International trade is a powerful force of societal transformation. Trade agreements not only stimulated trade; they have improved the quality and integrity of domestic economic and political institutions. This view on trade as a force of institutional development and societal transformation has been reinforced in the recent decade when the routes to the world market for developing countries have been through global supply and value chains of multinational firms. In this paper, we examine whether the trade profile of fast-growing emerging economies reflects the broader theory that has underlined thinking about trade: when these countries grow, do they expand their import from developed countries in the direction of high value-added goods in order to get access to technology and knowledge that they cannot produce as efficiently at home?
We find that the EU has seen strong growth in patent-intensive sector exports. Europe’s aggregate trade performance with key emerging economies has confirmed the expectation about the composition trade between an advanced economy and an emerging economy. Accordingly, the EU has by a high degree of certainty been able to climb the value-added chain through trade with emerging economies. However, the pattern of trade is not always as expected, or predicted by theories of comparative advantage. Trade in the EU’s major patent-intensive sectors – chemicals, pharmaceuticals, and motor vehicles – has generally evolved in a positive fashion in the period studied. However, recent years have witnessed a deterioration of EU exports in theses sectors.
In many instances, these deteriorations are not the result of the EU’s industrial mix. The under-performance in EU exports can be ascribed to local factors that artificially depress EU corporate competitiveness in those markets. In countries like Brazil, India and South Africa, these factors tend to be very strong and show a clear upward potential for the EU in improving the gains it can reap from trade in patent-intensive sectors. As a consequence, EU trade policy should focus on those sectors that show a strong potential export and import performance, but where other factors than economic competitiveness have caused trade under-performance in the past.
2. Trade Performance – EU-BRICS/MINTS
2.1 General Trade-policy Development
The past decades have witnessed a rapid expansion of trade in emerging markets. On the back of past openings to the global economy, many countries have helped to grow their economies by integrating themselves with regional and global trade patterns. General economic conditions have been favourable, especially in the period leading up to the crisis when most parts of the world enjoyed a “Goldilocks” macro-economic environment. For most emerging markets, the crisis years have been good too. The decline in key export markets like Europe and the United States certainly had an impact, but most of all only through slowing down growth in trade rather moving into stagnation. While there is evidence now suggesting a structural shift in especially the way Asian countries trade with Europe, regional trade in emerging regions like Asia is about to take another giant leap forward as the region grows less dependent on intermediary trade and more dependent on final goods trade.
While trade in emerging markets has been in good health, emerging markets trade policy – or commercial policy more generally – is another story. The past years have witnessed a considerable decline in reform appetite and less willingness to continue a process of reforms to reinforce an economic strategy of growth and development. The BRICS countries are a case in point.
After half a century of import-substituting policies, Brazil transitioned from a closed to a world integrating economy in the late 1980s. However, the country has had little to no trade liberalisation and structural reform since mid-1990s. Trade and FDI liberalisation have not improved with the Lula da Silva and Dilma Rousseff administrations.
Trade liberalisation in Russia started in 1990s, but took a new turn following President Putin’s second term. Politicised and selectively-applied measures related to economic regulations have increased in the past decade along with state control on internal and external trade. Following entry into the WTO, Russian trade and commercial policies have seen selected reforms. Yet, it remains a fairly closed economy and the recent economic standoff with Europe and the United States has reinforced levels of protection. Russia is now subject to trade sanctions, and employs such sanctions itself.
India moved towards ending the “licence raj” in 1980s, but its opening up to the world economy only started in 1991. However, trade liberalisation and related structural reforms have stalled since the Congress-led government took charge in 2004. The current Modi government is expected to move the country away from bureaucracy and its complex system of duty exemptions and investment regulations, but it remains to be seen if such reforms are launched and if they encourage trade and enhance market access.
Reforms in China have started ahead of all the BRICS. Trade and FDI liberalisation have been ongoing since 1978. Since its accession to the WTO in 2001, China’s trade with the EU and the rest of the world has grown very rapidly. By some measures, it surpassed in 2014 the US in becoming the world’s largest trading nation. However, further trade liberalisation has stalled in recent years, mainly in services. Investment restrictions have also increased in order to support domestic sectors and state-owned enterprises. New reform programmes have been designed, but few actual trade reforms have emerged as a consequence of them.
Highly protected under apartheid, South Africa opened up to the world economy in mid-1990s following its transition to a multiracial democracy. A quick burst of unilateral trade and FDI liberalisation followed by a Free Trade Agreement (FTA) with the EU in 2000. However, remaining protectionism and domestic regulatory barriers have proved an obstacle to domestic and foreign investment. The current government has reinforced barriers and generally deteriorated the climate of doing business in the country.
The picture does not look much better in the second-tier group of emerging economies – so-called MINTS countries like Mexico and Indonesia. Trade and FDI liberalisation started in the mid-1980s in Mexico, followed by the NAFTA agreement in 1994 and an FTA with the EU in 2000. Both trade and FDI liberalisation have been critical in growth of exports as well as foreign investment in the country. However, the problem with Mexico has been its inability to reform domestic regulatory barriers to complement its trade liberalisation.
Indonesia considerably opened up to the world economy in the late 1980s and early 1990s, followed by an IMF structural package in 1998. However, there has been a reform slowdown ever since. Although overall protection has not increased, domestic regulations have increased business costs in the country and discrimination remains a strong tenet in the actual conduct of trade policy.
Despite stalling trade and FDI liberalisation, trade has been critical to BRICS integration into the world economy in the past decade. Despite some volatility, it has also been growing. India’s trade-to-GDP ratio has rapidly grown from below 20% in 2000 to above 40% in 2012. South Africa is another country with a relatively high trade-to-GDP ratio at around 50%, which is the highest of the BRICS. China’s trade-to-GDP ratio has been declining in recent years due to the global financial crisis, but it is still above India, Brazil and Russia at 45%, which is high for a country with a big population. However, Russia has had declining trade-to-GDP ratio from above 50% in 2000 to 41% in 2012, and it has continued downward because of falling commodity process and recent trade sanctions. Of all the BRICS, Brazil is the least sensitive to changes in the global trading economy with the lowest trade-to-GDP ratio of the BRICS at 20%.
Nigeria and Mexico both have trade-to-GDP ratios at above 60%, while Turkey’s trade-to-GDP ratio grew from 30% in 2000 to about 50% in 2012. In contrast, Indonesia’s trade-to-GDP declined from close to 60% in 2000 to just above 40% in 2012. In general, MINTs enjoy a higher level of trade openness compared to the BRICS, at least when measured in real economic terms. That should not be surprising: small countries usually have a larger trade sector than big countries. For countries like Nigeria, the actual levels of trade largely reflect the development of global commodity prices, which is volatile.
Despite declining trade-to-GDP ratios in some BRICS countries in recent years, a relatively steady liberalisation has resulted in increased trade volumes and higher shares in total global trade in the past decade. However, as Figure 3 shows, the EU has not been able to take full advantage of this situation as BRICS country trade with the rest of the world has grown much faster than trade with the EU. Although EU trade with BRIC countries has grown from around 200bn USD in 2000 to over 1tn USD in 2012 (a plus of 457%), this growth has been slower than BRICS trade with the rest of the world. BRICS trade with rest of the world grew from just over 600bn USD in 2000 to about 5tn USD in 2012 (a plus of 647%).
This pattern of trade expansion is not exclusive to the BRICS group. MINTs trade with the EU and the rest of the world has grown at a somewhat lower rate in the past decade. In 2012, as the Figure 4 shows, MINTs total trade with EU stood at 300bn USD compared to a mere 87mn USD in 2000 (a plus of 245%). MINTs trade with the rest of the world increased from 470bn USD to 1.39tn USD (a plus of 196%).
None of this is evidence of policy problems in the EU’s trade relations with these countries. Bilateral trade between BRICS as a group and the EU has been growing in line with the increase in their share of world trade, and Europe’s share of world trade has naturally declined. However, the general pattern for the entire BRICS group masks important differences. India, Brazil and South Africa have experienced a growth of trade with the EU that has been slow. Trade between the EU and China and Russia have, on the other hand, expanded rapidly. In 2000, BRICS had a similar level of bilateral trade with the EU, each country’s trade at a level between 50bn and 100bn USD. In 2012, while EU trade with Brazil, India and South Africa still stands at around 100bn USD each, EU-Russia and EU-China trade have grown to 420bnUSD and 600bn USD respectively. The determinants of trade between the EU and China and Russia, respectively, are different. Proximity is a strong determinant in Europe’s trade with Russia, which is clearly is not in the case of China. For China, Europe’s trade expansion has largely been driven by supply chains and demand for particular types of goods. Notably, almost 50% of Europe’s export to China comes from Germany.
Taking account of the MINTs group, Turkey is, unsurprisingly, the outstanding performer as its trade with the EU has increased from around 45bn USD in 2000 to 160bn USD in 2012. EU trade with Mexico, Nigeria and, to a lesser extent, Indonesia has also been growing, but not by much if compared to Turkey. Indonesia has merely managed to double its trade with the EU from 15bn USD in 2000 to just over 30bn USD in 12 years.Russia and China have been two of the largest markets for EU exports in the past decade. Russia’s share of EU exports grew from just over 2.5% in 2000 to well over 7% in 2012, while China’s share of EU export grew from 3% in 2000 to 8.5% in 2012. In contrast to China and Russia, EU exports to other BRICS have not moved much, certainly not in line with the general growth of trade in these countries – or in line with increasing domestic demand. From 2000 to 2012, Brazil’s and South Africa’s shares in EU exports grew by a mere 0.3% and 0.2% in that order. Similarly, India’s share in EU exports just grew from around 1.5% in 2000 to little over 2% in 2012.
The growth of EU exports to MINTs has been far below potential. In the 12 years from 2000 to 2012, Turkey and Nigeria’s share in EU exports have had little growth at below 0.5%, while EU exports to Indonesia and Mexico have not grown at all. An FTA between the EU and Mexico was concluded in 2000, but it has had little impact on EU exports when measured as share of total exports.
2.2 Capital goods trade
Aggregate volumes of trade is one thing, the profile of trade is another. In this section we will look closer at what type of trade has grown between the EU and fast-growing emerging markets.
Capital goods trade, i.e. trade in manufacturing goods such as machinery that are intended to be used in the production of other goods, makes up the largest portion of overall EU-BRICs trade. Trade in capital goods was close to 380bn USD in 2012, an increase of around 300bn USD since 2002. This is largely due to increase in EU capital goods trade with China and Russia alone as trade with India and Brazil has significantly underperformed. While EU-China trade in capital goods grew by more than 200bn USD in the ten years from 2002, EU-India trade only grew by 20bn USD in the same period.
If we put the bilateral trade expansion in capital goods in relation to GDP growth, we find a similar pattern as in the aggregate volumes of bilateral trade for capital goods. The data suggest two patterns: firstly, there has been a structural shift in trade between the EU and China and Russia, accounting for the clear rise of bilateral trade as part of GDP. Secondly, trade growth in relation to Brazil and India have been cyclical and followed the trend of an expansion in the general trade-to-GDP pattern. It is noteworthy that EU trade in capital goods with India was not bigger than 20bn USD in 2012, while EU-China capital goods trade stands at 255bn USD after a recorded ten-year growth of 430%.
At around 85bn USD in 2012, EU-MINTs trade in capital good is significantly low when compared to EU-BRICs data. The groups of MINTs comprises large economies with a relatively high economic growth rate for the past decade. However, the data shows that there remains a great potential for growth in EU-MINTs trade in capital goods, particularly for Indonesia and Nigeria.
Put in relation to GDP, a declining trend can be observed for EU capital goods trade with Nigeria and Indonesia between 2002 and 2012. While EU trade with Turkey and Mexico has experienced a slight growth, the overall conclusion is that EU-MINTs trade in capital goods has not grown in line with these countries’ advances in domestic economic activity.
2.3 Consumer goods trade
EU-BRICs trade in consumer goods has grown from 82bn USD in 2002 to around 370bn USD in 2012. At the same time, trade in consumer goods has not grown as fast as expected given the growth in consumer demand in those countries. Although trade in this category with China and Russia has performed better over the last decade, there has been slow growth in EU trade in consumer goods with India and Brazil. In 2012, EU consumer goods trade with China exceeded 200bn USD, while EU-India and EU-Brazil trade remained below 30bn USD and 20bn USD respectively.
Brazil and India experienced an average GDP growth of around 3.5% and 7.5% between 2002 and 2012, while China had an average GDP growth of more than 10% in the same period. While Russia and China, to a much lesser extent, have performed well, EU trade in consumer goods with Brazil and India has not grown much given the growth in both GDP and consumer demand in these countries. Again, trade expansion with Brazil and India show a cyclical pattern, but not a structural rise, as can be observed in EU trade in consumer goods with China and Russia.
At 95bn USD in 2012, EU-MINTs trade in consumer goods is low compared to BRICS countries. Looking at numbers alone, EU-Turkey trade in consumer goods is the highest in the group of MINT countries. However, the same is not true when put in relation to GDP. When measured in terms of GDP, EU trade in consumer goods with Nigeria and Mexico have performed comparatively better than Indonesia and Turkey. This figure demonstrates a declining trend in EU trade with Indonesia in the past decade. This is not surprising given the EU’s meagre exports increase in consumer goods to Indonesia from 685mn USD in 2002 to 1.58bn USD in 2012.
2.4 Intermediate goods trade
A similar pattern as in the previous categories of trade can also be found in trade in intermediary goods, i.e. trade in products comprising semi-finished goods that are used in the production of other products. Intermediate goods trade has been growing in importance in the past decade. Rising trade in intermediate goods is a direct consequence of the international fragmentation of production and the rise of global supply chains. Figure 12 shows that EU trade with BRICs in intermediate goods has increased from 43bn to 166bn USD in between 2002 to 2012. However, given the overall growth in trade, the above increase in intermediate goods trade with BRICs is not that significant.
The underperformance of EU trade in intermediate goods with some BRICs countries can be further illustrated when put in relation to GDP. Intermediate goods trade with Brazil, China and India has significantly underperformed compared to Russia. This is despite the fact that Brazil, China and India are significantly integrated into global production networks, and according to the OECD (2009), each of them has a share of intermediates in total imports of more than 70%, well above the OECD average of 56%.
At around 50bn USD, EU-MINTs trade in intermediate goods is far below potential. Although trade with Turkey, Mexico and Indonesia have experience growth in the past decade, there is a general downward trend in EU-MINTs intermediate goods trade when put in relation to GDP.
When measured in terms of GDP, EU-MINTs trade in intermediate goods has not grown at all in the years from 2002 to 2012. The BRICs have performed relatively better than MINTs. This is probably due to regulatory barriers in these countries as intermediate goods, contrary to consumer goods, depend less on market size and consumer preferences.
2.5 Concluding Comments
What is the overall picture of this analysis of the types of trade that has expanded between the EU and BRICs countries? Table 1 summarises the above findings. One distinguishing pattern is that China and Russia are different from Brazil and India in growth in trade with the EU. For the BRICs, it turns out that “country” is a stronger determinant than type of trade. Moreover, the expansion in bilateral trade with the EU has been stronger in countries with a faster expansion of GDP. However, trade growth vis-à-vis the EU has expanded at a slower pace than GDP in BRICs countries. This is striking since the general pattern for BRICs countries is that their overall trade has expanded faster than GDP. While there are differences between the countries based on endowment and comparative advantages, many emerging markets have practised export-led economic growth and thus seen a faster expansion of trade than domestic demand.
 Erixon (2015a).
 Hansakul and Levinger (2014).