Developing countries' economic clout grows
The new alliances | A shifting geography of trade

It all started with drugs. Three years ago a few emerging economies - Brazil, South Africa and India - got together to fight pharmaceutical companies' high prices for life-saving medicines. AIDS was devastating sub-Saharan Africa, was a scourge in India and threatened to saddle already stretched state budgets in Brazil with expensive welfare programs. It was feared that such a weakening of the work force in densely populated countries would cripple newly high-flying economies and destabilize global markets.

After protests by those three countries, the World Trade Organization granted poor nations the right to make and import cheap copycat medicines for "national emergencies." That move helped fuel India's generic drug exports, which soared to $2.5 billion in 2002, up nearly 40 percent from the year before, according to the Organization of Pharmaceutical Producers of India.

It has also sparked concern about profits among the big pharmaceutical companies, most of them based in the United States and Europe.

Those same developing countries, plus at least 17 others, are taking a cue from that victory to grab for a bigger piece of the global-trade pie by fighting for freer agricultural markets. At the same time they are increasing trade and investment ties among themselves.

The economic and political clout of the group, sometimes called the "Group of 21" - a collection of countries from the developing world led by Brazil that includes South Africa, India and China - has grown. Since it flexed its muscles at the WTO talks in Cancún, Mexico, last year, the bloc has become even more sophisticated at negotiating and winning advantageous trade terms. And they are increasingly bypassing the developed world.

Witness the landmark WTO ruling in April against U.S. cotton subsidies. The victory, spearheaded by Brazil, could give some of these emerging economies wider access to markets and higher prices for its goods. Or the historic meeting in Cancún last year, when the bloc staged a walkout to stall the trade talks.

This axis of economies, which were once considered the economic underdogs, now have burning ambitions, fueled by explosive growth in China and India - both of which expanded by around 10 percent in the first quarter of this year. That expansion is in turn fueling the other members' growth through their strengthened trade ties.

"These countries can leverage their bargaining power as they become more important as both suppliers and markets," said Dominic Wilson, an economist at Goldman, Sachs. "It will be harder to ignore their demands."

Trade between poorer countries now makes up only 10 percent of world trade but it is growing rapidly. Today, 40 percent of exports from developing countries go to their peers, and trade between these countries is rising 11 percent a year, according to the Geneva-based UN Conference on Trade and Development.

"Developing countries are maturing and negotiating in a professional, businesslike way," said a senior Brazilian official, who did not want to be named, involved in trade negotiations with the United States and Europe.

"China and India on our team are important because they are growing fast," he said. "As a group, we have a better chance of success - we are a force. And as we talk trade, we are also building bridges for other subjects."

Investors are paying a lot of attention to three of the group's countries, which were singled out in a Goldman, Sachs report written by Wilson in October 2003.

It asserted that the combined gross domestic product of what it called the BRICs - Brazil, Russia, India and China - would grow to one-half the combined GDP of the G6 countries - the United States, Japan, Germany, France, Italy and Britain - by 2025, with their economies, together, surpassing that elite group's collective economies by 2050.

Today, the BRICs countries' combined GDP adds up to about one-sixth of that of the G6 economies.

The report, which cautions that such growth depends on accelerating institutional reforms and other factors, forecasts that China, India, Brazil and Russia will be the first-, third-, fifth- and sixth-biggest economies by 2050, with the United States and Japan in second and fourth place, respectively.

Most startling is a projection that the BRICs' U.S.-dollar spending growth could rise above G6 levels as early as 2009.

China is already leading the charge and turning world trade on its head following its entrance into the WTO in 2001. And it is lifting its suppliers in the process. Exports to China from Argentina more than doubled last year, while Brazil's rose 80 percent.

"We are witnessing the creation of a new geography of trade," said Rubens Ricupero, the secretary general of the UN Conference on Trade and Development.

The new axis stretches from the manufacturing might and emerging middle classes of China, and from the software powerhouse of India in the south, to the mineral riches of South Africa, a beachhead to the rest of the African continent, and across the Indian and Pacific oceans to South America, which is oil-rich and mineral- and agriculture-laden.

The Southern Hemisphere has always shipped commodities to its richer northern neighbors. What's different here is this coalition's complementary trade ties. Industrializing Asia needs the emerging economies' raw materials, but both sides want wider access to each other's markets, too.

The group of nations "will really take off over time," said Marc Faber, a Hong Kong-based contrarian investor.

Faber attributes the formation of the new alliance, in part, to a growing desire by its members to circumvent the United States, as that country's image abroad is eroded by the Iraq war and a ballooning budget deficit.

"China produces more steel than the U.S. and Japan combined, and five times as much cement than the U.S. for its own use," he said. "Economies like China and India don't want to depend on the U.S. forever."

China, in particular, is forging two-way relationships, both importing raw materials and pumping foreign direct investment into its suppliers with an eye toward its long-term needs.

"China is eating everyone's cake," said Vincent Palmade, lead economist at the World Bank Group. "It is both a major export market and FDI provider to the developing world."

China has more than $35 billion invested in overseas ventures, and is focusing on Latin America and Africa for increases in the future, according to the United Nations.

And that would be a break from the past: from 1979 to 2002 Asia and North America won most of China's foreign direct investment, followed by Africa and Latin America, according to the UN.

The acceleration of deals between China and Latin America tells the tale. Notable new Chinese ventures announced this year include a joint $1.5 billion investment by Shanghai Baosteel Group and a Brazilian peer, Companhia Vale Do Rio Doce to build a steel slab mill in Brazil. CVRD will also team up with China Aluminum Corp. to funnel $1 billion into the building of a Brazilian aluminum refinery.

China's export-import bank is also studying a deal to lead financing for the construction of a new natural-gas pipeline between Rio de Janeiro and the northeastern Brazilian state of Bahia.

And through an export-financed deal with Brazil, China will inject roughly $4 billion into crumbling Brazilian highways, railroads and ports to speed delivery of raw resources.

Other alliances among the bloc's countries include TCS Brazil, a subsidiary of the Indian outsourcing giant Tata Consultancy Services; and the Brazilian aerospace company Embraer's joint airplane manufacturing plant in China with Hafei Aviation Industry, to meet booming Chinese demand for aircraft.

And investment is going both ways.

Petrobras of Brazil now has a Chinese office. The Brazilian bus maker Marcopolo opened a new bus parts plant in China and is considering ventures in India and Russia.

Two top Argentine wine makers, Norton and Spadone's, have bought warehouses and wineries outside Beijing.

"Most business with the U.S. and Europe is one way. But our industries are complementary," said Shu Huang, the chief executive of the Software Internationalization Center, a software park in Zhaoqing, where the Argentine government has recently announced it will open a representative office for Argentine software companies.

"We want to help Chinese companies export to Latin America, and integrate Argentine software into Chinese hardware for export to Europe and the U.S," he said.

New bilateral investment treaties signed among the bloc nations are laying the ground rules and groundwork for such investments in each other's countries.

Since 1997, bilateral investment pacts have been signed by India and Argentina, Egypt, Nigeria, the Philippines and Thailand, all members of the group. Nigeria and South Africa have inked similar agreements with China.

Though investment between the world's poorest economies is still only a smidgen of total global foreign direct investment, it is rising, and rapidly.

Around 30 percent of foreign direct investment in developing countries comes from their peers, compared with 17 percent in 1995, for a heady 16 percent annual growth rate since then, according to the International Finance Corporation, the investment arm of the World Bank.

On the flip side, China surpassed the United States for the first time last year as the top recipient of foreign direct investment, according to the Organization for Economic Cooperation and Development.

Also accelerating investment are regional trade groupings that can negotiate en masse and offer larger and more diverse markets to the powerhouses they are courting.

The South American trade bloc Mercosur - comprised of Argentina, Brazil, Uruguay and Paraguay - for example, has just signed a preferential trade agreement with India; 2,800 products are earmarked for tariff cuts. Bilateral trade between Brazil and India could go up 16 times if existing trade barriers crumble, said Ricupero of the UN Conference on Trade and Development.

For investors looking to navigate the new geography, professionals advise tracking alliances, particularly in retail and tourism as household discretionary income grows in some of the Group of 21 countries.

Some big BRIC names may move into new markets by buying up household names: The purchase in 2000 of Tetley, the British tea company, by Tata of India is cited as an example.

Industries where India and China now have a competitive edge - say, in computers or cars - are also worth watching.

Tata Motors, for example, now has an African toehold. It makes light trucks in South Africa and is a finalist for a contract to make minibus taxis there.

"India is producing cheap jeeps that retail for $2,000 and China makes TVs with a $50 price tag," said Palmade of the World Bank Group. "These are low-spec products but exactly what developing countries need."

Arjun Divecha, a portfolio manager at GMO Emerging Markets in Berkeley, California, likes Indian textile makers including Arvind Mills, in advance of an expected end to world import textile quotas next year.

"After the Multi-Fiber Agreement expires there'll be a major shake-up in global textiles. China is going to take the low and high end in textiles and India everything in between," he said. "They're all cheap."

As always, investing in emerging economies is not without its risks. Current signs of an investment uptick among the bloc of developing nations are nascent, and largely anecdotal because current data are unavailable. And countries like China have disappointed investors countless times before.

Andy Cummins, a portfolio manager at Explorador Capital Management in San Francisco, likes CVRD, whose shares recently slipped on news that China was taking steps to cool its economy.

"Unless you think China will have a hard landing, it's probably a good time to buy," he said. "The long-term story is still intact."

There are safer ways to play the shifting trade winds.

"We occasionally invest in developed markets to get exposure to developing ones," said Mark Mobius, president of Templeton Emerging Markets, a fund management firm. He suggests finding companies with exposure to dominant brands in the fast-growing developing countries.

A few Templeton funds, for example, now have Interbrew holdings, after the Belgian brewer merged with the Brazilian brewer Ambev. Ambev only kicks in about 20 percent of Interbrew's revenue, but it is its fastest-growing business. Interbrew also has exposure to the Russian and the Chinese markets.

With over half the world's population in four of these emerging economies and a handful with the world's most sought-after raw materials on their shores, this group bears watching.