The Dichotomy of trade and investment in BRICS

The BRICS countries set ambitious goals for themselves, among which an important guideline is to turn the association into a pole for ensuring economic stability and sustainable growth. Trade relations and investment cooperation play a key role in achieving this goal. And although the BRICS countries have made notable progress in the growth of national GDP indicators, a more intensive and uniform increase in trade and investment cooperation between them could contribute to economic growth to a much greater extent.

Many indicators of the BRICS countries of a general nature (share in world GDP, world production, world trade) have good dynamics and indicate the strengthening of the position of this association in the world. Relations between the BRICS countries are also actively developing in many areas of politics, economics, culture, and education. Accordingly, many indicators of interaction between the BRICS countries within the association are also growing. However, not all of them show the same high dynamics.

In the theory and practice of international economic cooperation between different countries, it is generally believed that the development of trade relations leads to close investment cooperation, contributes to the generation of mutual investment flows into the economies of trading partners. Thus, the recognized leaders of international trade and at the same time international investment are the United States, China and the European Union. They also actively trade with each other and invest in each other's economies. However, in the practice of interaction between countries within the framework of BRICS, the phenomenon of multi-speed dynamics of flows of goods and investments is observed. While trade turnover between many BRICS countries is growing at a high rate, there is no adequate increase in the flow of investments.

The dynamics of trade and investment development over the years of the BRICS' existence is characterized by high rates of unevenness between individual countries of the association, as well as the absence of a noticeable correlation between trade growth and investment growth in different periods of the last two decades.

Foreign trade in BRICS

To begin with, let us note that the very importance of foreign trade for the development of the economies of the BRICS countries was far from the same at different stages of interaction between the countries of the association.  In the last 20 years, the role of foreign trade in the BRICS economies has changed in different directions (Graph 1). The share of trade in relation to GDP has increased significantly in South Africa and Brazil. For Russia and India, this indicator turned out to be almost unchanged during this period, and for China it decreased altogether (internal factors of the development of the national economy became more significant).

The countries that joined the BRICS on January 1, 2024, increase the difference in national approaches to the importance of foreign trade for the development of the national economy in the BRICS. Of the new countries, the United Arab Emirates is most distinguished from its original members by the high role of foreign trade in the development of the national economy, which has grown from 125% to almost 160% of GDP in the last decade.

Note that this is about three times higher than the average for all other BRICS members, whose share of foreign trade is in the area of 50% of GDP. Unlike the UAE, another new member of the association, Ethiopia, has the lowest share of foreign trade in GDP - about 25%.

Graph 1. The role of foreign trade in the BRICS economies
(share of trade in GDP, %)

Despite the fact that the role of foreign trade in ensuring GDP growth in China has significantly decreased after the global financial crisis of 2008-2009 (from about 60 to 40%), nevertheless, mutual trade between the five BRICS countries was primarily focused on China. It can be described as Chinese-centric. The main trading partner for both Russia and other countries of the association - India, Brazil and South Africa - was and is China. Its exports and imports (in US dollars) are significantly higher than those between the other countries of the association.

If we analyze the dynamics of trade during the existence of the BRICS between its five participants at that time, we can state that there was a significant increase in both exports and imports in trade with China, with the exception only of exports from India to China, which remained approximately at the same level all these years. China's exports to Brazil, South Africa and India more than doubled between 2010 and 2023. 

Exports to the Russian Federation increased 3.7 times (from $29.612 billion to $111.057 billion). And Brazil and South Africa's exports to China have more than tripled over the same period. Imports from the Russian Federation alone to China increased almost fivefold (from $25.913 billion to $128.484 billion). 

Brazil and Russia's trade with partners other than China remained static in 2006-2022. And if you look at the indicators of the volume of trade between Russia and Brazil within the BRICS, they generally grew, and even to a large extent, but this growth was ensured only by growing trade with China. China is also the main importer to India, but significant export growth began only in 2020. Russia has repeatedly increased exports of goods and services to India by almost 6.5 times (exports in 2019 - $ 6.226 billion, exports in 2022 - $ 40.628 billion). In addition, India began exporting more goods to Brazil and South Africa in 2020-2021, which was accompanied by a drop in exports of Indian goods and services to China. South Africa mainly trades with China, although since 2021 it has begun to increase import and export operations with India. Nevertheless, trade with other BRICS members remained at the same level. China has been actively increasing exports and imports to Russia and Brazil since 2015-2016.

Thus, the volume of trade within the BRICS countries increased significantly during the period under study, but, however, this growth was uneven and not for all pairs of partners in the then "five". The greatest growth was achieved mainly due to the intensification of trade between individual pairs of partners: China and Russia, China and Brazil, as well as Russia and India.

Table 1. The role of the ten BRICS countries in mutual trade in 2022-2023

China is the dominant exporter and importer within the BRICS, actively participating in trade with all countries of the group. For almost all BRICS countries, China is either the main or significant partner. However, China's trade importance as a market for exports from the new BRICS member countries is not so great. Thus, China's share in Ethiopia's exports is only 4.3%, in Egypt's exports - 3.70%, and in the UAE's exports - 2%. The disclosure of the export potential of national goods for these countries is a structural task, since the high discrepancy between import and export values becomes a serious obstacle to the implementation of financial and economic initiatives within the BRICS (for example, for the settlement system in national currency).

Trade flows between India, Russia, Brazil and South Africa are also not as large as those of China, but have significant growth potential. For all BRICS countries, India is an important trading partner, and for many countries, India is the second most important partner within the BRICS.

The role of African partners in the import and export of the rest of the BRICS countries is still insignificant, which can become an important resource for the development of foreign economic relations in the BRICS.

We will highlight the role of the United Arab Emirates in the BRICS. This state already has high import/export rates to the BRICS and has a developed trade system with the new countries of the association. It is safe to assume that the UAE will become a bridge to ensure the integration of the BRICS in the new composition.

Comparing trade and investment in BRICS

If we compare the role of direct investment in the BRICS economies with the role played by international trade in their economic development, it can be stated that all BRICS countries are characterized by a significantly lower importance of foreign investment in the economy compared to trade.

Graph 2. The role of the BRICS countries
in the format of five and in the format of ten in the global economy
(GDP, trade, FDI, as % of global indicators)

In general, it would be possible to describe the inclusion of the BRICS countries in the global economy according to three important indicators proposed in Graph 2, with an approximate ratio of "3-2-1". Thus, in terms of the share of global GDP (calculated by PPP), this share for five BRICS countries slightly exceeded 30%, and for ten BRICS countries it was about a third of global GDP. The share of the BRICS (five countries) in international trade (including exports and imports) was in the region of slightly less than 20%, and for the BRICS (ten countries) slightly above 20% (about 23%). As for the total share of the BRICS countries in global foreign direct investment, it was at a much lower level: less than 10% for the BRICS (five countries) and just over 10% for the BRICS (ten countries). In addition, this share has had a downward trend for the leading BRICS economies over the past two years.

At the same time, 10% of global investments were not evenly distributed among the BRICS countries. The main country of the association, where foreign investments were directed, and the main BRICS country that invested abroad, by a wide margin from the rest of the participants in the association, was China.  In the past decade, the People's Republic of China has accumulated 88% of all investments in the "five" countries. Without China, the BRICS countries would not have been able to demonstrate even the relatively modest 10% of global investment in the global economy shown in Graph 2. Thus, the revealed dichotomy of trade and investment development in the BRICS demonstrates an even more significant variation in the dynamics of trade and investment indicators, if China's investments are excluded. The same pattern was observed in mutual investments between the BRICS countries (Table 2).

Table 2. Accumulated mutual foreign direct investment
investments in BRICS until 2020

The undisputed leader in terms of accumulated investments of BRICS partners (in the format of five countries) over the years of the association's operation is the PRC: the figure reaches a relatively high level of $ 151.5 billion against the incomparably smaller and little-noticed 2-7 billion of the other five countries (Table 2). At the same time, the main volumes of Chinese investments are not concentrated in the BRICS partner countries, and in the Asian region - Singapore, South Korea and Japan, as well as in the Caribbean - the Cayman Islands and the Virgin Islands - and other regions.

South Africa was in second place after China in terms of attractiveness for investors from the BRICS countries. The volume of its accumulated modern investments amounted to approximately $7 billion (Table 2). However, this figure was even less than in 2010, when South Africa joined the BRICS and became the fifth member of the organization.  Thus, membership in the BRICS for more than a decade has not led to a noticeable increase in investment by the participating countries in the South African economy.

If we exclude statistics on China from the general indicators of accumulated investments of the BRICS countries, the scale of the problem of attracting foreign investment to the BRICS region will become obvious.

The exclusion of statistics on China from the general indicators of accumulated investments of the BRICS countries confirms the urgency of raising the issue of the need to attract foreign investment to the region. Thus, excluding the inflow of investments to China, the total growth of investments in the rest of the BRICS countries over ten years amounted to only $ 2.667 billion (an increase of 1.2 times). The average annual increase in investments without China during this period was obviously low (0.21%).

The insignificant use of the factor of foreign investment to ensure the growth of the national economy in different BRICS countries can be assessed in different ways. The traditional assessment of this phenomenon will be reduced to stating the fact that international investors distrust the level of reliability of recipient economies. And it's hard to argue with that. 

However, another logic can be proposed. On the one hand, in the context of growing instability of interstate relations and fragmentation of the world economy, ensuring that the BRICS countries reproduce more than a third of global GDP with relatively low involvement in international trade and very modest attraction of foreign investment indicates a high level of autonomy of the production processes of the countries of the association. Note that friendshoring is also becoming popular in the developed economies of the West, which are trying to get away from hydrocarbon dependence or semiconductor dependence on the part of unfriendly and unreliable, from their point of view, economies.

However, on the other hand, the lack of significant amounts of foreign investment in the national economy indicates an underutilized potential for innovative and industrial development, which could contribute to much higher economic growth rates and could be more effectively used by the collective efforts of countries of such a significant international association. 

Sluggish indicators of the current movement of investments in BRICS

Investment flows, both in absolute terms and in relation to the GDP of countries, remained static for most of the time period under review, regardless of changes in trade dynamics.

The current investment flows of China into the BRICS economies are extremely insignificant. China invests evenly in all BRICS countries, with the exception of the Russian Federation. In 2015, the growth of investments in this direction stopped, and after 2021, China's investments in Russia became significantly smaller than in other BRICS countries.

Table 3. BRICS direct mutual current investments in 2022 (in millions of dollars)

In the first decade, starting in 2010, FDI (foreign direct investment) between the BRICS countries grew at a high rate. However, this fact is mainly due to the growth of Chinese investments in the BRICS economies, to a large extent in the Russian Federation (although at the moment the trend has been replaced by a strong decline in investment). This initial growth can be explained more by the rapid development of the Chinese economy as a whole than by the results of the BRICS activities. This is particularly evident in the statistics for South Africa, for which membership in the organization has not led to an increase in investment between four initial and one new member.

The United Arab Emirates is a particularly active new participant in the investment policy of the expanded BRICS. This state has become the most attractive investment destination among the BRICS countries at the moment. At the moment, it is attracting even more money than mainland China. However, other BRICS states in the new composition will have the opportunity to strengthen the investment potential of the BRICS.

We can state that the countries most involved in trade with other BRICS members (Table 1), as a rule, conduct the most active investment activities within the association (Tables 2, 3). Thus, China, which accounts for the largest number of investments in BRICS, is most involved in trade within the framework of BRICS. However, the flow of investments within the association remains at a much lower level than trade flows.

This phenomenon is also observed in the case of the new BRICS countries. Thus, the UAE is simultaneously actively involved in both international trade and investment flows. According to these indicators, the Emirates are bypassing even many members of the old BRICS membership. Therefore, it is realistic to assume that the UAE's membership in the BRICS will lead to a deepening of their cooperation with other members of the organization in both trade and investment.

Possible actions of the BRICS that reverse the dichotomy

Close investment cooperation is an important element of economic cooperation in most regional or international associations of the world.  It should become so in the BRICS.

Another problem hindering the intensification of investment flows to the BRICS is the rather low credit rating of the countries of the association. The rating agencies Standard & Poor's and Fitch have assigned BBB-, BB-, BB and A+ ratings to India, South Africa, Brazil and China, respectively. These ratings significantly influence the behavior of investors. It is believed that if the credit rating of a state is lower than BBB-, then investments in financial instruments of such a state are high-risk. Two of the five old BRICS countries have a rating below investment grade, which clearly limits foreign investment in these countries.

Currently, the BRICS countries are experiencing a noticeable decline in the inflow of both external and domestic investments against the background of escalating contradictions with Western countries, unprecedented scale of sanctions, protectionist measures, growing distrust and fragmentation of the global economy. The authors of the study believe that understanding the scale of the problem and understanding the reasons for this situation will be the first step towards possible initiatives by Russia and its partners to improve the mechanism of economic cooperation within the framework of the BRICS, which could return the volume of foreign investment to high levels. 

Let's highlight some factors that could work to increase trade and investment flows of the BRICS countries.

1) The active inclusion of new BRICS countries in the system of trade and economic relations within the association, especially after the accession of new African countries as a result of the expansion of the membership of the countries of the association. BRICS and Africa have a long history of cooperation. African countries actively cooperated with the group in various formats. Economic ties between Africa and BRICS have been showing marked growth over the years: in 2023, trade between Africa and BRICS reached almost $500 billion, making BRICS the continent's largest trading partner.

2) Confirmation of commitment to trade and investment liberalization measures in the policies of the BRICS and the BRICS countries, including in relation to e-commerce and digital goods and services. E-commerce is developing very dynamically both at the global level and within the framework of the BRICS and can become an additional factor in increasing trade flows.

3) The development of special economic zones (SEZs) of the BRICS countries and the promotion of cooperation between them. Special attention is paid to these zones in all BRICS countries. Since SEZs provide preferential conditions for investors, they can logically become a significant additional factor in increasing investment and trade flows between the BRICS countries.

4) Launching a system for the regular preparation of a set of indicators of trade and investment cooperation between the BRICS countries to ensure constant monitoring of the state of trade between the BRICS countries and adjusting their policies in case problems are identified in certain areas of interaction between the countries. 

5) An increase in investment volumes from the New BRICS Development Bank. The New BRICS Development Bank could play a more important role in ensuring stable investment inflows. However, the volume of its financing remains relatively modest. In total, during the operation of the bank, loans in the amount of $ 32.8 billion were issued. If we compare this assistance with the support packages of leading global or even regional banks, which amount to hundreds of billions of dollars, then the lack of support becomes obvious. 

6) Investment guarantee. Geopolitical risks, fragmentation of the global economy, and increased instability are devaluing the national guarantees of the investment regimes of many BRICS countries. If national guarantees become insufficient to ensure the inflow of investments that all BRICS countries need, then it would be logical to think over an effective system of collective investment guarantees by the countries of the association. The new BRICS Development Bank or its special unit could perform this function with relatively modest financial resources. Investments can be guaranteed with significantly less funds than the allocation of funds to support national projects itself. The experience in the practice of the World Bank's MAGI Group shows the possibility of attracting impressive amounts of investment even in the unstable economies of many developing and least developed countries in Africa, Asia or Latin America.

Other authors: Daria Gribanova, Kirill Gorshkolepov