Trade Policies for the Developing Nations Chapter 7 Copyright © 2009 South-Western, a division of Cengage Learning. All rights reserved.

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