Chapter 11
Trade Policy in Developing Countries
◼ Chapter Organization
Import-Substituting Industrialization
The Infant Industry Argument
Promoting Manufacturing Through Protectionism
◼ 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
60 Krugman/Obstfeld/Melitz • International Economics: Theory & Policy, Tenth Edition
were often complex and overlapped across industries, in some cases leading to exorbitantly high rates of
protection. Furthermore, protection often led to an inefficiently small scale of production within countries
by creating competition over monopoly profits that would not have existed without protection. By the late
1980s, most countries had shifted away from the strategy, and the chapter includes a case study of Mexico’s
change from import substitution to a more open strategy.
Since 1985, many developing countries have abandoned import substitution and pursued (sometimes
◼ Answers to Textbook Problems
1. The countries that seem to benefit most from international trade include many of the countries of the
Pacific Rim: South Korea, Taiwan, Singapore, Hong Kong, Malaysia, Indonesia, and others. Though
the experience of each country is somewhat different, most of these countries employed some kind
2. The Japanese example gives pause to those who believe that protectionism is always disastrous.
However, Japanese success does not demonstrate that protectionist trade policy was responsible for
3. a. The initial high costs of production would justify infant industry protection if the costs to the
society during the period of protection were less than the future stream of benefits from a mature,
low-cost industry.
4. India ceased being a colony of Britain in 1948; thus, its dramatic break from all imports in favor of
homemade products following WWII was part of a political break from colonialism. In fact, the
5. In some countries, the infant industry argument simply did not appear to work well. Such protection
will not create a competitive manufacturing sector if there are basic reasons why a country does not
have a competitive advantage in a particular area. This was particularly the case in manufacturing