Successful import-substitution always requires simultaneous export promotion. Analyse and provide at least two examples.

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Trade: Policy Issues

  1. Successful import-substitution always requires simultaneous export promotion. Analyse and provide at least two examples.
  2. Does trade liberalisation by developing countries help or hinder their industrialisation? Explain with reference to specific country experiences.

The aim of this essay is to consider and analyse the policies that a country can pursue in order to restrict or modify its pattern of international trade. One may ask why a country wishes to alter its pattern of international trade rather than leaving market forces and comparative advantage to determine trade patterns. There are, however, several justifiable reasons why a country may wish to pursue such policies. For example the country may wish to develop a new industry or it may wish to break free from the production of primary goods whose inelastic price elasticity of demand is seen to hinder the country’s potential rate of growth and development. Three main topics shall be covered in the essay, these being import substitution, export promotion and trade liberalisation illustrating the theoretical benefits and weaknesses as well as empirical evidence.

        

An import substitution policy involves “erecting various barriers to the importation of foreign goods and substituting for these goods by producing them domestically”. There are many forms of import substitution from complete bans on the importation of certain products to discriminatory treatment for domestic producers of certain products. A combination of tariffs and quotas often plays the major role in a policy of domestic protection. A tariff is simply a percentage fee that is charged by the government on imports (in general or on specific items), hence raising the observed price of these goods to domestic consumers, whilst also raising revenue for the government. A quota on the other hand is a maximum quantity of a particular good that is permitted to be imported. It is often the case that a tariff and quota may be combined with a tariff being charged on imports until some given quantity after which all further imports of that good are banned. As well as tariffs and quotas import substitution can be promoted in a number of other ways. For example the imports of capital and intermediate goods which are used in production may be allowed in free of duty, inputs to protected industries may be subsidised and the government may even decide to impose domestic content requirements on particular goods.

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The adoption of protectionist policies is most commonly justified by the infant industry argument, which runs as follows. New industries would face too high costs to compete if they faced the international price line, but if it is believed that they may be able to become strong enough to compete after a temporary period of protection then a tariff and quotas policy is acceptable.  For this infant industry argument to hold, therefore, three conditions must hold. The industry in question must currently be uneconomic, but if developed would see a substantial fall in costs to such an extent that ...

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