TRADE POLICY

FOR DEVELOPING Ch. 7 Carbaugh

NATIONS
STRUCTURE OF
LECTURE
Definition of Advanced/Developing Nations
Trade Characteristics of Developing Nations
Trade Problems in Developing Nations
Aids to Developing Nations
Optimal Economic Growth Strategies for Developing
Nations
TRADE POLICIES FOR
THE DEVELOPING
NATIONS
Advanced nations
High levels of gross domestic product per capita
Longer life expectancies
Higher levels of adult literacy
Developing nations
Low levels of GDP / Capita
Shorter life expectancies
Lower levels of adult literacy
http://hdr.undp.org/en/content/latest-human-de
velopment-index-ranking
DEVELOPING-NATION
TRADE CHARACTERISTICS
Highly dependent on advanced nations
Imports originate in advanced nations
Exports mainly to advanced nations primarily in:
Primary products
Agricultural goods, raw materials, and fuels
Simple Manufactured goods
Textiles, Labor intensive, Low - Technology
Trade among developing nations is relatively
minor
INTERNATIONAL
TRADE IN
DEVELOPING
COUNTRIES
For more on International Trade in Developing
countries please click on the link below:
https://sdgpulse.unctad.org/trade-developing-economie
s/#:~:text=In%202019%2C%20developing%20econo
mies'%20share,cent%20(US%241.83%20trillion)
.
 DEVELOPING-NATION
TRADE CHARACTERISTICS

Investment in human capital and technology

have played a role in this move
Higher educational levels. Average
education and capital stock have increased
throughout the developing world
Higher capital stock per worker
Improvements in transport & communications
allow developing nations to play a greater role in
global production sharing
Trade Reforms- the liberalization of trade
barriers
TENSIONS BETWEEN
DEVELOPING-NATIONS &
ADVANCED NATIONS
Poor nations-
Need to take advantage of international trade
Problem: advanced world – increased barriers
to imports from developing nations- trade
protection imposed by advanced countries for
import competing products especially textiles and
agriculture.
Other problems:
Structural weaknesses
Nonexistent or inadequate institutions and
policies
Law and order, sustainable macroeconomic
management, and public services
TRADE PROBLEMS
OF THE DEVELOPING
NATIONS
Unstable Export Markets
Exports - concentrated in only one or a few primary
commodities
A key factor underlying the instability of prices and
producer revenues is the low price elasticities of
demand and supply for products such as copper, tin
and coffee
Changes in demand induce wide fluctuations in price
when supply is inelastic
Changes in supply induce wide fluctuations in price
when demand is inelastic
FIGURE 1- EXPORT PRICE
INSTABILITY
FOR A DEVELOPING NATION
 INELASTIC SUPPLY
AND PRICE
INSTABILITY

Fig 1 illustrates demand and supply for

coffee. Assume that these are highly inelastic.
Market equilibrium initially at point A.
Revenues of coffee producers $22.5mn
Suppose that there is a decrease in foreign
incomes. With the supply of coffee being
inelastic, the decrease in demand causes a
substantial decline in market price from $4.50
to 2 sold. TR falls to $8mn
Conclusion: Coffee prices and earning can be
highly volatile when market supply is inelastic
 INELASTIC DEMAND
AND PRICE
VOLATILITY
Changes in supply induce wide fluctuation in
price when demand is inelastic.
Suppose that favourable growing conditions
cause an increase in the market supply of
coffee. The result is a substantial drop in price
from $4.50 to $2 per pound and producer
revenue fall to $14mn
Prices and revenues can be volatile when
demand conditions are inelastic
TRADE PROBLEMS
OF THE DEVELOPING
NATIONS
Falling Commodity Prices Threaten Growth of
Exporting Nations
2000-2008 - increasing commodity prices benefited
developing nations
2008-15- recession, shrinking economies, lower
demand, falling prices
Between 2015 and 2018 commodity prices were volatile
but generally followed a downward trend especially for
agricultural products and minerals
Economies of developing nations tied to primary
products, exported to advanced nations
Advanced nation economic downturns passed on to
developing nations
https
 TRADE PROBLEMS
OF THE DEVELOPING
NATIONS
Worsening Terms of Trade for developing
countries
Prices of exports relative to imports have fallen – so
they have to export more and more goods to get the
same amount of imports.
Imports - manufactured goods traded in monopolistic
markets in advanced nations.
Exports - primary goods traded in competitive markets and
productivity gains result in lower prices
Hence market forces cause the prices they pay for imports to
rise faster than the prices commanded by their exports,
resulting in a deterioration of their terms of trade
As income rises, people tend to spend more money on
manufacturing items than on primary goods, thus contributing
to a worsening in developing nations terms of trade
http://www.sanandres.esc.edu.ar/secondary/economics%20packs/international_economics/p
age_89.htm
TRADE PROBLEMS
OF THE DEVELOPING NATIONS

Limited Market Access

Global protectionism
Higher tariffs.
Tariff escalation
Quotas & other NTBs on imports -
 TRADE PROBLEMS
OF THE DEVELOPING NATIONS

Agricultural Export Subsidies of Advanced

Nations
Discourages agricultural imports by
encouraging the production of agricultural
commodities domestically
Displaces developing-nation shipments to
advanced-nation markets
Results in unwanted surpluses which:
Are often dumped on to the world markets
Lead to decreasing prices for many
agricultural commodities sold by developing
countries
Reduces the export revenues of developing
 AIDING THE DEVELOPING
NATIONS

The World Bank-

Provides loans & grants to developing nations for
poverty reduction & economic development
Funds for specific development such as hospitals,
schools, highways, dams, rebuilding
World Bank’s role diminishing; new competitors
fund developing nations .
 BRICs funding infrastructure & industry for poor
nations to lock in access to raw materials
 AIDING THE DEVELOPING
NATIONS

International Monetary Fund

A bank for the central banks of member nations

Two major sources of IMF funds
 Quotas
 Subscriptions, pooled funds of member nations;
generate most IMF funds; larger quota for wealthier
nations
 Loans
 Loans from member nations
 All IMF funds are subject to some degree of
conditionality. That is to obtain a loan, a deficit nation
must agree to implement economic and financial
policies as stipulated by the IMF.
 AIDING THE DEVELOPING
NATIONS
Generalized System of Preferences (GSP)
Major advanced nations temporarily reduce tariffs
on designated manufactured imports from developing
nations below the levels applied to imports from other
advanced nations

Attempts to promote economic development

through increased trade rather than foreign aid
Trade preferences granted by a nation are voluntary;

Limited usefulness as preferences mainly apply to

products that are already facing relatively low tariffs.
Second, tariff preferences can be eroded by nontariff
measures such as antidumping duties and safeguards
DOES AID PROMOTE GROWTH
OF DEVELOPING NATIONS?
Critics contend aid prolongs bad governments,
favors the wealthy in poor nations. They note
widespread poverty in South Asia and Africa
despite 4 decades of aid (eg Haiti, DRC, Somalia,
Papua New Guinea)
Proponents counter that although sometimes
ineffective, has reduced poverty, spurred
growth & prevented worse performance in other
nations
Global Development distinguishes type of aid
For infrastructure development (such as transportation,
communications, energy generation & banking services),
growth oriented aid which has strong effect on
economic growth
Disaster & humanitarian relief, food supply, water
 ECONOMIC GROWTH STRATEGIES:
IMPORT SUBSTITUTION

Extensive use of trade barriers

 To produce goods which were formerly imported by
protecting domestic industries from import competition
through trade barriers
Inward-oriented
 Trade and industrial incentives favor production for the
domestic market over the export market
 Extension of Infant-industry argument
ECONOMIC GROWTH
STRATEGIES: IMPORT
SUBSTITUTION VS EXPORT
LED GROWTH
Advantages of import substitution
 Low risks of establishing a home industry to replace
imports because the home market for
manufactured goods already exists
 Easier to protect from foreign competitors
 Foreign firms have an incentive to locate
manufacturing plants in a developing nation
providing jobs for local workers (& avoid tariff walls)
ECONOMIC GROWTH
STRATEGIES: IMPORT
SUBSTITUTION
Disadvantages of import substitution
Domestic industries have no incentive to
increase their efficiency
Producers cannot avail of economies of
scale given the small size of domestic
markets
Discriminates against all other producers
(apart from import competing producers)
including potential exporting ones
Very difficult to remove the restrictions once
placed
Breeds corruption. The more protected the
economy, the greater the gains to be had from
ECONOMIC GROWTH STRATEGIES: EXPORT-LED GROWTH

Export-oriented policy
Outward oriented - links the domestic
economy to the world economy
Promote growth through the export of
manufactured goods
Trade controls - nonexistent or very low
Industrialization
Natural outcome of development
ADVANTAGES OF EXPORT-
ORIENTED POLICIES
 Encourage industries in which developing
nations are likely to have a comparative
advantage (such as labour intensive
manufactured goods)

 Allow domestic producers greater scope for

exploiting economies of scale by providing
a larger market in which to sell

 Impose a competitive discipline on domestic

firms that forces them to increase efficiency by
maintaining low restrictions on imported goods
 CAN ALL DEVELOPING NATIONS ACHIEVE EXPORT
LED GROWTH?

Although exporting can promote growth,

dependent on willingness of advanced
nations to absorb many goods from developing
nations.
Pessimists argue that if all developing nations
tried to export simultaneously, price of their
exports would drop
Moreover, advanced nations may become
apprehensive of foreign competition,
especially during recessions and impose
tariffs to reduce competition from imports
But production of developing nations equals
only 5% of world output-
EAST ASIAN ECONOMIES

Economic success
 Highly diverse in natural resources,
populations, cultures, and economic policies

 High rates of investment

 High and increasing endowments of

human capital due to universal primary and
secondary education
EAST ASIAN ECONOMIES
Foster competitiveness
 Invested in people
 Provided a favorable competitive climate for private
enterprise
 Economies - open to international trade
 Actively sought foreign technology
 Discouraged the organization of trade unions
 Free and competitive labor markets
Growth fostered from export led promotion strategies for
fast growing developing countries while those that have
followed import substitution strategies have been left
behind
Success has created problem including pollution and
trade surpluses which has triggered protectionist
sentiments overseas especially in the US market
EAST ASIAN ECONOMIES
Flying Geese Pattern of Growth
Nations gradually move up in technological
development
By following in the pattern of nations ahead of
them in the development process
The flying Geese pattern of growth is a result of
market forces. Labour abundant nations will
become globally competitive in labour intensive
industries, such as footwear and will graduate to
more capital or skill intensive industries as
savings and education deepen the availability of
capital and skilled workers.
East Asian governments have uses several
versions of export platforms such as free trade
EAST ASIAN GROWTH
RATES 2013-2019

https://public.tableau.com/views/PerCapitaGDPGrowthR
ate-DatasetVisualization/Story1?:embed=y&:embed_co
de_version=3&:loadOrderID=0&:display_count=y&publ
ish=yes&:origin=viz_share_link
The table shows the high growth rates of East Asian
countries between 2013 and 2019 at a time when
more advanced nations are struggling with low
economic growth and high unemployment
SUMMARY
Developing countries face unique trade problems that
hinder their rate of economic growth
Although direct aid is useful, economic evidence
would suggest that developing countries pursue export
led growth strategies
For this to be successful industrial countries must play
a role