South-South Trade: Building Block or Bargaining Chip?

In this chapter we examine the two usually-mentioned rationales for encouraging SST: namely, to enlarge the size of markets and permit LDCs to take advantage of economies of scale, and to act as a bargaining chip in North-South negotiations. The chapter examines the argument that SST is not in the interest of LDCs as it will be trade diverting and will mainly help the inward-looking LDCs to export their capital-intensive products. Though free trade may be the first-best policy for developing countries (although even this is controversial), the chapter argues that the reality is that given the BOP problems which most LDCs face, they are more likely to try to develop their industries behind protectionist barriers rather than forgo industrialization since export-led industrialization may be difficult because of the developed countries’ protectionist policies. In these circumstances, SST may permit some specialization and exploitation of economies of scale to reduce inefficiency. Exploitation of economies of scale is particularly stressed in the newer theories of trade. Furthermore, it is argued in this chapter that the current extent of SST is not optimal since for historical reasons transport, credit and information links are between developing and developed countries. In addition, Northern monopolies often control trade in primary commodities reducing Southern gains from such trade. If SST became more competitive this source of welfare loss would be avoided.