Policy Focus: Global production sharing and South-South trade

Purpose – The purpose of this paper is to examine patterns and determinants of trade among developing countries (South-South trade), with emphasis on the role of production sharing in global economic integration of the Southern economies. Design/methodology/approach – The paper begins with an analytical narrative of the emerging trends and patterns of South-South trade using a classification system that helps delineating trade based on global production sharing (network trade) from total recorded trade. Then it undertakes a comparative econometric analysis of the determinants of South-South and South-North trade using the standard gravity model. Findings – The share of South-South trade in world trade has shown a significant increase over the past two decades. This increase has predominantly come from the dynamic East Asian countries, reflecting their growing engagement in global production sharing. The growth dynamism of East-Asia centered production networks depends heavily on demand for final (assembled) goods in the Northern markets; South-South trade is largely complementary to, rather than competing with, South-North trade. While regional trading agreements (RTAs) could play a role at the margin, natural economic forces associated with growth and structural change in the economy and the overall macroeconomic climate as reflected in the real exchange rate, and the quality of trade related logistics are far more important in the expansion of South-South network trade. Originality/value – This is the first study to examine patterns and determinants of South-South trade paying attention to the role of global production sharing. The findings are valuable for informing the contemporary policy debate on promoting South-South trade. The trade data classification system developed here is expected to help further research on this subject.