International Trade - Chapter 10

07/11/2023
Chapter 10:
INTERNATIONAL Trade policies in

TRADE developing countries
Lecturer: Tran Huong Linh
WHERE ARE WE?

Here we are!
PART 1 PART 2 PART 3 PART 4
Introduction & International International International

overview trade theories trade policies trade integration
Tran Huong Linh, FIBE - UEB
● Introduction ● The Ricardian Model ● Tariff ● VN Integration in WTO

● Overview of ● The Heckscher-Ohlin ● Non-tariff barriers ● VN Integration in ASEAN
International Trade Model ● Political economy of ● VN Integration into FTAs
● The Standard Trade Model Trade policy
● Modern Trade Theories ● Trade policy in
developing countries
● Controversies
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WHAT WE EXPLORE TODAY
10.1. Import substituting industrialization

10.2. Trade liberalization since 1985

10.3. Export oriented industrialization
INTRODUCTION
Which countries are “developing countries”?
The term “developing countries” does not have a precise
definition, but it is a name given to many low and middle income
countries.
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INTRODUCTION
IMF rankings: 34 developed nations

● High developed nations
● Complete Industrialization and Modernization
● Modern economic structure

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INTRODUCTION
Least Developed Countries (LDCs) Tran Huong Linh, FIBE - UEB
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1.
Import substituting
industrialization (ISI)
Import Substituting Import Substituting

Industrialization:
Industrialization (ISI) Chiến lược công
nghiệp hóa thay thế
nhập khẩu
● From World War II until the 1970s, many developing

countries adopted Import Substituting
Industrialization (ISI)
● The policy aimed to accelerate their development
by limiting imports of manufactured goods, in

order to foster a manufacturing sector serving the
domestic market
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Infant Industry Argument

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Problems With the Infant

Industry Argument
It may be wasteful to support industries that will
have a “comparative advantage in the future”
With protection, infant industries may never

“grow up” or become competitive.
It is difficult to assess the intervention policies of

the government (corruption).
There is no justification for government intervention unless there is a market failure

that prevents the private sector from investing in a infant industry.
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ISI in practice
● Latin American countries (Brazil, Chile, Mexico, Argentina...) in the

1950s and 1960s.
● After WWII, some Latin American got political dependence. ISI was
an appropriate policy to help them to achieve multiple objectives
○ Economic Dependence

○ Promote economic growth and development
● Some Asian countries in 1960s, 1970s
● As a strategy to encourage manufacturing industries, import

substituting industrialization
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ISI - What policies?

● Encourage domestic production for substitution of
imports
● Use import-restricted policies
○ High tariff rates
○ Import quotas
○ NTBs
● Controlled monetary policy (maintain high value of the
domestic currency for importing high-tech machines and
instruments)
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ISI - Results

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Case Study
Vietnam’s protection of “infant”
automobile industry
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Case Study
Why to protect the automobile industry?
Roles and spill-over effects of car industry
■ GDP contribution (Vietnam: around 3
billion USD)
■ Employment (120,000 persons in Vietnam)

■ High - Technology and spillover effect
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Elegance, luxury and

About 40 enterprises
modernity
Piloting the automotive
supply chain Advantages Better quality,
high durability
Many major projects
The production cost is lower
Many policies to protect the EVFTA: remove and
auto industry eliminate import tax
Domestic Imported
Low manufacturer’s
experience and capacity
Selling price is higher

Models are designed abroad
Difficulty in maintenance and
Small market size, high warranty
depreciation rate, low sales volume
The prices inflated Cultural differences
Less competitive
Disadvantages The negative impact of
The linkage is still loose Covid 19 16
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Case Study
Challenges of Vietnam’s automobile industry
Small and
volatile market
High cost/low Stop
Low local content production?
Weak competitiveness
supporting
industries

Cost of car production
1.2
Tariff reduction schedule of CKD
1.0
cars imported from the EU
Thailand Vietnam
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Case Study
Desire to own a strong automobile industry
Over the past 20 years, there have been policies to protect and encourage
the development of domestic production
1. Attracting FDI: most major automobile companies are present in Vietnam
● Roll out the red carpet for foreign auto businesses
● The Vietnamese market has welcomed a series of giants in the automotive
field in just a short period of time in the 1990s: Toyota, BMW, Mercedes-Benz,
Ford, Honda, GM…
● Requirements: commitment to product localization roadmap
● Hopeful goal: If businesses follow the commitment schedule, in less than 20
years, Vietnam will be able to make cars with a localization rate of up to 60%,
businesses will transfer technology for Vietnamese businesses and moving
towards "Made in Vietnam" cars
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Case Study
Almost all global car producers are
investing in Vietnam

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Case Study
Result:
● Commitments not fulfilled ⇒ goals not achieved
● By 2009: Toyota's average localization rate was only 7% (while
the commitment in the 1996 investment license was to reach
at least 30% by 2006).
● Other joint ventures also only achieve a localization rate of
less than 10% of the commitment, for example: Suzuki 3%,
Ford Vietnam 2%
● Situation of the country, by 2010:
○ Cars with less than 9 seats: less than 15% (planning
proposes 50%)
○ Other vehicles with over 10 seats, specialized vehicles:
reaching 30-40% (planned 60%).
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Case Study
Desire to own a strong automobile industry
Over the past 20 years, there have been policies to protect and encourage
the development of domestic production
2. High import tax
● Since 1991: the domestic automobile assembly industry was formed
● Vietnam restricts car imports and uses taxes as a protection tool: import

tax, special consumption tax, registration fee
● Before January 1999, imported cars were taxed at 155% (55% is import tax,
100% is special consumption tax)
● After this time, entry is prohibited;

● 2004: taxable up to 180% (not including value added tax).
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Tariff, Tax and Fee Policy

Decree
Registration fees Value Added Tax
125/2017/ND-CP
proposes incentives
in the "Incentive
reduce the
program for import
registration
and export tax on
fee for domestically VAT will be
auto parts" for

manufactured and reduced from 10% to
domestically
assembled 8%,
produced vehicles
cars by 50% of the
and electric, battery,
current fee.
and biofuel vehicles.
...
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Case Study
A series of policies to support domestic auto businesses: Support for special
consumption tax, "businesses cannot take advantage of opportunities"
Result:
● Competition in the automobile market in Vietnam is very weak
● Businesses manipulate prices, prices are pushed up to maximize profits
(after Singapore, 2-3 times higher than foreign prices).

● All goals in the automobile industry development strategy were not achieved
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Case Study
VINFAST - A DREAM COMES TRUE FOR
VIETNAM’S AUTOMOBILE INDUSTRY?
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2.
Trade liberalization
since 1985
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Changes in viewpoints
● Problems of ISI
● Changes in viewpoints of economists and international
organizations (WB, IMF...)
● Advantages of free trade:
○ There is some evidence that low and middle income
countries which had relatively free trade had higher
average economic growth than those that followed
import substituting industrialization.

○ But this claim is a matter of debate.
○ By the mid-1980s many governments had lost faith
in ISI and begin to liberalise trade.
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Political argument

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Example: Effective Rates of

Protection for Manufacturing in India
and Brazil Tran Huong Linh, FIBE - UEB
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Trade Liberalization - Results

● Has trade liberalization promoted development?
○ The evidence is mixed.
○ Growth rates in Brazil and other Latin American countries
have been slower since trade liberalization than they were
during ISI
● But unstable macroeconomic policies and financial crises
contributed to slower growth since the 1980s.

● Other countries like India have grown rapidly since liberalizing
trade in the 1980s, but it is unclear to what degree liberalized trade
contributed to growth.
● Some economists also argue that trade liberalization has
contributed to income inequality, as the Heckscher-Ohlin model
predicts.
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Case study of Mexico
1. What are the characteristics of ISI in during 1950-1970?

● A lot of trade barriers
● Limit imports of almost manufactured products, including those

Mexico could not produce
● Limited exports (mainly maquiladoras)

● End 1970s: a lot of economic difficulties

○ Increase in inflation
○ Foreign debt
○ Economic crisis
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2. How has Mexico changed its policy after that?

● Mid 1985s: start to liberalize trade
● Reduce tariff
● Remove quota
● Promote exports to the US

● Participate in NAFTA
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3. What was the results?
■ Export increased very sharply, mainly exports of
manufactured products
■ Join North American production value chain
■ However, GDP per capita grew more slowly than during ISI
period
4. Which policy was better for Mexico?
■ Trade liberalization
■ Reasons for slower economic growth: a lot of other factors
contributing to economic growth or hindrance, such as
education, macro-economic policies.
■ Trade is only one channel to promote economic growth
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3.
Export oriented
industrialization
(EOI)
33
Export oriented
EOI - What policies? industrialization:

Chie" n lượ c công
nghiệ p hóa hướ ng
vào xua" t kha) u
● Promote exports
● Attract foreign investment (ODA, FDI and other

investment) to serve export orientation.
● Economic zones, export processing zones, free

trade areas.
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EOI by high performance Export oriented

industrialization:
Asian economies Chie" n lượ c công

vào xua" t kha) u
● Instead of ISI, several countries in East Asia adopted trade

policies that promoted exports in targeted industries.
○ Japan, Hong Kong, Taiwan, South Korea, Singapore, Malaysia,
Thailand, Indonesia, and China are countries that have
experienced rapid growth in various export sectors and rapid
economic growth in general.

○ These economies or a subset of them are sometimes called
“high performance Asian economies.”
○ The Asian takeoff
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industrialization:

vào xua" t kha) u
THE ASIAN TAKEOFF
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industrialization:

vào xua" t kha) u
● The questions raised: “Why do the Asian countries have high

economic performance?”
● Two reasons:
○ EOI and industrial policies
○ But these reasons are debatable

● The first reason: EOI
○ Conduct EOI ⇒ Free trade ⇒ Generate a high volume of
exports and imports relative to total production - “open
economies” ⇒ results in high economic growth
○ But 2 debatable issues
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industrialization:

vào xua" t kha) u
● 1st debatable issue: to what degree these economies

established “free trade.”
○ Although evidence suggests that these economies did have less
restricted trade than other low and middle income countries, some
trade restrictions were sometimes still in effect.
● 2nd debatable issue: It is also unclear if the high volume

of exports and imports caused rapid economic growth or
was merely correlated with economic growth.

○ The cause of rapid economic growth was high saving and
investment rates,
○ Almost all of the high performance Asian economies have
experienced rapid growth in education, leading to high literacy
and numeracy rates important for a productive labor force.
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industrialization:

vào xua" t kha) u

39
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industrialization:

vào xua" t kha) u
● The second reason: industrial policies

○ Some East Asian economies have implemented industrial
policies
○ Industrial policies: policies intended to promote
development of certain industries.
■ Examples of industrial policies:

● tariffs, import restrictions, export subsidies for import-
competing industries, subsidies for export industries,
● Subsidized loans for industries
● Subsidized research and development.
○ But it is debatable 40
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industrialization:

vào xua" t kha) u
● The second reason: industrial policies

It is debatable: because it is unclear to what degree this policy
contributed to or hindered overall economic growth
○ Not all high performance Asian economies implemented these policies,
and the ones that did had a wide variety of policies.
There is little evidence that countries with industrial policies had more

○
rapid growth in the targeted industries than those that did not.
○ There is some evidence that industrial policies failed: chemicals, steel,
automobiles were promoted by the South Korean government in the
1970s,
■ The policies were later abandoned because they were too expensive and did not
produce desired growth.
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SUMMARY
1. Import substituting industrialization (ISI) aimed to

promote economic growth by restricting imports
that competed with domestic products in low and
middle income countries.
1. The infant industry argument says that new

industries (ex., in poor countries) need temporary
trade protection for growing up in the future
● Problems of infant industry arguments
1. Import substituting industrialization was tried in

the 1950s and 1960s but by the mid-1980s it was
abandoned for trade liberalization.
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SUMMARY
4. The precise effect of liberalized trade on national

welfare is still being debated.
● Trade helped growth in some sectors, but saying that
trade caused higher overall economic growth has
attracted some skepticism.
● Some argue that trade has caused increased income
inequality.
5. Export Oriented Industrialization (EOI): promotes exports,

reduce trade restriction
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SUMMARY
6. Several East Asian economies adopted EOI instead of ISI.

● High export and import volumes and relatively low trade
restrictions were characteristics of this policy.
● High economic performance
● But it is unclear to what degree this policy contributed
to overall economic growth (2 debatable issues)
7. Some East Asian economies used more general industrial
policies as well.
● High economic performance
● But it is unclear to what degree this policy contributed
to or hindered overall economic growth (3 debatable
issues).
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READING MATERIALS
Must-read
CHAPTER 11 - Krugman, P. R., Obstfeld, M., Meltiz, M. J.
(2012). International Economics: theory and policy (9th
ed.). Boston, MA: Addison-Wesley.
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Preparation
Read: CHAPTER 12 (Course book)
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07/11/2023

INTERNATIONAL Trade policies in

Lecturer: Tran Huong Linh

WHERE ARE WE?

PART 1 PART 2 PART 3 PART 4

Introduction & International International International

● Introduction ● The Ricardian Model ● Tariff ● VN Integration in WTO

WHAT WE EXPLORE TODAY

10.1. Import substituting industrialization

Tran Huong Linh, FIBE - UEB

IMF rankings: 34 developed nations

Tran Huong Linh, FIBE - UEB

Import Substituting Import Substituting

● From World War II until the 1970s, many developing

by limiting imports of manufactured goods, in

Infant Industry Argument

Tran Huong Linh, FIBE - UEB

Problems With the Infant

With protection, infant industries may never

It is difficult to assess the intervention policies of

There is no justification for government intervention unless there is a market failure

● Latin American countries (Brazil, Chile, Mexico, Argentina...) in the

Tran Huong Linh, FIBE - UEB

● Some Asian countries in 1960s, 1970s

● As a strategy to encourage manufacturing industries, import

ISI - What policies?

Tran Huong Linh, FIBE - UEB

Tran Huong Linh, FIBE - UEB

Elegance, luxury and

Selling price is higher

Tran Huong Linh, FIBE - UEB

Tran Huong Linh, FIBE - UEB

Tran Huong Linh, FIBE - UEB

● After this time, entry is prohibited;

Tariff, Tax and Fee Policy

auto parts" for

Tran Huong Linh, FIBE - UEB

import substituting industrialization.

Tran Huong Linh, FIBE - UEB

Example: Effective Rates of

Trade Liberalization - Results

Tran Huong Linh, FIBE - UEB

Case study of Mexico

1. What are the characteristics of ISI in during 1950-1970?

● Limit imports of almost manufactured products, including those

● Limited exports (mainly maquiladoras)

● End 1970s: a lot of economic difficulties

Case study of Mexico

2. How has Mexico changed its policy after that?

Tran Huong Linh, FIBE - UEB

Case study of Mexico

EOI - What policies? industrialization:

● Attract foreign investment (ODA, FDI and other

● Economic zones, export processing zones, free

EOI by high performance Export oriented

Asian economies Chie" n lượ c công

● Instead of ISI, several countries in East Asia adopted trade

Tran Huong Linh, FIBE - UEB

EOI by high performance Export oriented

Asian economies Chie" n lượ c công

EOI by high performance Export oriented

Asian economies Chie" n lượ c công

● The questions raised: “Why do the Asian countries have high