1、7 Trade Policies for the Developing NationsIntroduction Economic and social indicators(Table 7.1)Developing nations Misgivings about international trading systems Skepticism regarding the comparative advantage principle and free trade Policies aimed at improving the economic conditions of developing
2、 nationsBackDeveloping-Nation Trade Characteristics Trade highly dependent on advanced nations Composition of exports Emphasis on primary products Manufactured goods-Labor intensive;modest amounts of technology used Structure of output(Table 7.2)Dominance of primary products has greatly diminished i
3、n the past three decadesBackChange in the Characteristics of Developing-Nation Trade Investments in both people and factories Sharp rise in average educational levels and capital stock per worker Improvements in transport and communications,in conjunction with reforms Liberalization of trade barrier
4、s after mid-1980s Certain developing countries have not integrated strongly into the global economyTensions Between Developing Countries and Advanced Countries Best strategy for a poor country to take advantage of international trade Developing countries have opened markets to international trade an
5、d foreign investment Import barriers set by advanced nations Reasons for Tensions Need for topmost countries to create new industries and products Stalling of innovation leads to competition from lower-wage workers Protectionist bias against catching up Advanced countries Trade-off between helping t
6、heir own,and the worlds poorTrade Problems of the Developing Nations Unstable export markets Worsening terms of trade Limited access to markets of industrial countriesUnstable Export Markets Characteristic of many developing nations:Concentration of exports in one or few primary products(Table 7.3)K
7、ey factor underlying instability of primary product prices and producer revenues:Low price elasticity of demand and supply schedules for products(tin,copper,coffee)Export price instability for a developing country(Figure 7.1)BackBackWorsening Terms of Trade Used to justify the refusal to participate
8、 in trade-liberalization negotiations Demand for preferential treatment Developing nations complain about deteriorating commodity terms of trade UN study in 1949 supported the assertion of worsening commodity terms of trade Other studies led to opposite conclusions about terms-of-trade movementsLimi
9、ted Market Access Global protectionism-a hindrance to market access Especially true of agriculture and labor-intensive manufactured products(Figure 7.2)Rich nations maintain barriers in areas where developing nations have comparative advantage Developing nations plagued by tariff escalation Antidump
10、ing and countervailing duties act as substitutes for traditional trade barriersBackLimited Market Access Poor countries have leaned on the U.S.and Europe to reduce trade barriers Average tariff rate of developing countries is higher(Table 7.4)Critics note:Developing countries themselves are part of
11、their problem They should liberalize trade Justification provided by developing nations:Poor countries do not have social safety net and reeducation programs to cushion trade disadvantagesContinuedBackU.S.Subsidies Support American Farmers World cotton prices in year 2002 decline to an unprofitable
12、level Comparison:West Africa:Price being offered to farmers not sustainable Mississippi Delta,U.S.:Farmers receive governmental subsidies No indications of depression in priceU.S.Subsidies Support American Farmers Since September 11,2001:Strategy to combat poverty as part of campaign against terrori
13、sm Counteracted by subsidies to U.S.farmers Lowers world prices of vital cash crops upon which developing nations depend Removal of U.S.subsidies would bring a rise in world cotton prices American cotton farmers maintain subsidies essential for survivalContinuedU.S.Food Aid Support American Farmers
14、Growers in developing countries complain of U.S.policy on purchasing food grain for assistance U.S.view:Policy supports American farmers,processors,and shippers,and the worlds hungry Developing countries prefer food-aid policy of the European Union Analysts estimate:Transport and handling costs from
15、 U.S.to Africa add on to cost Greatest benefit:Provides economic stimulus by providing cash to farmers in developing nationsStabilizing Primary-Product Prices International commodity agreements(ICAs)Agreements between leading producing and consuming nations of commodities such as coffee,rubber,and c
16、ocoa Areas include:Stabilizing prices Assuring adequate supplies to consumers Promoting economic development of producers Measures only have limited successProduction and Export Controls Stabilizing export revenues Affect price of commodities by influencing the world supply of the commodity Total qu
17、antity based on target price agreed to by member countries Obstacle in attempting to impose limits on production and exports Distribution of the limits among producing nations New producers drawn into the market by artificially high pricesBuffer Stocks Producers association(or international agency)i
18、s prepared to buy and sell a commodity in large amounts Consists of supplies of a commodity financed and held by producers association Hypothetical price-stabilization efforts of the International Tin Agreement(Figure 7.3)BackBuffer Stocks Advantages:Primary producing nations Promotes economic effic
19、iency Stabilizing commodity prices moderates the price inflation of industrialized nations Limitations:Agreeing on target price that reflects long-term market trends High costs of holding the stocks Include transportation expenses,insurance,and labor costs Poor decisions in choice of price targetsCo
20、ntinuedMultilateral Contracts Stipulates a minimum,and maximum price for purchase and sale of guaranteed quantities between producing nations and importers Designed to hold prices within a target range Results in less distortion of the market mechanism and allocation of resources Tend to furnish onl
21、y limited market stabilityDoes the Fair-Trade Movement Help Poor Coffee Farmers?Started in Europe in the early 1990s Objective:To increase income of poor farmers in developing countries Farmers sell their beans directly to roasters and retailers,bypassing middlemen in their own countries Results:Inc
22、reases farmers earnings Sets prices and arranges for export directly to brokerage firms and other distributors Critics:Biggest winners are not farmers,but retailersThe OPEC Oil Cartel Maximize member nation profits by supporting prices higher than would exist under more competitive conditions Market
23、 power stemmed from a combination of:A strong and inelastic demand for oil,and Control over half of world oil production and two-thirds of world oil reserves Exercise considerable control over world oil prices,by restricting competition among member nations Maximizing Cartel Profits Cartels attempt
24、to support prices higher than they would be under more competitive conditions Increasing the profits of its members Demand and cost conditions of 10 oil suppliers(Figure 7.4)BackObstacles in Forming a Cartel Number of sellers Cost and demand differences Potential competition Economic downturn Substi
25、tute goodsOPEC as a Cartel Has disavowed the term“cartel”Attempted to formulate plans for systematic production control among its members as a way of firming up oil prices Does not control prices Currently controls less than 40%of world supply Affected by high member violation of agreement:Higher pr
26、oduction than assigned quotas Exception:Saudi ArabiaNeed to Offset the Market Power of OPEC Policy initiation to increase supply and/or decrease demand Difficulties for the U.S.,to achieve these:Raising fuel economy standards mandated by the federal government Increasing federal excise tax on gasoli
27、ne Allowing oil companies to drill on federal land designated as wilderness in Alaska,where there is a good chance they might find oil Diversifying importsAiding the Developing Countries Institutions and policies created to support developing countries:The World Bank The International Monetary Fund
28、The generalized system of preferencesWorld Bank Provides loans to developing countries Member governments and their agencies Private firms in member nations Aimed toward poverty reduction and economic development Made up of 184 member countries One among UNs specialized agenciesWorld Bank Group Inte
29、rnational Bank for Reconstruction and Development International Development Association International Finance Corporation Multilateral Investment Guarantee Agency International Center for Settlement of Investment DisputesWorld Bank Group:Functions Provisions:Low-cost loans and grants Equity,long-ter
30、m loans,loan guarantees,and advisory services Provides encouragements to foreign investment through:Guarantees to investors against losses caused by war,civil disturbance,etc International facilities for conciliation and arbitration of investment disputes World Bank lending by sector(Table 7.5)BackI
31、nternational Monetary Fund(IMF)Consists of 184 nations A bank for member nations central banks Provides assistance with regard to BOP surpluses,or deficits Major sources of funds:quotas and loans All loans subject to a degree of conditionality Critics note:The moral-hazard problem Contractionary eff
32、ect of restrictive monetary and fiscal policy conditionsGeneralized System of Preferences Attempts to promote economic development through increased trade,rather than foreign aid Major industrial nations temporarily reduce tariffs on designated manufactured imports below the levels applied to import
33、s from other industrial nations Trade preferences granted by industrial countries are voluntary Program extends duty-free treatment to about 3,000 itemsGeneralized System of Preferences:Limitations Mainly apply to products that already face relatively low tariffs Products and countries removed from
34、GSP eligibility because of lobbying by domestic interest groups in importing countries Insufficient assistance to majority of the worlds poorDoes Aid Promote the Growth of Developing Countries?Critics maintain that aid has:Fostered government bureaucracies Prolonged bad governments Favored the wealt
35、hy in poor countries Been squandered Proponents counter:Contentions,while partially true,are overstated Aid enhances poverty reduction and growth in some countries Aid prevents worse performance in other countriesDoes Aid Promote the Growth of Developing Countries?Center for Global Development in Wa
36、shington,DC,research attempts to resolve this debate Distinguishing between types of aid granted:Aid for the development of infrastructure Considered to have relatively strong effects on economic growth Designated as growth-oriented aid Aid for disaster and humanitarian relief:Tend to have less imme
37、diate effects on economic growthContinuedEconomic Growth Strategies Developing countries have pursued two competing strategies for industrialization besides economic assistance:Import substitutionExport-led growthImport Substitution Extensive use of trade barriers to protect domestic industries from
38、 import competition Trade and industrial incentives favor production for the domestic market over the export marketImport Substitution:Advantages Low risks of establishing a home industry to replace imports Easier to protect its manufacturers against foreign competitors than to force industrial nati
39、ons to reduce trade restrictions To avoid the import tariff walls of the developing country,foreigners can locate manufacturing plants in the countryImport Substitution:Disadvantages No incentive for sheltered industries to increase efficiency Limited economies of scale and high unit costs due to sm
40、all market size of developing countries Considering resource utilization,protection of import-competing industries automatically discriminates against all other industries Resistance to removal of restrictions Breeds corruptionImport-Substitution Laws Backfire on Brazil Restrictions to foster a home
41、grown electronics industry:Policies prohibiting electronic imports Ban on foreign investment in Brazilian manufacturing plants Only 30 percent foreign ownership in local business Effect:Brazilian electronics industry was uncompetitive and technologically outdatedImport-Substitution Laws Backfire on
42、Brazil Ban lifted in 1991 Continued to protect domestic industry with high import duties Foreign partners were permitted to:Raise ownership shares to 49 percent Transfer technology into the Brazilian economyContinuedExport-Led Growth Links the domestic economy to the world economy Involves promoting
43、 growth through the export of manufactured goods Trade controls either nonexistent or very low Industrialization viewed as a natural outcome of developmentExport-Led Growth:Advantages Encourage industries in which developing countries may have a comparative advantage Access to larger markets ensures
44、 greater scope for exploiting economies of scale for domestic manufacturers Low restrictions on imported goods imposes a competitive discipline on domestic firms Relationship between openness and economic growth(Figure 7.5)BackIs Economic Growth Good for the Poor?Critics view:Potential benefits unde
45、rmined or even offset entirely by sharp increases in inequality that accompany growth Proponents view:Liberal economic policies raise incomes of the poor and everyone else in society proportionately Researchers at the World Bank confirm:Incomes of the poor have risen one for one with overall growth
46、Conclusion:Growth benefits poor as much as everyone else,so that growth-enhancing policies should be at the center of successful poverty reduction strategiesCan All Developing Countries Achieve Export-Led Growth?Depends on willingness and ability of industrial countries to go on absorbing large amou
47、nts of goods from developing countries Pessimists argue that this process involves a fallacy of composition Pessimists tend to underestimate the scope for intraindustry specialization in trade,which gives developing countries a further set of new trade opportunitiesEast Asian Economies Economic grow
48、th rates of the East Asian economies have been notable in recent years(Table 7.6)Common characteristics underlying economic success:High rates of investment High and increasing endowments of human capitalBackFlying-Geese Pattern of Growth In East Asian economies,countries gradually move up in techno
49、logical development by following pattern of countries ahead of them in the development process A result of market forces Governments have utilized several versions of an export platform:Bonded warehouses Free-trade zones Joint ventures Strategic alliances with multinational enterprisesChina:Awakenin
50、g Giant Early 1970s:Insignificant participant in world market for goods By 2005:Worlds second largest economy Reasons for growth:Chinas marketizing its economy through changes,minimizing economic disruption and political opposition Economy opened to foreign investment and joint ventures Governments
