The North-South Debate and the Terms of Trade: An Applied General Equilibrium Approach

A price endogenous numerical general equilibrium model of world trade is used to analyze terms of trade issues in the North-South debate. Seven regions are identified, the U.S., EEC, Japan, Other Developed, OPEC, New Industrialized, and Less Developed Countries. The model is benchmarked to a global 1977 micro consistent data set. In the central case analysis, protectionist trade policies in the North inflict an annual welfare loss on the South of around 30 billion dollars per year with an associated terms of trade deterioration of around 9%. The annual welfare cost to the South from northern trade restrictions is somewhat larger than annual North-South aid flows. Protection in the South, and the potential terms of trade impacts of differential growth, are also analyzed.