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Chapter 11
Trade Policy in Developing Countries
◼ Chapter Organization
Import-Substituting Industrialization
The Infant Industry Argument
Promoting Manufacturing Through Protectionism
Case Study: Mexico Abandons Import-Substituting Industrialization
Results of Favoring Manufacturing: Problems of Import-Substituting Industrialization
Trade Liberalization since 1985
Trade and Growth: Takeoff in Asia
Box: India’s Boom
Summary
◼ Chapter Overview
The final two chapters on international trade, Chapters 11 and 12, discuss trade policy considerations in
the context of specific issues. Chapter 11 focuses on the use of trade policy in developing countries and
Chapter 12 focuses on new controversies in trade policy.
Although there is great diversity among developing countries, they share some common policy concerns.
These include the development of domestic manufacturing industries, the uneven degree of development
within the country, and the desire to foster economic growth and improve living standards. This chapter
discusses both the successful and unsuccessful trade policy strategies that have been applied by developing
countries in attempts to address these concerns.
Many developing countries pose the creation of a significant manufacturing sector as a key goal of economic
development. One commonly voiced argument for protecting manufacturing industries is the infant industry
argument, which states that developing countries have a potential comparative advantage in manufacturing
and can realize that potential through an initial period of protection. This argument assumes market failure
in the form of imperfect capital markets or the existence of externalities in production. Such a market
failure makes the social return to production higher than the private return. Without some government
support, the argument goes, the amount of investment that will occur in this industry will be less than
socially optimal levels. Government support can theoretically raise investment up to the socially optimal
level. Given these arguments, many nations have attempted import-substituting industrialization, where
government support is focused on those industries that compete directly with imports. In the 1950s and
1960s, the strategy was quite popular and did lead to a dramatic reduction in imports in some countries. The
overall result, though, was not a success. The infant industry argument did not always hold, as protection
could let young industries survive but could not make them efficient. The methods used to protect industries
