the regional (such as UNASUR in Latin America and an expanding ASEAN in South East Asia) and cross regional (such as the BRICS, IBSA and the China-Africa Forum) levels, has helped rekindle interest in South-South cooperation. The global financial crisis in late 2008 added to this momentum. Advanced economies have found it difficult to shrug off the fallout from the crisis with growth prospects damaged, on some estimates, for a decade or more. By contrast the major economies in the South, in particular China and a number of dynamic medium-sized economies, bounced back quickly (though not fully) from the initial shock, further consolidating their position in the world economy.

As a result of these trends, the case for promoting South-South trade and investment as a means of maintaining growth momentum in developing countries has become a focus of the international development policy debate. Indeed, for the first time, policy makers in advanced countries have begun to see South-South cooperation in a more positive light, partly as a means to correct persistent global economic imbalances, but also as a way to shift some of the burden of global governance which is stretching budgets in these countries. However, the preferred policy agenda they attach to South-South cooperation owes little to the one outlined by Prebisch, Lewis and other early development pioneers and is instead heavily focussed on a further push towards market opening and private sector development through more rapid liberalization (often in the form of regional and bilateral agreements) and increased participation in global value chains (GVCs).

This agenda has been promoted as part of a “great economic transformation” in the global economy, away from a world in which trade took the form, primarily, of finished goods between countries towards a new “21st century world” involving the continuous, two-way flows of things, people, training, investment, and information within GVCs organised by transnational corporations (TNCs).

Analysis of these two-way flows and their impact has been hampered by data limitations from a reporting system designed at a time when countries were trading predominantly in final goods. UNCTAD offered a seminal analysis in its Trade and Development Report 2002, using revisions in the SITC statistics which made it possible to distinguish between trade in final goods and trade in parts and components for some sectors, notably machinery and transport equipment. However, parts and components are only one element of network trade associated with GVCs, which also includes final assembly and service activities. Moreover, the relative importance of these tasks varies among countries and over time in a given country, making it problematic to use data on the parts and components trade as the only indicator of the trends and evolving patterns of network trade over time and across countries. More recently, the WTO and the OECD have produced a dataset (for 57 countries, 18 industries and for selective years since 1995), to address some of these statistical weaknesses and anomalies by separating out the domestic and foreign value added contained in imports and exports.

These data issues, though important, are not, however, the real challenge when it comes to the discussion of GVCs, trade and development. The earlier UNCTAD research already showed that the success of many developing countries in expanding their manufacturing exports and improving their share in world trade, including in what appeared to be more sophisticated products, could not be taken at face value. This was because for many high and medium technology goods produced in GVCs, most developing countries were still only engaged in low-skilled labour intensive assembly activities. Thus the apparent technological "leapfrogging" by developing countries attributed to their participation in GVCs was largely a statistical mirage. That research also showed that the heavy reliance on imported inputs that accompanied that participation did not necessarily bolster value addition or incomes, and consequently that a country’s growing share in world manufacturing trade did not necessarily imply a corresponding increase in its share of world manufacturing output and income. Important differences amongst developing countries were also uncovered regarding the relation between manufacturing trade and value added, reflecting differences in how they had managed their integration into the global trading system. This was illustrated by a comparison of South Korea and Mexico, both of which experienced rapid growth of trade in manufactured goods (from the early 1980s and early 1990s respectively). In the former, however, growth was stronger for exports than imports and was accompanied by very strong growth in manufacturing value added. In the latter by contrast, growth in manufacturing value added was negligible compared with the surge in (particularly) imports and exports.

Building on previous UNCTAD research, this study examines trends and patterns of South-South trade over the last decade linked to GVCs. Its findings confirm much of the earlier analysis. However, there are some new, or at least more visible, trends that have emerged over the last decade and have impacted international production and South-South trade, including the growing influence of financial markets on the real economy (“financialization”), and the emergence of China as the world`s leading export economy. There has also been strong growth performance across the developing world, which began after the recovery from the dotcom crisis of 2000, and continued after the financial crisis of 2008, albeit at a slower rate than prior to the crisis.

The study begins with an analysis of the links between trade, industrialization and the evolving international division of labour. Contrary to much recent analysis it emphasises the longstanding nature of the economic forces behind GVCs and the familiarity of the challenges they pose to policy makers in the South. This is followed by a discussion of some of the main changes in the global trading system over the past three decades, in particular the growing participation of developing countries in world trade, the shift in the composition of their trade from primary products to manufactures, and the rise of South-South trade both as a share of developing country and world trade. These three features are connected, in no small part, through the spread of GVCs. The next three sections examine in turn recent trends in global production sharing, the value added by different countries in GVCs, the contribution of GVCs to rising South-South trade, and the role of FDI in spreading international production and its development impact. A final section summarizes the key findings and draws policy implications.