IPE 10/15

Trade as a Tool for Development

Overview of Key Agenda Items

  • Trade as a tool for development: The primary focus is on how trade serves as an instrumental strategy for economic growth and development.

  • Industrial Policy: A key concept wherein governments strategically influence the development of their industries.

  • Trade-related development policies: Policies that link trade with broader economic development goals.

  • Import-Substitution Industrialization (ISI): A strategy aimed at reducing foreign dependency through local production.

  • Export-Oriented Industrialization (EOI): A strategy focusing on manufacturing goods for export to promote economic growth.

  • Washington Consensus: A set of 10 economic policy prescriptions deemed necessary for economic growth in developing countries.

  • China’s trade policy: Examination of China's modern trade practices and their implications on the global economy.

  • Cultural Reference: Inclusion of Harry Belafonte’s song "Banana Boat (Day-O)" as a thematic element.

Key Reflection and Inquiry

  • Reflection Question: What are the positive aspects of trade?

  • Interactive Engagement: An instapoll gives students the chance to reflect on the benefits of trade.

Benefits of Trade

Trade as a Tool for Development

  • Importance of Trade Policy:

    • Defined as a key element of industrial policy.

    • Industrial Policy: Refers to government initiatives aimed at determining the types and levels of economic activities within a nation.

    • National-level analysis is crucial to understanding the impact of these policies.

    • Governments leverage trade policy to drive economic development by combining trade liberalization and protectionist measures.

    • This blended approach is prevalent in both developing and developed nations.

Industrial Policy Trends in the United States

  • Shift in Perception: Industrial policy has historically been viewed negatively in the U.S., often referred to as “picking winners.”

    • This term can often signify initiatives that promote innovation.

  • Rising Acceptance: Industrial policy is gaining traction in U.S. policy discussions, with examples such as:

    • Federal investments in green energy sectors.

    • Subsidies directed at chip manufacturing.

    • Implementation of tariffs and non-tariff barriers (NTBs) to protect local aluminum and steel industries.

    • Policies advocating for “Made in America” initiatives.

Economic Development

  • Definition: Refers to the progressive enhancement of the standard of living for a society, often quantified by economic growth metrics.

  • Development Pathway:

    • Characterized by a transition from being a primary good exporter to establishing competitive manufacturing sectors.

  • Challenges for Primary Exporters:

    • Revenue from commodities tends to be volatile, complicating government planning and fiscal management.

    • Growth within industries can become constrained by the availability of natural resources.

Historical Approaches to Trade-Based Industrial Policies

  • Mixed Success of Trade-Based Policies: Countries have adopted varying degrees of industrial strategies with varying outcomes:

    • Import-Substitution Industrialization (ISI): Primarily utilized in Latin America during the 1960s and 1970s.

    • Export-Oriented Industrialization (EOI): Gaining traction in East Asia since the 1990s.

    • Neoliberal/ Washington Consensus Persuasion: Impactful in Eastern Europe and former USSR during the 1990s to 2000s.

Import-Substitution Industrialization (ISI)

Strategy Overview

  • Governments select specific industries for growth and implement trade policies to minimize foreign importation.

    • Tools: Tariffs, quotas, and trade embargoes to shield domestic industries.

    • Investment Strategy:

    • Financial support for infant industries to encourage local substitutes for imported goods.

    • Includes subsidies for private firms and establishment of state-owned enterprises (SOEs).

    • Consumers may be compelled to purchase these domestically produced, albeit lower-quality products.

    • The underlying goal is to return to free trade once these industries mature and can compete globally.

    • Historical Outcome: The 1980s marked a downturn for Latin America, often referred to as the “Lost Decade.”

Export-Oriented Industrialization (EOI)

Strategy Overview

  • Specifically targets industries for export growth, with key characteristics:

    • Export Promotion: Trade policies favoring exports include substantial financial subsidies for exporters (contrary to free trade principles).

    • Domestic Competitive Landscape: Avoids protecting domestic firms from imports, focusing instead on fostering competitive industries.

    • Consumer Goods: Not prioritized; emphasis placed on capital and intermediate goods.

    • As industries mature and compete in global markets, the state can gradually reduce or redefine support systems.

    • Influential Success Examples: “Asian Tigers” (Hong Kong, Singapore, South Korea, Taiwan) as well as later adopters like Indonesia, Malaysia, and Thailand.

Washington Consensus

Concept and Historical Context

  • A framework developed in the 1990s, establishing recommended economic policies for developing countries to enhance trade and economic development.

    • Originally articulated by institutions like the IMF, World Bank, and the U.S. Treasury.

  • 2000s Reforms: After recognizing limited success, the Washington Consensus was reformulated, leading to political backlash in both developing and developed nations.

Backlash Against Washington Consensus

  • Major Events:

    • The “Battle of Seattle” in 1999 saw over 50,000 protesters against the WTO, reflecting widespread dissatisfaction with global trade dynamics and policies.

    • The event became a significant historical moment of political activism, pre-social media.

Examining China’s Trade Policy

Strategic Framework (2000s onward)

  • Adopting principles similar to both ISI and EOI:

    • Export Orientation: Focused on promoting exports with substantial subsidies and technology transfers among businesses.

    • Infant Industry Development: A strategy to nurture high value-added industries with state-sponsorship.

  • Distinctive Features:

    • State control over financial institutions.

    • Evolving alignment with Washington Consensus policies, modifying approaches over time.

Economic Explanations for Trade Policy

  • Guiding Inquiry: Understanding the motivations behind government openness to free trade.

    • Influences on trade policy include:

    • Advances in technology, particularly in shipping logistics.

    • Fluctuations in oil prices impact trade dynamics.

    • The rise of e-commerce reshapes consumer demand.

    • Global demand for rare earth minerals.

    • New Trade Theory: Establishes that larger firms tend to perform better in export markets, while New New Trade Theory continues to evolve.