Why emerging markets have increased trading both on a global scale and with each other over the last decade.

Cranes load containers at the Port of Oakland, California. March 24, 2013. Jed Sullivan/Flickr CC BY 2.0

By Zenia Lewis | October 24, 2016

The trend towards advanced economies taking the largest share of international trade and being the main trading partners of emerging markets has changed. Over the last decade, emerging markets have increased trading both on a global scale and with each other, a pattern that is expected to continue.

Changing global trade leaders

An HSBC report showing the historical patterns of trade and recent prominence of emerging markets demonstrates, in particular, the degree to which the global industry transformed between 1950 and 2007. In the mid-20th century, the advanced economies of the US and Western Europe led total global exports. That changed with the arrival of the 2008 financial crisis, allowing emerging Asia to play a more dominant role. HSBC predicts these changes will continue, with North-east Asia in particular expected to overtake the US and Europe by 2050 for the largest share of global trade.

Regional Share of World Trade, 1950-2050

Regional Share of World Trade, 1950-2050
Sources: HSBC Global Connections, 2015; IMF, Oxford Economics, 2016

Changing trading partners

Over the last decade, advanced economies have seen a fall in their share of exports from emerging and developing regions, which now send more than half their goods to each other.

Exports to Main Regions ($trn)

Exports to Main Regions (US$ trillions)
Source: IMF Direction of Trade Statistics, 2016

Potential for intra-regional and mega-regional trade

Global trade growth has slowed since the financial crisis. Despite rapid improvement over the last few decades, it is unclear if this pattern will be reversed. However, the UN Conference on Trade and Development notes that “the potential for trade growth will be relatively less about South-North and more about South-South trade”, highlighting the potential for increasing intra-regional trade.

Looking beyond this, mega-regional trade agreements also present an opportunity for expanded global trade and increased integration between different regions.

The development of mega-regional trade agreements

Regional trade agreements have become increasingly popular, but mega-regionals, so called because they include countries from across the world, in particular present a new kind of co-operation. Recent examples include the Trans-Pacific Partnership (TPP), which would include North and South America, East Asia, South-east Asia, and the Pacific. Another, the Trans-Atlantic Trade and Investment Partnership (TTIP), which is pending, would include the US and EU, while the Regional Comprehensive Economic Partnership (RCEP) would include countries from East Asia, South-east Asia, and the Pacific.

These agreements are expected to have a noticeable effect on overall trade by creating the potential for structural reforms that would enhance and facilitate the industry, as well as by promoting regional growth. The World Bank predicts TPP could lead to the GDP of each member country rising an average of 1.1% every year, the equivalent of roughly $465bn. It could also boost member country trade by 11%, about $1bn annually, by 2030. In terms of exports, it is predicted the US will gain the most, with Vietnam coming out on top when taking into account indicators such as real income. Similarly positive results would likely be seen in countries involved in TTIP and RCEP.

Despite these potential gains, drawbacks are possible. According to some economic models, TPP is expected to negatively affect (albeit slightly) Chinese trade. In addition, some economists worry mega-regional trade agreements may divert talks from Doha, as the resulting standards and issues that would be developed and implemented could be more advanced than the current trading standards of many developing countries, or indeed those being discussed during World Trade Organisation (WTO) rounds. The Doha Round, a series of trade negotiations between WTO members, initially intended to cover a number of trade issues relating to agriculture, services, market access, and IP. Agriculture in particular has proven difficult to resolve, leading to stalled discussions.

Standards established by mega-regional agreements could be unfortunate for developing countries that would have gained by moving forward regulations on a variety of trade issues (e.g. services, IP, etc.) discussed in Doha. When global standards are created through the WTO framework, all member countries are included in the decision-making process. Standards set by mega-regionals, on the other hand, only apply to countries that are part of the agreement. As a result, when these countries become leaders in global trade, the standards they set can become global norms that developing countries must adhere to – despite never agreeing to them nor being included in the negotiations.

Is Africa being left out?

While many of the mega-regional agreements mentioned here include developing Asia and some Latin American countries, Africa is nowhere to be seen. The continent would stand to gain immensely from the positive effects of such agreements, with regards to the creation and implementation of new global trade standards.

Experts have also expressed concern that higher thresholds for standards could create barriers and negative effects on market access for African exporters whose countries may not have instituted the regulatory changes others have. Preference erosion – where African exporters would see diminishing advantages in markets they previously fared better in due to the introduction of free trade status for countries involved in mega-regional agreements – is also a concern.

Africa is in the process of developing its own Continental Free Trade Area, which will promote deeper trade integration and is expected to positively affect the region’s trade. However, despite these moves, the continent still appears to have been sidelined when it comes to the increasingly common global norm of participating in mega-regional trade agreements.

Looking ahead

In the months and years ahead there is plenty of space for new developments, including in Africa. The US has long had a unilateral trade preference for the continent that expires in 2025, and ideas on what kind of agreement would make sense beyond this period are certainly on its radar. There is potential for a mega-regional agreement akin to TTIP, this time including Africa. Such an agreement could also be negotiated on a bilateral or regional basis (e.g. between the US and East Africa, or the US and West Africa, etc.). However, the interest of individual African countries and specific trade areas (e.g. services) that would be included in such an agreement have likely not been developed. An upcoming report from the US Trade Representative’s Office may provide some hints regarding the future and form of potential US trade agreements with the continent.

At the same time, TPP and TTIP have very much been on the radar of politicians whose countries are involved in the negotiations. What might become of these agreements in the US following the upcoming presidential elections is unknown, and the fate of TTIP in Europe seems similarly unclear after politicians recently expressed their concerns.

There are many questions regarding how mega-regional trade agreements will proceed moving forward and what role Africa will play in the global trade arena. However, the new and rapidly changing global trading landscape cannot be debated, demonstrating the growing influence and importance of emerging market trade in the decades to come.

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