Developing countries1 have become major players in global trade. Their relative weight has grown enormously, mainly due to China’s meteoric rise as an exporter. Though they partly reflect surging oil prices, increasing exports from the Middle East and North Africa (MENA), Eastern Europe, and Central Asia have further increased the weight of developing countries in world trade. GDP projections suggest that the share of world trade held by developing countries will expand further, more than doubling over the next 40 years and reaching nearly 70 percent by 2050.
The Rising Weight of Developing Countries in World Trade
Developing countries are already playing an increasing role in world trade. In 2006, they accounted for 30 percent of world exports, up from 19.5 percent in 1996.2 The share of exports held by the BRIC economies (Brazil, Russia, India, and China) more than doubled, rising from 6 percent to 12.4 percent. China accounted for a significant portion of this rise—its claim of world exports nearly tripled from 2.7 percent to 7.6 percent. On the other hand, India, which also stands out as a large economy, did little to contribute. Its share of world exports remains very low, at little more than 1 percent in 2006.
As oil prices rose, oil exporters also experienced large share increases. MENA’s share increased from 1.4 percent to 4.5 percent, while Sub-Saharan Africa (SSA)’s share rose from 0.7 percent to 1.6 percent. Having transitioned into market economies, the Eastern European and Central Asian countries also saw large increases in export shares, matched by even larger increases in imports and rising current account deficits.
Trade and investment have risen not only between the rich countries of the North and the developing economies of the South, but also among countries in the South.
In contrast, the export share of industrialized countries fell, with the United States’ share decreasing from 13.9 percent to 9.5 percent. Japan’s decline was particularly stark; its share fell from 8.6 percent—significantly more than the total share of the BRIC—to 5.4 percent, less than China’s share alone.
The importance of developing countries as a source of import demand has grown as well, reflecting increases in foreign exchange availability and purchasing power, a rapidly growing middle class, and a great appetite for imported goods. The EU’s imports to China rose more than four times from 1996 to 2006, while its imports to Russia, SSA, Eastern Europe, and Central Asia more than tripled. Developing countries also imported 38 percent of U.S. total exports in 2006, up from 31 percent in 1996. On the other hand, imports to Japan and other industrialized countries from the EU grew a relatively meager 31 percent and 81 percent, respectively.
The Rise of South-South Trade
Over the past two decades, trade and investment have risen not only between the rich countries of the North and the developing economies of the South, but also among countries in the South, particularly—though not exclusively—involving Asian nations. China and India significantly increased imports from MENA and SSA, partly due to rising commodity demand, with China absorbing $32.5 billion in exports from them in 2006, up from just $545 million in 1996. Bilateral trade between China and India has grown increasingly significant as well, with exports from China to India jumping from $686 million to $14.5 billion.
The expansion of South-South trade has contributed to the growing attractiveness of developing countries as destinations for foreign direct investment (FDI), both to access large and growing domestic markets in the host country and as export platforms for multinational companies. Developing countries accounted for 43 percent of global FDI flows in 2008, a significant rise from 32 percent in 2007.
The Increasing Role of Developing Countries in Manufactures Exports
Successful developing countries have often pursued export-led economic growth policies, diversifying from primary commodities to manufactured goods. Following this pattern, today’s developing countries have increased their presence in manufactured goods exports. China’s surpassed those of both the United States and Japan in 2006, as its share increased from 3.2 percent in 1996 to 9.8 percent in 2006. The share of manufactured goods in the exports of other developing countries has also increased, with that of SSA rising from 7.1 percent to 18.7 percent.
Largely due to higher prices, but also because of new natural resource discoveries and increased efficiency in production, developing countries also increased exports of mineral fuels and chemicals, the two product groups that exhibited the highest growth rates from 1996 to 2006. In 2006, MENA’s mineral fuels exports reached $360 billion, nearly ten times the $36.9 billion in 1996. Over the same period, SSA’s mineral fuels exports rose from $14.5 billion to $80.9 billion.
The role of developing countries as exporters and importers will increase significantly over the next 40 years.
Exports of manufactured goods may have increased even more and export diversification might have progressed even further had exports of minerals not surged so substantially, driving up the exchange rate and diverting investment.
Changed World of Trade in 2050
Will these trends continue? Barring geopolitical or climate-induced catastrophes and assuming that the world does not retreat into protectionism, the role of developing countries as exporters and importers will increase significantly over the next 40 years, reflecting their high growth rate and the rise of their middle classes. In addition, their dependence on developed country markets is projected to weaken.
Patterns of comparative advantage will shift, opening the door for currently lower-wage countries to benefit.
Consistent with the current trend, the value share of exports of developing countries in world trade will increase from 30 percent in 2006 to 69 percent in 2050. China’s share will increase from 7.6 percent to 24 percent, while India’s will reach 6.4 percent, up from just 1.2 percent. Conversely, the industrialized countries’ share will decline, with that of the United States decreasing from 9.5 percent to 7 percent and that of Japan falling dramatically from 5.4 percent to just 2.4 percent.
Developing Countries as an Export Market
Developing countries’ role as an export market will significantly increase. Based on a conservative GDP elasticity of trade3 of 1(a more realistic projection would be between 1.3 and 1.5), China’s imports from the United States and the EU will account for 3.1 percent of the world’s total in 2050, representing more than a twofold increase in its importance as an export market since 2006. Because the majority of U.S. and EU exports appeal to the middle class—a segment that is rapidly growing in developing countries—these numbers likely underestimate the rise in exports from advanced countries to China and other developing giants.
As the share and importance of developing countries increases, the share of world trade occurring among developing countries will continue to rise. China’s imports from India and Russia will account for 2.4 percent of world trade by 2050, representing a huge increase from 0.21 percent in 2006. A booming China and India indicate strong demand not only for primary products, but also for niche manufactures and services, as well as for industrial inputs and equipment from other developing countries.
Policy
As wages, capital/labor ratios, and education levels in the most successful developing countries rise faster than in the less successful ones, patterns of comparative advantage will shift. The fastest growing developing economies’ current comparative advantage in labor intensity will weaken as wages there rise, opening the door for lower-wage countries to benefit. However, the extent of this shift will depend on the ability of the lower-wage developing countries to expand manufactures exports and improve capacity to produce and distribute agricultural products and raw materials. This will require eliminating the high import protection still present in some sectors and countries. Policies could include modifying logistics and customs procedures that currently make it very expensive to trade, as well as improving the business climate to encourage investment and the expansion of capacity.
The success of developing countries in manufactured exports will force rich countries to innovate and differentiate even further if they are to sustain their market position in high-value-added products.
The establishment of an open, rules-based system appropriate for the world economy of the twenty-first century is far from certain. Far-reaching reforms of the World Trading System, including the World Trade Organization, are needed.
A large expansion in world trade, as well as marked increases in efficiency, innovation, and, ultimately, human welfare are likely in the coming 40 years. However, as the moribund Doha process shows, the establishment of an open, rules-based system appropriate for the world economy of the twenty-first century is far from certain. Far-reaching reforms of the World Trading System, including the World Trade Organization, are needed to ensure that the progress of world trade is not hampered, or worse reversed, in the midst of the next economic and financial crisis.
Shimelse Ali is an Economist in Carnegie’s International Economics Program. Bennett Stancil is a Junior Fellow in Carnegie’s International Economics Program.
1 Includes BRIC (Brazil, Russia, India, and China) and other developing countries in MENA (Middle East and North Africa), SSA (Sub-Saharan Africa), Latin America, Asia Pacific, Eastern Europe, and Central Asia.
2 This discussion of past trends compares 1996 levels with 2006 ones, unless otherwise noted. Projections, which are explored later in the paper, compare 2006 levels with those expected in 2050.
3 For simplicity, current account surpluses and deficits are assumed to stay constant forty years from now.
