Trade Policies for Developing Nations

Chapter 7: Trade Policies for Developing Nations

Overview of Trade Policies for Developing Nations

  • Nations are categorized based on real income, drawing a line between advanced (developed) and developing nations.

    • Advanced Nations:

    • Comprises countries in North America, Western Europe, Australia, New Zealand, and Japan.

    • Characteristics include:

      • High levels of GDP per capita.

      • Longer life expectancies.

      • Higher levels of adult literacy.

    • Developing Nations:

    • Includes a majority of countries in Africa, Asia, Latin America, and the Middle East.

Characteristics of Developing Nation Trade

  • Developing nations display specific trade characteristics:

    • Highly dependent on advanced nations for trade purposes.

    • Majority of imports originate from advanced nations.

    • Historically, major exports comprise:

    • Primary Products:

      • Agricultural goods, raw materials, fuels.

    • Simple manufactured goods includes:

      • Textiles (labor-intensive, low-tech products).

    • Over the last 30 years, some developing nations have increased their exports in manufactured goods and services.

Factors Supporting Increased Exports in Developed Nations

  • Investments in human capital and technology have boosted exports:

    • Improvement in educational levels.

    • Increased capital stock per worker.

    • Enhanced transport and communication mechanisms.

    • Trade reforms initiated through liberalization of trade barriers after the mid-1980s.

Tensions Between Developing and Advanced Nations

  • Developing nations are motivated to exploit international trade opportunities.

  • Problems faced by poor nations include:

    • High barriers imposed by advanced nations on imports from developing countries.

    • Structural weaknesses inherent in developing nations, such as:

    • Nonexistent or inadequate institutions and policies.

    • Insufficient law and order, unsustainable macroeconomic management, and public service availability.

Trade Problems Confronting Developing Nations

1. Unstable Export Markets

  • Exports are often concentrated in a limited number of primary commodities, leading to:

    • Price instabilities and fluctuations in revenues for producers.

    • Low price elasticities of demand and supply.

    • Changes in demand: lead to significant price fluctuations when supply is inelastic.

    • Changes in supply: induce notable price variations when demand is inelastic.

2. Falling Commodity Prices

  • The growth of exporting nations is threatened by falling commodity prices.

    • In the early 2000s, increasing commodity prices benefited developing nations.

    • The 2007-2008 Great Recession led to shrinking economies, decreased demand, and falling prices.

    • Economies of developing nations reliant on primary product exports suffered when advanced nation economies contracted.

3. Worsening Terms of Trade

  • Over the last century, prices of exports relative to import prices have declined.

  • Increased productivity gains in developing nations generally lead to lower prices for primary goods, while advanced nations import more manufactured goods from them.

4. Limited Market Access

  • Global protectionism restricts developing nations' access to markets, particularly in:

    • Agriculture.

    • Labor-intensive low-skilled manufactured goods.

    • Advanced nations have higher tariffs and quotas imposed on developing nations.

Agricultural Export Subsidies from Advanced Nations

  • Advanced nations provide export subsidies that discourage agricultural imports from developing nations, leading to:

    • Displacement of developing-nation shipments in advanced-nation markets.

    • Creation of unwanted surpluses often dumped on the world market.

    • Reduction in agricultural commodity prices and export revenues for developing nations.

Case Study: Bangladesh’s Sweatshop Reputation

  • Definition of a Sweatshop:

    • A factory characterized by poor and unsafe working conditions, unreasonable hours, unfair wages, and child labor without benefits for workers.

  • Bangladesh is a significant player in the global clothing industry, with labor working for the lowest wages globally.

  • Despite expected challenges due to the expiration of the MFA in 2005, demand for low-cost labor led to increased orders.

  • Producers expanded capacity unsafely, leading to catastrophic events such as factory fires and building collapses in 2013.

The OPEC Oil Cartel

  • Explanation of Cartels:

    • Formed among exporting nations to raise prices and realize profit akin to “monopoly” profits.

  • Organization of the Petroleum Exporting Countries (OPEC):

    • Formed to increase oil revenues for member nations.

    • Before OPEC, oil-producing nations operated like independent competitive sellers; OPEC implemented restrictions on output and competition, raising prices.

    • Currently, OPEC controls less than 40% of global oil supply.

  • To counteract OPEC’s market power:

    • The government has mandated higher fuel economy standards.

    • Increased federal excise taxes on gasoline, which negatively impacts lower-income consumers.

    • Strategies include diversifying oil imports and developing alternative energy sources such as biofuels and wind power, requiring taxpayer-funded government subsidies.

Aiding Developing Nations

1. World Bank

  • Provides loans and grants for:

    • Poverty reduction and economic development.

    • Funds specific projects like hospitals, schools, highways, and AIDS awareness campaigns.

  • Issues include corruption, resulting in misappropriation of funds by officials.

2. International Monetary Fund (IMF)

  • Functions as a bank for member nations' central banks:

    • Facilitates funding from surplus nations to those with temporary deficits.

  • Major sources of IMF funds:

    • Quotas: Pooled funds based on member nations' contributions; wealthier nations have larger quotas.

    • Loans: Borrowed from member nations.

3. Generalized System of Preferences (GSP)

  • Advanced nations reduce tariffs on designated manufactured imports from developing nations which:

    • Aims to promote economic development through trade.

    • Trade preferences are voluntary and determined by the granting nation, with eligibility and terms established accordingly.

Debate: Does Aid Promote Growth in Developing Nations?

  • Critics’ Perspective:

    • Aid may enable poor governance, favoring the wealthy in impoverished nations and resulting in wasteful expenditures.

  • Proponents’ Argument:

    • Although sometimes ineffective, aid has been instrumental in reducing poverty and fostering economic growth.

Economic Growth Strategies: Import Substitution vs. Export-Led Growth

Advantages of Import Substitution

  • Low risk in developing home industry to replace imports due to the existing home market.

  • Easier to shield from foreign competitors than seeking concessions from advanced nations on trade restrictions.

Disadvantages of Import Substitution

  • Domestic industries may lack incentives for efficiency.

  • Producers cannot achieve economies of scale.

  • Practices foster corruption.

Case Study: Import Substitution Laws in Brazil

  • Brazil's attempt to develop its electronics industry (1970s-1991) through stringent import restrictions and foreign investment limitations resulted in:

    • A non-competitive local electronics industry and technological obsolescence.

    • In 1991, the nation began to eliminate protectionism measures.

Export-Led Growth Strategy

  • Emphasizes an outward-oriented economy linked to the global economy:

    • Promotes growth by exporting manufactured goods.

    • Minimal or nonexistent trade controls.

Is Economic Growth Beneficial to the Poor?

  • Developing nations with sustained growth tend to:

    • Make significant strides in poverty reduction.

    • Liberal economic policies fostering open markets and monetary stability raise the overall incomes across socioeconomic strata, including poor populations.

Limitations of Universal Export-Led Growth

  • While exports can boost growth, a simultaneous push for all developing nations to export may lead to:

    • Decreased export prices due to oversupply in the market.

  • However, developing nations account for only 5% of total world output.