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Trade Strategies for Development: Export Promotion versus Import Substitution

Trade Strategies for Development: Export Promotion versus Import Substitution. Export promotion: looking outward and seeing trade barriers primary-commodity export expansion expanding manufactured good exports Import substitution: looking inward but still paying outward

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Trade Strategies for Development: Export Promotion versus Import Substitution

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  1. Trade Strategies for Development: Export Promotion versus Import Substitution • Export promotion: looking outward and seeing trade barriers • primary-commodity export expansion • expanding manufactured good exports • Import substitution: looking inward but still paying outward • tariffs, infant industries, and protection

  2. Drawbacks of ISI • Protection  Inefficiency • Protection  Foreign Ownership  Profits Remitted • Copy MDC Technologies  High Capital Intensities  Little benefit to abundant labor / Limited learning • Import capital goods  weak backward linkages • Forward linkages penalized: Brazilian computers for Brazilians. • Protection  Overvaluation • Traditional exports hurt – urban vs. rural bias • Capital intensity further encouraged

  3. Overvaluation • How? • Run down reserves / borrow more reserves • Reduce imports via tariffs and NTBs • Ration available foreign exchange • Dual exchange rates / preferred customers/ rent seekers • Why not? • Hurt exporters: reduced sales / reduced value of proceeds • Nation lives beyond means … temporarily • Eventual sharp devaluation: • Import Prices  CoL  Wage–Price Spiral  Worsened B of P  Currency Crisis

  4. Why Tariffs? • Government revenue • Discourage imports/Improve b of p • Foster economies of scale • Reduce dependency on MDCs • Attract FDI – they get in under tariff barrier • EFFECTIVE RATE OF PROTECTION • Net nominal tariff relative to value added

  5. Trade pessimists • Slow growth of demand for primary products Low Income Elasticity/Increased Efficiency/Synthetics • Terms of trade deterioration over time • MDC import barriers • Trade optimists • Competition  efficiency • Economies of scale for efficient sectors • Attract foreign capital • Generate foreign exchange Propels Growth – When World Demand is Strong

  6. South-South Trade and Economic Integration • Growth of trade among developing countries • Economic integration: theory and practice • Industrial complexes  Economies of scale • Regional trading blocks and the globalization of trade • NAFTA: Mexican boom, ~ 1996 - 2000 • Mercosur: • Brazil / Argentina / Paraguay / Uruguay • Real depreciation  Argentine Tariffs • Andean Group • Colombia/Ecuador/Peru/Bolivia/Venezuela

  7. Trade Policies of Developed Countries: the Need for Reform • Rich-nation tariff and nontariff trade barriers and the 1995 Uruguay Round • The problem of adjustment assistance • Domestic economic policies

  8. The Poor Face High Tariffs

  9. Adjustment assistance Autarchy Common market Customs union Depreciation Devaluation Dual exchange rate Economic integration Economic Union Effective rate of protection Exchange control Exchange rate Export promotion Flexible exchange rate Free-market exchange rate Concepts for Review

  10. General Agreement on Tariffs and Trade (GATT) Globalization Import substitution Infant industry International commodity agreements Inward-looking development policies Multi-Fiber Arrangement (MFA) New protectionism Nominal rate of protection Nontariff trade barriers Concepts for Review, cont’d

  11. Official exchange rate Outward-looking development policies Overvalued exchange rate Parallel exchange rate Quotas Regional trading bloc Rent seeking Synthetic substitutes Tariffs Trade creation Trade diversion Trade liberalization Trade optimists Trade pessimists Concepts for Review, cont’d

  12. Uruguay Round Value added Wage-price spiral World Trade Organization (WTO) Concepts for Review, cont’d

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