TWN Trade & Development Series No. 39

Selective and Neutrality of Trade Policy Incentives: Implications for Industrialization and the NAMA Negotiations

By Mehdi Shafaeddin

Publisher: TWN (ISBN: 978-983-2729-96-9)

Year: 2009   No. of pages: 72


The need for selectivity in trade and industrial policies has long been the subject of debate in academic and policy-making circles. Selectivity (as against neutrality) in trade and industrial policies entails the differential application of tariff rates, other trade measures and incentives to different industries over the course of industrialization. This paper examines the need for selective trade policy for spurring industrial development in developing countries and its implications for the World Trade Organization (WTO) negotiations on “non-agricultural market access” (NAMA).

The author discusses the principal theoretical arguments for and against selective, non-neutral trade policy and other incentives. He then goes on to survey the actual historical experience of the Republic of Korea and other East Asian and a number of other developing countries. He shows that selective government intervention has contributed significantly to their industrialization. Subsequently, studying the performance of 32 developing economies over the 1980-87 period, when many countries still applied discriminatory trade measures, the author finds that selectivity is associated with higher export and, particularly, output growth. He concludes that temporary infant-industry support and export promotion measures should be an integral part of selective, dynamic and flexible trade and industrial policies; however, in order to enhance competitiveness, gradual trade liberalization becomes necessary as industries near maturity.

He further argues that the need for selectivity in promoting industrialization has increased in recent decades due to rapid changes in technology (hence the increased duration of technological learning) and the emergence of new forms of production and competition in the globalized economy. Yet, developing countries’ ability to use selective trade policy measures as a tool of selective trade and industrial policies  is increasingly constrained by international trade rules, conditionalities attached to loans from international financial institutions and donors, and, if adopted, proposals for across-the-board liberalization of the manufacturing sector put forward by developed countries in the ongoing NAMA negotiations.

This paper thus makes the case for reforming the international trade regime to allow developing countries to pursue dynamic, flexible and selective trade policies tailored to their own development needs.


MEHDI SHAFAEDDIN is a development economist with a D.Phil. degree from Oxford University, former head of the Macroeconomics and Development Policies Branch of the United Nations Conference on Trade and Development (UNCTAD), and the author of Trade Policy at the Crossroads: The Recent Experience of Developing Countries (Palgrave Macmillan, 2005). He is currently an international consultant and affiliated with the Institute of Economic Research, University of Neuchatel, Switzerland. He can be contacted at or


1 Introduction                                                                                           

2 Theoretical Issues                                                                                 

    Supply response to relative prices                                                              

    The scarcity argument                                                                            

    The externality argument                                                                          

    Strategic trading

    X-efficiency and external economies                                                       

3  Historical Evidence                                                                             

    Selectivity and the roles of government, the market and enterprises:

    The case of the Republic of Korea                                                       

    The role of other factors                                                                         

    Other countries                                                                                      

    Preconditions for selective intervention                                                    

4 Recent Empirical Evidence                                                                 

    Methodology and data                                                                             


5 New Forms of Competition and the Growing Need for Selectivity    

    New methods of production and competition                                            

    The role of FDI

6  Conclusions and Implications for the Negotiations on NAMA and Other Trade Agreements                                                     

    Implications for trade negotiations and WTO rules                                    



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