Time to put the Southern Silk Road on the map

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13 Jun 2011
Stephen King, Group Chief Economist

Stephen King

From a western perspective, it's tempting to believe that either the eurozone debt crisis or the US slowdown is the greatest show on earth. That temptation should be resisted. The greatest show on earth is happening elsewhere: the creation of a Southern Silk Road, a network of new "South-South" trading routes connecting Asia, the Middle East, Africa and Latin America.

As Europe and the US lick their fiscal wounds, the centre of global economic gravity is heading south, and southern trade is becoming turbocharged. Take Brazil. At the moment, 42% of its trade is with the developed world and, of the rest, 22 % is with other countries in Latin America. The remaining 36% is what might be described as intercontinental South-South trade. That share is set to rise enormously, outstripping trade with the developed world by a factor of eight over the next 40 years. By 2050, ISS trade might account for well over half of all Brazil's trade.

This extraordinary change is happening because the economic "borders" which have prevented South-South trade from taking off are being dismantled. Only last month, Brazil and China were engaged in talks designed to open China's markets up to more value-added Brazilian products. Some of the world's biggest M&A activity is taking place on a South-South axis: the second largest M&A deal in Brazil last year was Sinopec's $7.1bn acquisition of a large stake in Repsol-YPF. Within a range of new political groupings – of which the Shanghai Cooperation Organisation is one of the better examples – being created, there is no seat at the table for western powers.

Talks, financial transactions and political manoeuvrings capture only a small part of the changes. Whether it's a Chinese-funded railroad connecting Colombia's Pacific and Atlantic Coasts, investments by Brazil's CSN in Mozambique or the manufacture of cheap "people's cars" designed for first-time buyers throughout the emerging world, South-South trading opportunities are increasing rapidly.

The centre of global economic gravity is heading south, and southern trade is becoming turbocharged.

The associated capital flows will trigger further change. China's high levels of savings so far have found their way mostly into the US Treasury market but, as its connections with the southern hemisphere increase – if only through a hunt for resources – the infrastructure investment which has already transformed economic conditions in China's eastern provinces will start to transform them in Latin America, the Middle East and Sub-Saharan Africa: more docks, roads, railways and airports.

The Southern Silk RoadChina's behaviour today is not so different from the behaviour of the UK in the 19th Century. Like China today, the UK then ran a large balance of payments current account surplus, using its excess domestic savings to invest across the globe. While the Chinese don't have the same imperial ambitions, the economic consequences are similar.

This is not all one-way traffic, however. With China offering the biggest market in the world for investment and with China's consumers contributing almost as much to global consumer spending as their US counterparts, many southern nations are recognising that trade with China offers more opportunities than trade with either the US or Europe. There are many hurdles still to cross. South-South tariff levels are still very high, there are heavy restrictions on capital flows while ethnic, religious, cultural and territorial divisions are too often obstacles to sustained economic progress. Yet the hurdles are slowly falling, paving the way for a period of turbocharged South-South trade growth every bit as impressive as the expansion across the developed nations after the Second World War.

The easiest thing to do would be to recognise the growing role of South-South trade and ensure that our international institutions are staffed accordingly. Europe continues to push the case for yet another of its own to run the IMF and the US frets over the end of quantitative easing, These, however, are sideshows. Centre stage now belongs to the Southern Silk Road. If the West refuses to recognise this simple fact, it will find itself – and its cherished institutions – increasingly isolated as the balance of economic and political power heads south.

Stephen King originally wrote this article for the Financial Times newspaper, published on 13 June 2011.