Import Substitution vs. Export Promotion

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:

There are six main reasons for the disparity realized between theory and reality. These explanations would suggest that politicians are just not responsive to the lobbying efforts, the welfare costs of the implemented tariffs are higher than anticipated, the General Agreement on Tariffs and Trade (GATT) successfully restrained trade barriers, free-rider

As a result, of rising opportunity costs, domestic production may stop short of complete specialization. However, if a large group of people and nations are benefiting from specialization and in international exchange, the government has the power to restrict the free flow of imports or encourage exports. Government can interfere with free trade by protective tariffs, import quotas, nontariff barriers, and export subsidies. Protective tariffs are tariffs that are enacted with the aim of protecting a domestic industry. Import tariffs limits on the quantities or total value of specific items that may be imported. Nontariff barriers is a form of restrictive trade where barriers to trade are set up and take a form other than a tariff. While export subsidies is a government policy to encourage export of goods and discourage sale of goods on the domestic market through direct payments, low-cost loans, tax relief for exporters, or government-financed international advertising. In executing barriers against imports, the nations whose exports suffer may retaliate with trade barriers of their own, creating a trade

However, the United States does have some industries which do not perform at the capacity of those in other countries. These inefficient industries could be helped to stand on their own legs if their foreign competition was to be restricted by tariffs. If the East Asian auto industry is flooding the market with cars that sell better than their American-made counterparts, the government can intervene in the name of domestic businesses and jobs by placing tariffs on them. On the flip side, the consumer has to pay more for imported Japanese and Korean cars. [3]

Trade policies are developed by foreign and domestic governments in an effort to influence net imports or net exports (Cengage, 2009). Two common policies are the use of tariffs and import quotas. As XYZ expands into Asia, Mexico and Canada it will want to factor the costs of tariffs and the possible effects of the limitations of import quotas. What is interesting is that the basic premises of supply and demand, imports and exports, equilibriums and trade balances are all meant to lead to an efficient market place (Cengage, 2009). Tariffs, wage restrictions, quotas and other such policies can create inefficient markets. So XYZ will have to take the basic study of economics and then apply the effects of various trade policies and restrictions. Another factor of government that influences the

Tools protectionist trade policy can include high tariffs on goods imported from abroad or import quotas. State support for local producers so that the money remains in the country and increasing production. However, this argument is not correct, because according to his reasoning should refrain from imports completely (to maximize national income), and it is imports, although not part of the GDP, contributes to its augmentation by providing intermediate and capital goods. Protection of new industries, temporary favouritism helps industries that are not yet ready to face international competition. Opponents of this argument suggests that there is no rational confirming that such companies increase their competitiveness in the contrary to develop in favourable conditions than other industries, accustomed to state support. Another problem is the choice branches, which are to be

In this I am going to assess the methods to increase trade between countries and the methods to restrict trade between countries. When asses the methods of encouraging and restricting trade I will talk about the purpose for the methods of promoting and restricting international trade, identify how and why they might be used and I will decide how useful each method is giving appropriate reasons for it. International trade is the exchange of goods and services between countries.

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.

If a particular industry is protected against foreign competitors through government policies such as quotas and tariffs, other domestic industries will suffer as an inevitable side effect. ??the costs of protectionism spill over into other industries? (Blinder 118). An example of this would be the U.S. steel prices compared to those of Korean steel. If U.S. steel is protected, the cost to domestic consumers increases and downstream industries suffer since they are paying more than the international competitive price. For example, the U.S. automotive industry would now pay the higher price for steel and subsequently must also charge higher prices. In the end, jobs are lost in these component industries.

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.

In addition to political reasons, governments also intervene in investment and trade to maintain or enhance their economic positions. Countries’ leaders find it essential and rightly so, to offer protection to new and emerging industries, referred to as infant industries, from stern competition until they possess a comparative advantage to be capable of competing efficiently in international markets. The other economic reason for intervention is based on the strategic trade policy, which states that a government should assist domestic firms to attain first-mover advantages and also

Persistent unemployment pushes many groups to call for protectionism; one of the most effective is organized labor. By limiting imports, local jobs are retained as firms and consumers are forced to purchase domestically produced goods and services. However, unless the protectionist country is relatively small, such measures usually do little to limit unemployment. On the other hand, they may result in a decline in export-related jobs because of (i) price increases for components or (ii) lower incomes abroad. Further, such measures are likely to lead to retaliation unless either the protectionist or the affected country is relatively small. Thus, governments must carefully balance the costs of higher prices with the costs of unemployment and the displaced production that would result from freer trade when enacting such measures.

In the ever globalizing world of today, exports have become a fundamental ingredient in country 's growth. Many countries, especially the less developed ones , often use policies of trade liberalization to boost up their exports. The most commonly used policy is import substitution. However, sometimes export promotion also becomes a prominent part of country 's economic policy. Unfortunately, Pakistan has never had a consistent, coherent and well-articulated trade policy. Trading patterns have closely followed a cycle defined by a major departure from and return to protectionist import substitution policies. For Pakistan, import substitution strategy failed to boost up the economic performance of the country. Although, the policy of import substitution has resulted in the promotion of industries oriented towards the domestic market by using import restrictions, through high tariffs, quantitative restrictions, overvalued exchange rates, to encourage the replacement of imported consumer and manufactured goods by domestic products but it was also observed that domestic industries growing behind protective tariff walls had no incentive to become efficient in production. Infant industries also never grew up. In addition, Import substitution policies accompanied by exchange controls promoted the use of more capital-intensive techniques of production.

In this modern world, countries carry out import substitutions majorly through tariff barriers as well as through Non-Tariff Barriers. Some studies had revealed that Non-Tariff Barriers persist to be a barrier to promote trade between Sri Lanka and India despite the existence of the ISFTA. These Non-Tariff Barriers consist of Indian authorities not accepting the ISFTA certificate issued by Sri Lankan authorities, State taxes, Anti-Dumping duties and etc. As long as such Non-Tariff Barriers be present Sri Lanka would not be able to develop the fullest benefit of any Free Trade Agreement with India. Considering the above, prior to signing the ETCA the government should look into potential Non-Tariff Barriers and obtain measures to