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.

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Introduction

International trade is a powerful force of societal transformation. Time and again through modern history, countries have begun a process of economic development by stepping into the global market for trade and investment. Greater integration with other markets has provided new economic opportunities, both for real business and for policy makers desiring to better domestic policy framework for economic and regulatory policy. Apart from promoting trade, trade agreements have improved the quality and integrity of domestic economic and political institutions, leading to greater economic benefits outside the field of cross-border trade.

The importance of trade for economic development is widely acknowledged, but there has been a wing of the argument that has seen it through the exclusive prism of export. This school of thought – pointing to export powerhouses such as China and, before that, the Asian Tiger economies – has suggested the role of trade for economic development is largely a story about exports, in essence by scaling up competitive production and selling abroad. That view has been powerful in trade politics, but has always been at odds with the economics and real experiences of trade. The process of trade and economic development is dependent on import as much as on export – and importing technology or other competitive input products have been necessary for countries to enable exports, let alone improving the efficiency of production. For economies like Brazil and China, about three quarters of their import are intermediary goods. Similarly, good access to foreign capital and a flow of inward investment have always been critical elements of development, in early stages as well as when countries have moved into middle-income status. Making themselves an attractive destination for investments, aspiring countries have also needed to ensure good conditions for imports.

This view on trade as a force of 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. The fragmentation of value chains has expanded trade and investment, and made it more important for emerging economies to get their policies to reflect good global economic standards.

In this paper, we aim to discuss the nexus of policy standards and volumes of trade, especially the volumes of imports. A number of countries like the BRICS or MINTS have experienced a decade of very fast economic expansion, manifested in general economic growth as well as in the indicators of economic integration with other parts of the world. The question we want to examine in this paper is 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? One can also look at it the other way around: has the growth of emerging markets shifted the export profiles of developed regions to the emerging regions? Does their export growth especially manifest itself in products with a higher share of technology, knowledge and value-added?

Basic trade theory on specialisation prompts the view that there should be a shift in the pattern of exports: an entity like the European Union should have seen a relatively faster expansion of one type of products relative to others in its exports to emerging economies. Related to that is the larger political defence in developed regions in their trade with emerging economies: even if imports from emerging economies have grown faster than exports (leading to a shift in the trade balance), the exports that have grown are goods that generate high value-added growth that in turn can provide for more and higher-paying jobs. In this paper, we also aim to examine this sensible political proposition.

The paper is structured as follows. Chapter 2 gives a long overview of trade and economic expansion in emerging economies, and how they have integrated with the EU, in the past ten years. Chapter 3 analyses headline numbers of trade in the in the “ideas economy”, or trade that usually has a higher value-added content. Chapter 4 dives a bit deeper into general trade data in patent-intensive sectors to analyse whether patent reforms have made an impact on EU exports in its top patent-intensive goods. Chapter 5 provides quantitative analysis to examine how the shifts in the trade patterns between the EU and emerging economies reflects structures of production – and whether trade expansion has happened in those sectors you would expect on the basis of basic trade theory and the popular perception about what trade that should grow in trade relations with emerging economies. The chapter is centred around a shift-share analysis of trade in patent-intensive and less patent-intensive sectors. Importantly, it looks at two periods of trade in order to capture the direction of change in recent years. Chapter 6 concludes the paper.