University of Oxford

Developing Countries And Trade:

Developing countries and trade:

Introduction:

International trade is an important source of foreign income in almost all developing economies, these countries are referred to as developing due to their low GDP level and they are faced with high levels of poverty and unemployment, according to David Ricardo and Adam smith international trade plays a crucial role in the development of an economy, the Mercantile theory of development states that trade led to the wealth of nation.

This paper discus the various problems that the developing countries face in international trade and their effect on the agricultural, industrial and service sectors. Some of these problems are external while others are internal problem. Some external problems include competition in the global market, tariffs and other trade barriers, required quality standards. Some internal problems include high cost of production, tariffs of inputs and

Problems faced by developing countries:

There are various problems that developing countries face in international trade which will be discussed; this paper also provides possible solutions to these problems of trade. Some of the problems include trade barriers, unfavorable terms of trade, high quality standards,

Agricultural sector:

A large portion of GDP in developing countries depend on agriculture, agriculture helps in providing food to the population, providing employment and surplus is exported to other countries. Foreign income highly depends on agricultural products exported and also tourism, however agriculture plays an important role in these countries in providing employment and food, there are various problems that these developing countries face in this sector and they include:

Trade barriers:

High tariffs are imposed on imports in international trade; tariffs are a source of revenue to the government but at the same time they restrict the level of imports in a country, the agricultural sector in developing countries are faced with this problem because their good become more expensive in the internal market due to imposed tariffs.

The tariffs will reduce the amount demanded due to the increase in price, therefore the agricultural sector is faced with the problem of declined demand for their products, and for this reason therefore the surplus amounts produced is not exported.

Bans and quotas are also trade barriers that cause problems in internal trade, in the case of quota the developing countries are only required to export a certain quantity to country, this is a major draw back to the agricultural sector in the developing countries.

High input costs:

Most developing countries import inputs such as fertilizer, pesticides and oil, their cost in the internal market are usually high and some producers cannot afford these costs, for this reason therefore the cost of producing the agricultural products is usually very high making the final price for these products to be high.

Therefore the high cost of inputs will lead to an increase in the cost of production, the final price of the agricultural products is usually very high and therefore less competitive in the internal market, for this reason therefore the agricultural products are usually less demanded in the internal market due to competition from more efficient producers.

Oil is also a major input in production in each and every sector in an economy, the developing countries in most cases will import oil from developed countries where prices fluctuate frequently, and the cost of oil will lead to an increase in the cost of production of these products leading to less competitive prices in the internal market.

Subsidies:

Many countries subsidize their agricultural sector in order for them to produce more, this has posed a major problem to the developing countries that cannot afford to subsidize its agricultural sector, subsidizing of agricultural production in developed countries result into a reduction in the cost of production and therefore the country demand less imports.

Subsidies therefore will create problems to the agricultural sector in the developing countries; this is because the developing countries produce more at low prices that are more competitive in this market.

Technology and mechanization:

Developing countries import technology and machinery from the developed countries, these machines help in increasing production and also bringing down the cost of production, however due to the high cost of these machines the developed countries prefer to use labor intensive methods of production due to high initial cost and also maintenance costs.

The lack to use modern machines and technology in production lead to low levels of exports and also high costs of production, for this reason therefore the developed countries remain with the problem of underproduction and also low exports.

The lack of machines that help in turning the raw materials from the agricultural sectors into finished products lead to increased disadvantages to the developing countries, most developing countries export raw materials whose prices in the international market is low, developing countries should therefore start exporting finished products from the agricultural sector rather than export raw material.

Some developing countries use genetically modified plants for production, these products are more productive where the time taken to grow and also the production levels. This is a challenge to the developing countries to adopt modern technology to increase production and also reduce costs of production.

Lack of product diversity:

Developing countries export approximately the same product to the internal market, this leads to increased competition and the developed countries have power over them on deciding from which country to import from, and further the developed countries will set prices due to high competition in the global market.

Product diversification means that the developing countries should not produce the same goods for exports; they should try and diversify the products they exports in order to reduce competition and therefore increase the foreign income received. This should involve the introduction of new products to be produced in the agricultural sector that are to meet the demand for consumers abroad.

Unfavorable terms of trade:

Terms of trade will also be a major problem to the agricultural sector, developing countries exports are mostly agricultural products and they will import machinery and oil from developed countries, this poses a major problem in the terms of trade and this finally results to trade balances because the imports have more value than the exports they produce.

Lack of proper bargaining power by the developing countries lead to them experience a problem in setting prices, the developed countries will give their decisions on the price they are willing to pay for the products and because the supply in the global market for these products is high the developing countries have little control over the export prices and the problem of terms of trade arises making imports expensive than the exports.

Debts and balance of trade:

Due to the problem of balance of trade and terms of trade the developing countries are faced with the problem of debts, developing countries face balances in trade adding to the problem of high debt levels to finance debts, for this reason therefore the developing countries may restrict imports in order to reduce the level of debts and therefore less inputs to the industries and agricultural sectors, for this reason therefore the country will not be in a position to increase production to offset the debts earlier incurred.

Quality and standards:

Developed countries and developing countries tradfe partners set high standards for products exported, this lead to frequent ban on products produced in developing countries, A good example is the ban on fish imported from east Africa during Idian Amin reign, the reason was because the dictator had all the disabled people thrown into lake Victoria and therefore it was unhealthy to import fish from the lake.

From the above example it is clear that developing countries will ban imports due to various reasons, in the example it was evident that most fish exported from east Africa was tilapia, tilapia fish is a glazer and fed on sea weed and not meat, however due to the act of the dictator fish imports were banned for health reasons.

Other products have also been faced with the same problem, example beef from developing countries where a certain disease outbreak may result into a total ban in the exports of these products even after health checks on the slaughtered animals. This is a major draw back to the agricultural sector.

Processing and transportation:

Most of the agricultural products require that they are processed before being consumed, most of these products are perishable and require to enter the market within the shortest time possible, this requires that the developed country to device ways by which this is possible but due to security reasons some products get stale before they enter the market. For this reason therefore there is a need to process these products before they are transported.

The other problem is that some products require refrigeration example flowers, vegetables and fish and due to lack of capital to purchase and maintain these machines, for this reason therefore the products are not of quality on entering the market. Poor transport and communication network in developing countries also hinders the movement of good, for this reason the surplus products produced in developed countries does not find its way into the market resulting into less products being exported, for this reason therefore the developing country government has a role to play in ensuring supportive infrastructure exist which will aid in transportation of goods to the market.

Bureaucracy in international trade:

Most developing countries are faced with the problem of bureaucratic policies formed by developed countries, a country may export a certain product to a developing country but it is required to import a certain product from the developing country, these are bureaucracies that lead to trade diversion where developing countries may be forced to import good from a high cost country because it exports the products to that country.

These bureaucratic policies harm the developing country agriculture sector whereby they are required to import a product from a country where it exports to its product failure to which they are denied access to the market. These bureaucratic organization also set the prices they buy the imports from the developing countries, this is amjaor draw back to the agricultural sector in the developing country because developed countries will set prices for the goods imported from these countries and also set the prices for the inputs into the agricultural sector.

Industrial sector and services:

The industrial sector in developing countries is still in its initial stages of development, developing countries will protect these industries though tariffs and quotas to protect infant industries, the countries will also try to help these industries by subsidizing the products in order for them to gain competitive advantages in the internal market, there are some problems that this sector face in international trade and they include:

High cost of inputs:

The industrial sector will demand inputs from foreign countries and in most cases the cost of these inputs will be very high which will make the cost of final products to be high, the industrial sector products therefore will have a higher price in the global market reducing their competitiveness in other countries, this is a disadvantage to the industrial sector.

Some of these inputs include oil and oil products that lead to an increase in the cost of production if their prices are increased by oil exporting countries; the cost of production caused by high input prices is therefore a major disadvantage toward the development of the industrial sector in developing countries. However there is need for the industrial sector to adopt other alternatives as sources of energy and also substitute imported inputs with locally produced products.

Technology:

Developing countries fail to make a break through in science and technology, they do not undertake sufficient research for technological progress, for this reason their products do not meet the quality of the products in the international products, developing countries are highly advanced in technology and will produce high quality products that are very competitive in the market, for this reason therefore the products produced in the industrial sector does not meet the standard set by internal traders.

Therefore it is evident that developing countries face challenges in the production of goods where they are required to produce high quality goods but they are unable to met these standards due to the lack of technology and machinery that aid in improving the quality of the good they produce.

Quotas and tariffs:

Developing countries will have infant industries that they protect by means of tariffs and quotas; however trade partners will be against this move and will result into an imposition on more tariffs on goods imported from such a country, this therefore leads to problems in the international market.

Tariffs and quotas imposed on the imports by developing countries also pose a major problem to the industries, this is because the cost of production rises far beyond the equilibrium global market prices, the developing countries impose these tariffs to earn revenue from imports but at the same time the industries face problems.

Tariffs imposed on their exported products is also a major disadvantage to the developing countries, their products become very expensive in the international market due to these tariffs leading to reduced demand for these products, this is a problem that can only be resolved through formation of trading blocks.

Competition:

These developing countries aim at producing good for exports but they are faced with stiff competition from other countries producing the same good, high competition leads to a reduction in the global market prices posing a threat to the industrial sectors in developing countries, high competition in the global market therefore leads to reduced earnings from exports by developing countries.

High competition also occurs as a result of trading partners producing the same goods they import from the developing countries, these products are substitutes to the products imported and in order to reduce the level of imports they subsidize the production and at the same time impose tariffs on imports and therefore the developing countries loose the international markets they earlier acquired.

Lack of product diversity:

The industrial sector is also faced with the problem of the lack of diversity in the industrial products they export. This lead to increased competition which would have not been present if the countries produced many different goods for exports, for this reason therefore there is a need to diversify on the products produced by the industrial sector.

Most developing countries will have industries that do not completely convert raw materials into finished products, this leads to the disadvantage that the industry receive less for exports than when it would have converted the products to their final stage, this happens however due to lack of machines and capital to undertake processing, therefore it is important that the industrial sector produces fully processed products for exports.

Bureaucracies;

Bureaucracies in internal trade also affect the industrial sector where developed countries set conditions regarding trade, they require developed countries that export products in their country to import their products, for example a country that exports coffee to a developed country is required to import inputs such as fertilizers and pesticiedes from the same country leading to problems in the industrial sector.

Bureaucracies also distort the free market in international trade by setting the prices for products from developing countries, therefore they determine both the input prices and the export prices in developing countries, this is major problem in the development of the industrial sector in developing countries and this is what is referred to as neocolonialism.

Loans and grants from developing countries also lead to problems in international markets, developing countries may be offered a grant or a loan but with strings attached or conditions attached, they may require the developing country to purchase certain products from them or even other conditions that may hinder efficient exchange of goods in the international market, the developed country do this for their own benefits and the developing remain poor due to these problems faced in trade.

Service sector:

Trade involves trade in both goods and services, services include the trade in services provided by countries to other countries, these services in trade can for example be viewed as outsourcing services, most companies in developed countries outsource in developing countries due to low wage rates demanded, for this reason therefore there is an exchange of services for income.

This sector has developed as a result of improved communication network all over the world allowing people to get employed by companies abroad, however the lack of proper communication networks in developing countries creates a major problem to this sector and there is less income sourced through these methods.

Therefore one of the problems is lack of support infrastructure such as communication networks and also electricity supply in remote regions of developing countries. this hinders the development of this sector resulting to reduced income from this sector.

The other problem is the high income taxes imposed on this type of sourcing, most countries will demand revenue from firms in this sector which makes it difficult for the sector to develop, as a result this sector remains underdeveloped to its full potential due to high tax imposed on income.

Despite the high foreign income potential in this sector the developing countries have not focused on its development, according to the various trade theories the free movemtn of goods and services between countries will result to equalization of factor incomes, however this is not the case and the developing countries still remain low income countries where labor is cheap and capital is far much expensive.

There are inputs for this sector such as computers and other machines that are imported from developing countries, they are very expensive and developing countries will impose taxes on these products making them very expensive, the high cost of inputs results into high cost of production and therefore they are less competitive in the global market.

Bureaucratic organizations also affect nthe service sector in developing countries, certain conditions put in place by developed countries hinder the proper running of the service sector, conditions are put in place by these bureaucracies that affect the service sector where the developing country must adhere to in order to participate.

Possible solutions:

The industrial sector and agricultural sector should adopt modern technology to help increase production and also increase efficiency, when this is done the sectors will experience scale economies and also a reduction in the costs of production, technology should be adopted in the agricultural sector where machines should be introduced to perform various tasks increasing efficiency, the other option is to introduce genetically modified plants and seeds that are more productive, when this occurs the final product prices will be very competitive in the global market.

The other possible solution is through formation of trading blocks with trading partners, this will lead to opening up of trade and formation of free trade areas, and this will lead to increased specialization among countries that will aid in formation of free trade areas, specialization will result into reduced global market prices of products resulting into improved standards of living among countries.

Reduced tariffs on industrial inputs will also result into an added advantage into the industrial and agricultural sector, this will make the inputs more affordable and therefore the cost of production will be reduced significantly resulting into more competitive prices in the international markets.

Conclusion:

From the above discussion it is clear that both the agricultural and industrial sector face major problems in international trade, some of the highlighted problems in this paper include trade barriers, lack of product diversity, quality and standards, high costs of inputs, terms of trade, lack of technological advancement and competition from other countries.

The service sector also faces various problems in trade, outsourcing involves providing services to oversea companies which in turn pay for the services provided, however lack of support infrastructure results into reduced income levels in this sector which remains less developed yet the high potential for foreign income

These problems can however be resolved through formation of trading blocks that will help achieve free trade among countries; this will ensure that goods and services exported are competitive in the market. Other solutions include subsidizing and protection of infant industries which will help products to b e more competitive in the international market.

Other challenges faced by these developing countries include the bureaucratic policies put in place by developed countries, developing countries are required to follow conditions put in place by these copuhntries for it to continue trading with the developed countries, this is a major problem that should be eliminated to allow proper runni9ng of a free market in international trade, however this requires the developed countries to seize giving conditions to the developing countries to enable them to develop.

Developing countries governments should also come up with policy measure that help in providing support infrastructure such as road networks and also communication networks, this will help improve internal problems faced by these sectors. Further improvements in policies should be aimed at reducing costs of inputs through zero tariffs on industrial and agricultural inputs imported.

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