Session 14 Trade Policy for Developing Country

Basic Characteristics of Developing Countries  Many developing countries have comparative advantages based on “land” (usually with a tropical climate) and in various resources in the ground.  Many developing countries have comparative advantages based on “land” (usually with a tropical climate) and in various resources in the ground.  Many developing countries also have comparative advantages based on “less-skilled labor”.

Four Basic Trade-policy Choices for Developing Countries 1. A trade policy that focus on the country’s comparative advantages in land and natural resources.

2. A trade policy that attempts to enhance the gain from export primary products by raising the world prices. Developing Country (as an Exporter) Larger Country Small Country ? ?  Joining an international cartel can also achieve this.

3. A trade policy that taxes and restricts imports to protect and subsidize new industries serving the domestic market. Developing Country Other Countries Import Restrict Subsidize

4. A trade policy that encourage the development of new industries whose product can be readily exported. Developing Country Other Countries Import Restrict Encourage Export This could be achieve in many ways. These product are based on the country’s comparative advantages (i.e., products base on land and less-skill labor resources.)

Problems toward Trade Policy for Developing Country 1. Capital markets work less efficiently in developing countries. 2. Labor markets work less efficiently in developing countries. How can businesses get the money ?

The Long-run Price of Primary Product 1. The price of primary product is depressed. 2. The price of primary product is raised.

1. The price of primary product is depressed. 1.1 Engel’s Law The increasing in percentage of “income” in developed country The increasing in percentage of “expenditure ” in developed country <  The result is that the developing country need to reduce the price to cope with the reduced demand. 1.2 Synthetic Substitutes  People are likely to discover ways to replace minerals and other raw materials.

2. The price of primary product is raised. 2.1 Natural Limits  Nature’s scarcity eventually raises the price of primary products. 2.2 Slow productivity growth in the primary sector  The growth of supply increase lower than the demand.

International Cartel to Raise Primary-product Price MR (with completion) MC Profit with competition MR (without completion) Profit without competition

Impacts of Cartel 1. Sagging Demand  The higher price will make buying countries look for new ways to import the cartel’s products. hybrid car

2. New competing supply  Buying countries will accelerate the search for additional supply in non-cartel country. Buying Country Cartel Countries Non-cartel Countries

3. Declining Market share Price Quantity For example, “Ecuador withdrew on December 31, 1992 because it was unwilling or unable to pay a $2 million membership fee and felt that it needed to produce more oil than it was allowed to under the OPEC quota”

4. Cheating  Some cartel countries could cheat on the agreement (i.e., selling product over the agreed quota).

Import-substitution Industrialization (ISI)  The way in which developing countries shift their production toward developing new industries. Skilled labor Unskilled labor As a result, developing countries will be more independent.

Challenges toward ISI  The infant industry argument  The government budget argument  The terms of trade effects  Lack of market information

Rationales for the Success of Export to Industrial Countries  Developing countries have been able to become exporters in standardized manufacturing lines where technological progress has cooled down, such as textiles, tires, and etc.  Developing countries have become locations for low-cost assembly technologically advanced products.