Chapter 19Learning ObjectivesChapter 19: OutlineTrade and DevelopmentTrade Trend and PatternsFig. 19.1: Exports as % GDPTable 19.1: Regional Participation in Trade and Capital FlowsGlobal and Regional TradeTrends and Patters of TradeTable 19.2: Shifts in Trade CompositionTable 19.3: Intra and inter-regional Trade (1980-2003)Fig. 19.2: Economies of scale & SizeProtective TariffsFig. 19.3 Nominal Tariff ProtectionEffective Rate of ProtectionImport Quotas & SubsidiesFig. 19.4: The Impact of subsidies on Firms competing with ImportsExchange Rate ManagementExchange Rate Management, cont.Overvalued and Undervalued Exchange RateFig. 19.5; Overvalued and Undervalued Exchange RateFig. 19.6: Average Tariff Rates by RegionImport Substitution Policy and its outcomesExport Promotion PoliciesPolicies Supporting Outward OrientationThe Benefits of Outward OrientationPolicies toward Export Promotion See Figure 16.1 for Tariff Rates by RegionsFig. 19.7: Manufactured output and Economic GrowthTrade and Growth: Empirical EvidenceTrade and Poverty ReductionKey Issues on the Global Trade AgendaIncreased Global Competition & rise of India and ChinaDoes Outward Orientation create Sweatshops?Slide 34Expanding Market AccessTextiles and ApparelAgricultural Exports &ImportsProtection of Agriculture by Industrial Countries: subsidies & TariffsWTO and Multilateral Trade NegotiationsThe Outcome of Negotiation of the Uruguay RoundThe Grand Bargain between ICs and LICsTable 19.4: Overall Protection of AgricultureSummarySummary ContBoxed Case ExamplesEnd Chapter 19Slide 47Chapter 19Trade andDevelopmentNorton Media LibraryDwight H. PerkinsSteven RadeletDavid L. LindauerLearning Objectives•The premises, objectives, and policy instruments defining import substitution as a strategy for industrialization. The main features of an outward-looking export-led strategy of industrialization.•The outcomes generated from pursuit of the two alternative trade strategies. •The economic effects of tariffs and import quotas, including the distinction between nominal and effective protection. •How various forms of subsidies are applied to support a country’s chosen industrialization strategy. •How exchange-rate policy can be managed to influence the pattern of industrialization.•How protectionist policies encourage rent-seeking practices in lieu of efforts to improve efficiency.•How Asia’s newly industrializing countries balanced market interventions with competitive pressures, thereby reconciling import substitution and export promotion strategies. •How multilateral agreements have been adopted to move the world economy toward freer international trade (multilateralism). •How trade interacts with growth and its effect on poverty. In general terms, what has worked and what has not, with respect to trade and associated policies for industrialization, and why.Chapter 19: Outline •Trade Trend and Patterns •Import Substitution •Protective Tariffs –Import Quotas –Production Subsidies –Exchange-Rate Management –Outcomes of Import Substitution •Outward Orientation and Export Promotion –Policies Supporting Outward Orientation –The Benefits of Outward Orientation •Trade and Growth: The Empirical Evidence –Trade Volumes, Trade Policy, and Growth –Trade and Poverty Reduction •Key Issues on the Global Trade Agenda –Increased Global Competition and the Rise of China and India –Does Outward Orientation Create Sweatshops? –Expanding Market Access –Multilateral Trade Negotiation and the WTOTrade and Development•Trade creates gainers and losers•The net benefit of trade is positive, i.e. benefits are greater than costs •But, why are demonstrations against World Trade Organization (WTO)•For example The head of the South Korean Federation of Farmers, and Fishermen stabbed in Lee Kyang himself during protest!•Lee opposed Trade liberalization arguing it would destroy South Korean Farmers•The evidence is that on balance free trade has benefited developing countriesTrade Trend and Patterns •Globally trade almost doubled from 13% of world out put in 1970 to 24% in 2003•See figure 19.1 for export growth as share of GDP•Globalization is broader than trade since it includes rapid financial lows, migration of people, and information flows through Internet and satellite phones, etc..Table 19.1: Regional Participation in Trade and Capital FlowsGlobal and Regional Trade•There are significant regional differences in trade trends •Global grew from 7% in 1970 to 38% in 2002•Africa depends on trade that accounts about 20% GDP.•But, Africa’s exports of 3.6% in 1970 by declined to 1.4% in 2002Trends and Patters of Trade•See 19.1.Regional Participation in International Trade and capital flows•Shifts in the composition of exports , 1970-2003•Trade shifts in the composition of exports (see table 19-2, from 1970-2003Protective Tariffs•Protective tariff is aimed at raising the domestic price of the imported good above the world price•Figure 19.3 the Pw is the world price with free trade. If import tax or tariff is placed the Pd will include tariff or tax of (Pd-Pw) reducing imports form M2 to M1 as shown in the figure:•Pd= Pw (1+tr)•We can identify the effect of tariff on the following: tariff revenue, consumer & produce surplus, deadweight loss, etc•Nominal Tariff rate= Real rate + inflation rateEffective Rate of Protection •Effective rate of protection (ERP) measures the effect on tariffs on input and output. •It measures the impact of trade policies on value added•ERP= (value added (domestic Prices)/ Value added (World Prcies)-1ERP= (Pd-Cd)/(Pw-Cw)-1ERP=( Pwto-Cwti)/ (Pw-Cw) see box 19.1Import Quotas & Subsidies•These involve the quantitative restrictions on imports by import licensing.•Quota rent is substantial so importers expend great effort in rent seeking activities including bribes.•The impact of subsidy is shown on Figure 19.4 next.•Producers are equally happy with a subsidy or equivalent tariff.•The dead weight with subsidies is reduced to area b. Economists generally prefer subsidies over tariffs but government officials prefer tariffs and quotasExchange Rate Management•Figure 19.5 Shows the market for foreign exchange where exporters supply and importers demand foreign currencies •Government can fix exchange rates with two outcomes:•1. Overvalued Exchange rate: official exchange rate below equilibrium rate•2. Undervalued Exchange: