POLI 243 Lecture Notes - Investment, General Agreement On Tariffs And Trade, Protectionism

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16 Mar 2013
South Korea EOI
Trade and Economic Development
Despite similar starting points in 1945, several countries have attained different
Similar branching points, different trajectories
East Asian countries were quite successful
Latin American Countries struggled
Difference in how they thought about trade in development strategy
Trade policy played an important role
The Popular Trade Strategy
The popular strategy after WWII
Import-Substitution Industrialization (ISI)
Old mercantilist thinking and you need to break it
Break through industrialization
Stop importing manufacturing goods, start subsidizing with local production
Did not have an industry yet
Protectionism: Protect the infant industries
Tariff Barriers, block imports from coming in
Based o historical experience (during WWI+WWII)
Industries in Britain and France are converted to wartime production
Making trucks for the army instead of trucks for the world market
Exports are not going to be there
That’s why they HAVE to start local production and to invest in their own structure
Industry on the warring party focus on the war patterns and not on consumer
But the war will end, so tariff barriers can protect local industries
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In case Britain wants to sell cars back to Argentina, local industries will be protected
ISI widely adopted after WWII
Linked to nationalism, security concerns
India: don’t want the same relationship with Britain when they were a colony
Problems with ISI
May work in the short run but hard to sustain
Some countries will stick to ISI because they can justify it as working
Others will abandon ISI because it is not exactly producing the benefits
Shortages develop, causing bottlenecks in production
Raising price of steel in domestic market to encourage firms to produce more
Steel is an important immediate good
Not going to import steel, but there aren’t enough steel producers to satisfy the wants of
all the firms
Even IF YOU produce enough, the high cost inputs would create a high market price for
Arbitrage, buy high sell low, would be severely violated
Profits are not always reinvested
Steel manufacturers are guaranteed a profit
The logic would be to reinvest it but these firms are not government owned and private
What to do with the profit
whatever the owners of the firms want to do
It could be reinvested to expand the operation of the firms, to update capital but there
are no pressures to do this because the tariff barriers are there
Home Markets cannot always support production
Steel production is a large operation
Not enough to go around in South America, large market, large population
South Korea, smaller population, smaller market
Does not earn foreign exchange
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