TRADE LIBERALIZATION IN DEVELOPING-COUNTRIES - INITIAL TRADE DISTORTIONS AND IMPORTED INTERMEDIATE INPUTS

Trade liberalization in developing countries is frequently opposed on the grounds that, because it is likely to cause a deterioration in the external balance, it may not be a viable policy option for countries facing foreign exchange constraints. Recent literature suggests, howev er, an ambiguous relationship between tariff changes and the current a ccount. This paper shows that if liberalization involves reducing tari ffs on imported intermediate inputs (a reform that has figured promine ntly in developing countries), then the current account may improve or deteriorate, depending on the level of initial trade distortions and the structure of the economy.