International trade and economic development

International trade and economic development

1. Trade strategies for economic growth and economic development

   • Import substitution
     • Advantages:
       •  ISI protects jobs in domestic market protects local culture and social habits protects economy from the power of multinational corporations --basically preventing foreigners from doing anythign to domestic peeps
     • Disadvantages:
       • ISI may only protect jobs in short run, long run= economic growth may be lower---> lead to unemployment May lead to innefficieny in domestic countries because less competition  may lead to high rates of inflation due to domestic As CONSTRAINTS may cause other countries to take protectionist measures
     • ISI- strategy that developing countries rather should produce goods domestically rather than import them
       • So industries domestically will grow, as will economy and will be able to be competitive on world markets in the future for this to work, there are conditions: government needs to adopt a policy of organizing the selection of goods Subsidies are made available to encourage domestic peeps governments---> protectionist system with tariff to keep out foreign imports
     • inward oriented growth strategy
   • 2. Export promotion
     • Outward oriented growth strategy
     • Increase of exports--->Increase in GDP--->higher incomes
     • Certain policies
       • Liberalized trade: open up domestic markets to foreign markets etc... Liberalised capital flows: reduce restrictions on foreign direct investment (FDI)
       • Floating exchange rate system
         • when the exchange rate of a currency is determined by the supply and demand for that currency.
   • 3. Trade liberalization
     • Reduction of trade barriers
       • that block the free trade of goods and services between countries
       • Elimination of tarriff barriers, quotas, export subsidies
         • Belief is that it will increase world trade and will  
     • Policies
       • Fiscal discipline      Redirect spending from things like indiscriminate subsidies to basic health & education                                   Lower marginal tax rates & broaden tax base    Interest rate liberalization                                                         Competitive exchange rate  Trade liberalization   vii.      Liberalization of FDI inflows                                                                                                        viii.      Privatization                                                                                                            ix.      Deregulation   Secure property rights   
   • 4. Bilateral and regional preferential trade agreements
     • Prefrential access(special)
       •    a.       Countries in a trading bloc give preferential access to products from other member countries (reducing tariffs)   b.       More agreements, greater the ability of developing countries to trade & gain growth and development   
   • 5. Diversification
     • Aim: To move from the production and export of primary commodities and to replace these with the production and export of manufactures and semi-manufactures products. To protect themselves from the volatile changes in primary productwfekfhi

2. International barriers to development

   • Over-specialization on a narrow range of products
     •    a.       Many developing countries are dependent on primary commodities for their export revenues and rising commodity prices will be beneficial to these countries as it increases their rate of economic growth & could start a positive cycle. However if prices fall, there will be a deteriorating terms of trade (export price relative to import price) & current account deficits are likely to increase and it will be difficult to finance current expenditure and necessary imports. b.       They face great vulnerability and uncertainty (e.g. economic growth dependent on tourism will be affected if there is terrorism / global slowdown in economic growth / natural disasters)   
     • Primary commodities-
   • Price volatility of primary products
     •    a.       Price elasticity of demand & price elasticity of supply for commodities tend to be relatively inelastic and thus change in demand/supply will lead to large fluctuations   
   • Inability to access international markets
     •    a.       If protectionist measures (aimed at support domestic producers at the expense of foreign producers) prevent developing countries from utilizing their comparative advantage & exporting to develop countries then they will be limited in their ability to earn foreig exchange b.       Especially harmful for primary product makers – developed countries export the surplus to the developing countries and lower world prices thus damaging prices & local supplies thus there is an argument of “dumping” c.        Tariff escalation (e.g. in agricultural markets of meat, cocoa)                                                                                                                i.      Rate of tariffs on goods rises the more the goods are processed.                                                                                                              ii.      Importing country protects its processing & manufacturing industries by putting lower tariffs on imports of raw materials & components & higher tariffs on processed & finished products.                                                                                                            iii.      There is little incentive to diversify away from producing raw materials to processing them as the higher prices due to tariffs will make their processed goods uncompetitive.                                                                                                            iv.      This reduces the imports of the more important processed goods & their final processing is done in developed countries & since these add the highest value to the product in terms of the price at which it is sold, this is where the largest gains are to be made.                                                                                                              v.      Many of them have non-convertible currency and this can only be used domestically and not accepted for exchange on foreign exchange markets. Most developing countries adopt a fixed exchange rate system where the domestic currency is pegged to a more acceptable currency (often the US dollar) at a certain rate. Trade is less likely to occur as there will be more risk and they are likely to go elsewhere to conduct their business & FDI                                                                                                            vi.      Non covertible currencies are often over valued at their official pegged, exchange rate therefore there might be a black market & this will be damaging. Some domestic currency may become unacceptable within the country & this damages local trade as well international trade   

3. Development strategies

   • Fairtrade organizations
     • An attempt to ensure that producers of food and some non-food products in developing countries recieve a fair deal when they are selling their products
     • FLO

4. Key words of international trade and economic development

   • Protectionism-damaging to developing countries
     • Tarrif escalation
       • If tarriff escalatiion manages to reduce imports of more processed goods, then packaging and marketing are done in developed countries Takes away benefits for developing countries....
       • Rate of tarriff on goods rises the more the goods are processed
         • Cocoa
           • If the cocoa is partially processed before exporting in the EU the tariff rises to 9.7%, 7.0% in Japan. Fully processed cocoa = 30%
   • Non-convertible currencies = con for developing countries
     • Trade is less likely to occur

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