4.4 THE ROLE OF INTERNATIONAL TRADE
I. Trade problems facing many economically less developed countries:
With reference to specific examples, explain how the following factors are barriers to development for economically less developed countries.
1. Over-specialisation on a narrow range of products
· Developing countries, especially the lower income ones, tend to specialise in the production and export of only a few goods (usually primary goods) (Sub-Sahara Africa, Latin America).
· Missing out benefits of diversification and expansion into higher value-added production:
· Engaging in more varied production activities.
· Creating employment opportunities.
· Establishing new firms involved with manufactured goods.
· Expanding into activities requiring higher skill and technology levels.
2. Price volatility of primary products
· PED and PES is inelastic (low) Prices of primary goods are more volatile (than the prices of manufactured goods).
· As product prices fluctuate, so do farmers’ income, along with agricultural investment, employment and wages of agricultural workers.
· When product is exported, fluctuating prices also translate into fluctuating and unstable export earnings, affecting the country’s balance of payments and the ability to import, as well as the government’s efforts to engage in development planning and undertake necessary investments (water, health, education, etc.).
3. Inability to access international markets: Trade protection
a) Definition: The inability to access international markets refers to difficulties (mainly involve trade protection policies) encountered by developing countries in their exports to developed countries.
b) Tariff barriers:
· Developed countries impose higher tariffs on imports from developing countries. Limit access to wealthy markets needed by developing countries to expand their exports.
· Have raw materials Easier to produce manufactured goods. Developed countries impose higher tariffs on processed products than primary ones. Discourage developing countries from diversifying their production into manufacturing with a higher value added.
· Developing countries impost high tariff barriers on trade with each other (Sub-Sahara Africa and South Asia – highest tariffs in the world average).
c) Agricultural trade and rich country subsidies
· Agriculture is one of the most protected sectors of developed countries (they believe farmers earn low incomes must be assisted) creating some forms of support system for farmers: European Union’s Common Agricultural Policy (CAP), the United States’ farm policy.
· (CAP): Setting a price floor for each product.
· United States farm policy: Giving a target price that the farmer is guaranteed for the product. Ensuring their competitiveness in international markets.
· Negative consequences:
· Global misallocation of resources: Support system from developed countries encourages farmers to produce more Over-allocation of resources Excess production and surpluses ...