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