Import Substitution and Trade Protectionism

Topics: International trade, Free trade, Tariff Pages: 6 (1871 words) Published: March 2, 2011
The economy of XYZ recently gained independence from their colonial masters. The first president Dr. Yebeyebi embarked on a massive imported substitution drive as a way of promoting growth and development. Industrialization became a vital off shoot of this policy and in the process the country concentrated on inward activities and restricted through several tools the importation of certain products.

Would you as a consultant support their initiative viz –a- viz the supposed gains and the welfare implications of international trade.

Import substitution and trade protectionism are tools or strategies that have been adopted by many a country to promote economic growth and development when independence is gained. Countries like Ghana, China, India, Malaysia and many other countries have all used these tools or strategy in one way or the other for their economic growth.

To appreciate the strategy being adopted by Dr. Beyeebi and to support it or not, it would be advisable to understand what import substitution and trade protectionism are, the benefit to be derived if the economy is closed or restricted and the benefit international trade provides which will be absent if trade is restricted.

Import Substitution
Import substitution is the strategy of encouraging domestic industry by limiting imports of manufactured goods. In economics, an import is any good (e.g. a commodity) or service brought into one country from another country in a legitimate fashion, typically for use in trade. Import goods or services are provided to domestic consumers by foreign producers. The strategy is inward oriented in that trade and industrial incentives favor production for the domestic market over the export market An import in the receiving country is an export to the sending country. If a country practices import substitution, then the country is restricting free trade of certain goods and services. Free trade refers to the trade that is free from all artificial barriers to trade like tariffs, quantitative restrictions, exchange controls, etc.

A process of socio-economic change whereby a human group is transformed from a pre-industrial society into an industrial one. A part of a wider modernization process, where social change and economic development are closely related with technological innovation, particularly with the development of large scale energy and metallurgy production

Trade protectionism
Protection refers to the government policy of according protection to the domestic industries from foreign competition. Any form of restriction imposed on international trade, especially the importation of goods, eg tariffs, quotas, exchange control, etc. The action by the president

The import substitution and trade protectionism drive embarked on by the president Dr. Yebeyebi has both advantages and disadvantages for the country and the citizenry. As already explained above, import substitution is encouraging domestic industry by limiting imports of manufactured goods. Import Substitution involves extensive use of trade barriers to protect domestic industries from import competition. There are a lot of benefits to be derived from such a policy drive.

In the first place the policy can assist the president and the country to protect infant industries. According to Alexander Hamilton and Frederick List a new industry having a potential comparative advantage may not get started in a country unless it is given temporary protection against foreign competition. An established industry is normally much stronger than an infant one because of the advantageous position of the established industry like its longstanding experience, internal and external economies, resource position, market power, etc. Hence, if the infant is to compete with such a powerful foreign competitor, it will be a competition between unequals and this would result in the ruin of the infant industry. Therefore, if a...
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