ECON-2220 Lecture Notes - Lecture 2: Free-Trade Area, Lac Region, Washington Consensus

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Trade Liberalization
What was expected? Extent of reform, results of reform.
Franko Chapter 8, 2 articles (NAFTA-related)
ISI: trade protectionism resulted in inefficiency industry
From 1990 until now: export-led growth model (ELG): trade liberalization was at its core
Main mechanism: elimination or sig reduction of trade barriers
1. Lowering import tariffs on manufacturing goods
2. Promoting foreign competition
3. Promoting exports of traditional and nontraditional products
This time, the promotion of exports is both traditional (raw materials such
as agro and mining) and nontraditional (new products)
Expected results from trade liberalization
For consumers: lowering import tariffs meant
More product selection (more quantity)
products at lower prices
Closer to the world’s prices
Better quality
Foreign competition will push local industry to increase their competition levels
Fight to keep their share in the domestic markets
Improve local production
Quality and quantity
Export production surplus
Searching for new markets abroad
Main goals: it meant promoting exports
Continuing exporting traditional agricultural and mining goods plus
Encouraging export of non-traditional products: new primary commodities
Producing local competitive manufacturing products for local markets and abroad
Negotiate with additional international trade partners
International markets become once more the ideal destiny of LAC production
Baker and Brady plans at work
All of this is part of Washington Consensus
Main characteristics of ELG strategy
Global markets were the main source of dynamic economic growth
Private (profit-maximizing) firms rather than the state, became the engine of
economic development
Expected results from trade reform
Reversing distortions of protectionism under ISI
Transforming exports into engine of economic growth
Re-allocate resources according to comparative advantages
The agriculture and mining sector became crucial sectors again for LA
Absurd to think that comparative advantage doesn’t apply
Two different ways to implement
1. Gradual reform: lowering import tariff gradually
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Providing industries time to adapt to new competition, given them time to
modernize, becoming more efficient
Learn how to do joint ventures with other countries outside LAC
2. Quick shock where only the fit would survive
Most countries did the reform in stages
First stage
Duration: 2-3 years
Extent: lowering and unifying import tariffs down to 50%
Second stage
Duration: 7-10 years
Extent: lowering import tariffs down to 10%
Internal mechanisms to promote exports
Creating and providing export credit lines
Reforming financial sector was imperative so they could support local
companies to have better access to credit at competitive interest rates
Policies accompanies LAC trade liberalization
Internal mechanisms to promote exports
Export credit lines
Help local agricultural and industrial firms to access knowledge and information
on international marketing
Consumers needs and wants in foreign markets
How to search for markets abroad (trade missions assistance)
How to navigate and negotiate in the international markets
Financial assistance to establish themselves abroad
Assistance on export diversification
Extent of trade reform
Over ten years, average import tariff of manufactured goods declined
1985: 50% average
1995: 12.3% average
At the end of the 1990s, less disparity on import tariffs across countries signaled
the consensus in the entire LAC region
These countries were clearly committed
Differences in plan implementation across countries
Brazil: gradual approach
Took 4 years to lower import tariffs from 80 to 30 percent
Down to 14% in additional eight years
Paraguay: shock approach, lowering tariff in 1 year from 72% to 9%
Impact of trade liberalization: higher export and import growth rates
Trade reform resulted in higher export growth
Imports increased which could be positive if imported goods brought better
technology or production techniques
Impact of trade liberalization: export diversification
Composition of export foods sig changed
Share of agricultural products/ToT X decreased
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1965: 60%, 1990: 43%
2005: 39.7%, 2011: 37%
United States
2005: 9.2%, 2011: 11.4%
European Union
2005: 9.25, 2011: 10.4%
Export composition changed
LA’s share of manufactured goods on total exports increased
1965: 30%, 1995: 72%
2005: 50%, 2011: 43%
There are four broad categories of trade integration
Free trade area: FTA
Eliminates trade restrictions between participating countries
Each country maintains an independent trade policy and separate tariff
rates with the rest of the world
Main benefit: FTAA eliminates trade and investment barriers on selected
goods and services traded by member countries, reducing prices for
consumers and creating new markets for producers
Customs unions
Same as FTA plus
Harmonization of some regulatory trade policies: all members determine
a Common External Tariff Rate (CET) with the rest of the world
Common markets
Same as customs unions
Coordination of some macroeconomic policies
There are advances in cooperation in policy making measures, such as
agriculture and the social sector
Economic union
Same as common market
Common monetary policy and common currency
Advantages of economic integration
Stepping away from global isolation
Access to new open markets previously protected creating new sales
opportunities
Access to larger markets: economies of scale
Larger investment, more labor training, technology, international
competitiveness
Different preferences and tastes, promoting product and export
diversification
It promotes credibility in the permanence of reforms, leading to higher confidence
for investors
NAFTA: North American Free Trade Agreement
North American Free Trade Agreement (NAFTA)
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Document Summary

From 1990 until now: export-led growth model (elg): trade liberalization was at its core. Main mechanism: elimination or sig reduction of trade barriers. This time, the promotion of exports is both traditional (raw materials such as agro and mining) and nontraditional (new products) Foreign competition will push local industry to increase their competition levels. Fight to keep their share in the domestic markets. Continuing exporting traditional agricultural and mining goods plus. Encouraging export of non-traditional products: new primary commodities. Producing local competitive manufacturing products for local markets and abroad. All of this is part of washington consensus. International markets become once more the ideal destiny of lac production. Global markets were the main source of dynamic economic growth. Private (profit-maximizing) firms rather than the state, became the engine of economic development. Transforming exports into engine of economic growth. The agriculture and mining sector became crucial sectors again for la. Absurd to think that comparative advantage doesn"t apply.

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