UNIT II

The Global Institutional Structure - GATT (General Agreement on Trade and Tariffs) -
WTO (World Trade Organization) - Regional Trade Blocks and Trade Agreements.

GATT and the Goods Council

The General Agreement on Tariffs and Trade (GATT) covers international trade in
goods. The workings of the GATT agreement are the responsibility of the Council
for Trade in Goods (Goods Council) which is made up of representatives from all
WTO member countries. The current chair is Ambassador José Luís CANCELA
GÓMEZ (Uruguay).
The Goods Council has 10 committees dealing with specific subjects (such as
agriculture, market access, subsidies, anti-dumping measures and so on). Again,
these committees consist of all member countries.
Also reporting to the Goods Council are a working party on state trading
enterprises, and the Information Technology Agreement (ITA) Committee.
The General Agreement on Tariffs and Trade (GATT) is a legal agreement between many
countries, whose overall purpose was to promote international trade by reducing or
eliminating trade barriers such as tariffs or quotas. According to its preamble, its purpose was
the "substantial reduction of tariffs and other trade barriers and the elimination of
preferences, on a reciprocal and mutually advantageous basis."
The GATT was first discussed during the United Nations Conference on Trade and
Employment and was the outcome of the failure of negotiating governments to create
the International Trade Organization (ITO). It was signed by 23 nations in Geneva on 30
October 1947, and took effect on 1 January 1948. It remained in effect until the signature by
123 nations in Marrakesh on 14 April 1994, of the Uruguay Round Agreements which
established the World Trade Organization (WTO) on 1 January 1995. The WTO is the
successor to the GATT, and the original GATT text (GATT 1947) is still in effect under the
WTO framework, subject to the modifications of GATT 1994.[1][2] Nations that were not party
in 1995 to the GATT need to meet the minimum conditions spelled out in specific documents
before they can accede; in September 2019, the list contained 36 nations.[3]
The GATT, and its successor the WTO, have successfully reduced tariffs. The average tariff
levels for the major GATT participants were about 22% in 1947, but were 5% after the
Uruguay Round in 1999.[4] Experts attribute part of these tariff changes to GATT and the
WTO.

A regional trading bloc is a group of countries within a geographical region that protect
themselves from imports from non-members. Trading blocs are a form of economic
integration, and increasingly shape the pattern of world trade.
What are Regional Trading Blocs?
A regional trading bloc (RTB) is a co-operative union or group of countries within a specific
geographical boundary. RTB protects its member nations within that region from imports
from the non-members. Trading blocs are a special type of economic integration. There
are four types of trading blocs −
 Preferential Trade Area − Preferential Trade Areas (PTAs), the first step towards
making a full-fledged RTB, exist when countries of a particular geographical region
agree to decrease or eliminate tariffs on selected goods and services imported from
other members of the area.
 Free Trade Area − Free Trade Areas (FTAs) are like PTAs but in FTAs, the
participating countries agree to remove or reduce barriers to trade on all goods
coming from the participating members.
 Customs Union − A customs union has no tariff barriers between members, plus
they agree to a common (unified) external tariff against non-members. Effectively,
the members are allowed to negotiate as a single bloc with third parties, including
other trading blocs, or with the WTO.
 Common Market − A ‘common market’ is an exclusive economic integration. The
member countries trade freely all types of economic resources – not just tangible
goods. All barriers to trade in goods, services, capital, and labor are removed in
common markets. In addition to tariffs, non-tariff barriers are also diminished or
removed in common markets.
Regional Trading Blocs – Advantages
The advantages of having a Regional Trading Bloc are as follows −
 Foreign Direct Investment − Foreign direct investment (FDI) surges in TRBs and it
benefits the economies of participating nations.
 Economies of Scale − The larger markets created results in lower costs due to mass
manufacturing of products locally. These markets form economies of scale.
 Competition − Trade blocs bring manufacturers from various economies, resulting in
greater competition. The competition promotes efficiency within firms.
 Trade Effects − As tariffs are removed, the cost of imports goes down. Demand
changes and consumers become the king.
 Market Efficiency − The increased consumption, the changes in demand, and a
greater amount of products result in an efficient market.
Regional Trading Blocs – Disadvantages
The disadvantages of having a Regional Trading Bloc are as follows −
 Regionalism − Trading blocs have bias in favour of their member countries. These
economies establish tariffs and quotas that protect intra-regional trade from outside
forces. Rather than following the World Trade Organization, regional trade bloc
countries participate in regionalism.
 Loss of Sovereignty − A trading bloc, particularly when it becomes a political union,
leads to partial loss of sovereignty of the member nations.
 Concessions − The RTB countries want to let non-member firms gain domestic
market access only after levying taxes. Countries that join a trading bloc needs to
make some concessions.
  Interdependence − The countries of a bloc become interdependent on each other. A
natural disaster, conflict, or revolution in one country may have adverse effect on the
economies of all participants.
Trade Agreements
Trade agreement, any contractual arrangement between states concerning their trade
relationships. Trade agreements may be bilateral or multilateral—that is, between two states
or more than two states.
“national treatment of nontariff restrictions” clause is necessary because most of the
properties of tariffs can be easily duplicated with an appropriately designed set of nontariff
restrictions. These can include discriminatory regulations, selective excise or sales taxes,
special “health” requirements, quotas, “voluntary” restraints on importing, special licensing
requirements, etc., not to mention outright prohibitions. Instead of trying to list and disallow
all of the possible types of nontariff restrictions, signatories to an agreement demand
treatment similar to that given to domestically produced goods of the same type (for
example, steel).
UNIT III
India’s Industrialization Strategy and International Trade - Review of Economic planning
strategies and issues - Early phase; the 1970s and 1980 - Policies since 1991 - Exim policy
- Structure of tariffs and restrictions - Currency depreciation and convertibility - Export
Promotion Zones, Special Economic Zones, Importer and Exporter Code (IE Code).

India’s Industrialization Strategy and International Trade

Trade policy plays an important role in achieving the objectives of rapid economic growth
and self-reliance. It is on the basis of these static and dynamic gains of trade that case for free
trade or liberalisation of trade has been built. When a country specialises on the basis of its
comparative cost or production efficiency and export and import accordingly, it enables it to
make optimum use and allocation of its resources. As a result, output, income and welfare of
its people increase.

These gains emanating from trade through improved allocation of given resources of a
country are generally described as static gains. Thus, Professor Haberler writes,
“International division of labour and international trade which enable every country to
specialise and to export those things which it can produce in exchange for what others can
provide at a lower cost have been and still are one of the basic factors promoting economic
well-being and increasing national income of every participating country.”

However, importance of trade is not confined to static gains flowing from improved
allocation of the given resources. Foreign trade also promotes economic growth of a country.
It is the beneficial effect of trade on economic growth that is described as dynamic gains.
D.H. Robertson described foreign trade as “an engine of growth”. With grate income and
production made possible by specialisation and trade, greater savings and investment become
possible and as a result higher rate of economic growth can be achieved.

India’s Trade Strategy of Import Substitution:

As we began our planning for development, the two options were open to us with regard to
our foreign trade policy. First, we should lay stress on export promotion in our strategy of
development for accelerating economic growth. The second option was to adopt import
substitution as a major element of our trade policy. Note that the second policy of import
substitution does not emphasise the role of foreign trade for accelerating economic growth.

In fact, the policy of import-substitution was adopted in view of the perceived bleak
prospects of raising India’s exports. When exports could not be increased substantially, we
could not pay for imports on a large scale. Therefore, India’s strategy of industrialisation was
based on substitution of imports rather than export-oriented trade policy. The policy of import
substitution for promoting growth was also thought to be quite feasible in view of India’s vast
domestic market.

It is clear from above that India adopted the policy of import-substitution because of what is
now called export-pessimism. In fact, in the nineteen fifties and sixties export pessimism
characterised the thinking of most development economists. For example, Raul Prebisch
postulated that the terms of trade of developing countries have a tendency to deteriorate over
time regardless of the policies of developing countries. Prebisch’s postulate was based on
three grounds.

ADVERTISEMENTS:

First, demand for primary products which underdeveloped countries were exporting, were
income-inelastic. Second, technological progress that was taking place in developed countries
was of the nature that saved the use of raw materials which underdeveloped countries were
exporting. Third, because of the prevailing monopolies in the manufacturing industries of the
developed countries, the prices of their manufactured products were relatively higher than the
prices of primary and agricultural products whose production and sale were being done under
competitive conditions. Thus, according to Prebisch, export expansion by developing
countries was quite unprofitable.

Similarly, R. Nurkse, another pioneer in development economics, believed that for the newly
emerging countries like India foreign trade could no longer serve as ‘engine of growth’.
Nurkse’s export pessimism arose from his belief that foreign market could not absorb imports
on a sufficient scale as developing countries accelerated their process of economic growth. In
view of this external environment, Nurkse concluded that in order to accelerate growth
developing countries should undertake a balanced pattern of investment in a number of
different industries so that they can generate mutual demand for each other’s product leading
to the expansion in size of home market.

To quote Nurkse, “When developing countries face difficulties in exporting both traditional
and new exports, import-substitution strategy may be adopted by them as an escape route
from stagnation.” Nurkse further writes, “International trade cannot now be an effective
engine of ‘economic growth’ and in the strategy of growth, underdeveloped countries have of
necessity to lay emphasis on ‘balanced growth’ – a coordinated development of local
industries in accordance with the growth and structure of domestic demand.”

It is interesting to note here that our former Prime Minister, Dr. Manmohan Singh, was
perhaps the first economist who challenged this export pessimism of early development
economists, especially in the context of India. On the basis of his empirical findings about the
export potential of the Indian economy, he concluded that it was not easy to meet the increase
in import requirements in raising the rate of economic growth by any other means but export
promotion.

Arguing the case for export-promotion policy of development he writes, ”Whatever the
development strategy, the function of international trade as a supplier of ‘material means
indispensable for development’ is likely to retain its importance for most underdeveloped
countries in their quest for higher rates of economic growth. Imports, however, have to be
paid for either by current export earnings or by withdrawal from reserves of foreign exchange
or by fresh capital inflows. The withdrawal from reserves is not unlimited process, capital
inflows ultimately lead to higher service charges and repayment obligations. In the long run,
therefore, the import capacity of an economy and its ability to utilise the benefits of
international trade is crucially dependent on its export capacity. ”

But Dr. Manmohan Singh not only highlighted the need for export promotion for accelerating
economic growth but with his empirical study he demonstrated in India’s case that export
promotion to meet the growing needs for imports was in fact possible and that the stagnation
of India’s exports during 1951-61 was partly a consequence of faulty Indian economic
policies. Commenting on Dr. Manmohan Singh’s work, Prof. Amartya Sen writes, “Rapid
increase in exports would be impossible if export pessimism prevailing at that time was well-
grounded.” And Professor Sen himself answers that “with its very careful and painstaking
empirical arguments, Dr. Manmohan Singh demonstrated that it was not so well grounded
after all.”
Empirically, the export pessimism of the nineteen fifties (Post-War Period) has been proved
to be untrue and unjustified. World trade in the nineteen fifties and sixties grew faster than
world income. Several developing countries used export promotion as a means of attaining a
fast economic growth. In the early 1960s Japan was the shining example of using export
promotion strategy to achieve a fast rate of economic growth, beginning from a state of
underdevelopment.

Japanese growth experience is often described as Japanese miracle. In the later period, other
success stories of achieving high growth through outward-looking strategy of development
have been of Asian countries of South Korea Taiwan, China, Thailand, Singapore and Hong
Kong. Owing to their rapid economic growth in nineteen seventies and eighties they have
been called ‘Asian Tigers’. It is also worth mentioning that the expansion in exports of
developing countries which have used export promotion as a strategy of growth has not been
confined to primary products such as fuel and agricultural products (food, agricultural raw
materials). As a matter of fact, there has been significant change in the composition of
exports of developing countries towards manufacturers.

It may be noted that in the nineteen fifties and early sixties free trade was opposed on
political grounds also. Fears were expressed that through free trade industrial developed
countries would acquire political domination, as happened in case of India. East India
Company of Britain which came to India for trading acquired political domination. It may
however be noted such fears of political domination through trade have now receded in the
present political context. In fact, the protectionist sentiment is now stronger in the developed
countries such as US and EU. There is now huge cry in USA for protecting American jobs by
banning outsourcing of business services (BPO) to India.

ADVERTISEMENTS:

The success in export promotion accelerates economic growth of a country. The emergence
of Japan and Germany and recently China as major economic powers has shown that their
success in export expansion made them economically more independent and strong. On the
other hand, developing countries like India which followed import-substitution strategy had
to face recurrent balance of payments crises and the persistence of huge external debt
problem which made them more dependent on developed countries and international
institutions such as IMF and World Bank.

For at least up to 1980, India adopted a trade strategy of import substitution. The choice of
this policy was based on export pessimism which led the Indian planners to believe that
export earnings of India cannot be increased. The choice of this inward-looking strategy was
further strengthened by the vast size of Indian domestic market To implement this trade
policy of import substitution the imports of several commodities into India were banned and
quantitative restrictions on some other commodities were imposed.

Besides, to give protection to the domestic industries, customs duties were levied on a
number of commodities to discourage their imports by raising their prices. The customs
duties levied in India on certain commodities were as high as 200 per cent or 150 per cent
which were one of the highest in the world. In addition to these, the import-licensing was
used so as to regulate the quantities of some essential goods and raw materials that could be
imported and accordingly licenses for import quotas were issued by the Government.

A scheme of import- licensing in case of certain commodities was introduced under which
imports were permitted to the extent that domestic production fell short of domestic demand.
Further, stringent foreign exchange regulations were introduced and foreign exchange was
released to the holders of import licences for importing specific commodities.

ADVERTISEMENTS:

It may be noted that India’s policy of import substitution was indiscriminate and also
continued for quite a long period. This is unlike some other countries such as Japan and
South Korea which adopted import substitution only for some period of time and that too in
case of selected commodities for which they had potential comparative advantage.

Results of Import-Substitution Policy:

However, it may be noted that policy of import substitution contributed significantly to
industrial growth between 1956-66. But several weaknesses of the policy of import
substitution became evident during the course of time. First, the policy-makers
underestimated the possibilities of expansion in exports. As in the path-breaking study about
the trends in exports, Dr. Manmohan Singh found that a lot of export possibilities were lost
due to faulty trade policies. As a result, India’s share of world exports declined from about 2
per cent in 1951 to about 0.53 per cent in 1992.

Second, policy of import substitution underestimated the import intensity of import

substitution process itself. Growth of import-substituting industries required large quantities
of imports of capital goods, machines, raw materials etc. As a consequence, whereas imports
increased substantially there was no adequate growth in exports resulting in balance of
payments problems. In 1966 we had to devalue the rupee to promote exports and discourage
imports in order to solve balance of payments problem. However, 1966 devaluation did not
succeed in improving the trade deficit.
ADVERTISEMENTS:

It may be noted that deficit in balance of payments which arose mainly due to import-
substitution policy forced Indian policy-makers to make some changes in attitude towards
exports. Accordingly, in the Third Plan period (1961-66) and the Fourth Plan period (1969-
74) several export promotion measures (including devaluation of 1966) were taken. However,
as has been correctly pointed out by C. Rangarajan that “Until the end of 1970s, exports were
primarily regarded as a source of foreign exchange rather than as an efficient means of
allocating resources. Import substitution remained the basic premise of the development
strategy.”

Since import-substituting industrialisation was pursued regardless of comparative cost

considerations, inefficiencies crept into the system resulting in the Indian economy becoming
increasingly high-cost economy. This high cost and inefficiency in production was an
important reason for poor export performance despite the various incentives and concessions
given by the Government for export promotion.

India’s Trade Strategy – Import Liberalisation and Export Orientation:

There was a severe economic crisis in 1991. This economic crisis had its root in persistent
deficits in balance of payments in the last several years. Gulf war of 1990 added to the
problem as it resulted in shooting up of oil prices which required enhanced spending in terms
of foreign exchange. By March 1991, current account deficit in balance of payments reached
a record level of about 10 billion US dollars or over 3 per cent of our GDR Exports were
declining.

Foreign borrowing in last several years raised the ratio of short-term debit to foreign
exchange reserves to an extremely high level of 146.5 per cent. Foreign debit reserve ratio
rose to a peak of 35.5 per cent. As a result, our foreign exchange reserves dwindled to a
meagre amount which was hardly adequate to meet only a few weeks imports. A default on
payments for the first time in our history became a distinct possibility in June 1991. Foreign
capital was flying from India. No one was willing to lend us anymore.

ADVERTISEMENTS:

The severe economic crisis of 1991 forced us to make drastic reforms in trade policy. Fortu-
nately, Dr. Manmohan Singh was appointed as Finance Minister. Since then many far-
reaching reforms in trade policy have been undertaken. Though some liberalisation of trade
policy was undertaken in the 1980s, a truly liberalised trade policy was adopted from 1991
onwards.
The liberalisation of trade policy in India is characterised by two important features:
1. Import liberalisation and

2. Export orientation of trade policy.

This new trade policy has accelerated India’s transition to a globally oriented economy by
stimulating exports and facilitating imports of essential inputs and capital goods. Steps were
taken to promote exports by removing anti-export bias in the earlier policy. This policy of
import liberalisation and export-orientation was in fact the policy that was recommended by
IMF and World Bank to solve the balance of payments problem facing the developing
countries and to accelerate rate of economic growth. We explain below this trade policy in
some detail.

1. Import Liberalisation in Economic Reforms of 1991:

The first important reform in India’s trade policy has been the elimination of quantitative
restrictions in a phased manner on most of intermediate and capital goods since 1991.
Secondly, prior to 1991 imports were regulated by means of a positive list of freely
importable items. Instead, since 1992 as a part of trade policy reforms only a short negative
list of imports is subject to regulations by Government. Other goods can be imported, subject
of course to payment of duty.

Abolition of Licensing:
Prior to 1991 a large number of goods were subject to import-licensing restrictions. Now,
most of the items of imports have been put on Open General License (OGL). That is, for their
imports prior approval or license from any authority is not required. Thus, License -Permit
Raj regarding imports has been done away with.

Tariff Reduction:
An important step towards import liberalisation has been reduction in import duties to
eliminate protection given to domestic industries from foreign competition. The maximum
import duty which was as high as around 150 per cent was reduced to 110 per cent in 1992-
93. This was further reduced to 85 per cent in 1993-94, to 65 per cent in 1994-95 and to 50
per cent in 1995-96. In 2004-05 average customs duty had been reduced to 20 per cent only.

Empirical evidence shows reduction in protection increases efficiency and productivity in the
domestic industries as it exposes them to foreign competition.

Liberalisation of Imports of Gold and Silver:

Another significant import liberalisation has been that imports of gold and silver have been
liberalised. This has helped in preventing smuggling of these metals.
Critique of Import Liberalisation:
It may be noted that fears were expressed about import liberalisation both by certain
politicians and economists, especially with Leftist leanings. They contended that import
liberalisation would kill domestic industries as they would not be able to compete with the
cheap foreign products. This would lead to closure of a large number of industrial units,
especially small-scale industries. Besides, they claimed that large-scale imports would require
substantial foreign exchange resources.

Thus, according to them, import liberalisation would worsen the balance of payments
problem rather than solving it. Even a reputed economist, Dr. Bimal Jalan, a former Governor
of Reserve Bank of India, expressed reservations about the policy of import liberalisation and
pointed out that it would be highly risky for the Indian economy.

Writing in 1991, he says, “Given the balance of payments constraints operating now, and the
financing options currently available, import-liberalisation as strategy does not seem to be a
feasible option over the next few years. This pragmatic view is not dependent on the
theoretical validity (or otherwise) of the liberalisation argument. By implication, import
liberalisation would have the effect of raising, even in the short run, the ratio of import to
GDP. This may not be undesirable in itself, but it would require larger inflows of external
capital in the next few years and this is not available on appropriate terms. Past experience
shows that further commercial borrowing to finance import liberalisation would also be
undesirable, given the high level of external debt. In this situation, import liberalisation
would be unduly risky and could lead to a repetition of the unfortunate experiences of several
other developing countries.”

However, in actual experience, these fears about import-liberalisation leading to adverse

consequences have not proved to be true.

2. Export Orientation of India’s Trade Policy:

Along with import liberalisation, export-orientation was also given to India’s trade policy
pursued since 1991. In other words, for the first time greater emphasis was placed on export
promotion in our trade policy by removing anti-export bias of our earlier policy. Some
economists describe it as outward-looking strategy which was adopted since 1991 in place of
inward-looking strategy of import substitution followed earlier.

Following are the various export-promotion measures taken to give export orientation
to trade policy:
i. Reduction in Customs Duties to end Anti-Export Bias:
Prior to 1991 customs duties of India were the highest in the world and were levied to
promote import substitution. These very high customs duties provided a high degree of
protection to domestic industries. In actual practice, the high degree of protection lowers
efficiency and is not conducive to optimum use and allocation of resources. In the absence of
competition from imported products, the prices of domestic goods were high and this served
to induce import substitution but worked against promotion for exports. Since prices of
products in international markets were lower, it was not profitable to produce for export.
Therefore, to remove this anti-export bias and promote the growth of exports, custom duties
were reduced and in 2004-05, average rate of customs duties has been reduced to 20 per cent.

ii. Devaluation of Rupee:

Another important step to promote exports was devaluation of rupee by 20 per cent in July
1991. Devaluation lowered the prices of our exports and gave an important boost to them.
Prior to 1991 rupee currency was overvalued and to ensure growth in exports to make some
foreign exchange earnings, export subsidy in the form of cash compensatory allowance was
provided to exporters. Therefore, along with devaluation cash compensation allowance was
withdrawn.

Market – Determined Exchange Rate – Convertibility of Rupee:

After two years of reforms in 1993, exchange rate of rupee was made market determined, that
is, exchange rate of rupee with foreign currencies was left to be determined by demand for
and supply of rupee and other currencies. This implies that rupee can appreciate or depreciate
in terms of other currencies every day depending on demand and supply conditions. This
flexible exchange rate works to some extent to correct disequilibrium in the balance of
payments. However, it is worth mentioning that exchange rate though determined by demand
for and supply of foreign exchange can be influenced by RBI through buying and selling of
dollars and other foreign currencies in the foreign exchange market. Therefore, present
exchange rate system is more correctly described as managed float.

It may be noted that over a period of time since 1993, exchange rate of rupee has declined,
that is, rupee has depreciated. This has tended to promote exports and discourage imports. In
addition to the introduction of market-determined exchange rate rupee has been made
convertible on current account of balance of payments, that is, importers can now get their
rupees converted into dollars and exporters can sell their dollars for rupees at market-
determined exchange rate. Thus, convertibility of rupee has facilitated imports and exports
and has contributed to the globalisation of the Indian economy.

iii. Liberalisation of Control over Exports:

Through continuous review and revisions during the last 20 years controls on exports has
been liberalised to the extent that now all goods may be exported without any restriction
except the few items mentioned in the negative list of exports. The items in the negative list
of exports are regulated because of strategic considerations, environmental and ecological
grounds, essential domestic requirements, employment generation and on account of socio-
cultural heritage.

iv. Duty-Free Import of Capital Goods for Use in Production for Exports:
A significant export- promoting measure is that capital goods meant to be used for production
of exportable products can be imported free of customs duty. There are two windows to fulfill
export obligation on FOB (free on board) and NFE (net foreign exchange) basis.

v. Advance Licenses for Imports against Exports:

Advance licenses which are used to import specified raw materials without payment of any
customs duty against confirmed export order and/or letter of credit have been made
transferable after export obligation has been fulfilled.

vi. Exemption from Tax and Credit Subsidies:

Profits or incomes from exports are completely exempt from income tea. Besides, exporters
are provided preferential access to credit from banks. Concessional rates of interest are
charged for pre-ship and post-ship credit to exporters.

vii. The Duty Drawback Scheme:

In this important scheme of providing incentives to exporters customs duty and excise duty
paid on inputs which are used for production of exports are reimbursed to exporters.

viii. Incentive to Exports of Services:

In an attempt to provide massive thrust to export of services EXIM Policy 2003-04 has
introduced duty-free import facility for the service sector units having a minimum foreign
exchange earning of Rs 10 lakh. The scheme is likely to provide a major boost to export of
services like healthcare, entertainment, professional services and tourism.

ix. Small-scale industries (SSI) reservations have been withdrawn from a large number of
items so that large-scale producers can produce these items cheaply and export them.
Case for Export Orientation of India’s Development Strategy:
The export orientation of trade policy (or outward-looking growth strategy) is believed to
have many advantages and is regarded as superior to import-substitution policy. Some of
these advantages are explained here.
First, it has been pointed out that export-oriented trade policy is conducive to more efficient
use and allocation of resources. Jagdish Bhagwati has emphasized the efficiency gain of
export promoting trade strategy. He is of view that export orientation and import liberlisation
trade strategy will ensure domestic resource allocation closer to efficient production of goods
in accordance with comparative cost of a country. According to him, such a trade strategy
will not lead to rent-seeking unproductive activities.

An important advantage of export-oriented strategy arises from economies of scale which can
be reaped more effectively. As a result, cost per unit of output rises which will tend to lower
prices of exports. Lower export prices will help in significant expansion in exports and enable
us to earn more foreign exchange. As export demand or market size for a good expands this
will lead to economies of scale. With adequate size of market even small-scale and medium
enterprises can set up plants of optimum size to enjoy the economies of scale.

Export-oriented trade policy makes substantial contribution to economic growth by relaxing

the foreign exchange constraints. Export-promoting trade policy places emphasis on
industries geared towards earning foreign exchange. This helps to keep the balance of
payments in equilibrium. It has been found that import-substitution trade strategy generally
causes shortage of foreign exchange and leads to the balance of payments problem, as
happened in case of India in 1991. Shortage of foreign exchange and balance of payments
problem lowers the rate of economic growth.

On the other hand, export-oriented trade policy does not have to face the problem of shortage
of foreign exchange and is therefore conducive to higher rate of economic growth. Further, a
significant merit of export-oriented trade policy is that it will help to achieve self-reliance,
that is, self-sustained growth of the Indian economy. As a matter of fact, import-substitution
strategy was adopted in India with the belief that through it we will achieve self-reliance.

But the policy underestimated the import intensity of import-substitution process. Import-
substitution strategy substantially increased our import requirements for equipment and raw
materials. This necessitated a large amount of foreign exchange which could not be earned
sufficiently through exports. Thus, far from helping to do away with foreign assistance,
import-substitution, strategy increased our dependence on foreign capital inflows.

Export-oriented trade policy coupled with liberalised foreign investment will enable us to
earn adequate foreign exchange to solve our balance of payments problem and ensure self-
sustained economic growth. Above all, several studies have found a highly positive relation
between growth of national income and expansion in export. However, as Balassa has
 pointed out that for relation between export orientation and economic growth initial
conditions matter a lot.

These initial conditions include resource endowment, expansion opportunities of trade, stock
of technical knowledge. No doubt, these initial conditions are important for determining
economic growth. However, trade policy is certainly important for providing incentives for
expansion of exports for availing of the opportunities thrown up by international trade. This
will lead to the optimum use and allocation of material resources which will stimulate
economic growth.

special economic zone (SEZ)

A special economic zone (SEZ) is an area in which the business and trade laws are different
from the rest of the country. SEZs are located within a country's national borders, and their
aims include increased trade balance, employment, increased investment, job creation and
effective administration.

To instill confidence in investors and signal the Government's commitment to a stable SEZ
policy regime and with a view to impart stability to the SEZ regime thereby generating
greater economic activity and employment through the establishment of SEZs, a
comprehensive draft SEZ Bill prepared after extensive discussions with the stakeholders. A
number of meetings were held in various parts of the country both by the Minister for
Commerce and Industry as well as senior officials for this purpose. The Special Economic
Zones Act, 2005, was passed by Parliament in May, 2005 which received Presidential assent
on the 23rd of June, 2005. The draft SEZ Rules were widely discussed and put on the website
of the Department of Commerce offering suggestions/comments. Around 800 suggestions
were received on the draft rules. After extensive consultations, the SEZ Act, 2005, supported
by SEZ Rules, came into effect on 10th February, 2006, providing for drastic simplification
of procedures and for single window clearance on matters relating to central as well as state
governments. The main objectives of the SEZ Act are:

 generation of additional economic activity

 promotion of exports of goods and services
 promotion of investment from domestic and foreign sources
 creation of employment opportunities
 development of infrastructure facilities

It is expected that this will trigger a large flow of foreign and domestic investment in SEZs,
in infrastructure and productive capacity, leading to generation of additional economic
activity and creation of employment opportunities.
 The SEZ Act 2005 envisages key role for the State Governments in Export Promotion and
creation of related infrastructure. A Single Window SEZ approval mechanism has been
provided through a 19 member inter-ministerial SEZ Board of Approval (BoA). The
applications duly recommended by the respective State Governments/UT Administration are
considered by this BoA periodically. All decisions of the Board of approvals are with
consensus.

The SEZ Rules provide for different minimum land requirement for different class of SEZs.
Every SEZ is divided into a processing area where alone the SEZ units would come up and
the non-processing area where the supporting infrastructure is to be created.

The SEZ Rules provide for:

 " Simplified procedures for development, operation, and maintenance of the Special
Economic Zones and for setting up units and conducting business in SEZs;
 Single window clearance for setting up of an SEZ;
 Single window clearance for setting up a unit in a Special Economic Zone;
 Single Window clearance on matters relating to Central as well as State Governments;
 Simplified compliance procedures and documentation with an emphasis on self certification

Approval mechanism and Administrative set up of SEZs

Approval mechanism
The developer submits the proposal for establishment of SEZ to the concerned State
Government. The State Government has to forward the proposal with its recommendation
within 45 days from the date of receipt of such proposal to the Board of Approval. The
applicant also has the option to submit the proposal directly to the Board of Approval.

Steps Involved in IEC (Import/Export Code) Registration

Step 1: First, you need to prepare an application form in the specified format – Aayaat
Niryaat Form no. 2A format and file it with the respective Regional office of DGFT.
Step 2: Secondly, you need to prepare the required documents with respect to your identity &
legal entity and address proof with your bank details & the certificate in respect of ANF2A.
Step 3: One your application is completed, you need to file with DGFT via DSC (Digital
Signature Certificate) and pay the required fee for the IEC Registration.
Step 4: Finally, once your application is approved then you would receive the IEC Code in a
soft copy from the government.

Documents required for IEC (Import Export Code) Registration

For IEC Code Registration following documents are required:
  Individual’s or Firm’s or Company’s copy of PAN Card
 Individual’s voter id or Aadhar card or passport copy
 Individual’s or company’s or firm’s cancel cheque copy of current bank account
 Copy of Rent Agreement or Electricity Bill Copy of the premise

Benefits of IEC Registration

1. Expansion of Business
IEC assists you in taking your services or product to the global market and grow your
businesses.

2. Availing Several Benefits

The Companies could avail several benefits of their imports/ exports from the DGFT, Export
Promotion Council, Customs, etc., on the basis of their IEC registration.

3. No Filling of returns
IEC does not require the filing of any returns. Once allotted, there isn’t any requirement to
follow any sort of processes for sustaining its validity. Even for export transactions, there
isn’t any requirement for filing any returns with DGFT.

4. Easy Processing
It is fairly easy to obtain IEC code from the DGFT within a period of 10 to 15 days after
submitting the application. There isn’t any need to provide proof of any export or import for
getting IEC code.

5. No need for renewal

IEC code is effective for the lifetime of an entity and requires no renewal. After it is obtained,
it could be used by an entity against all export and import transactions.
etc.
Tax Saving Investment