Import Substitution Industrial ( Isi ) Use Tariffs On Foreign Goods

There is no doubt that increasing in international trade is supporting the economic growth across the world, raising incomes and creating jobs. However, international trade can also some create economic obstacles, such as the international context and the market policy and regulations of each country, and consequently it can be said that the effects would have positive and negative sides, and it is useful to mention all of them and to take them into consideration.

The two key approaches by developing nations to implement their own trade policies are import substitution and export-led growth. Import substitution strategy is inward oriented: trade and industrial incentives favor the domestic market over the export market of developing nations, a strategy utilized extensively in Latin America by Argentine, Brazil, and Mexico (Carbaugh, 2013, p. 247). Advantages of this approach include:

Following World War II, economic policies were marked by two major trends. On one hand, industrialized economies gradually removed trade barriers. These policies were based on the idea that free trade is not only a factor for economic prosperity of nations, but also for the promotion of peace. On the other hand, economic policies of many developing countries with the exception of few countries in Southeast Asia have been conditioned by the belief that the key to development rests in the establishment of a powerful manufacturing sector, and that the best way to create such an area was to protect local industries from international competition through substitution imports policies.

The disadvantages of having tariffs is that they can increase prices of imported goods, reduces the quality of that particular good or service, and can minimize competition in that particular industry. The advantages of having

Krueger argues that trade liberalization is the only way developing countries can spur a rapid economic growth. He argues that industry substitutes industrialization (ISI) is a failed policy when it comes to development of developing countries. Unlike Stiglitz, he mentioned even with the protection, the developing countries growth slows down eventually. The main intention of ISI was to provide protection for domestic industries against the developed countries industries. Because of that protection, the export earning grew less rapidly and real GDP

Although its main goal was to strengthen the national economy to better compete in the global market, ISI has had very controversial results. Positively speaking, it has resulted in a decrease in imports, which has favoured certain national industries such as electric materials for construction, textiles, chemicals, etc., the nationalization of natural resources, betterment of term of trade, state intervention in economics (which led to the development of education, health and employment), strengthening of social organizations, but most importantly, the consolidation of the middle class. On a negative note, these nations led to become greatly dependent on technology, there was an increase of external capital control over developed areas, an under qualified labour force for factory jobs, increase in prices of manufactured goods and inflation, migration from rural to urban areas and as a result an increase in social problems, and finally, the industrial sector did not bother to conquer external markets which essentially contradicted the whole purpose of ISI. For these reasons ISI was seen as a

Meanwhile, according to Morelock, J (2017) Tariff has a clear number of results that may be an advantage to some parties, while being a significant disadvantage to others. Tariff have an impact on promoting American products, when the U.S government chooses to place a tariff on an import good, the producer can choose to reduce their price to compensate for the tariff or to pass on the cost to the consumer. (2) increase the government revenue, the U.S. government collect revenue in order to economically support its function. (3) discourages trade, when American consumers choose to buy a lower-priced American product, foreign producers become disadvantaged, ultimately leading to less trade with the U.S. Foreign producers are forced to reduce their prices to compete with similar American products. (4) reduces consumer choice, individual consumer choice remains as one of the greatest consumer benefits of international trade. When tariffs are placed on imported goods, the increase prices and reduced trade prohibit individuals from all choices that could be available in the market.

The infant industry argument is one of the leading arguments why G20 countries should enact trade protectionism policies, it argues that newly formed industries do not have the economies of scale that the older competitors from other countries may have, thus they need to be protected so that they can attain the economy of scale (Stiglitz, 70-73). This argument illustrates Stiglitz’s point that many times these protectionist policies must stay in place to protect infant industries because the industries “never grow up and demand to be permanently insulated from outside competition” (Stiglitz, 70). Another argument in support of these policies will create more jobs domestically for the country, but these jobs will only be temporary and the jobs that depended on the exportation of goods will be lost. By turning inward and developing industries domestically, countries as a whole will become less competitive internationally. The products that they develop domestically will be hire priced, and will not feel the need to continuously innovate because they have no competition, ultimately people will be paying higher prices for lower quality products. This has been demonstrated with American cars in the 1970s, Ford produced standard cars that had no quality so when Toyota, a Japanese company broke into the American car market with

Countries that impose obstacles to exchange by domestic or international does not reduce their citizen’s ability to have a prosperous life. Specialization and free trade allows countries to be more competitive as well as innovated. While we are losing manufacturing jobs to other 3rd world nations, doing this forces the younger generation to seek higher education and will produce better technology to help our nation prosper. This will cause a higher standards of living and higher wage payments.

After the end of the World War II the world faced the challenges of economic and social recovery. The majority of developing countries based their economies on Import Substitution Industrialization (ISI), the state-oriented approach to a trade and economic policy. ISI supports the replacement of import with domestic production in order to reduce foreign dependency. This protectionist policy dominated in developing countries, especially in Latin America and sub-Saharan Africa, during the first 30 years after the World War II. By 1980s, when the main gains of ISI were exhausted and it demonstrated its inefficiency, the countries of East Asia adopted a new development strategy. Consequently, this new export-oriented and market-friendly strategy, so-called East Asian model, has determined the successful economic and trade policy of East Asian countries during the next several decades. To understand the reasons of the shift from ISI to the East Asian model, it is needed to carefully examine and contrast these two approaches and their supporting theories.

The country can maximize their wealth by putting the resources in the most competitive industries. Government created comparative advantage rather than free trade because now easier moves the production processes and the machines into countries that can produce more goods (Yeager & Tuereck, 1984). However, many countries now move to new trade theory suggests the ability firms to limit the number of competitors associated with economic scale (reduction of costs with a large scale of output) (Krugman, 1992). The comparative advantage occurs when two-way trade in identical products, it will useful where economic scale is important, but it will create problem with this model. As a result, government must intervene in international trade for protection to domestic firms (Krugman, 1990)

Some of the countries with surplus commodities may dumb them on international markets at a low price. Under such conditions, some of the efficient industries can might find difficulties in competing for long period. Furthermore, countries whose economies are mostly rural will face unfavourable terms of trade. For example, ration of export prices to import prices. Which means that their export income is more smaller than their import payments the make for high value added imports, as it leads to subsequently large foreign debt levels.

Free trade has long be seen by economists as being essential in promoting effective use of natural resources, employment, reduction of poverty and diversity of products for consumers. But the concept of free trade has had many barriers to over come. Including government practices by developed countries, under public and corporate pressures, to protect domestic firms from cheap foreign products. But as history has shown us time and time again is that protectionist measures imposed by governments has almost always had negative effects on the local and world economies. These protectionist measures also hurt developing countries trying to inter into the international trade markets.

Tariffs hold smaller nations back because the high prices impacts the amount of imports that the smaller nation can bring in resulting in fewer options for consumers (Carbaugh, 2013). The cost prohibits the consumer from purchasing goods, which results in increase demand for domestic products which also may result in consumers going without necessary goods that result in a decline in their welfare (Carbaugh, 2013). This reduction in demand by consumers for imported goods in turn reduces revenues for domestic suppliers because lost imports causes other nations to reduce their import demand for the domestic goods (Daniels & VanHoose, 2004). The shift in demand decreases the nation’s economic welfare and results in deadweight for the smaller less-industrialized nations which again holds back progress (Daniels &

To begin with the benefits of trade liberalization, while country starts to open the country borders for foreign trade with lowering tariffs and import restrictions, basically, the gains from import and export will be rise. Moreover, with the allowance of trading for foreigners who bring with them technology, investment and production skills inside borders of the country, country will achieve to fill up the lack of production skills and increase the amount of manufacturing goods, job opportunities for community, while sometimes foreign firms will benefit only from low labor costs. In the other words, a country will start to earn from comparative advantage as sector specialization and exporting goods while making sectoral transformation due to trade liberalization continuously which is also explained with an expansion of investment on research and development. Additionally, the industrialization degree of the manufacturing will be affected positively by Foreign Direct Investment (FDI) according to the country’s sector of comparative advantage. These processes can cause to make new job opportunities, boost in income per capita, advantages for consumers. All in all, these benefits can be listed as, (Arsalan Hasan,