Trade Policies for
Developing Nations
Module 8
Categories of Nations
• Traditional practice: Nations categorized according to real income
• Advanced Nations: N. America, W. Europe, Australia, NZ, Japan
• Higher GDP per capita
• Longer life expectancy
• Higher adult literacy
• Developing Nations: Latin America, M. East, Asia, Africa
• Lower GDP per capita
• Shorter life expectancy
• Lower adult literacy
• Most of world’s population lives in these nations
• Believe current international trading system, based on theory of Comparative Advantage,
is irrelevant for them
Developing nations trade
characteristics
• Developing nations dependent on major nations:
• Most of their exports go to major nations
• Most of their imports are from major nations
• Trade amongst developing nations is minimal
• Exports are mainly primary products (fuels, raw materials, agricultural
products)
• Finished goods exports (such as textiles) are labor intensive, and include only
modest technology to produce.
Developing nations trade characteristics
(cont’d)
• Since the 80’s, more developing nations exporting manufactured goods and
services (China, India, Vietnam, S. Korea, Mexico, etc.)
• Investments in people and industry
• Improvements in transport and communications, and reforms allowed breaking of
product chain into components; developing nations playing major role in global
production sharing
• Mainly for manufactured goods and processed primary products
• Still many nations (Africa, former USSR), about 2B population, not integrated in world
trade
• Inferior infrastructure
• Very high cost of transporting goods to major nations
• Major corruption
• Lower education
• Higher trade barriers
Tensions between Advanced and Developing
Nations
• Since the 90’s, a lot of developing nations adopted the strategy of
international trade.
• Issues:
• Exporting finished products to advanced nations isn’t always easy
• Competing with local products, made by low-income jobs in target country
• Leads to protectionist policies in target country, to protect low end jobs in country
• If poor countries are to move up the ladder, rich countries have to do the same; this is usually
done by more innovation and creating more technical jobs; not always easy
• Catch 22 situation
• WTO supposed to help with negotiating these issues; again, not always easy
• Unless Advanced nations can move up the ladder to create “space”, developing
nations can’t either
• Not a total solution but it will help
Trade problems of developing
nations
• Unstable Export Markets
• Poor nations mainly depend on 1 or a handful of primary products to export
• If there is any fluctuation in the supply/demand equilibrium of such products,
it could push the price down drastically; major economic effect on countries
• Worsening Terms of Trade
Aiding Developing Nations
• Developing nations pressed advanced nations for institutions and policies
to improve climate for economic development
• World Bank: Born in 1944 at the Bretton Woods Conference
• Int’l organization; a UN specialized agency
• Provides loans to developing nations aimed at reducing poverty & economic
development
• Loans to member nations (188) governments & private companies
• Member nations responsible for how WB is financed and how money spent
• Mainly loans and grants for specific development projects and infrastructure
• Ex. Aids education, schooling for girls, health care delivery, rebuilding after disaster.
• Loans to nations who can’t afford to borrow on open market
• Recently, fighting competition from sovereign nations development funds
Aiding Developing Nations (cont’d)
• World Bank Group: 5 closely associated institutions
• Int’l Bank for Reconstruction & Development; Int’l Development Assoc. (low
cost loans & grants)
• Int’l Finance Corp. (equity, LT loans, loan guarantees, advisory service)
• Multilateral Investment Guarantee Agency (encourages foreign investment in
countries w/guarantees covering losses from war, civil disturbance, etc.)
• International Center for Settlement of Investment Disputes (int’l facilities for
conciliation & arbitration of investment disputes)
• World Bank: over 10,000 staff in HQ (Washington, DC) and over 100
countries worldwide
• Have to fight corruption (5-25% of money misused)
Aiding Developing Nations (cont’d)
• International Monetary Fund (IMF)
• Bank for Central Banks of member nations
• HQ in Washington, DC
• Source of foreign currencies to lend to nations with trade deficits
• Funds come from 2 major sources
• Quotas (subscriptions): each member nation provides its share of funds, depending on
the size of its economy, and its importance in the world. Adjusted periodically.
• Loans: from member nations; lines of credit from Advanced nations & Saudi Arabia
• Loans are conditional upon fixing trade balance (austerity measures)
(remember Greece?)
• Consequences of asking IMF for loans: Would austerity measures cause a
contraction in economy?
Aiding Developing Nations (cont’d)
• Generalized System of Preferences (GSP)
• Non-reciprocal tariff preferences to some nations
• Non-uniform: Different temporary tariff reductions to different countries on different
products
• Encourage developing nation to manufacture and trade more, rather than giving them
foreign aid (instead of giving them fish, teach them how, and encourage them to fish!)
• Trade preferences voluntary; not WTO obligations.
• Each advanced nation does its own analysis on what products to reduce tariffs on, by how
much, and for how long.
• Usually, they do not grant deep preferences in sectors where a developing nation has large
export potential (internal/local opposition). Textiles, apparel, footwear & some Agri
products are not eligible for GSP.
• GSP may be removed or reduced when trading nation reached $100M+ of exports. Change
could be immediate or graduated.
Economic Growth Strategies
• Inward-Looking Strategy - Import Substitution:
• Industries established mainly to supply domestic market
• Impose higher tariff on imports of certain products to protect local industry
• Could lead to self sufficiency in certain sectors
• Advantages of Import Substitution
• Lower risk of establishing industry - market & demand already there
• Easier to protect local industry than fight other nations who want to export their product
• Incentives for foreign investors to locate factories in developing nation
• Disadvantages of Import Substitution
• No incentive for local industry to increase efficiency
• No economies of scale; small market.
• May not be the best use of resources
• Industry can only survive with protection.
• Corruption: If domestic manufacturing costs are too high, opens door to smuggling
• Research showed this didn’t work as well as open trading. Most tariffs cancelled.
Economic Growth Strategies (cont’d)
• Outward-Looking Strategy – Export-led Growth
• Encourage development of industries with heavy reliance on exports
• Advantages
• Encourage industries where nation has comparative advantage (ex. labour intensive)
• Allow advantage from economies of scale (larger selling markets)
• Low restrictions on imports forces local industry to remain efficient and competitive
• Research showed “globalizers” economies increased faster than “non-
globalizers” economies.