South-South Trade, Export Sophistication, and Terms of Trade: Empirical Studies on Developing Countries from 1995 to 2014

Industrialisation and trade are two major contributors to growth and development. Historical experience has clearly demonstrated the importance of industrialisation and manufactured exports in the transformation from a backward country to an advanced country. Moreover, industrialisation is not only an efficient way to increase productivity and welfare, but also an effective way to promote social and cultural changes. Over the recent decades, two trends in developing countries' industrialisation and trade have been well documented in the literature. First, manufactures have taken increasingly important share in many developing countries' export basket. Second, the fast-growing trade between developing countries, say, South-South trade, has been highlighted. Given the importance of industrialisation and trade in development process, this PhD thesis aims at contributing to knowledge on the evidence, mechanism, and determinants of developing countries' trade and industrialisation, centring on South-South trade, export upgrading, export directionality, and terms of trade over the recent two decades from 1995 to 2014. Each of the four topics is addressed in one of the following four chapters from Chapter 2 to Chapter 5. Chapter 2 criticises the existing approach towards the definition of the Global South and South-South trade, and clarifies that the delightful picture of South-South trade highlighted in the literature is actually an "illusion". Including de facto developed countries (e.g., the Asian Tigers) and emerging countries in the group of developing countries strongly inflates the size and growth of South-South trade. If these countries are excluded, then the relative size of South-South trade becomes quite small. In particular, this chapter demonstrates that including these de facto developed and emerging countries in South-South trade statistics heavily overstates technological and manufacturing capabilities of the so-called "Global South". Moreover, this chapter also explores the composition of developing countries' exports to different trade partners and their trade potential with the rest of the world. It reveals great differences in the composition between developing countries' different export directions and significant asymmetries in mutual trade potential between developing countries and the rest of the world. Chapter 3 examines the determinants of developing countries' export upgrading with a particular interest in the role of China and productive investment. Amongst general factors, access to sea, human capital, productive investment, and trade openness are found to be major contributors to developing countries' export upgrading. The robust effect of productive investment reflects the importance of political and social agents' motivations of industrialisation and, perhaps more importantly, endemic political-economic embeddedness that determines the motivations. This echoes the centrality of strong and developmentally-oriented elites in the developmentalist model of industrialisation and development. Developing countries' absolute gains from trade with China, as reflected by the significant improvement in their income terms of trade vis-a-vis China, promote their export upgrading. Importantly, mediation analysis shows that this export-upgrading effect operates, to a large extent, through the enhancing effect of trade with China on developing countries' productive investment. This export-upgrading effect of absolute gains from trade with China is stronger and more robust in the period of 2002-2014 than 1995-2014, which is consistent with the growing role of China in the global economy since the early 2000s, reflecting on China's commodity boom and its strong performance in manufactured exports. That is to say, trade with China serves as a source of investment for developing countries' export upgrading. This finding provides a new and indirect channel to understand the influence of China on developing countries' industrialisation, going beyond the conventional perspectives of the "crowding-out" effect and the "re-primarisation" effect. It suggests that, for developing countries, China serves more as a stimulator of capital accumulation than a competitor in manufacturing market or a predator of natural resources. Therefore, the priority for developing countries is the appropriate use of gains from trade for productive purpose. Chapter 4 provides the latest evidence to the discussion in the 1980s on developing countries' export directionality, and explores the determinants of this directionality. Between 1995 and 2014, more than half of developing countries tended to have more sophisticated Southbound exports than Northbound exports, while the opposite is true for the rest. Productive capabilities are found to be a major and robust determinant of this directionality of export sophistication. Productively more advanced developing countries are more likely to have more sophisticated Northbound exports than Southbound exports, which is likely to be due to their ability to access the more competitive markets of developed and emerging countries and/or the downstream value chains with their relatively sophisticated products. In contrast, productively less advanced developing countries have to access developed and emerging countries' markets and/or the downstream value chains with their less sophisticated products, due to the lack of competitiveness in more sophisticated products. This finding suggests that the conventional argument that South-South trade is more beneficial to developing countries than North-South trade should be interpreted conditionally, because, for those productively more advanced developing countries, Northbound exports are likely to be more sophisticated. Another important contributor to the directionality of export sophistication is geographical distance. Larger distance to other developing countries reduces a developing country's Southbound export sophistication or increases its Northbound export sophistication, which is consistent with the argument of the gravity model in a broad sense. Chapter 5 examines the recent trends of developing countries' terms of trade under the trichotomous global economic hierarchy consisting of developed, emerging, and developing countries. Time-series analysis shows that developing countries, especially those specialising in fuels or minerals, have experienced an improvement in their net barter terms of trade vis-a-vis developed countries over the recent two decades. In contrast, developing countries' net barter terms of trade vis-a-vis China and other emerging countries tends to show negative or trendless behaviour, except those specialising in mineral fuels. In summary, on a global scale, developing countries specialising in fuels or minerals have tended to hold a favourable position, whereas those specialising in agricultural products or manufactures have experienced a less favourable or even unfavourable situation. On the other hand, income terms of trade of all groups of developing countries vis-a-vis the rest of the world, regardless of developed countries, China or other emerging countries, has significantly improved. This indicates developing countries' absolute gains from trade with the rest of the world. However, the rest of the world has comparable improvement in their income terms of trade vis-a-vis developing countries. Therefore, despite the favourable income terms of trade facing developing countries, the condition for global (North-South) convergence does not hold. As a consequence, developing countries have to mobilise more resources to maintain the favourable income terms of trade, which impedes their domestic consumption and investment, and the unequal global exchange has remained. Particularly, this global inequality is magnified by the persistent North-South gap in productivity and technology and by developing countries' high population growth. The global inequality is rooted in the competitive nature of the markets for primary commodities and simple manufactures and the oligopolistic nature of the markets for sophisticated manufactures. In this sense, the findings are in line with the Prebisch-Singer hypothesis.