ECO610 Discussion 2 Week 6 Borrowing

Explain how a developing country’s decision to reduce trade restrictions, such as import tariffs, affects its ability to borrow in the world capital market.

            The state imposes tariffs as a means of a tax on goods and services imported from other nations, increasing the price to make imports less competitive over domestic goods and services. Tariffs generally benefit the importing countries, given they are in charge of setting and imposing taxes on goods and services in the given country. On the other hand, trade barriers reduce economic output and income.

            Tariffs distort trade markets because they change the equilibrium price and quantity in a market that functions appropriately. Taxes increase the cost of imported goods, resulting in imported goods costing more than domestically produced goods of similar quality. However, high tariffs may not be wise, especially for developing countries. For instance, governments impose such taxes to protect small industries. However, tariffs hinder free trade, which favors rich nations since there is a limit to the choice of product (De Melo & Solder, 2020). In addition, lowering trade barriers makes borrowing on the global financial market simpler, boosting borrowing capacity and making it simpler to get funds for further expansion and growth. A move that is beneficial for developing nations.

Analyze how a country can sustain its ability to borrow in capital markets, even when their economy struggles. Respond to at least two of your classmates’ posts

Capital markets help firms to raise money for expansion by allowing traders to purchase and sell stocks and bonds. Because they have trustworthy marketplaces where they can receive money, businesses also have less danger and price when acquiring financial resources. Capital markets can potentially increase risk sharing and the effectiveness of capital allocation to the actual economy, promoting economic development and welfare. Despite these possible advantages, not all nations have highly established capital markets. To effectively move financial resources from people who save to those who need capital and those who successfully offer greater capitalization, the capital market must be working correctly.

Reference

De Melo, J., & Solleder, J.-M. (2020). Barriers to Trade in Environmental Goods: How Important they are and what should developing countries expect from their removal. World Development, 130, 104910.