Step ➊ : Define ‘trade restriction’ and ‘developing countries’ in the introduction.

Developing countries tend to have more trade restrictions on their products. A developing country is a country with a less developed industrial base and a low human development index (HDI) relative to other countries. Trade restrictions are government policies which place restrictions on international trade. Trade restrictions can either make trade more difficult and expensive (tariffs) or prevent trade completely (e.g. trade embargo). In this essay, we will discuss whether or not a developing country will benefit from the removal of trade restrictions.


Step ➋ : Explain how the removal of trade restrictions will benefit a developing country.

Removing trade restrictions may be beneficial to an economy in several ways.

➤ 2.1 The removal of trade restrictions on the country’s products can enable a developing country to specialise in the products it is best at producing.

In order to grow, developing countries should specialise in producing those items in which they have a comparative advantage: i.e. those goods that can be produced at relatively low opportunity costs. For most developing countries, this means that a large proportion of their exports should be primaries. They can be sold at a lower price which may increase demand in foreign markets.

➤ 2.2 The removal of trade restrictions that the country imposes may mean a developing country can purchase raw materials and capital equipment at a lower price, reducing costs of production.

Certain raw materials, capital equipment and intermediate products that are necessary for development can be obtained only from abroad. Others could be produced domestically, but only at a much higher cost. Thus removal of trade restrictions will help firms lower their cost of production and produce better quality and quantity of goods and services. This leads to economic growth.

➤ 2.3 Consumers in developing countries may enjoy a greater variety of products and greater availability of products at lower prices.

The removal of trade restrictions enable local consumers to purchase a wider range of foreign products at a cheaper price. Foreign products may also be of better quality. This will help to improve the standards of living of the people in developing countries.

➤ 2.4 Domestic firms a developing country may respond to greater competition by becoming more efficient.

With more trade, domestic firms will face more competition from abroad. Therefore, there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices. If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.

➤ 2.5 The removal of trade restrictions may increase inward investment and attract MNCs .This will help to stimulate the economy of developing countries, which are normally characterised by low or poor GDP.

Most free trade agreements also reduce restrictions on foreign investment. This change allows foreign firms and financiers to more easily provide funds for in-country projects. With new capital entering a developing country, it begins an upward productivity cycle that stimulates the entire economy. An inflow of foreign capital can also stimulate the banking system, leading to more investment and consumer lending.


Step ➌ : Explain how the removal of trade restrictions may be a disadvantage to a developing country.


Removing trade restrictions may have several disadvantages for a developing country:

➤ 3.1 Infant industries in the developing country may not be able to survive without protection because they cannot take advantage of economies of scale.

Firms in a new industry in a developing country may find it difficult to survive when faced with competition from more established, larger foreign firms. This may be because the foreign firms are already taking advantage of economies of scale and benefit from their names being well-known. Protecting a new infant industry may give it time to grow, to benefit from economies of scale and to gain a global reputation. If the infant industry has the potential to develop into an efficient industry in line with comparative advantage, then using trade restrictions may be justified.

➤ 3.2 Removing trade restriction may cause declining industries to go out of business more quickly, causing unemployment. This will worsen the situation of developing countries, which normally have a high rate of unemployment.

If declining industries, which have lost their comparative advantage, go out of business quickly there may be a sudden and large rise in unemployment. If the industry is granted protection and that protection is gradually removed, unemployment might be avoided. As the industry reduces its output, some workers may retire and some leave for jobs in other industries. This is clearly not beneficial for a developing country.

➤ 3.3 Strategic industries in a developing country may go out of business following the removal of trade restrictions, disrupting the rest of the economy.

Some governments in developing countries seek to protect industries that produce products they regard as strategic, such as fuel and food by imposing trade restrictions. They may not want to be dependent on foreign supplies of these products. For example, a government in a developing country may be worried that firms and households in its country would be seriously disadvantaged if fuel was cut off due to a trade dispute or a military conflict. As a result, it may protect some home industries even if they are relatively inefficient.

➤ 3.4 There may be dumping.

There may be an economic justification for imposing trade restrictions in the case of dumping as this practice may be regarded as unfair competition. Dumping involves selling products at below their cost price. In the short run, home consumers will benefit from dumping as they will enjoy lower prices. In the long run, however, if the foreign firms drive out the domestic firms, they may gain a monopoly and then raise their prices.

➤ 3.5 Tax revenue from tariffs may fall.

Tariffs may account for a relatively high proportion of a developing country’s tax revenue. The government in a developing country may not receive enough tax revenue to finance key sectors such as healthcare, education and infrastructure. These sectors are essential for the development of low-income countries.


Step ➍ : Conclude

To conclude, it is desirable that developing countries keep trade restrictions when most of their businesses are in their early stages. Trade restrictions will help infant businesses to grow, benefit from economies of scale and gain a comparative advantage. During this time the government will also be able to collect tax revenue from tariffs and spend in areas such as healthcare and education. This will help the developing country to grow. When businesses in developing counties are ready to compete with foreign firms, trade restrictions can then be removed to promote efficiency.