The term developing countries does not have a precise definition, but it is a name given to many low and middle income countries.

Transcription

1 Trade Policy in Developing Countries KOM, Chap 11 Introduction Import substituting industrialization Trade liberalization since 1985 Export oriented industrialization Industrial policies in East Asia The Great Convergence 1. Introduction The term developing countries does not have a precise definition, but it is a name given to many low and middle income countries. GDP per Capita (USD), 2016 United States 56,220 Germany 48,282 Japan 38,317 South Korea B37lank 37,490 Mexico 18,471 China 13,395 Bangladesh 3,087 1

2 2. Import Substituting Industrialization Import substituting industrialization was a trade policy adopted by many low and middle income countries before the 1980s. The policy aimed to encourage domestic industries by limiting competing imports. It was often accompanied with the belief that poor countries would be exploited by rich countries through international financial markets and trade. India used importsubstitution policies until the 1990s. The main justification: the infant industry argument: Countries may have a potential comparative advantage in some industries, but these industries cannot initially compete with well-established industries in other countries. To allow these industries to establish themselves, governments should temporarily support them until they have grown strong enough to compete internationally. 1. But, it may be wasteful to support now industries that may have a comparative advantage in the future. 2. With protection, infant industries may never grow up or become competitive. 3. There is no strong justification for government intervention unless there is a market failure that prevents the private sector from investing in the infant industry (e.g., external economies). Which industry to favor? Once protected, it is difficult to excel. 2

3 Infant Industries and Market Failures Two arguments for how market failures prevent infant industries from becoming competitive: 1. Imperfect (financial) capital markets Because of poorly working financial laws and markets, new industries are not allowed to borrow as much as they need, which results in restricted economic growth. If creating better functioning laws and markets is not feasible, then high tariffs would be a second-best policy to increase profits for new industries, leading to more rapid growth. 2. The problem of appropriability The knowledge created when starting an industry may be not appropriable (may be a public good) because of a lack of property rights. If establishing a system of property rights is not feasible, then high tariffs would be a second-best policy to encourage growth in new industries. Good intentions but it generally did not work as planned If import substitution favored manufacturing, it did not promote economic development: countries adopting these policies often grew more slowly than rich countries and other countries not adopting them. New industries did not become competitive despite or because of trade restrictions. Import substitution industrialization involved costs and promoted wasteful use of resources: They involved complex, time-consuming regulations. They set high tariff rates for consumers, including firms that needed to buy imported inputs for their products. They promoted inefficient industries. Most examples of developing policies that encourage manufacturing industries through import substituting industrialization worked during the first few years and then fail (Latin American countries during the 1950s and 1960s; India during the 1980s). Made in China-2025 plan 3

4 3. Trade Liberalization There is some evidence that low and middle income countries which had relatively free trade had higher average economic growth than those that followed import substituting industrialization. Regardless, by the mid-1980s many governments had lost faith in import substituting industrialization and began to liberalize trade. Trade Growth of Developing Countries Beginning in the 1980s, many developing countries began shifting away from import-substitution policies. One result has been a large rise in both exports and imports as a percentage of GDP. Source: The World Bank 4

5 As with import substituting industrialization, economic development was the ultimate goal of trade liberalization. Has trade liberalization promoted development? The evidence is mixed: some countries giving up import substitution policies took off (India), others did not. Growth rates in Brazil and other Latin American countries have been slower since trade liberalization than they were during import substituting industrialization, The success of emerging countries came from a mixture of policies and dramatic decreases in the cost of moving goods and `ideas. Trade liberalization (lower tariffs) has been largely a consequence, not a cause, of these dramatic changes. 4. Export Oriented Industrialization This is a policy followed by most Asian countries. Trade policies that promoted exports in targeted industries. Japan, Hong Kong, Taiwan, South Korea, Singapore, Malaysia, Thailand, Indonesia and China are countries that have experienced rapid growth in various export sectors and rapid economic growth in general. These economies or a subset of them are sometimes called high performance Asian economies. These high performance Asian economies have generated a high volume of exports and imports relative to total production. They have liberalized trade but not established a free trade regime. Although these economies had less restricted trade than other low and middle income countries, some trade restrictions were still in effect during different times. Difficulties to import in Japan, China, Korea. 5

6 The Asian Takeoff Asia Surging Trade 6

7 Causation goes both ways: high volume of exports/imports caused rapid economic growth and rapid growth caused more trade. An important cause of rapid growth was high saving and investment rates, leading to both rapid economic growth in general and rapid economic growth in export sectors. Almost of the high performance Asian economies have experienced rapid growth in education, leading to high literacy and numeracy rates important for a productive labor force. 5. Industrial Policies in East Asia In addition to export promoting trade policies, some East Asian economies have implemented industrial policies to promote certain industries. Examples include tariffs, import restrictions, export subsidies for import-competing industries and export industries as well as subsidized loans for industries and subsidized research and development. But not all high performance Asian economies implemented these policies, and the ones that did had a wide variety of different policies. Like elsewhere in the world, there is little evidence that countries with industrial policies had more rapid growth in the targeted industries than those that did not and there is evidence that industrial policies failed like chemicals, steel, automobiles in South Korean during in the 1970s. 7

8 The above does not fully explain the Asian takeoff. The missing parts are: 1. The massive decrease in the cost of international transportation since the early 1960s; 2. The information and communication technology revolution since the 1990s. 6. The `Wal-Mart effect consumer goods From retail revolution in the US to booming Asia exports; From Japan, to South Korea and Taiwan, then China, Thailand, Malaysia, Indonesia, etc. Step 1: Deregulation of the retail market in the US; retailers expand in size and assortments; Step 2: They look for consumer products (textile, footwear, etc) abroad; 1. Japan captures this market in the 1960s and 1970s; 2. Korea and Taiwan start producing for Japanese wholesalers and then by direct contacts with retailers in the 1970s and 1980s; 3. China starts producing, often through Hong Kong intermediaries and then by direct contacts; 4. Now Vietnam, Bangladesh participate to supply chains. 8

9 Knowledge about quality, design, product specifications have passed from North American (and then European) large buyers to producers in Asia; The invention of containers (1950s), then computers, Universal Product Code (1974) and bar code scanners have facilitated orders, coordination of production, inventory management despite distance, production taking place well before consumption (for instance toys). In 2013, Wal-Mart, Target and Home Depot brought 784,150 standard 20ft containers in the US or the content of 2,150 containers per day. Retailers from developed countries had a large impact on the international trade and on the industrialization of Asian countries since the 1960s. This process continues today. 7. The ICT revolution and the Great Convergence ICT Revolution allows to split most production process into stages that can be produced anywhere around the world if cost justifies it; iphone with R&D in the US, some parts coming from Germany, Japan, Korea, Taiwan, China and assembly in China. Possible only when transport costs and other trade costs are are low AND communication costs allowing coordination of production are low as well. It is the combination of the ICT revolution and the low labor cost of emerging countries that made offshoring attractive. This has resulted in a massive re-distribution of global manufacturing shares and incomes. 9

10 Global manufacturing shares, World manufacturing share 80% 70% 60% 50% 40% 30% 20% 10% 0% RoW 6 risers, 5% , G7 65% % % China, 18% 9% Source: unstats.un.org; 6 risers = Korea, India, Indonesia, Thailand, Turkey, Poland Big change around 1990 G7=7 losers 7 risers : China, India, Indonesia, Korea, Poland, Thailand, Turkey RoW = little change. Tariffs Applied tariffs (%) Middle East & North Africa East Asia Sub- Saharan Africa South Asia US, Jpn,EU Traditionally: 1. North tariffs low. 2. South tariffs high. 3. North had reduced tariffs gradually in GATT Rounds. 4. South did not

11 And then something changed around Applied tariffs (%) Middle East & North Africa East Asia Sub- Saharan Africa South Asia From about 1995: 1. Developing nations unilaterally lowered tariffs. - Protectionism becomes destructionism. 2. Not in GATT/WTO Rounds US, Japan & EU Key impacts of the post-1990 globalization G7 nations deindustrialized while a handful of developing nations industrialized. Effects surprisingly concentrated geographically. Rapidly industrializing nations experienced steep growth take-offs. Rapid growth in developing nations and stagnate G7 growth produced the Great Convergence. Nature of trade between the G7 and many developing nations changed dramatically. Almost all developing nations liberalized their policies on trade, investment, capital, services, and intellectual property. Trade liberalization policy has moved from `I liberalize if you liberalize to `what can I do for you! 11