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CHAPTER 8
TRADE POLICIES FOR THE DEVELOPING NATIONS
CHAPTER OVERVIEW
This chapter discusses the economic characteristics of the developing countries and the trade policies that have
been implemented to improve the well being of their people. The chapter begins by identifying the major trade
problems of developing countries: (1) lack of economic diversification, (2) unstable export markets, and (3) worsening terms of trade.
Attention then turns to policies to stabilize the prices of primary products: (1) production and export
controls, (2) buffer stocks, and (3) multinational contracts. In general, these policies have had only modest
success in stabilizing commodity markets. To further help developing countries improve their economic wellbeing, industrial countries have extended nonreciprocal tariff preferences to exports of developing countries.
To enhance economic growth, developing countries have enacted an inward-looking strategy (import
substitution) and an outward-looking strategy (export-led growth). Developing countries which have pursued
export-led growth have generally realized higher rates of economic growth than those countries that adopted
import-substitution policies.
From the 1960s to the mid-1990s, East Asian economies realized remarkable records of high and sustained
economic growth. By the late 1990s, however, several nations experienced financial crises that weakened their
economies.
After completing this chapter, the student should be able to:
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Identify the trade problems of the developing countries.
Discuss the nature and operation of international commodity agreements.
Explain how the generalized systems of preferences attempts to improve the welfare of developing countries.
Discuss the advantages and disadvantages of import-substitution policies and export-led growth.
Assess the recent economic performance of the East Asian economies.
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Instructor’s Manual for International Economics, 8e
BRIEF ANSWERS TO STUDY QUESTIONS
1. Developing nations often contend that the existing pattern of trade and specialization has made them
excessively dependent on primary products, which has led to unstable export markets and a secularly
declining terms of trade.
2. To promote stability in commodity markets, international commodity agreements have relied on production
and export controls, buffer stocks, and multilateral contracts.
3. International commodity agreements have been applied to commodities such as tin, cocoa, coffee, sugar,
and wheat. Deciding on acceptable ranges for price and output fluctuations has been difficult. Convincing
countries to accept production and export quotas has also been difficult, especially during periods of falling
market demand.
4. Many developing countries find that their economies are greatly tied to the export of one commodity, such
as tin. Since the price elasticities of supply and demand of most commodities are low, modest changes in
supply or demand can exert large swings in commodity prices and export earnings.
5. During the 1960s oil was relatively abundant at the world level, which limited OPEC’s ability to raise oil
prices. By the 1970s oil was perceived as being in short supply. Following the Yom Kippur War in 1973,
OPEC realized that market conditions would support substantial increases in the price of oil. Among the
factors that contributed to the downfall of OPEC during the 1980s were worldwide recession, oil
conservation efforts of importing countries, and increased oil supply by non-OPEC nations.
6. The purpose is a cartel is to restrict market output, thus driving up price and profits; output restriction
requires cartel members to sell no more than their quotas. An individual cartel member has the economic
incentive to sell more than its quota, thus becoming a cheater. But if all cartel members sell more than their
quotas, the cartel price will fall and profits will vanish.
7. Under the GSP program, industrial countries reduce tariffs on imports from developing countries below the
levels applied to imports from other industrial countries.
8. Developing countries use import substitution policies to restrict the import of manufacturers so that
domestic producers can take over established markets. Export promotion policies attempt to replace
commodity exports with exports of processed primary products, semi-manufacturers, and manufacturers.
9. East Asia’s growth strategy has emphasized high rates of investment combined with high and increasing
endowments of human capital due to universal primary and secondary education. East Asia’s economies
have followed a flying geese pattern of growth in which countries gradually move up in technological
development by following in the pattern of countries ahead of them in the development process. Moreover,
industrial policies have attempted to support selected sectors of East Asia’s economies. Economic growth
for East Asia has been export oriented.
Chapter 8: Trade Policies for the Developing Nations
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10. Since the 1970s, China has abolished much of its centrally-planned economy and allowed free enterprise to
replace it. This move toward capitalism has dramatically improved the productivity and export performance
of the Chinese. In the United States, there has existed pressure to use China’s normal-trade-relation (mostfavored-nation) status as a lever to force China to improve in areas such as human rights, trade, and
weapons proliferation. Although China has moved away from central planning, government intervention in
its economy still remains strong. Many observers maintain that such intervention is incompatible with the
provisions of the World Trade Organization.
SUGGESTIONS FOR FURTHER READINGS
Arayama, Y. and P. Mourdoukoutes. China Against Herself. Westport, CT: Quorum Books, 1999.
Brauscomb, L., ed. Korea at the Turning Point, Westport, CT: Praeger/Greenwood Publishing Group Inc., 1996.
Buthrie, D. Dragon in a Three-Piece Suit: The Emergence of Capitalism in China. Princeton, NJ: Princeton
University Press, 1999.
Dorn, J., ed. China in the New Millennium. Washington, D.C.: Cato Institute, 1998.
Farrell, W. Crisis and Opportunity in a Changing Japan. Westport, CT: Quorum Books, 1999.
Henderson, C. China on the Brink. New York: McGraw Hill, 1999.
Hoekman, B. and J. Zarrouk, eds. Catching Up with the Competition: Trade Policy Challenges and Options for
the Middle East and North Africa. Ann Arbor, MI: The University of Michigan Press, 2000.
Houseman, G. America and the Pacific Rim. Lanham, MD: University Press of America, 1995.
Katz, R. Japan: The System That Soured. Armonk, NY: M. E. Sharpe, 1998.
Kazuo, J. Japan and China: The Meeting of Asia’s Economic Giants. Binghamton, NY: International Business
Press, 1998.
LeClair, M. International Commodity Markets and the Role of Cartels. Armonk, NY: M.E. Sharpe, Inc., 2000.
Mshomba, R. Africa in the Global Economy. Boulder, CO: Lynne Rienner Publishers, 2000.
Murray, G. China: The Next Superpower. New York: St. Martin’s, 1998.
Piggott, J. and A. Woodland. International Trade Policy and the Pacific Rim. New York: St. Martin’s , 1999.
Rosen, A. Restoring Japan’s Economic Growth. Washington, D.C.: Institute for International Economics, 1998.
Shuguang, Z., et al. Measuring the Costs of Protection in China. Washington, D.C.: Institute for International
Economics, 1998.
Srinivasan, T. and s. Tendulkar. India in the World Economy. Washington, D.C.: Institute for International
Economics, 2000.
Waters, H. China’s Economic Development Strategies for the 21st Century. Westport, CT: Greenwood
Publishing Group, Inc., 1997.
World Bank. The East Asian Miracle. New York: Oxford University Press, 1994.
Zhang, W. B. Japan Versus China in the Industrial Race. New York: St. Martin’s, 1998