International trade and economic development (4.4)

The book discusses four international barriers to development

• Over-specialization on a narrow range of products
• Price volatility of primary products
• Inability to access international markets
• Long term changes in the terms of trade

A country that overly dependent on a limited number of specific goods or services are facing a great barrier in the international trade market, and will have a problem sustaining their economic growth

Many developing countries are overly dependent on primary commodities for a share of their export revenue

One of the upsides to this, is that if the prices rise on these commodities, they will face an economic growth, and if this is used on education, infrastructure and so on it, it can also prove to create a positive cycle of development. However, if the prices falls so will the economy of the country, meaning that they will be unable to establish development in the country and to import necessary goods

The elasticity of demand for commodities tends to be relatively inelastic on the world market, therefore developing countries (of which a majority focuses on commodities) are facing a huge income barrier as a small change in demand can lead to a larger price fluctation

Considering the fact that poor weather can have an impact of quantity as well, it is for manufacturers and governments to plan ahead, and they can therefore face huge profit losses

Most international markets are influenced by protectionism in the form of tariffs, subsidies, quotas and non-tariff barriers. These can prevent a developing country to enter a market which is influenced or controlled by a developed country

One example of protectionism is the cotton market - the American cotton farmers shares US$3 billion in government subsidies every year, which enables and encourages them to produce more. As the American farmers produces more, the prices will decrease and eventually harm the farmers in the developing countries, as they are unable to follow the price decrease due to expenditures

Tariffs can also be a larger barrier to an international market. An example of this is the cocoa market, where the export tariffs in the EU is 0.5% for unprocessed cocoa, however, if the cocoa is partially processed before export, the tariff will go up to 9.7% and completely processed cocoa has a tariff of 30.6%. As completely processed cocoa has the highest value, the developing countries are unable to compete in this market, as they will mostly export completely processed cocoa, and then make a marginal income

A final barrier to the international market is the fact that many developing countries have a non-convertible currency that won't get accepted in an international market. By trading with a non-convertible currency, the other party would be taking a risk by trading with the developing country

"History shows how feeble are barriers of paper" - John Lothrop Motley

This can have a significant effect on the developing countries, as a long term change in the terms of trade can fluctuate, so that the producer won't, in the long run, be able to sell anything due to high prices, or possibly not have a large income due to low prices

The book describes five different trade strategies for economic growth and development:

• Import substitution
• Export promotion
• Trade liberalization
• Bilateral and regional preferential trade agreements
• Diversification 

Import substitution is fully known as Import Substitution Industrialization (ISI).

The purpose of the strategy is that a developing country should, when possible, produce goods domestically. By doing so, the industries can grow and possibly be able to compete in the international markets

For the strategy to work, the government needs to adopt a policy concerning which goods should be produced domestically, subsidies should be made available, and lastly, in order to keep out foreign goods, the government needs to create a tariff on goods that are to be produced domestically

Advantages - protects jobs in the domestic market, protects local culture and social habits by isolating foreign influence and protects from power and influence of multinational corporations

Disadvantages - may only protect jobs in the short run, domestic products may not have the same quality as the foreign produced products, due to a lack of competition it can lead to inefficiency, can lead to high inflation rates and it may lead to other countries taking retaliatory protectionist measures

Also known as export-led growth. This strategy is based on international trade. The idea is that an intensive export can lead to an increase in GDP, higher incomes, and eventually growth in domestic markets.

It is assumed that, in order to follow the strategy, a country adopts certain policies such as:

Liberalized trade - opening domestic markets to foreign competition

Liberalized capital flows - Reducing restrictions on FDI

and a floating exchange rate, investment in the provision of infrastructure and minimal government intervention

Countries following this strategy does not necessarily adopt all of these policies

Minimal government interventions, by removing or reducing barriers such as tariffs, quotas, export subsidies and administrative legislation

The idea is that this strategy will enable developing countries to focus on the production of goods and services, in which they have a comparative advantage

Some criticizes this strategy as being a way for multi national corporations to exploit cheap labor markets in developing countries

Trading blocs such as the EU and the APC has either abolished or decreased the tariff and quotas of trading within the bloc. However, this is a large disadvantage for the developing countries as they will have a hard time selling their goods within the bloc.

For example, a French farmer will be able to sell cotton in Germany without tariffs or quotas, therefore he can sell it a cheaper price. An Afghan farmer selling cotton to Germany will need to raise his prices due to the tariffs and quotas that he will face

The idea behind this strategy is that if there is an increase in trading blocs, then developing countries within the bloc will be able to increase growth and eventually development

Many developing countries are only focusing on developing one or two primary commodities, this creates a problem when the producers are trying to sell it, as there is a lot of the same primary commodity on the market.

This strategy was created by a number of developing countries, and the idea is that by moving from focusing on export of primary commodities, they will focus on export of manufactured and semi-manufactured products

By doing this the countries hopes that they can achieve economic growth

There are some barriers to this strategy, for example, the country will need more highly skilled workers, which the country may not have the monetary means to employ. Another barrier is the practice of tariff escalations

Fair-trade organizations provides small-scale farmers with food and some non-food products in exchange of work, as some small-scale farmers are unable to make a living income on farming

Some farmers outside of fair trade organizations live in harsh and often unfair conditions

Fair-trade products might  sometimes have a higher price than non-fair-trade products, as the producer must be able to give the farmers the production costs and a living income

Therefore fair-trade products provides economic development to a country