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Trade Protectionism

Trade Protectionism

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Published by tonydickpatakesseh
PROS AND CONS OF TRADE PROTECTIONISM
PROS AND CONS OF TRADE PROTECTIONISM

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Published by: tonydickpatakesseh on Oct 05, 2010
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12/10/2012

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QUESTION
The economy of XYZ recently gained independence from their colonial masters. Thefirst president Dr. Yebeyebi embarked on a massive imported substitution drive as away of promoting growth and development. Industrialization became a vital off shoot of this policy and in the process the country concentrated on inward activities andrestricted through several tools the importation of certain products.Would you as a consultant support their initiative viz ±a- viz the supposed gains and thewelfare implications of international trade.
 
Introduction
Import substitution and trade protectionism are tools or strategies that have beenadopted by many a country to promote economic growth and development whenindependence 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, itwould 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 benefitinternational trade provides which will be absent if trade is restricted.
Import Substitution
Import substitution is the strategy of encouraging domestic industry by limiting importsof 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, typicallyfor use in trade. Import goods or services are provided to domestic consumers byforeign producers. The strategy is inward oriented in that trade and industrial incentivesfavor production for the domestic market over the export market An import in thereceiving country is an export to the sending country. If a country practices importsubstitution, then the country is restricting free trade of certain goods and services. Freetrade refers to the trade that is free from all artificial barriers to trade like tariffs,quantitative restrictions, exchange controls, etc.
Industrialization
 A process of socio-economic change whereby a human group is transformed from apre-industrial society into an industrial one. A part of a wider modernization process,where social change and economic development are closely related with technologicalinnovation, particularly with the development of large scale energy and metallurgyproduction
Trade protectionism
Protection refers to the government policy of according protection to the domesticindustries from foreign competition. Any form of restriction imposed on internationaltrade, 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. Asalready explained above, import substitution is encouraging domestic industry bylimiting 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 infantindustries. 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 giventemporary protection against foreign competition. An established industry is normallymuch stronger than an infant one because of the advantageous position of theestablished industry like its longstanding experience, internal and external economies,resource position, market power, etc. Hence, if the infant is to compete with such apowerful foreign competitor, it will be a competition between unequals and this wouldresult in the ruin of the infant industry. Therefore, if a new industry having a potentialcomparative advantage is not protected against the competition of an unequallypowerful foreign industry, it will be denying the country the chance to develop theindustry for which it has sufficient potential. The intention is not to give protection for ever but only for a period to enable the new industry to overcome its teething troubles.The policy of protection has been well expressed in the following words: "Nurse thebaby, protect the child and free the adult". This practice is evident in China when Chinaclosed it economy and protected its infant industries to mature before opening up to therest of the world. This has given China a very good advantage as it is now counted asone of the giant industrialized countries. Another good aspect of import substitution and trade protectionism is the fact that thecountry would have diversified industries producing different goods and services for thebenefit of the citizenry. It is necessary to have a diversified industrial structure for aneconomy to be strong and reasonably self-sufficient. An economy that depends on avery limited number of industries is subject to many risks. A depression or recession inthese industries will seriously affect the economy. A country relying too much on foreigncountries runs a number of risks. Changes in political relations and internationaleconomic conditions may put the country into difficulties. Hence, a diversified industrialstructure is necessary to maintain stability and acquire strength. It is, therefore, advisedto develop a range of industries by according protection to those which require it.Therefore the president Dr. Yebeyeebi adopting this trade protectionism and importsubstitution will help the country to achieve diversification. For instance when Ghanagained independence in 1957, the president Osagyefo Dr. Kwame Nkrumah embarkedon massive industrialization establishing over a hundred factories to produce differentkinds of products. Mismanagement however, has led to the collapsed of all thiswonderful factories leading many people to be unemployed. Again XYZ can improve its balance of payment account if the economy is protected. Byrestricting imports, a country may try to improve its balance of payments position. Thedeveloping countries, especially XYZ, may have the problem of foreign exchangeshortage. Hence, it is necessary to control imports so that the limited foreign exchangewill be available for importing the necessary items. In developing countries, generally,there is a preference for foreign goods. Under such circumstances it is necessary tocontrol unnecessary imports lest the balance of payments position become critical. Another benefit is that employment could be created if import is restricted. The domesticeconomy could be stimulated and employment opportunities expanded if trade isprotected. Restriction of imports will stimulate import competing industries and itsspread effects will help the growth of other industries. These, naturally, create more

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