South-South trade helps firms build competitiveness, meet growth goals
New ITC report finds that South-South trade benefits businesses in developing countries more than North-South trade.
Companies that engage in South-South value chains and produce higher value-added goods are more competitive and better able to reach growth targets, a new International Trade Centre (ITC) report says. The report, The Power of International Value Chains in the Global South, was produced in collaboration with the Research and Information System for Developing Countries, a think-tank based in New Delhi, India.
Using macroeconomic data and a survey of 558 East African firms, the report finds that the recent proliferation of regional trade agreements and rising trade in technology-intensive goods have propelled the South’s ‘remarkable growth’ in the past two decades. The economy of the ‘Global South’ – which encompasses least developed countries, economies in transition and developing economies – more than quadrupled from 2000 to 2016, to $30.9 trillion.
The South is clearly catching up with the North in terms of gross domestic product and trade. The challenge now is maintaining that momentum. According to The Power of International Value Chains in the Global South, one solution to ensure that South-South trade continues to increase.
The report’s findings underscore the need for decision-makers to step up support for regional cooperation to promote South-South trade and international value chains alongside South-North initiatives. The report sets out almost a dozen strategies aimed at increasing South-South trade, including recommendations to encourage inward foreign direct investment, facilitate imports, target both bilateral and multilateral South-South trading arrangements, and support investment in technology.
The North offers opportunities for enterprises in developing economies to access international markets and boost sales and employment, the report says. But connecting to the other countries in the South enables these firms to move up the value chain, into activities of higher value added and allows for knowledge transfer.
The East African businesses that participated in the survey capture 10% more value when they work in South-South chains instead of North-South value chains, increasing their bargaining power. They also are involved in a broader range of activities in South-South value chains, which improves their competitiveness. As a result, firms in South-South chains hire more skilled workers than firms in North-South value chains.
According to The Power of International Value Chains in the Global South, the global South now offers opportunities that complement, but do not replace, those offered by the North. It suggests that the development implications are clear: firms no longer have to rely solely on North-South value chains, but can take advantage of burgeoning opportunities in South-South value chains to build competitiveness and achieve their growth objectives.
Firms in the global South enter international value chains by specializing in very specific tasks such as dyeing or printing garments, milling of sunflower seeds, foreign investment, indirect exports and the sourcing of raw materials and equipment from abroad. Up to 91% of imports of raw materials and equipment originate in the South, researchers found.
‘This report provides a compass to help policymakers, institutions and industry who aim to foster South-South cooperation and promote South-South trade and investment initiatives,’ said ITC Executive Director Arancha González. ‘If adopted effectively, South-South trade and investment cooperation can result in a productive workforce and help eradicate poverty.’
The Power of International Value Chains in the Global South was produced as part of the International Trade Centre’s Supporting Indian Trade and Investment for Africa project, which is supported by the United Kingdom’s Department for International Development.
Download The Power of International Value Chains in the Global South.