Trade Policy Debate:

TOPIC Export Promotion,

Import Substitution and
Economic Integration
• policies that encourage exports, • policies that stress economic self-
often through the free movement of reliance on the part of developing
capital, workers, enterprises, and countries, including domestic
students; a welcome to development of technology, the
multinational corporations; and imposition of barriers to imports,
open communications and the discouragement of private
foreign investment.
• a deliberate effort to replace • governmental efforts to expand
consumer imports by promoting the volume of a country’s exports
the emergence and expansion of through increasing export
domestic industries. incentives, decreasing
disincentives, and other means in
order to generate more foreign
exchange and improve the current
account of its balance of
payments or achieve other
objectives
 (encouragement of agricultural
(mainly agricultural self-sufficiency)
and raw materials)

(manufactured commodity self-

(promotion of manufactured exports) sufficiency through import
substitution)
 (encouragement of agricultural
and raw materials)
SECONDARY OUTWARD-LOOKING
POLICIES
(promotion of manufactured exports)
• Income elasticity • Structural rigidity of many rural
• Population growth rates production system
• Price elasticity • Dualistic farming structures
• Synthetic substitutes • Marketing boards
• Protection of agricultural • Foreign aid and trade policies
growth
 (pomotion of manufactured exports)

SECONDARY OUTWARD-LOOKING
POLICIES
(promotion of manufactured exports)
• Developing World - manufactured exports
grew from 6% of their total merchandise
exports in 1950 to almost 64% by 2000 A set of nontariff quotas
• Low- and Middle-Income Countries - established by developed
accounted for about 29% of the world's countries on imports of
manufactured exports by 2011 cotton, wool, synthetic
• Low-Income Countries - accounted for textiles, and clothing from
individual developing
under 1% of the world's manufactured
countries
exports
 (mainly agricultural self-sufficiency)

SECONDARY OUTWARD-LOOKING
POLICIES
(manufactured commodityself-sufficiency
(promotion of manufactured exports)
through import substitution)
• Infant Industry - a newly established industry, usually protected by a tariff barrier
as part of a policy of import substitution.
• balance of payments will be improved as fewer consumer goods are imported.

• Protective tariffs (taxes on imports) or quotas (limits on the quantity of imports)

are the principal mechanism of the import substitution strategy
• infant-industry argument - basic economic rationale for such protection
shows the extent (%) to which the the degree of protection on value added as
domestic price of imported goods exceeds opposed to the final price of an imported
what their price would be in the absence of product—usually higher than the nominal
protection. rate of protection.

where:
where:
p = effective rate
t = tariff rate
v' = value added per unit of output with
p' = unit prices of output with tariffs
protection
p = unit prices of output without tariffs
v = value added per unit of output without
protection
FREE TRADE AUTOMOBILE AUTOMOBILE PROTECTION AUTOMOBILE AUTOMOBILE
(FOREIGN) (DOMESTIC) (FOREIGN) (DOMESTIC)
Material Input $8000 $8000 (imported) Material Input $8000 $8000 (imported)

Labor $2000 $2000 Labor $2000 $3000

(Value-Added) (Value-Added)

Nominal Tariff = $1000 X

10%

Total $10000 $10000 Total $11000 $11000

t = ($11000 - $10000) / $10000 p = ($3000 - $2000) / $2000

= 10% = 50%
 It began primarily as an empirical
The industrialization strategy approach
literature but has developed a theory to
is outward-oriented and optimistic
help explain why an interventionist
about export-led development but still
strategy toward exports can accelerate
envisions an active role for government growth and improve development
in influencing the type and sequencing outcomes more than a strict free-trade
of exports as a country strives to approach. The theories developed in this
produce more advanced products, approach are focused on identifying and
adding higher value redressing market failures encountered
in the process of industrialization
• The limited growth of 2. The secular deterioration
world demand for primary in the terms of trade for
exports primary producing nations

3. The rise of “new 4. The presence of market

protectionism” against failures that reduce the ability
manufactured and processed of developing countries to
agricultural goods from move up to export higher-
developing countries value products.
• a shift in developed
countries from low- • the substitution of
technology, material- • increased
synthetics for
intensive goods to high- efficiency in
natural raw
technology, skill- industrial uses of
intensive products, materials like
raw material rubber, copper, and
which decreases the
demand for raw cotton
materials
 • relatively higher
• the low income
• the rising levels of
elasticity of demand
productivity of protectionism for
for primary products
agriculture in both agriculture and
and light
developed countries labor-intensive
manufactured good
developed country
industries
Oligopolistic control of
factor and commodity
markets in developed A generally lower level of
countries, combined with the income elasticity of
increasing competitive demand for its exports
sources of supply of a
developing country’s
exportables
Trade optimists tend to underplay the role of international
demand in determining the gains from trade. Instead, they focus
on the relationship between trade policy, export performance, and
economic growth.
• It promotes competition, improved resource allocation,
• and economies of scale in areas .
• It generates pressures for increased efficiencies, product
improvement, and technical change
• It accelerates overall economic growth
• It attracts foreign capital and expertise
• It generates needed foreign exchange that can be used to
import food if the agricultural sector lags behind or
suffers droughts or other natural catastrophes.
• It eliminates costly economic distortions caused by
government interventions in both the export and foreign-
exchange markets, and substitutes market allocation for
the corruption and rent-seeking activities that typically
result from an overactive government sector
• It promotes more equal access to scarce resources
• It enables developing countries to take full advantage of
reforms under the WTO.
 In the terminology of
Occurs whenever a group
integration literature, nations If external tariffs against
of nations in the same
that levy common external outside countries differ
region join together to tariffs while freeing internal among member nations
form an economic union trade are said to have while internal trade is free,
or regional trading bloc by formed a customs union. If the nations are said to have
raising a common tariff external tariffs against formed a free-trade area.
wall against the products outside countries differ Finally, a common market
among member nations possesses all the attributes
of nonmember countries
while internal trade is free, of a customs union
while freeing internal trade
the nations are said to have
among members.
formed a free-trade area.
 Trade diversion is said to occur when
the erection of external tariff barriers
Trade creation is said to occur when
causes production and consumption
common external barriers and internal
of one or more member states to
free trade lead to a shift in production
shift from lower-cost nonmember
from high- to low-cost member states.
sources of supply (e.g., a developed
country) to higher-cost member
producers