1. Trade Policy for Developing Country
Session 14
Trade Policy for Developing Country

2. 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 also have comparative advantages based on “less-skilled labor”.

3. 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.

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

5. Developing Country Other Countries Restrict Subsidize
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

6. This could be achieve in many ways.
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
These product are based on the country’s comparative advantages (i.e., products base on land and less-skill labor resources.)
This could be achieve in many ways.

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

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

9. < 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.

10. 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.

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

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

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

14. Price Quantity 3. Declining Market share
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”

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

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

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

19. 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.