Trade Policies for the Developing Nations Chapter 7 Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.
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Trade Policies for theDeveloping Nations
Chapter 7
Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.
Developing Nations Characteristicso developing nations – relatively low per capita
GDP, life expectancy and adult literacyo exports tend to focus on primary products such
as agricultural goods, raw materials & fuels
Developing Nations Trade Problemso question on distribution of trade benefitso unstable export markets o concentration
of exports particularly problematic
o poor output or decreased demand will significantly decrease trade revenue
Developing Nations Problems (cont.)o inelastic supply and demand also problemso shift in either demand or supply could cause
large decrease in prices and revenues
Developing Nations Problems (cont.)o declining terms of trade
• developing nations concern that terms of trade have deteriorated
• data does not support this conclusiono limited market access
• industrial countries impose higher tariffs on developing countries than on other industrial
• tariff escalationo agricultural export subsidies in advanced
countries
International Commodity Agreements1) production and export controls – target price
determines total quantityo lowering production leads to an increase in priceo raising production leads to a decrease in price
2) buffer stock – association maintains stock of exported goodo buys additional stock to raise priceo sells from existing stock to lower price
3) multilateral contracts – agreement stipulating minimum price at which importers will purchase and maximum price at which exporters will sell
Maximizing Cartel Profitso If individual suppliers compete with each other
prices will fall to relatively low levels.oOPEC or any
cartel colludes to reduce output levels which increase price and profits for individual firms.
oProfits are maximized where MC=MR.
Obstacles to Collusion1) number of sellers: greater number of sellers
makes collusion more difficult2) cost & demand differences: make it difficult to
agree on price3) potential competition: possibility of new firms
entering market would cause agreement to break apart
4) economic downturn: falling profits make firms more likely to reduce prices
5) substitute goods: if consumers have alternatives available, higher cartel prices may cause consumers to shift purchases
Aiding Developing CountriesWorld Banko international organization that provides loans to
developing countrieso poverty
reduction and economic development
o UN specialized agency with 185 member nations
Aiding Developing Countries (cont.)International Monetary Fund (IMF)o finances balance-of-payments for member
nationso lender of last resorto to obtain loan nation must agree to IMF fiscal
and monetary policy stipulations
Generalized System of Preferenceso industrialized nations temporarily reduce tariffs
on designated products from developing nationso trade preferences are voluntary
Does Aid Promote Growth?critics:o aid fosters bureaucracyo prolongs bad governmento moral hazard problems
proponents:o enhanced poverty reductiono prevented further decline in some nationso growth-oriented aid which improves and
expands infrastructure has strong economic impact
Import Substitutiono use of trade barriers to protect domestic
industrieso establishment of domestic industries to produce
goods previously importedo based on rational that developing countries
cannot compete with established producers of industrial goods – infant industry argument
o advantages: low risk, easily accomplished, and provides incentive for others to relocate
o disadvantages: inefficient production, lack of economies of scale, discriminated against other non-protected industries, and corruption
Export-Led Growtho trade controls limited or completely eliminatedo industrialization as natural result of developmento advantages: promotes production based on
comparative advantage, larger world market, and promotes efficient production
Questions on Economic GrowthGrowth Good for the Poor?o critics: growth leads to increased income
inequalityo counter: higher growth rates decrease poverty o counter: World Bank study indicating incomes
of poor rose in proportion to overall growth
Export Led Growth & Developing Countries? o critics: increased exports lead to decreased
prices in world marketso counter: developing countries as a group would
not have a huge impact on world markets
East Asian Economieso substantial economic
growth 1995-2005o high rates of
investmento increasing human
capital - educationo discouraged union
formationo initially relied on import substitution then shifted
to export-push strategieso flying-geese pattern of growth – nations
advance technologically by following pattern set by more advanced nations
China’s Transformation to Capitalismo centrally planned economy from 1949-1970so minimal international tradeo 30th largest exporting country
o China “marketized” economy from 1970s forward
o goods sold for market-determined priceso production based comparative advantageo labor intensive goods such as sporting goods,
toys, footwear, garments & textileso entered WTO in 2001o world’s 2nd largest economy by 2005
India’s Economic Developmento 1947 independence brought socialism and
import substitutiono isolationist from 1950s to 1980s
o 1991 saw large reduction in tariffs and removal of ban on foreign investment
o multinational companies outsourced back office operations to India
o competitive auto market with free trade improved efficiency in auto production
o forecast to become most populous country by 2030
o however retail sector still regulated and inefficient due to closed markets
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