Question

Explain trade problems that developing nations face. Find a current example, preferably from a professional source, over something in the last year that shows the difficulty a developing nation has faced when trying to become a trade partner.

Answer 1

Explanation about trade problems that developing nations face:

1. Primary Exporting:

• Most of the developing countries, in its initial stage of development are exporting mostly primary products and thus cannot fetch a good price of its product in the foreign market. In the absence of diversification of its export, the developing countries have failed to raise its export earnings.

2. Unfavorable Terms of Trade:

• Another problem of trade faced by these developing countries is that the terms of trade are always going against it. In the absence of proper infrastructure and the quality enhancement initiative, the terms of trade of these countries gradually worsened and ultimately went against the interest of the country in general.

3. Mounting Developmental and Maintenance Imports:

• The developing countries are facing the problem of mounting growth of its developmental imports which include various types of machaneries and equipment’s for the development of various types of industries as well as a huge growth of maintenance imports for collecting intermediate goods and raw materials required for these industries. Such mounting volume of imports has been creating a serious problem towards round management of international trade.

4. Higher Import Intensity:

• Another peculiar problem faced by the developing countries is the higher import intensity in the industries development resulting from import intensive industrialisation process followed in these countries for meeting the requirements of elitist consumption (viz., colour TVs, VCR, Refrigerators, Motor cycle, cars etc.). Such increasing trend towards elitist consumption has been resulting a huge burden of burgeoning imports in these developing countries, resulting serious balance of payment of crisis.

5. BOP Crisis:

• The developing countries are facing the problem of burgeoning imports and sluggish growth in its exports resulting in growing deficit in its balance of payments position. In some countries, this deficit has gone to such an extent at a particular point of time that ultimately it led to a serious crisis in its international trade.

6. Lack of Co-ordination:

• The developing countries are not maintaining a good co-ordination among themselves through promotion of integration economies grouping, formation of union etc. Thus in the absence of such co-ordination, the developing countries could not realize those benefits of foreign trade which they could have realised as a result of such economic grouping.
• Another important concept in international trade theory is the concept of “terms of trade.” This refers to the amount of exports needed to obtain a given amount of imports, with the fewer amount of exports needed the better for the country. The terms of trade can shift, either benefiting a country or reducing its welfare.
• Assume that the United States exports aircraft to Japan and imports televisions, and that one airplane can purchase 1,000 televisions. If one airplane now can purchase 2,000 televisions, the United States will be better off ; alternatively, its welfare is diminished if it can only purchase 500 televisions with a single airplane.
• A number of factors can affect the terms of trade, including changes in demand or supply, or government policy. In the example given just above, if Japanese demand for aircraft increases, the terms of trade will shift in the United States’ favor because it can demand more televisions for each airplane. Alternatively, if the Japanese begin producing aircraft, the terms of trade will shift in Japan’s favor, because the supply of aircraft will now be larger and the Japanese will have alternative sources of supply.
• Under certain conditions, improvements in a country’s productivity can worsen its terms of trade. For example, if Japanese manufacturers of televisions become more efficient and reduce sale prices, Japan’s terms of trade will worsen as it will take more televisions to exchange for the airplane.
• For example, trade and economic data between countries, and even within countries, are not readily compatible. In the United States, the North American Industry Classification System (NAICS), which is used to collect statistical data describing the U.S. economy, is based on industries with similar processes to produce goods or services. In contrast, data on international trade in goods are collected on a commodity basis.[16] The United States’ NAFTA partners, Canada and Mexico, also use NAICS, but the European Union uses a system called Nomenclature of Economic Activities. Although there are concordances between these differing systems, these are far from exact.

7.Steep Depreciation:

• Steep depreciation of the currency with dollar and other currencies in respect of developing countries has been resulting in a considerable increase in the value of its imports which ultimately leads to huge deficit in its balance of trade.

8.Higher Prices of POL imports:

• The worsening of the current account deficit in balance of payments of the developing countries has been partly on account of higher price of POL imports charged by the oil producing countries especially since the Gulf War.

9. International Liquidity Problem:

• Most of the developing countries has been facing all the more serious international liquidity problem. Accordingly, these countries are experiencing chronic deficiency of capital and technology resulting heavy dependence on the developed countries for their scarce resources.

Trade Related Problems Faced by Developing Countries:

1. Deterioration of the Terms of Trade:

• According to some economists such as Prebisch, Singer and Myrdal, the commodity terms of trade (which is the ratio of the price index of exports to the price index of imports) -tend to deteriorate over time.

There are two main reasons for this:

(i) Productivity increase:

• Most or all of the productivity increases that take place in devel­oped nations are passed on to their workers in the form of high wages and income. But productivity increases in developing countries lead to fall in commodity prices.

(ii) Income elasticity of demand:

• The demand for the manufactured exports of devel­oped nations tends to grow much faster than the latter’s demand for the agricultural exports of developing countries. This is due to much higher income elasticity of demand for manufactured goods than for agricultural commodities. For these reasons, self-sufficiency (no trade) is at times better than trade. As J. N. Bhagwati has argued, the deterioration in the terms of trade of developing nations could be so great as to make them worse-off with trade than without it. This is known as immeserising growth.