Heading South or Looking Up?
Changing Trends in South-South Trade
by Helen Sanders, Editor
The combination of China’s slowdown and commodity price volatility has resulted in significant damage to commodity-reliant economies, but does this spell the end – or at least a pause - in the expansion of ‘south-south’ trade?
‘South-south’ trade, i.e., exports/imports between counterparties in regions that fall largely in the southern hemisphere: Latin America; Asia and Africa, has increased dramatically in recent years, driven by the growth in demand from China. As China’s growth trajectory has shallowed, the resilience of national economies in these regions has been tested. As we discussed in the last edition of TMI (edition 243), for example, Africa’s oil- and investment-dependent economies such as Nigeria have suffered a great deal from China’s cooling demand. However, Sumanta Panigrahi, Citi urges caution in over-generalising about how each region, and ultimately each country is affected by changing global trade patterns,
“When considering south-south trade corridors, it is important to recognise that they can differ significantly. China-LatAm, for example, is predominantly commodities-driven; China-Africa is more investment-led, and intra-Asia trade is focused on equipment exports. As a result, the drivers and influencers are often quite different.”
So how are other economies, particularly those in Asia, dealing with the inevitable impact of China’s rebalancing, and what does this mean for treasurers operating in, or trading with counterparties in these countries?
A quarter of global trade
South-south trade is no longer an economic sideshow, with nearly a quarter of world trade already taking place between counterparties in emerging or newly emerged countries. As Michael Vrontamitis, Standard Chartered Bank emphasises,
“We have seen rapid growth in south-south trade: it now accounts for around 24% of global trade, and we expect it to reach 43% by 2035.”
Although medium- and long-term forecasts are positive, these trade flows have been under stress recently, as Michael continues,
“We have seen a significant slowdown in trade over the past 24 months for a variety of well-publicised reasons, not least the collapse in the price of many commodities and China’s slowdown. These two factors impact on many emerging, commodity-dependent markets bearing in mind China’s importance as a buyer of commodities. China’s economy has not collapsed or stagnated, however, it is simply experiencing slower growth, from more than 10% to 6 -7%. A key element in this is the underlying transformation of the Chinese economy from a predominantly manufacturing economy to a consumption based economy, which inevitably leads to a reduction in cross-border trade, particularly exports.”
One outcome of a slowdown is the problem of over-capacity, as Sumanta Panigrahi, Citi explains,
“Over the past few years, during a period of strong growth, excess capacity has developed across most industrial sectors. Today, therefore, there is less investment in new capacity and less demand for commodities, which in many respects can be seen as a rebalancing.”