Should BRICS leaders rethink their trade strategy?

This week the leaders of the BRICS nations and their trade ministers meet for their annual summit in Ufa, Russia. In 2014 as far as commerce was concerned, they focused on promoting commercial ties, establishing a New Development Bank, advocating steps at the World Trade Organization (WTO) and cautioning that mega-regional free trade deals, such as the Trans-Pacific Partnership, should not harm non-members.¹ Is this still the best trade strategy for these emerging economic powers? The evidence published in the latest report of the Global Trade Alert suggests not.

BRICS exports have stalled

At the end of May 2015, the OECD published data on the first quarter’s exports and imports of leading trading nations, including those for BRICS (OECD 2015). This data showed that in US dollar terms the total value of each BRICS nation’s exports was falling (see Figure 1). Worse, the exports of Brazil, India, Russia, and South Africa have essentially stagnated over the past four years or deteriorated significantly. China’s exports appear to have plateaued at the end of 2014.

Figure 1. Only China’s exports are now worth more in US dollar terms than four years ago – and even there Q1 2015 data is disturbing.

Source: OECD (2015). For each series the data was normalised to 100 in Q2 2011.

Stalled exports matter not just because of its growth implications. Rising exports are used frequently to dismiss trade distortions as a policy concern. In fact, the GTA’s latest report reveals the substantial exposure of the BRICS to foreign trade distortions.

Fighting the wrong enemy?

Using data collected by the independent Global Trade Alert (GTA), whose database contains now nearly two-and-a-half as many entries about government policies taken since the crisis began than the WTO’s Trade Monitoring Database, the number of times each BRICS’ commercial interests have been harmed by trading partners was calculated. Taken together, 2,733 measures taken by trading partners have harmed one or more members of the BRICS since November 2008. In fact, since the crisis began 60% of the protectionist measures implemented worldwide harmed at least one member of the BRICS.

No country in the world has seen their commercial interests hit as often as China, harmed a total of 2,153 times. South Africa, the least frequently hit of the BRICS, has seen its commercial interests harmed 649 times. Any notion that the BRICS have been able to escape beggar-thy-neighbour policies since the crisis began should be set aside.

Which trading partners are responsible for the significant number of hits to commercial interests? This matter takes on particular significance for the BRICS. Not only are these countries signatories to the various G-20 pledges to eschew protectionism but, in their condemnation of protectionism, BRICS Trade Ministers often excuse measures taken by developing countries on the grounds that they amount to Special and Differential Treatment. It may come as a surprise, therefore, to find that just 20% of the 2,733 measures harming the BRICS were implemented by the industrialised country members of the G-20. This, of course, does not imply that such industrial country protectionism is inconsequential or irrelevant. Rather it suggests that, while it may be diplomatically convenient to frame crisis-era beggar-thy-neighbour activity in North versus South terms, the reality is quite different.

Figure 2. “Special and differential treatment” for developing countries – at the expense of the BRICS.

Distribution of responsibility for crisis-era hits to BRICS commercial interests

The reality is that the developing country members of the G-20 are responsible for more than half of the hits to the commercial interests of the BRICS (Figure 2). Furthermore, notions of BRICS solidarity on protectionism should be set aside—almost a third of the time a BRICS commercial interest is harmed it is because of actions taken by another member of the club. The BRICS ought to put greater weight on discouraging and unwinding trade distortions worldwide, taking a hard line against all perpetrators of protectionism.

Time to clean up their own act too

To be fair, since the crisis began the record of BRICS commercial policy has been mixed. For sure, the BRICS share of the global total of discriminatory measures has risen year by year from 0.2 in 2008 to just under 0.4 in 2014 and 2015. However, it must be acknowledged that the BRICS share of the global total of liberalising measures has risen to one half in 2014 and 2015. Moreover, for much of the crisis era half of BRICS measures introduced each year liberalised trade or foreign investment. While the latter are to be applauded, such findings are tempered by the fact that 28% of BRICS trade reforms were temporary and have already lapsed (the comparable percentage for the rest of the world, 15%, is much lower).

When the spotlight is pointed on the steps taken by BRICS governments to tilt the playing field against foreign commercial interests, the extent of their retreat from open borders becomes clear. Figure 3 presents the totals for the number of measures each of the BRICS have taken that discriminate against foreign commercial interests. India and Russia have taken almost 450 harmful measures since the crisis began. Only a fifth of the BRICS’ harmful measures have been unwound.

Figure 3. Together the BRICS have implemented 1,450 trade disortions since the crisis began, only 20% has been unwound.

As discussed in chapters 3 and 4 of this GTA report, since the global economic crisis began three of the BRICS (Brazil, India, and China) have introduced dozens of additional incentives to inflate exports. These incentives harm the interests of trading partners that compete in the same markets abroad, boosting market shares of goods shipped by these three BRICS. Foreign subsidiaries operating in the BRICS may be eligible for these state incentives as well—so these incentives cannot be justified as giving a hand to emerging market firms taking on Western rivals.

Using detailed product and bilateral trade data, as shown in Map 1, for many of the BRICS trading partners the percentage of exports harmed by BRICS export incentives is significant. In an analysis of the impact of such export incentives, Evenett and Fritz (2015) found that they were largely responsible for holding back LDC exports by 31% over the years 2009 to 2013.

Taken together, these findings imply that there is much the BRICS could do to improve the own commercial policy credentials. While the mix of trade distortions introduced by each of the BRICS differs, the reality is that the BRICS have repeatedly discriminated against foreign commercial interests, harming not only industrial countries and each other, but also more vulnerable developing countries. That harm is not only done by import restrictions but also by the many steps taken by the BRICS to artificially lift their exports.²

Map 1. Artificial export incentives by the BRICS threaten large shares of trading partner’s exports.

BRICS trade strategy: Time for a rethink

This year’s BRICS summit occurs during tougher times for the leading emerging markets–each of the BRICS’ exports are falling and when only India is expected to see faster economic growth in 2015 and 2016 (IMF 2015). The exposure of BRICS commercial interests to discrimination by foreign governments revealed in this report calls for a rethink of BRICS trade strategy.

At best, current BRICS trade strategy is incoherent. On the one hand, the BRICS have sought to bolster trade between them with more generous credit lines for exporters and the like. On the other, the BRICS are responsible for a third of all of the harm done to each other’s commercial interests. This cannot make sense.

Moreover, BRICS Trade Ministers may want to rethink the wisdom of them excusing protectionism imposed by developing countries on the grounds that their economies are deserving of special and differential treatment. This report showed that four-fifths of the 2,733 trade distortions harming the BRICS were implemented by developing countries. There isn’t much evidence of BRICS solidarity either as one third of the hits to BRICS commercial interests come from another BRICS member.

The BRICS ought to have a strong interest in discouraging and unwinding protectionism. The frequency with which BRICS commercial interests are harmed by beggar-thy-neighbour interests ought to turn the BRICS into champions of the monitoring of protectionism by international organisations and of renewing the G-20 pledge on eschewing protectionism.

Lastly, the amount of global commerce that competes with BRICS-based firms that are eligible for state-provided export incentives, that was revealed in this report, won’t go unnoticed by trading partners of the BRICS. The BRICS would be advised to clean up their own commercial policy act before trade tensions rise.

References

Evenett and Fritz (2015), Throwing Sand In The Wheels: How Foreign Trade Distortions Slowed LDC Export-Led Growth, CEPR Press.

IMF (2015). World Economic Outlook, Chapter 1, Washington, DC. April.

OECD (2015), International trade slows sharply in first quarter of 2015.

Footnotes

1 The 2014 BRICS Leaders declaration can be found at http://brics6.itamaraty.gov.br/category-english/21-documents/223-sixth-s…. The communique of the BRICS Trade Ministers meeting, which took place just before their Leaders met in Brazil in 2014, can be found athttp://brics6.itamaraty.gov.br/category-english/21-documents/225-communi….

2 Given how poorly Brazil and India’s exports have performed during the past four years, the question arises how much lower the contribution of exports to economic growth would have been in these two countries in the absence of these artificial export incentives?

This article is published in collaboration with VoxEU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Simon J. Evenett is Professor of International Trade and Economic Development at the University of St. Gallen, Switzerland. 

Image: A worker walks in a shipping container area at the Port of Shanghai. REUTERS/Aly Song.