Comparative Efficacy of Import Substitution vs Export Promotion

Competitiveness is the everlasting strength of any economy for its international trade. Development of economy is depending upon the development of economic globalization and international market which come through strategy advantage which adopted by country for international market. A country is becoming more and more severe by owing to different economic strength and different degree of division of labour and availability of recourses.

As my topic Comparative efficacy of Import substitution vs. Export promotion in stimulating growth in developing countries with specific reference to any one east Asian country . I selected China for research objective.

Introduction of Country

China’s foreign trade has developed greatly because China had adopted strategy to making China a large trading nation and on the road to becoming a powerful one. China is 1st country which development rate is high. China is hub of all manufacturing industry. There are from every country at list one company which have production plant in china because china has comparative advantage like availability of recourses and low labour cost.

Introduction of topic

Countries develop more than others because their strategies on international trade have a role on this import substitution (IS) and export promotion (EP) will be introduced. These strategies are compared.

There is research done that Import substitution versue export promotion a continuing dilemma for developing country like china. Developing China has adopted a number of approaches in their attempts to move their economies from backward orientation towards a more modern one. For this process is required to change from rural traditional dominance to modern industrial mode for the simple reason that development was corresponded with industrialization. As result that china growing now more than other country because it adopted import substitution versus export promotion strategy

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Import substitution vs. Export promotion

Import Substitution (Inward-looking)

“Policies that stress economic development Policies self-reliance on the part of Lest Develop Country including the development of indigenous-appropriate technology and the imposition of substantial protective tariffs and Non tariff barriers to promote import substitution, and the discouragement of private foreign investment.

Export Promotion (Outward-looking)

Policies that encourage free Development Policies for trade where the free movement of capital, workers, enterprises, and students and a welcome to MNCs and an open system of communications.

Developing countries experienced a decline in world markets for their primary products deterioration in terms of trade and growing deficits in their balance of payments. For the industrialisation the developing countries had to choose between competing modes of industrialisation: import substitution (IS) and export promotion (EP).

Promotion of Infant Industry: A Case for IS Strategy

The IS strategy is an attempt to replace commodities that are being imported, usually manufactured consumer goods, with domestic sources of production and supply. The typical strategy is first to erect tariff barriers or quotas on certain imported commodities, then to try to set up a local industry to produce these goods. This might or might not involve joint ventures with foreign companies which are encouraged to set up their plants behind the protective wall.

Although initial costs of production may be higher than former import prices the economic rationale put forward or the establishment of import substituting manufacturing operations is either that the industry will eventually be able to reap the benefits of large-scale production and lower costs or that the balance of payments will improve due to imports of fewer consumer goods. Often a combination of both arguments is advanced. Eventually it is hoped the infant industry will grow up and be able to compete in world markets. It will then be able to generate net foreign exchange earnings once it has lowered its average cost of production.

An IS strategy has two major advantages, which explain the support from both policy makers and entrepreneurs. First the market for the relevant industrial products already exists prior to the IS strategy as evidenced by imports of these commodities so that risks are reduced in setting up an industry to replace imports.

Second it is easier for developing nations to protect their domestic market against foreign competition than to persuade developed nations to lower trade barriers against their manufactured or primary exports.

Against these advantages are the following disadvantages: domestic industries can grow accustomed to protection from foreign competition and have no incentive to become more efficient and import substitution can lead to inefficient industries.

Efficiency and Scale economies: A Case for EP Strategy

The benefits of the EP strategy lie in its ability to do away with the drawbacks of IS. The main advantages of EP strategy are it overcomes the smallness of the domestic market and allows a developing country to take advantage of scale economies production of manufactured goods for export requires and stimulates efficiency throughout the economy and last the expansion of manufactured exports is not limited by the growth of domestic market.

Comparisons of Import substitution and export promotion

Import substituting

• High tariffs for importing products
• Lots of non-tariff barriers

Export Promotion

• Low tariffs
• Few non-tariff barriers
• Relatively laissez faire Stance toward domestic markets

China’s policy is to avoid relying on imports, now day china imposing high tariff on imports and low tariff on export because main aim to export promotion. In china there is cost of production for any goods is lower than other country because it has comparative advantage. China aim to be hub of any production by promoting nation through trade policy

Import Substitution

• Trade policy is a good way to offset domestic distortions
• Unemployment
• Promotion of sectors with positive externalities

Export Promotion

• Using trade policy to offset domestic Distortions leads to efficiency losses
• Comparative advantage effects
• low pricing

As difference said that, base on that china doing export promotion. Because of comparative advantage and monopoly prising. Monopoly prising in term of production. In china employment rate is high because of more production unit, low prise for export. Prise of export commodity is lower than other country so that china able to dumping in any country. Now day if u see that all MNCs have plant in china because easy availability of labour and row material at low cost.

Import Substitution

• Countries lose from trade liberalization when scale economies are important
• At the sector level
• At the firm level

Export Promotion

• Losses due to scale Economies are more likely to be exacerbated by protection
• Goods that can’t be produced efficiently at home can be imported.
• Trade will force producers to produce fewer things on a larger scale.

China not losing by trade labialization for export but it profitable to china to being largely developing country. China importing technology and making substitute product at lower prise. China is known for substitute product. High scale of production which making high output at lower price than other country so that it promote producer to sell products at lower prise in other country.

Import Substitution

• Countries should exploit their monopoly power in world markets

Export promotion

• Most countries don’t have monopoly power, and have trouble creating it.
• There is no monopoly but it destroying monopoly of other country by producing substitute products. As book “World is Flat” china have good manpower which make innovative idea. Example like medicine, software. So that other country facing trouble from its capacity top produce anything. Now day India facing problem in EU for medicine because china dumping duplicate medicine in EU.

Import Substitution

• Declining terms of trade can undermine countries that rely on exports.

Export Promotion

• Even if terms of trade decline, free trade is the best policy.
• China’s rapid and relatively recent accession to the global economy has had a number of important impacts for the global economy. Amongst these is the consequence of its rising manufacturing exports and commodity imports for the terms of trade. If this leads to a sustained reversal of the long-term relationship between the prices of manufactures and commodities, it challenges the basic premise of industrialisation which underlies much of development strategy. This feeds into, and is in turn fed by, domestic and regional political processes. And there is improvement in china term of trade

Import Substitution

• Technical progress is facilitated by protection
• Learning by doing
• Emergence of an R&D sector
• Large market shares create large incentives to innovate.

Export Promotion

• Protection actually reduces innovation
• Imported capital and intermediate goods embody new technologies.
• Producers learn new technologies by participating in world markets.

China learning thing by innovation at small level but its effect on market at large level. There is not more RD in china but MNC putting their innovation in china. in import substitution there is must requirement for innovation but china not doing same it following epoport promotion by importing capital goods and make production through use of that capital. As china there is more producer & they participating in each activity and they also invite outside producer for their trade faire and base on that they make thing batter.

Import Substitution

• Export price volatility inhibits efficiency and growth.

Export Promotion

• Volatility due to trade may be damaging, but the gains from trade more than offset this damage.
• Gains from trade may not be distributed equitably and are determined. Gains from trade are offset by the decline in the terms of trade and more than two thirds of static gains to developing countries like china. High growth was not necessarily due to trade liberalization or export. China doing same but china gaining high growth rate by trade liberalization and export.

Import Substitution

• Protection allows countries to save scarce foreign currency reserves for critical goods.

Export Promotion

• Protection is more likely to allow inappropriate exchange rate regimes to continue.
• A better way to avoid foreign currency shortages is to get the exchange rate right.
• Current scenario and base on dispute for currency of china I can say that its strategy is export promotions. China is regulating exchange rate. There is intervention of government to fix currency prise china devaluate its currency so that more export happen. China making own exchange rate so that there is no need to foreign reserve to protect currency from market fluctuation. But current situation of china currency that are dispute arise for foreign exchange of china currency so that china realised all currency measure and solving that. 1st time china face trade deficit.

FROM IMPORT SUBSTITUTION TO EXPORT PROMOTION

Most of the less-developed countries have begun developing by an IS strategy and then they have followed an outward oriented strategy EP which china done. Especially the chain which have a huge internal market had advantage of the IS strategy during 1960s. In practice the china that applied IS strategy had to shift their strategies to EP strategy due to heft economic crisis. After these shifts these china had developed faster than the others.

However, the process of this shifting is not simple Export Promotion vs. Import Substitution China which apply traditional IS strategies make appropriate Structural changes in order to trade. Some of these structural changes had to be about the exchange rate.

The most important necessity for openness in trade is to have a flexible exchange regime. By this way the appreciation of the local currency, which worsens the trade balance, is prevented nevertheless some problems appear during shifting to an EP strategy. In order to have trade openness these problems must be solved. Some of these problems are introduced below.

Structural changes in exchange rate regime in not enough to china promote exports. Some structural changes in the real sector such as improving productivity are also needed. Some other structural changes may be about the choice of appropriate technology the human capital, the appropriate allocation of resources and institutional rearrangements.

Some other policies are used in order to terminate the discrepancy between the IS and EP strategies. These include protecting the exporters as much as the firms that produce substitutes for imports because exporters do not have enough power in the foreign competition area especially at the beginning

According to the IS strategy internal industries must be protected via some subsidies. By the same analogy exporters must be promoted too. However, this kind of a subsidy may cause some further budget deficit, by the side of government. Export Promotion vs. Import Substitution Tariffs, as a medium of protection, is always less harmful than quotas. So the China starts trade openness by getting rid of quotas. Beside this the level of tariffs must also be decreased in order to have an appropriate environment for trade. Getting rid of tariffs does not necessarily lead to unprotected local producers. With a flexible exchange rate is the new way of protection for the local producers. China planning now thinking on that.

Export promotion strategies necessitate the absence of government intervention to the price level, factors of production and exchange rates but an EP strategy can be successful only via government support let say about chi that all decision in hand of china government for trade and tariff. Each and every where all right reserved by government.

This government support may be the training of the exporters the promotion of the export goods in foreign countries or direct subsidy Moreover exporters must be enlightened about the qualities norms and standards of the international goods. And getting rid of bureaucracy may be the pushing force of the exports

Export promotion is not only increasing the exports but also opening all the goods and services to trade. In china there in all MNC had setup plant for production purpose.

Export Promotion vs. Import Substitution There is still a debate that the EP strategy is the best one. Most of the economists of the current time agree that Import substitution is not an alternative for EP strategy but what is the alternative for EP

China that have shifted their strategies from Import Substitution to Export Promotion have Developed faster than others. China is now highly developing country because of it strategy and support of government.

Conclusion

It is amply clear from the experiences of reviewed developing china that they pursued an IS strategy in their early development process subsequently the failure of such policies forced them to embark on an EP strategy.

However, the overall research on china for import substitution vs. export promotion experiences would suggest that neither strategy can bring desired results when pursued in isolation. Rather strategies have to be fine tuned to economic, social and political reality of the country in question.

There is now a general recognition that the policy of liberalisation alone can hardly render benefits and that there are other critical issues that require urgent attention for promoting trade and development for china.

China experienced both policy and now taking advantage of both by selecting best option of strategy. It using fixed exchange rate and law tariff and government intervention in all area of production.

China’s economy grew 8.7 % in 2009. Latest figures showed fanning suggestions that China may have surpassed Japan to become the second biggest economy in the world as the latter is expected to shrink as much as 3 % due to the global financial and economic crisis.

China could replace the United States as the No. 1 economy as early as 2020 leading business consultancy Price Waterhouse Coopers (PWC) projected. But some analysts point to some underlying problems in the Chinese economy which they say if left unsolved may result in the ultimate collapse of the Chinese economy.

Suggestion is only that china should have flexible exchange rate so that other country no face problem and china should produce high quality good rather than high quantity good because now costumer preference diverting from law prise and low quality goods to high prise high quality goods. Because high quality goods have longer life than low quality good.

“According to the Forbes it’s the new vocation that is creating the shortage of labour in China! this vocation pays Rmb1,500 to Rmb3,000 a month compared to assembly factory cost of Rmb700 a month!”

China highly developing now but maturity period is also near for china. China will be developed country but standard of living of Chinese people will be remain low because chipper labour and government regulation which making effect on low income but still Chinese people accepting that income.

The proportion GDP in 2010 will be 20% for the US, 21 % for the EU, 13 % for China and 5 % for India PWC said. But by 2030 that will have changed to 16 % for the US, 15 % for the EU, 19 % for China and 9 % for India. China is main competitor of India so that china wold has to start good relation with India for future perspective.

There is forecast that china will overtake US in future so china should start making eye on US policy so that it will not affect china growth.