Deck 7: Trade Policies for the Developing Nations

Question 1

What are the major reasons for the skepticism of many developing nations regarding the comparative- advantage principle and free trade?

Answer 1

Many developing nations have that their doubts on the principle of comparative advantage and free trade because they feel that advanced nations are reaping greater benefits from engaging in international trade as compared to their engagement. Developing nations argue that their paths to industrialization are impeded by the protectionist trade policies initiated by advanced nations. They also face unstable export markets, worsening terms of trade, and have very limited access to the markets in which advanced nations participate. Overall, developing nations feel that they are being taken advantage of by advanced nations because their exports of primary products do not generate enough revenue to sustain their imports of manufactured products from the developed nations.

Question 2

Stabilizing commodity prices has been a major objective of many primary-product nations. What are the major methods used to achieve price stabilization?

Answer 2

Developing nations that produce primary products have sought to stabilize the prices of their exporting goods to maintain a steady amount of export revenues. Some major methods used to achieve price stabilization include production and export controls, multilateral contracts, and buffer stocks. All of these methods help developing nations maintain a target price, or achieve price stabilization, for their primary-product exports and make sure that their goods are not sold at any lower prices to prevent worsening terms of trade with other more advanced nations.

Question 3

What are some examples of international commodity agreements? Why have many of them broken down over time?

Answer 3

International commodity agreements (ICAs) are agreements among leading commodity-producing and -consuming nations regarding matters that include price stabilization, the assurance of adequate supplies to consumers, and the promotion of economic development of commodity producers. The major methods used to achieve price stabilization include production and export controls, multilateral contracts, and buffer stocks. The reason that ICAs have broken down over time is because they yield limited success in stabilizing prices for developing nations' exports. This is because enforcement and implementation of the three methods mentioned above is difficult.
For example, production and export controls are used to alter the market supply of commodities in order to keep the price of the commodities on its target price level. Firms in developing nations have the incentive to cheat their production limits because they would be able to reap more profits by selling greater quantities of their products. The use of buffer stocks and multilateral contracts face a similar problem in that target prices are difficult to determine and agree upon. Due to these difficulties in implementing methods for price stabilization, ICAs break down over time from their limited success in improving the economic conditions of developing nations.

Question 4

Why are the developing nations concerned with commodity-price stabilization?

Question 5

The average person probably had never heard of the Organization of Petroleum Exporting Countries until 1973 or 1974, when oil prices skyrocketed. In fact, OPEC was founded in 1960. Why did OPEC not achieve worldwide prominence until the 1970s? What factors contributed to OPEC's problems in the 1980s?

Question 6

Why is cheating a typical problem for cartels?

Question 7

The generalized system of preferences is intended to help developing nations gain access to world markets. Explain.

Question 8

How are import-substitution and export-promotion policies used to aid in the industrialization of developing nations?

Question 9

Describe the strategy that East Asia used from the 1970s to the 1990s to achieve high rates of economic growth. Can the Asian miracle continue in the new millennium?

Question 10

How has China achieved the status of a highperforming Asian economy? Why has China's normal-trade-relation status been a source of controversy in the United States? What are the likely effects of China's entry into the WTO?

Question 11

What led India in the 1990s to abandon its system of import substitution, and what growth strategy did India adopt?