1. Chapter 13 Slide 1 Copyright © 2003 Pearson Education, Inc. Trade Strategies for Development: Export Promotion versus Import Substitution n Export promotion: looking outward and seeing trade barriers –primary-commodity export expansion –expanding manufactured good exports n Import substitution: looking inward but still paying outward –tariffs, infant industries, and protection

2. Chapter 13 Slide 2 Copyright © 2003 Pearson Education, Inc. Drawbacks of ISI n Protection  Inefficiency n Protection  Foreign Ownership  Profits Remitted n Copy MDC Technologies  High Capital Intensities  Little benefit to abundant labor / Limited learning n Import capital goods  weak backward linkages n Forward linkages penalized: Brazilian computers for Brazilians. n Protection  Overvaluation Traditional exports hurt – urban vs. rural bias Capital intensity further encouraged

3. Chapter 13 Slide 3 Copyright © 2003 Pearson Education, Inc. Overvaluation n How? –Run down reserves / borrow more reserves –Reduce imports via tariffs and NTBs –Ration available foreign exchange Dual exchange rates / preferred customers/ rent seekers n Why not? –Hurt exporters: reduced sales / reduced value of proceeds –Nation lives beyond means … temporarily –Eventual sharp devaluation: Import Prices  CoL  Wage–Price Spiral  Worsened B of P  Currency Crisis

4. Chapter 13 Slide 4 Copyright © 2003 Pearson Education, Inc.

5. Chapter 13 Slide 5 Copyright © 2003 Pearson Education, Inc. Why Tariffs? n Government revenue n Discourage imports/Improve b of p n Foster economies of scale n Reduce dependency on MDCs n Attract FDI – they get in under tariff barrier n EFFECTIVE RATE OF PROTECTION Net nominal tariff relative to value added

6. Chapter 13 Slide 6 Copyright © 2003 Pearson Education, Inc.

7. Chapter 13 Slide 7 Copyright © 2003 Pearson Education, Inc. n Trade pessimists –Slow growth of demand for primary products Low Income Elasticity/Increased Efficiency/Synthetics –Terms of trade deterioration over time –MDC import barriers n Trade optimists –Competition  efficiency –Economies of scale for efficient sectors –Attract foreign capital –Generate foreign exchange Propels Growth – When World Demand is Strong

8. Chapter 13 Slide 8 Copyright © 2003 Pearson Education, Inc. South-South Trade and Economic Integration n Growth of trade among developing countries n Economic integration: theory and practice –Industrial complexes  Economies of scale n Regional trading blocks and the globalization of trade –NAFTA: Mexican boom, ~ 1996 - 2000 –Mercosur: Brazil / Argentina / Paraguay / Uruguay Real depreciation  Argentine Tariffs –Andean Group Colombia/Ecuador/Peru/Bolivia/Venezuela

9. Chapter 13 Slide 9 Copyright © 2003 Pearson Education, Inc.

10. Chapter 13 Slide 10 Copyright © 2003 Pearson Education, Inc. Trade Policies of Developed Countries: the Need for Reform n Rich-nation tariff and nontariff trade barriers and the 1995 Uruguay Round n The problem of adjustment assistance n Domestic economic policies

11. Chapter 13 Slide 11 Copyright © 2003 Pearson Education, Inc. The Poor Face High Tariffs

12. Chapter 13 Slide 12 Copyright © 2003 Pearson Education, Inc. Concepts for Review n Adjustment assistance n Autarchy n Common market n Customs union n Depreciation n Devaluation n Dual exchange rate n Economic integration n Economic Union n Effective rate of protection n Exchange control n Exchange rate n Export promotion n Flexible exchange rate n Free-market exchange rate

13. Chapter 13 Slide 13 Copyright © 2003 Pearson Education, Inc. Concepts for Review, cont’d n General Agreement on Tariffs and Trade (GATT) n Globalization n Import substitution n Infant industry n International commodity agreements n Inward-looking development policies n Multi-Fiber Arrangement (MFA) n New protectionism n Nominal rate of protection n Nontariff trade barriers

14. Chapter 13 Slide 14 Copyright © 2003 Pearson Education, Inc. Concepts for Review, cont’d n Official exchange rate n Outward-looking development policies n Overvalued exchange rate n Parallel exchange rate n Quotas n Regional trading bloc n Rent seeking n Synthetic substitutes n Tariffs n Trade creation n Trade diversion n Trade liberalization n Trade optimists n Trade pessimists

15. Chapter 13 Slide 15 Copyright © 2003 Pearson Education, Inc. Concepts for Review, cont’d n Uruguay Round n Value added n Wage-price spiral n World Trade Organization (WTO)