In recent times there has been much discussion of how world trade is changing dramatically because of the “rise” of some large developing countries, including China and India. In this edition of MacroScan, C. P. Chandrasekhar and Jayati Ghosh examine recent trends in trade of six important emerging nations to assess the actual extent of this shift, as well as India’s position within this group.
In many ways, the past two decades have been seen as the period of “emergence” of some developing countries as major exporters and importers, as well as new sources of foreign capital flows.
This is widely perceived to have significant implications for existing trade structures and patterns, as well as for global power expressed in other ways.
Within the developing world, four countries are usually marked out for their actual or potential significance in this regard: China, India, Brazil and South Africa. (It is no accident that there is also a grouping of these countries, BASIC, which is a subset of the BRICS group that also includes Russia.)
All of these are seen to be economies that have been increasing their share of global trade and investment and are likely to become even more significant in future.
They are also seen as countries that have experienced relatively rapid GDP growth in recent times, and have now become much larger in absolute terms (with GDP typically calculated in Purchasing Power Parity exchange rates rather than nominal exchange rates.)
There are also some other countries that are frequently cited as potential members of this group — particularly Mexico and Indonesia, once again relatively large economies with large populations and recent history of GDP growth perceived to be higher than average. Like much of the rest of the developing world, they have also sought to add to their holding of foreign exchange reserves even when these are financed by relatively expensive capital inflows.
In fact, all of these countries have also become more assertive in terms of their involvement in international negotiations, in groupings such as G20 and in their engagement with the Bretton Woods institutions, rightly demanding greater voice in a world economy that has hitherto been mostly dominated by G3.
Given the widespread perception of rapid change, it is worth examining the actual picture with respect to global trade shares. (The charts below all present data calculated from the online database of the WTO, http://stat.wto.org/Home/WSDBHome.aspx?Language=E accessed on December 22, 2012.)
Chart 1 shows the share of global merchandise exports of these six countries from 1990 to 2011, calculated in nominal US dollars.
The most interesting feature that emerges from this is the sense of China being a huge, if impressive, outlier. It is only China that has experienced a really dramatic increase in its share of global exports, particularly in the period from 2003 onwards, such that it now accounts for more than 10 per cent of world merchandise exports.
The other feature that stands out is how the other countries still remain relatively minor players in terms of aggregate world merchandise exports.
India’s trade share has increased, indeed it nearly tripled over the entire period, but it still remains well below 2 per cent, and the average for the three years 2009 to 2011 was less than 1.5 per cent.
Brazil shows even more moderate increase in global trade share, while Mexico, whose share increased from 1.2 per cent in 1990 to 2.6 percent in 2001, has subsequently experienced a decline such that its share of world exports in 2011 was less than 2 per cent.
Chart 2 presents information on the share of these countries in world exports of commercial services. Once again, there are some surprises here. It is often thought that the largest service exporter in the developing world is India, and this is the fond belief that drives much of Indian government strategy in trade negotiations as well, where it behaves as if it has an offensive interest in services.
But in fact China exports of services have been higher consistently than that of India throughout this period and both seem to have increased their global shares at a similar pace even in the recent period.
Until recently this was largely because of the significance of transport services in China’s services exports, and the growth of such services could be easily explained by the rapid increases in merchandise exports from China.
However, in recent years, the picture has become more complex, with some other exports such as travel and computer and information services increasing very rapidly. Meanwhile, despite rapid though volatile growth in the period since 2003, India’s share of global services exports is still only just above 3 per cent, while that of China is around 4.5 per cent.
Brazil’s share of world services nearly doubled over these two decades, but still remained well below one per cent. Mexico’s share declined continuously from 0.9 per cent in 1990 to less than 0.4 per cent in 2011. And there was little change in the relatively insignificant shares of the other countries.
Chart 3 describes the aggregate balance of trade in merchandise and services of these countries. (Note that this is not the same as the current account balance, which also includes various invisibles payments such as factor incomes and remittances.)
Once again, China is the significant outlier in terms of massive trade surpluses particuarly after 2003, which have been followed by almost equally sharp declines from 2009 onwards as the economy rebalances to some extent.
The only other country that showed some improvement in the total trade balance is Indonesia, but this can largely be explained by the increase in oil prices which benefited this petroleum exporter. (Another side story worth noting is how Indonesia, which had moved away from primary exports towards manufactured goods in the 1980s and 1990s, reverted to primary exports dominating the trade account in the 2000s.)
Brazil and South Africa have moved from approximate balance in trade of goods and services to deficits, and the most substantial movement in this regard happened after 2004.
Meanwhile, two countries show sharp and even alarming deterioration in total trade balances: India and Mexico, and once again the major change occurred from 2004 onwards.
In general, it is clear that 2004 marks a definite break in trade patterns with the tendencies towards surpluses or deficits of these countries becoming much more marked.
Remarkably, this was also the period when there occurred a global surge in the cross-border flows of capital, and many of these countries were recipients of large net capital flows that both financed their larger deficits as well as allowed them to accumulate additional foreign exchange reserves.
How much of this trend in net exports in these six countries was due to goods trade, and how much to services? Table 1 provides some sense of this by differentiating between merchandise and services balances in terms of the annual average for the three years from 2009 to 2011.
There are two outliers here: China with its enormous total trade surplus (which is still much smaller than earlier) and India with its enormous trade deficit.
China’s merchandise trade surplus is reduced by its services deficit.
India is the only country among these six to have a services trade surplus, but the average for 2009-11 is a relatively small $11 billion or so, scarcely enough to make much of a dent on the very large average merchandise trade deficit of more $125 billion.
The picture that emerges from an examination of recent trade patterns suggests that it is problematic, if not downright misleading, to club the other five countries into the same group as China, as if all of them had experienced similar recent trajectories.
In fact it is really China that has exploded onto the world trade scene and become one of the major economies, for a combination of complex factors that cannot be adequately dealt with here.
For the other countries, shares of the global market are still relatively small for both goods and services trade. Further, there are very evident fragilities expressed in the large and growing deficits of some countries, especially India.
There is no doubt that the world economy is changing and older power imbalances are shifting to newer and more complex scenarios.
But a premature celebration of this tendency in most “emerging” economies, without careful recognition of the realities and limitations inherent in the process, is not only unjustified but can even be described as hubris.