International trade barriers

Overspecialisation on a narrow range of products Dependence on commodity exports. Many LDCs still heavily dependent on primary products for their export earnings: most of Sub-Saharan Africa and many in Latin America receive 50% of their export earnings from primary products. Missing out benefits of diversification and higher VA production.

Adding value means: More varied production activities Creating employment opportunities Establishing new firms involved with manufactured goods Expanding into activities requiring higher skill and technology needs. Too much specialization: criticism of theory of comparative advantage. A country would be limiting its growth and development prospects if it did not diversify into new areas of production.

Price volatility of primary products

Inability to access int’al markets Tariff barriers. DCs impose higher tariffs on LDCs imports. Tariffs faced by LDCs from DCs are 3 to 4 times higher than those faced by other DCs. In this way, DCs limit the access to their markets needed by LDCs to expand their exports. Tariff escalation is used to discourage diversification into higher VA activities. Tariffs imposed on raw materials are low, but rates increase on processed products.

Examples: EU. 9% tariff on cocoa paste, rising to 30% on final products made from this material. LDCs produce 90% of cocoa beans but export only 44% of cocoa liquor and 20% of cocoa powder. The largest exporter of processed cocoa is Germany! LDCs impose high tariff barriers on trade with each other, which accounts for the very low levels of intraregional trade observed in sub-Saharan Africa and South-Asia.

Agricultural trade and rich country subsidies. EU Common Agricultural Policy. Minimum price (intervention price, ip) in order to support farmers’ incomes. The resulting surplus is purchased by EU authorities at the ip. Since this is higher than the world price, the product can only be exported through the payment of export subsidies. US farm policy. Consists of a target price that the farmer is guaranteed for the product. When tp is larger than market price, the farmer receives the latter from the consumer plus a subsidy (=tp-mp). Farmers receive other subsidies and many products enjoy export subsidies.

Negative impacts of DC farm support: Global misallocation of resources. Higher prices received by farmers due to price supports as well as production subsidies result in overallocation of resources to the production of protected goods in DCs. Also, export subsidies artificially lower the int’al price of goods, making it more difficult for farmers in LDCs to compete. Very low prices force some farmers to abandon cultivation of the product leading to underallocation of resources to the product. So: overallocation in DCs and underallocation in LDCs.

Global inefficiency. Because of protection, less efficient DC producers continue to produce, capturing global market shares from the more efficient developing country producers. US is the largest cotton exporter in the world yet it also has among the highest costs of cotton production. Lower X revenues for LDCs that specialize in the export of products that receive protection in DCs. Increased poverty among affected farmers.

Other non-tariff barriers. Certain non-tariff barriers have been rising increasingly in recent years and are referred to as the ‘new protectionism’. Although some are justified (minimum safety and quality standards), others (technical regulations, testing and certification, labelling & packaging requirements,...) might be being used excessively as a mechanism to reduce imports.