Trade Liberalization Since 1985

Trade Liberalization Since 1985
Beginning in the mid-1980s, a number of developing countries moved to lower tariff
rates and removed import quotas and other restrictions on trade. The shift of developing
countries toward freer trade is the big trade policy story of the past two and a half
decades.
After 1985 many developing countries reduced tariffs, removed import quotas, and
in general opened their economies to import competition. Figure 11-1 shows trends in
tariff rates for an average of all developing countries and for two important developing
countries, India and Brazil, which once relied heavily on import substitution as a development
strategy. As you can see, there has been a dramatic fall in tariff rates in those
two countries. Similar if less drastic changes in trade policy took place in many other
developing countries.
Trade liberalization in developing countries had two clear effects. One was a
dramatic increase in the volume of trade. Figure 11-2 plots exports and imports of
developing countries, measured as percentages of GDP, since 1970. As you can see, the
share of trade in GDP has tripled over that period, with most of the growth happening
after 1985.
The other effect was a change in the nature of trade. Before the change in trade
policy, developing countries mainly exported agricultural and mining products. But as
2See Francisco Rodriguez and Dani Rodrik, “Trade Policy and Economic Growth: A Skeptic’s Guide to the
Cross-National Evidence,” in Ben Bernanke and Kenneth S. Rogoff, eds., NBER Macroeconomics Annual 2000.
Cambridge, MA: MIT Press for NBER, 2001.
264 PART TWO International Trade Policy
0
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Percent
India
Brazil
All developing
Figure 11-1
Tariff Rates in Developing Countries
One measure of the shift away from import-substituting industrialization is the sharp drop in tariff rates in
developing countries, which have fallen from an average of more than 30 percent in the early 1980s to only
about 10 percent today. Countries that once had especially strong import-substitution policies, like India and
Brazil, have also seen the steepest declines in tariff rates.
Source:World Bank.
we saw in Figure 2-6, that changed after 1980: The share of manufactured goods in
developing-country exports surged, coming to dominate the exports of the biggest
developing economies.
But trade liberalization, like import substitution, was intended as a means to an end
rather than a goal in itself. As we’ve seen, import substitution fell out of favor as it became
clear that it was not delivering on its promise of rapid economic development. Has the
switch to more open trade delivered better results?
The answer is that the picture is mixed. Growth rates in Brazil and other Latin
American countries have actually been slower since the trade liberalization of the late
1980s than they were during import-substituting industrialization. India, on the other
hand, has experienced an impressive acceleration of growth—but as we’ll see in the next
section of this chapter, there is intense dispute about how much of that acceleration can be
attributed to trade liberalization.
In addition, there is growing concern about rising inequality in developing countries. In
Latin America at least, the switch away from import-substituting industrialization seems to
have been associated with declining real wages for blue-collar workers, even as earnings of
highly skilled workers have risen.
One thing is clear, however: The old view that import substitution is the only path to
development has been proved wrong, as a number of developing countries have achieved
extraordinary growth while becoming more, not less, open to trade.