1. International Economics By Robert J. Carbaugh 10th Edition
Chapter 7:
Trade Policies for the Developing Nations

2. Developing nations’ trade
Developing nations and trade
Developing nations’ trade
Very dependent on the developed industrial countries as export markets and source of imports
Exports are heavily weighted toward primary products (agricultural goods, raw materials, fuels) and labor-intensive manufactures
Share of manufactured exports is increasing, but mainly in a small number of newly industrialized nations (such as China, South Korea, Hong Kong)
Carbaugh, Chap. 7

3. Developing nations: dependence on primary products (2002)
Developing nations and trade
Developing nations: dependence on primary products (2002)
Major export As % of
Country product total exports
Nigeria Oil 96
Saudi Arabia Oil 86
Venezuela Oil 86
Burundi Coffee 79
Mauritania Iron ore 56
Zambia Copper 56
Ethiopia Coffee 54
Chad Cotton 40
Rwanda Coffee 31
Carbaugh, Chap. 7

4. Tensions between developing and advanced industrial nations
Developing nations and trade
Tensions between developing and advanced industrial nations
Many developing countries have taken to heart the advice that opening up to foreign trade and investment will help their economies
At the same time, industrial countries have often responded by increasing barriers on developing country manufactured exports
Developing country exports often compete with the most vulnerable industries (with the least skilled workers) in the industrial countries
Developing country economies are also hampered by structural weaknesses and inadequate institutions
Carbaugh, Chap. 7

5. Developing nations’ concerns
Developing nations and trade
Developing nations’ concerns
Question whether gains from trade with industrial countries have been fairly distributed
Face problems of unstable export markets
Concentration on one or a few primary-product exports combined with inelastic supply and demand conditions
Argue that they face worsening terms of trade as relative value of primary products has fallen compared to manufactured goods they import
Face limited market access for exports because of protectionism
Especially for agricultural and labor-intensive goods
Carbaugh, Chap. 7

6. Export price instability for a developing nation
Developing nations and trade
Export price instability for a developing nation
Carbaugh, Chap. 7

7. Trade barriers limit developed country exports
Developing nations and trade
Trade barriers limit developed country exports
Tariff protection in agriculture is higher than in manufactures.
Average MFN Tariffs in 1997–1999 (Unweighted in Percent)
Carbaugh, Chap. 7

8. Trade barriers limit developed country exports
Developing nations and trade
Trade barriers limit developed country exports
Tariffs impede trade in labor-intensive manufactures.
Average MFN Tariffs in 1997–1999 (Unweighted in Percent)
Carbaugh, Chap. 7

9. Assistance for developing nations (1)
Developing nations and trade
Assistance for developing nations (1)
World Bank
Makes loans in developing countries to improve infrastructure, alleviate poverty, and assist in restructuring economic policy
International Monetary Fund (IMF)
Makes shorter-term loans to finance balance-of-payments deficits; it also engages in structural adjustment lending
Generalized system of preferences (GSP)
Voluntary program where industrial nations give trade preferences to selected developing country manufactured exports
Patchwork of measures has limited impact
Carbaugh, Chap. 7

10. Assistance for developing nations (2)
Developing nations and trade
Assistance for developing nations (2)
Stabilizing commodity prices - international commodity agreements
Production and export controls
Buffer stocks
Multilateral contracts
But experience with commodity agreements has been mixed, at best, and application of the GSP is spotty
Carbaugh, Chap. 7

11. International commodity agreements
Developing nations and trade
International commodity agreements
Agreement
Membership
Principal Stabilization Tools
International Cocoa Organization
26 consuming nations 18 producing nations
Buffer stock, export quota
International Tin Agreement
16 consuming nations 4 producing nations
Buffer stock, export controls
International Coffee Organization
24 consuming nations 43 producing nations
Export quota
International Sugar Organization
8 consuming nations 26 producing nations
International Wheat Agreement
41 consuming nations 10 producing nations
Multilateral contract
Carbaugh, Chap. 7

12. Production and export controls
Developing nations and trade
Production and export controls
Carbaugh, Chap. 7

13. Buffer stocks: price ceiling and price support
Developing nations and trade
Buffer stocks: price ceiling and price support
Carbaugh, Chap. 7

14. Developing nations and trade
Cartels
Attempt to restrict competition among producers and support higher prices for their product
OPEC is a prime example
Face obstacles:
Incentive to cheat
Number of sellers
Cost and demand differences
Potential competition
Economic downturns
Substitute goods
Carbaugh, Chap. 7

15. Growth strategies Import substitution Export-led growth
Developing nations and trade
Growth strategies
Import substitution
Trade barriers protect emerging domestic industries
Popular in 1950s and 1960s
Export-led growth
Focus on export of manufactures as engine of growth
Became more common starting in 1970s
Carbaugh, Chap. 7

16. Import substitution: pros
Growth strategies
Import substitution: pros
Risk of establishing home import-replacing industry is low because home market already exists
Easier for developing nations to protect their own markets than to force industrial nations to open theirs
Gives foreign firms an incentive to locate production in developing country, providing jobs
Carbaugh, Chap. 7

17. Import substitution: cons
Growth strategies
Import substitution: cons
Trade restrictions shelter home industry from competition, giving no incentive for efficiency
Small size of most developing country markets makes it difficult to benefit from economies of scale
Protection of import-competing industries draws resources away from all other sectors, including potential exporters
Once firms have sunk investments in sectors which only became profitable when protected, they will tend to resist ever removing those protections
Carbaugh, Chap. 7

18. Export-led growth: pros
Growth strategies
Export-led growth: pros
Encourages industries in which developing countries are likely to have a comparative advantage - such as labor-intensive manufactures
Export markets allow domestic producers to utilize economies of scale
Low level of trade restrictions forces domestic firms to remain competitive
Carbaugh, Chap. 7

19. Export-led growth: cons
Growth strategies
Export-led growth: cons
Main disadvantage to export-led growth is that it depends on the ability and willingness of industrial nations to absorb large quantities of manufactures from developing countries
In other words, it is sensitive to economic cycles and protectionist pressures in the export markets
Carbaugh, Chap. 7

20. Openness and economic growth
Growth strategies
Openness and economic growth
Average Annual Growth in Real Income per Capita (%)
Source: David Dollar and Aart Kraay, Trade, Growth, and Poverty, World Bank Development Research Group, 2001.
Carbaugh, Chap. 7

21. Growth strategies: case studies
Brazil - import substitution in computers
Policy backfired, and was abandoned by 1991
East Asian newly industrialized countries - export-led growth
Generally very successful, until 1997 crisis
High rates of investment and building human capital
Problems overlooked: pollution, income distribution
Vulnerable to protectionist reactions elsewhere
Carbaugh, Chap. 7

22. Growth strategies: case studies
China - transformation from extreme import-substitution to focus on exports
Dramatic change in China’s role in the world economy has accompanied rapid growth in its domestic economy
Heavy state role in economy (legacy of central planning) raises issues of fairness
Political issues, lack of enforcement of some agreements (intellectual property) complicate economic relations
Accession to the WTO will mean adherence to global trade rules - and coping with the dislocations that will involve
Carbaugh, Chap. 7