Trade Policy in Developing Countries
AcknowledgementsFor me, completing this study has provided invaluable experience, and I would not have been able to obtain this knowledge and experience without the help and advice that I have got from my supervisor and colleagues. My supervisor has been quite patient with me while I worked to finish my dissertation, and I am grateful for that. I will be able to refine the approach and develop the research question with the helpful suggestions, comments, and encouragement I have received.It is a valuable experience for me to undertake this study, and it is not likely for me to gain this experience without the support and guidance that I have received from my supervisor. I am very appreciated to my supervisor for patiently guiding me to complete this dissertation. With the valuable advice, feedback and encouragement, I can better improve the methodology and develop research question. Executive SummaryThe goal of this study is to evaluate trade policies in developing nations, as well as their impact on economic development. This will be accomplished using secondary research. To investigate the factors of trade policies and development in developing nations, a quantitative research study was devised and carried out, with secondary quantitative data collected to support it. In order to give accurate and up-to-date information regarding trade policy and development in poor countries, the secondary data for the two primary topics was gathered from two online databases: the World Bank’s Global Trade Alert and the World Bank’s World Development Report. The data was collected between 2009 and 2019, before to the COVID-19 pandemic, and it was based on the cases studied in China and India at the time. To further exhibit, characterize, and analyze the data, descriptive and comparative analyses were used in conjunction with each other. As a result, there are numerous important results.The purpose of this study is to examine the trade policies and their influence on economic growth in the developing countries using a secondary research. A quantitative research was designed and used to collect secondary quantitative data to examine the variables of trade policies and development in developing countries. The secondary data about the two key themes was collected from online databases: The World Bank and Global Trade Alert, to provide authentic and the latest data about trade policies and development in developing countries. The data between 2009 and 2019 before the COVID-19 pandemic was gathered and based on the cases study fo China and India. Furthermore, descriptive and comparative analysis were adopted to present, describe and analyse the data. Therefore, there are several key findings. The findings about discriminatory intervention policies against external rivalries indicate that export is more preferred by developing countries. Developing countries should develop and implement support program to encourage exporters to improve their exports of goods and services to the external rivalries. Furthermore, the findings also suggest that trade policy has its weakness which limits developing countries’ ability to learn and use technology and management skills from the rivalries of the global market, and reduces the attractiveness of doing business in the developing countries, particularly FDI. It is important for developing countries to reduce its skill gaps and shortages by improving the workforce quality, which will provide quality workforce to foreign investors as well as the domestic industries. Finally, the benefits brought by trade liberalization by the developing countries indicate that there is a need for these countries to further enhance the openness for international trade. Though discriminatory intervention helps to protect the domestic industries and hurt the foreign industries, it is still important for both industries and developing countries to have their comparative advantage and competitive advantages.
Table of Content
TOC o “1-7” h z u Acknowledgements PAGEREF _Toc101593057 h iExecutive Summary PAGEREF _Toc101593058 h iiList of Tables and Figures PAGEREF _Toc101593059 h vChapter I: Introduction PAGEREF _Toc101593060 h 11.1 Background PAGEREF _Toc101593061 h 11.2 Statement of the Problem PAGEREF _Toc101593062 h 31.3 Research Aim and Objectives PAGEREF _Toc101593063 h 41.4 Significance of the Study PAGEREF _Toc101593064 h 4Chapter II: Review of Related Literature and Studies PAGEREF _Toc101593065 h 62.1 Trade Policy PAGEREF _Toc101593066 h 62.2 Key Theories in Trade Policy PAGEREF _Toc101593067 h 62.2.1 Mercantilist theory of trade PAGEREF _Toc101593068 h 62.2.2 Absolute Advantage PAGEREF _Toc101593069 h 72.2.3 Comparative Advantage PAGEREF _Toc101593070 h 72.2.4 Heckscher-Ohlin Theory PAGEREF _Toc101593071 h 82.3 The Relationship between International Trade and Economic Development PAGEREF _Toc101593072 h 82.4 Trade Policies Development over the Years PAGEREF _Toc101593073 h 102.5 Developing countries’ use of trade policies PAGEREF _Toc101593074 h 102.6 Trade Policy and the Developing Economies PAGEREF _Toc101593075 h 11Chapter III: Research Design & Methods PAGEREF _Toc101593076 h 133.1 Research Design PAGEREF _Toc101593077 h 133.2 Data Collection Procedure and Sample PAGEREF _Toc101593079 h 143.3 Data Analysis PAGEREF _Toc101593080 h 153.4 Ethical Considerations PAGEREF _Toc101593081 h 16Chapter IV: Presentation of Research Findings PAGEREF _Toc101593082 h 174.1 Introduction PAGEREF _Toc101593083 h 174.2 Results and Analysis PAGEREF _Toc101593084 h 174.2.1 Trade Policies PAGEREF _Toc101593085 h 220.127.116.11 India PAGEREF _Toc101593090 h 204.2.2 Development PAGEREF _Toc101593096 h 244.2.2.1 Short-term Growth PAGEREF _Toc101593097 h 244.2.2.2 Long-term Growth PAGEREF _Toc101593100 h 264.2.3 Trade policies and development in developing countries PAGEREF _Toc101593105 h 284.3 Summary PAGEREF _Toc101593112 h 31Chapter V: Discussion of Results PAGEREF _Toc101593113 h 325.1 Trade policies in developing countries PAGEREF _Toc101593114 h 325.2 Economic development in developing countries PAGEREF _Toc101593115 h 335.3 The impact of trade policies on economic development in developing countries PAGEREF _Toc101593116 h 34Chapter VI: Summary, Implications, Conclusions PAGEREF _Toc101593117 h 366.1 Summary PAGEREF _Toc101593118 h 366.2 Limitations and recommendations for future studies PAGEREF _Toc101593119 h 36References PAGEREF _Toc101593120 h 38Appendices PAGEREF _Toc101593121 h 43Appendix 1: Secondary research results (The World Bank, 2022a; 2022b; 2022c; 2022d; 2022e; 2022f; 2022g; 2022h; 2022i; 2022j; 2022k; 202l; Trading Economic, 2022a; Trading Economic, 2022b) PAGEREF _Toc101593122 h 43
List of Tables and FiguresTable 4.1 Percentage of China exports at risk due to various foreign discriminatory policy instruments (Evenett & Fritz, 2019, p. 113) PAGEREF _Toc101593086 h 18Table 4.2 Foreign discriminatory policy instruments against India exporters (Evenett & Fritz, 2019, p. 125) PAGEREF _Toc101593091 h 21Table 4.2 Trade liberalizing intervention and FDI net flow PAGEREF _Toc101593106 h 28Table 4.3 Trade discriminatory intervention and Net trade (US$) PAGEREF _Toc101593107 h 29Table 4.4 Trade policies, GDP and GDP growth rate in China PAGEREF _Toc101593110 h 30Table 4.5 Trade policies, GDP and GDP growth rate in India PAGEREF _Toc101593111 h 31Figure 3.1: Framework PAGEREF _Toc101593078 h 14Figure 4.1 Comparison of the countries harm to China and its export markets (Evenett & Fritz, 2019, p. 114) PAGEREF _Toc101593087 h 19Figure 4.2 Number of trade liberalizing intervention implemented by China PAGEREF _Toc101593088 h 20Figure 4.4 Number of discriminatory interventions imposed by China PAGEREF _Toc101593089 h 20Figure 4.5 Comparison of the countries harm to India and its export markets (Evenett & Fritz, 2019, p. 126) PAGEREF _Toc101593092 h 22Figure 4.6 Number of literalizing interventions PAGEREF _Toc101593093 h 23Figure 4.7 The number of discriminatory interventions by India PAGEREF _Toc101593094 h 23Figure 4.8 The tariff rates of China, India and the United States PAGEREF _Toc101593095 h 24Figure 4.9 Final consumption expenditure (% of total GDP) PAGEREF _Toc101593098 h 25Figure 4.10. Net exports in India and China over the past decades (Current US$) PAGEREF _Toc101593099 h 25Figure 4.11 Unemployment rate PAGEREF _Toc101593101 h 26Figure 4.12 Foreign direct investment, net flows (% of GDP) PAGEREF _Toc101593102 h 27Figure 4.13 GDP (current US$) PAGEREF _Toc101593103 h 27Figure 4.14 GDP growth rate-China, India PAGEREF _Toc101593104 h 28Figure 4.15 Individual internet users (% of total population) PAGEREF _Toc101593108 h 29Figure 4.16 The business regulatory environment and technological innovation-China, India PAGEREF _Toc101593109 h 30Chapter I: Introduction1.1 BackgroundOver the last several decades, trade policies in developing nations have been a major topic of debate among international economists. As a result of a desire to quickly expand the economy in order to fulfill a range of local and international demands in emerging nations, a number of issues about the relationship between trade and economic development have been highlighted. Trade policies in developing countries have been a critical point of discussion by international economists over the past few decades. A desire to rapidly develop the economy to meet a variety of domestic and international needs in the developing countries have raised a lot of problems about the connection between trade and economic growth. The trade policies implemented in developing countries often widely differ from the rational resource distribution models, which offer ample scope analysis of the influences of trade policies in literature (Conway, 2002; Mukherjee, 2019). Furthermore, the trade policies in vital ways have been reversed by some developing countries, which often result in dramatic outcomes (Milner & Kubota, 2005). The changes also bring changes to economic structure and then stimulate the discussion the relationship between trade policies and economic development. Therefore, the subject matter that is often perceived as the combination of trade policy and economic development related to the concerns and experience of developing countries. The first chapter here outlines the research background, issues and historical evolution, theoretical framework, hypotheses, limitation and significance of the study, which help set the groundwork for the later sections.
Previous studies on the trade policies and development identify the central issue that is the extent to which the unique environment in developing countries brings damages to the usual free trade. Due to the importance of this issue, the relationship between trade and development is first analysed. Empirical evidence about positive connection between free trade and growth have been provided for developed countries. However, such relationships have been rarely discussed and identified empirically in developing countries. The attempts to build such relationships in prior studies reviews the critical problems on the relationship trade policies with development in developing countries (Edwards, 1993), particularly the difficulty in gaining effective measures of trade policy and developing right channels for facilitating economic growth. There is another study emphasizing trade as a powerful tool that can be used to gain benefits from international trade (UNCTAD, 2022a). However, there is very a few attempts in empirical studies on the association of trade with growth, and that establish a cause and effect between the two variables (Oskam et al., 2004). Following the viewpoint of Chatterji, Mohan, and Dastidar (2013), international commerce is associated with development because, as the economy grows, so does the number of transactions, and the economy becomes more open. Relaxing the limitations on foreign currency is anticipated to result in an increase in the number of investment possibilities. Investments are increasing, and with them, the introduction of new technologies that may be used to promote and boost the development of a country’s economy is possible.The view by Chatterji, Mohan and Dastidar (2013) links international trade with development, as with the growth of economy, there are increasing trades, and economy become increasingly open. Relaxing the controls of foreign exchange is likely to help increase opportunities for investments. While the investments increase, they can bring about new technologies that are useful to stimulate and enhance the growth of a country’s economy. Additionally, the opportunities for investing can be promoted via producing the opportunities of trading and a circumstance in which multinational corporates across the world can be appealed. Nevertheless, benefits from global businesses heavily rely on the nature, characteristics and production of the goods that developing countries manufacture and exchange (Marrewijk, 2012). In this status, developing countries have pursued the domestic economic policies as well as the adopted trading regime. From the comparative advantage theory and the influence of trade on investment level, the dynamic gains from trade take place and increase with the improvement in technical knowledge (Marrewijk, 2012).
Though trade makes contribution to development, there have been a number of challenges for developing countries to ensure the contribution of trade to development. Developing countries are often limited by their resources and capacity to establish a significantly positive relationship among trade, assess policy choices, productive capacity and employment, as well as suitable national trade policy frameworks, which reduces their ability to fully use their transformative power of trade to fulfil development. International trade plays a critical role in reducing poverty and improving the national welfare (UNIDO, 2017). The view raises increasing concern from many governments. Policymakers are desire to know the approach that they can use to increase the chances of their firms in the global market, improve employment rate through trade as well as increase the attractiveness of their countries to foreign investors. Countries are not likely to develop sustainably without extensively trading with other countries. Through trading, countries are allowed to specialize in goods and services production and align the production with their comparative advantage, and to enable producers and consumers to use a wider variety of services or products at lower prices.
Since the early 1990s, there has been a substantial change in the common perception of the trade agenda. At the same time, the emphasis of trade liberalization has turned to the discussion over trade policy (UNIDO, 2017). Twenty years later, new obstacles have emerged, despite the fact that average import duties have been reduced (UNIDO, 2017). Also beneficial to development are stricter trade regulations, and the construction of trade barriers for international transactions rather than being open to international commerce is regarded to be advantageous for economic growth in developing nations (The Work Bank, 2018).The general view about trade agenda has significantly shifted since the early 1990s; at the same time, the focus of trade liberalization was on the debate on trade policy (UNIDO, 2017). 20 years later, new challenges have appeared, though average import tariffs are relaxed (UNIDO, 2017). Furthermore, stronger trade policies also enable development for developing countries, and building trade barriers for international transactions instead of being open to international trade is considered is considered helpful to growth (The Work Bank, 2018). The evolution is mainly displayed in the following aspects (UNIDO, 2017). In the first place, there has been a significant increase in non-tariff measures (NTMs) to protect domestic industries, as well as an increase in the importance of services in international trade, as well as significant vulnerability from globally integrated markets to external shocks caused by the financial crisis, as well as continuous volatility in commodity markets and increasing risk for commodity exporters. Additionally, the complex incentive structures produced by regional and bilateral preferential trade agreements, the recent increase in trade costs, which has been mostly driven by logistics expenses, and de facto trade obstacles imposed by various non-tariff laws are all worth highlighting.:Sharply increase in non-tariff measures (NTMs) for the protection of domestic industries;Increasing role that services play in trade;Significant vulnerability from globally integrated markets to external shocks caused by financial crisis;Continuous volatility faced by commodity markets and increasing risk for commodity exporters;Complicated incentive frameworks created by regional and bilateral preferential trade agreements;Recent trade costs largely contributed by logistics costs;De facto barriers created by other non-tariff regulations to trade.1.2 Statement of the ProblemIn the increasing globalization context, international trade implies opportunities, but also presents problems. Developing countries have been struggling to compete in the global economic context for numerous reasons. Economists have contributed their efforts to assist government policymakers to confirm the trade-relevant limitations and barriers to fulfil sustainable reduction of poverty as well as achieve shared prosperity (The World Bank, 2018). Economists often first examine the specific environment in the developing countries and point out what sectors are currently beneficial from the trade policies, and then look into how those sectors make contribution to the economic growth (Zattleer, 1996; Salvatore, 2022). Regarding to the economic growth and trade policies are examined and explored in prior studies, other problems are also considered, such as employment and wages issues, technology or innovation issues, trade barriers, environment and profits, and national capacity to solve competition shocks.
On the other hand, economists also pay attention to the problems brought by trade policies, and point out that trade policies sometimes also bring damage or harmful effects on some foreign industries. The US-China trade war suggests that the manufacturing and some high-tech sectors like information and communication technologies of the United States are adversely affected by the trade policies adopted by China. The United States have suffered from the trade deficit, and thus implemented discriminatory interventions instruments, such as increase in tariffs and constraints on foreign direct investment. The exporters of China have been seriously hurt by the foreign trade policies. To response to the discriminatory interventions, China has also imposed similar unfair trade policies on the exporters of the US. Though these policies help protect the domestic commercial interests, it is not good for sustainable development for businesses in the global market.
1.3 Research Aim and Objectives
Regarding to the problems faced by the trade policies of developing countries today, the purpose of this study is to examine the influence of trade policies on economic growth in the developing countries using a secondary research. Furthermore, the focus of this study is also on solving three research objectives to provide more accurate and further insights into the research aim. Thus, the research objectives are developed as follows:
To identify the key trade policies imposed by developing countries;
To identify the economic development in the developing countries;
To examine the impact of trade policies on economy in the developing countries;
1.4 Significance of the StudySolving the aim of this research provides more accurate understanding about the recent trade policies in the developing countries, as trade policies have been always shifting, and critical to the economic growth of all nations (Lamers et al., 2012). In developing countries, for example, international trade has been adopted so that it can give an end to poverty. It is well known that trade policies are important to international trade that brings benefits, such as stimulating innovation, improving productivity and efficiency, and providing more job opportunities. It can be seen that trade policies study is important. For this study, it provides timely study on the trade policies, which can provide useful recommendations to improve the trade policies.
Trade policies, on the other hand, not only provide advantages to developing nations, but they also create difficulties for them. Generally speaking, imports may deplete a country’s resources and inhibit the development of native industry. When compared to their international competitors from industrialized nations, domestic industries often have less advantages. As a result, trade policies are often used as a weapon to discourage the importation of products and services from foreign exporters, which is a negative development. It is the purpose of this research to examine the negative aspects of trade policies in order to provide more realistic suggestions for trade policies that would promote international commerce.On the other hand, trade policies do not only bring benefits, but also cause problems to developing countries. Typically, imports can reduce the resources of a nation, and discourage the domestic industries. Domestic industries often own less advantages in comparison with external rivalries from developed countries. Due to such reason, trade policies sometimes are used as tool to discourage imports of goods and services from foreign exporters. This study looks into the negative side of trade policies in order to provide more practical recommendations for trade policies to improve international trade.
Chapter II: Review of Related Literature and StudiesThe literature review chapter assesses the existing theories and empirical studies about trade policies and their impact on development.
2.1 Trade Policy
Trade policy is defined as a set of laws, regulations, practices and agreements used to govern imports and exports to foreign markets, or the international trade practices (Greenaway & Nelson, 2022). Each country makes decision on its own standards for internationally trading, such as subsidies, tariffs and regulations. The aim of trade policies is to enhance and grow the domestic economy (Handley, 2014). For instance, China trade policies are adopted to enhance the competitiveness of the industries of the country. As it is reported in some cases, a more aggressive protectionist trade policy is pursued by many countries in order to favour their domestic industries over its foreign competitors (Guo & Johnston, 2021; Metiu, 2021). In such policy, quotas on numerous imported goods are often designed and implemented in a country, and tariffs on imported goods have been imposed and subsidies are offered to the domestic producers.
2.2 Key Theories in Trade PolicyIn literature, there have been a number of different theories to explain trade across national border. Trade refers to exchange goods between persons or entities. Similarly, international trade refers to goods and services exchange across countries (Guo & Johnston, 2021). It is believed that the exchange of goods or services can generate various benefits. This looks simply, but it involve a number of policies, theories as well as business strategies related to international trade. Different trade patterns have been explained and understood using those theories, which include country-based theories and firm-based theories. However, country-based theories are mainly used to explain international trades, as this study aims to investigate trade policies in the national context of developing countries.
2.2.1 Mercantilist theory of tradeMercantilist theory of trade was developed in the 16th century, and states that the wealth of a country is decided by the total number of its silver and gold holdings (Aizenman & Lee, 2007). Mercantilists hold a belief that a country is supposed to grow its holdings of wealth by stimulating exports but discourage imports (Anderson & Neary, 2003). Regarding to this view, if people of foreign countries purchase more from exporters than they sell, the difference in the wealth should be pay by the people of foreign countries. Each country aims to achieve trade surplus, or achieve an outcome that the export values are greater than the import values in order to prevent trade deficit. Despite of this theory as one of the oldest theories, it still implies some modern thinking. In both the developing and developed countries, such as China, Japan, Germany and Singapore, exports is favoured and imports are discouraged through a form of neo-mercantilism through which these countries can stimulate an integration of protectionist policies and barriers, and subsidies to the domestic industries (Evenett & Fritz, 2020). Export-oriented companies often support protectionist policies in order to favour their firms or industries while other consumers and companies are hurt by the protectionist policies.
2.2.2 Absolute AdvantageA new trade theory, named as absolute advantage, is developed to focus on country ability to achieve efficient production of goods and services than another nation (Schumacher, 2012). This view is based on a rationale that trade between countries is not supposed to be restricted and regulated by government intervention and policies. Trade should naturally flow in line with the forces in market (Bellino & Fratini, 2021). For example, if a country is able to supply a good faster or cheaper than another, then the country has an absolute advantage and should concentrate its ability on specializing and producing that goods. Applying this type of trade pattern can provide more efficient production, as an incentive to generate faster and better solution for production can be used by a country with absolute advantage to increase its competitive advantage.
Due to the fact that these sectors are not only capable of high-end technology that emerging nations do not have, but also have a lengthy history of development, this theory is more appropriate for countries with high-tech industries. For example, the automotive industries in Japan and Germany are known for producing high-quality automobiles that cannot be replicated by the industries in emerging nations, despite their similarities. In this situation, the two developed nations have a competitive edge in terms of increasing their level of specialization.This theory is more suitable for the countries with high-tech industries, as these industries are not only capable of high-end technologies that developing countries do not have, but have also had a long history in development. For instance, Japan and Germany have automotive industries that specialize in high-quality cars, which cannot be copied by the industries from developing countries. In this status, the two developed countries have advantages to increase the specialization.
2.2.3 Comparative Advantage
The challenge of absolute advantage theory is that some developed countries are better at goods and services production and thus have advantages at many areas. However, other countries do not have the absolute advantages. To solve the challenge, the comparative advantage was proposed and emphasized that even though one country has the useful absolute advantage in goods production, trade and specialization still can happen between the two nations (Lang, 2011). This theory concentrates on that the productivity is relatively different. When a country is not able to produce a service or product in more efficient manner than another, the country is often able to produce products better and more efficiently than it produces other goods. In reality, the global economy is increasingly complex and contain trading relationship between more than two countries. Additionally, trade barriers are also increasing, which makes it more complex for the trading between two nations.
2.2.4 Heckscher-Ohlin TheoryThe above theories do not help to identify the advantage of a country, as those theories generally focus on the assumption that open and free markets enable countries and producers to decide which goods can be produced more efficiently. However, the Heckscher-Ohlin theory emphasizes how a country can obtain comparative advantage by products production using the factors the country (Fisher, 2011; Saylordotorg, 2022). The factors refer to a variety of resources, such as labour, capital and land, which can offer resources for investment in equipment and plants. Additionally, these factors have significant impact on the costs of supplying the goods. This theory is significantly suitable this study, as it is more about the resources as an advantage of a country. Some countries with emerging economies, such as India and China, have large pools of labour, which make them the best choice for labour-incentive industries like clothing industries.
The above theories are country-based theory, incorporating external environmental factors, while the firm-based theories consider product and services factors, such as customer loyalty, technology and quality.
2.3 The Relationship between International Trade and DevelopmentFor many policymakers and observers, international trade’s relationship with economic development is about the relationship between exports and the benefits the exports bringing to a country. Exports are a benefit to countries, but import demonstrates a drain on the national resources and discourages the local industry (Lee, 2020). Prior studies in the context of Western countries, high levels of income suggest high level of exports, as exports can help stimulate local production and employment (Brambilla & Porto, 2016). Imports refer to the foreign services and goods bought by citizens, businesses as well as the government. Services and goods are assembled and generated in foreign countries and then sold to the residents of the domestic market regardless of how they are imported and how they are sent.
International trade can promote economic growth can be promoted by international trade through introducing technology and management skills and stimulating innovation (Chen, 2009). Prior study also proposed a few growth models about trade, which shows the crucial aspect of knowledge accumulation and technological progress (Grossman & Helpman, 1990). Through these models, a long-run growth model is generated for trade and growth using technology and knowledge. International trade allows investment as well as results in growth (Xing, 2016). Furthermore, Frankel and Romer (1999) found that productivity per capita grew by 2% to 3% while there was a growth in each percentage in the trade ratio, it then contributes to the GDP of a nation. It proves an interdependent relationship of trade with growth in economy in the Asia countries. These studies disclose a significantly positive relationship between the share of investment in GDP and the growth of economies. Furthermore, the above studies also show that trade is significantly important to development in economies, as variables of external environment like exchange rate and tariffs strongly affect the development as they have direct impact imports as well as exports.
Exports can be regarded as a crucial source of income as well as an engine of growth. Furthermore, successfully exporting to foreign countries has positive effects on the economy. In a study by Ajmia, Ayeb, Balcilarc and Guptad (2013), the causal-effect relationship of exports with development in economy was tested in the context of South Africa and proved a cointegrating correlation between the two variables. From these findings, exports play an important part in stimulate a status that GDP grows with the increase in incomes and employment in the sectors related to exports as well as technological development. On the other hand, imports intric