4.4 The Role of International Trade 

There are a number of international factors that act as barriers to development.

Read Dorton P367-370 or 477-482 tragakes and make notes on these specific factors.

One confusing issue that may require further explanation is the fact that many LEDCs have "non-convertible" currencies. This means that they are not generally acceptable on FOREX markets and therefore not acceptable as a means of payment for international trade. This is obviously a barrier to trade.

Import substitution is a government industrialisation policy for growth by replacing imports with domestic production. Involves protectionism. e.g. tariffs & quotas to protect infant industries. 

However protecting domestic industries from world-class competitors results in inefficiency, low productivity and high unit costs. Consumers pay higher prices and suffer a loss of consumer surplus. Argument for import substitution often rest on “Infant industry” argument. However small domestic industries may become over-reliant on protectionism and may never become efficient. 

Export promotion is a policy promoting exports to achieve growth and development. These policies are associated with Asian NIC ‘tiger economies’ such as S Korea. It has been very successful for many countries in Asia-eg China. GDP has grown and unemployment and poverty have fallen dramatically.  Many countries have healthy BOP surpluses.

But did crash of 97 mean that these policies do not work? "when America sneezes the whole world catches a cold"

It is not always about free trade- think about China's export promotion- it may include large subsidies and financial help from Government banks. Equally a country like Singapore has focussed interventionist S-Side policies such as education, incentives for R&D and infrastructure spending on improving the competitiveness of its' export industry.

The successes of export promotion policies are affected by world trade condition. 

Possible problems are:

• Over specialization (and therefore export diversification is often a strategy)

• You may have an advantage now and specialize but this advantage is dynamic and you may lose it. Thailand cannot export low cost goods to world anymore it doesn’t have an advantage-China can beat it on prices

• Also strategic reasons for not over dependence on trade.

• Finally consider that globalisation and trade result in issues of sustainability due to the carbon footprint of transportation. 

• Much of the benefits of export led growth have relied on US buying these goods- with Trump's protectionist policies this may be risky- hence China

• Many of the benefits of cheap exports have been felt by US (not Asian) consumers.

Diversification of Exports:

• LEDCs over rely on Primary commodities

• This is concern due to long term deteriorating terms of trade (Low YED, increased supply due to improved technology and greater competition).

• Also in short term price volatility is harmful (PED and PES inelastic and supply volatility)

• Therefore diversification- particularly into higher value added production- manufactured goods etc is beneficial

• Problems of doing this- protectionism from DCs; lack of skilled labour; lack of finance for investment- may need Gov help.