 Trade Strategy

Trade Strategy
• Trade strategy refers to the system of government interference (government policy) in
foreign trade.

• The nature of government interference or trade policy has very broad implication’s has
impact on the volume and composition of imports and exports.

• The choice of the trade strategy is one of the most important economic policy decisions a
developing country has to make because of its wide implications
[pattern of investment and direction of development, competitive conditions, cost
conditions, entrepreneurial and business attitudes, consumption patterns etc.]

• The trade policy is only one of the elements of the macroeconomic policy mix
 
Trade Strategy

• The government policy towards trade, trade strategies may be broadly divided
into two groups, viz.

1. Outward oriented strategies and

2. Inward oriented strategies.
  OUTWARD ORIENTED STRATEGIES

• An outward oriented or outward looking strategy is one in which trade and

industrial policies do not discriminate between production for the domestic
market and exports, nor between purchase of domestic goods and foreign
goods.
• An outward oriented strategy is neutral between production for domestic
market and exports and between consumption of domestic goods and foreign
goods

• An outward oriented policy neither discriminates in favour of exports nor is it

against import substitution
  Inward oriented strategies
• An inward oriented or inward looking strategy is characterised by a bias of trade
and industrial policies in favour of domestic production and against foreign trade.

• As import substitution is the key element of the inward oriented strategy, it is

often described as the import substitution strategy

• Protection of domestic industries from foreign competition is an essential feature

of the inward oriented strategy.
  Inward oriented strategies
• An inward oriented strategy does not intend a bias against exports, but it discourages
exports in the following ways:

The cost of some exportables increases because of the high cost of imported items (due to
reasons like import duty) used in exportables.
Cost of exportables increases also because of the general rise in prices in the economy due
to protection.
The lucrativeness of the protected domestic market discourages exports.
 Protection often results in the neglect of cost and quality. This also adversely affects
exports.
The emphasis on import substitution may lead to the relative neglect of industries with
export potential. [jute and cotton textiles, 1950]
  Extent of Strategy Orientations

• World Bank has classified the countries into:

1. Strongly Outward oriented,

2. Moderately outward oriented,

3. Strongly inward oriented and

4. Moderately inward oriented economies.

  Extent of Strategy Orientations

 Strongly Outward Oriented

Trade controls are either non existent or very low.
There is little or no use of direct controls and licensing arrangements

 Moderately Outward Oriented

The overall incentive structure is biased towards production for domestic rather than
export markets.
 Extent of Strategy Orientations

 Moderately Inward Oriented

The overall incentive structure distinctly favours production for the
domestic market

 Strongly Inward Oriented

The overall incentive structure strongly favours production for
domestic market.
  TRADE STRATEGY OF INDIA

• Until the early 1990s, the trade strategy of India was strongly inward oriented.

• Outright ban on the import of many products, quantitative restrictions, tariff wall, which
was one of the highest in the world, and administrative restrictions like import licensing,
foreign exchange regulations etc. were important instruments used to pursue this strategy.

• Inward orientation was, of course, necessary in the early stages of development.

• The import substitution has significantly contributed to industrial development until the
late 1960s
 • TRADE STRATEGY OF INDIA

• Period of Export Pessimism - In the early period, the planners were pessimistic
about India's export prospects

• Era of Export Promotion and Import Restriction - Export promotion became an

important component of India's trade policy since the early 1960s

• Towards an Open System - Since the early 1990s, the trade policy of India has
been progressively liberalized.
  FREE TRADE AND PROTECTION

• Free trade refers to the trade that is free from all artificial barriers to trade like tariffs,
quantitative restrictions, exchange controls etc.

• Protection on the other hand, refers to the government policy of protection to the domestic
industries from foreign competition.

• There are a number of arguments for and against both free trade and protection
  Arguments in favour of free trade

• Free trade leads to the most economic utilisation of the productive resources of the world.
Under free trade each country will specialise in the production of those goods for which it is
best suited, and will import from other countries those goods which can be produced
domestically only at a comparative disadvantage.

• Under free trade, division of labour occurs on an international scale leading to greater
specialisation, efficiency and economy in production.

• As there will be intense competition under free trade, the inefficient producers are
compelled either to improve their efficiency or to quit.

• Free trade helps to break domestic monopolies and free the consumers from exploitation.
  Arguments in favour of free trade

• Free trade benefits the consumers in different ways. It enables them to obtain
goods from the cheapest source. Free trade also makes available large varieties of
goods.

• Further, under free trade there is not much scope for corruption which is rampant
under protection.
  ARGUMENTS FOR PROTECTION

• Governments resort to some manner of protective measures to safeguard the national

interests.
• US, which appeared to be the champion of the cause for free trade, has been becoming
protectionist as its industries are threatened by increasing global competition.

• Infant Industry
a new industry having a potential comparative advantage may not get started in a country
unless it is given temporary protection against foreign competition
• The policy of protection has been well expressed in the following words: “Nurse the baby,
Protect the child and Free the adult”
  ARGUMENTS FOR PROTECTION

• Diversification
It is necessary to have a diversified industrial structure for an economy to be strong and reasonably
selfsufficient. An economy that depends on a very limited number of industries is subject to many risks.
A depression or recession in these industries will seriously affect the economy. A country relying too
much on foreign countries runs a number of risks.

• Improving the Terms of Trade

• Improving Balance of Payments

This is a very common ground for protection. By restricting imports, a country may try to improve its
balance of payments position. The developing countries, especially, may have the problem of foreign
exchange shortage
  ARGUMENTS FOR PROTECTION
• Anti-Dumping
Protection is also resorted to as an anti-dumping measure. Dumping, certainly, can
do harm to the domestic industry; the relief the consumers get will only be
temporary. It is possible that after ruining the domestic industry by dumping, the
foreign firms will obtain monopoly powers and exploit the home market.
Sometimes, dumping represents a transmission of the recession abroad to the
home country. These factors point out the need to protect domestic industries
against dumping
Bargaining
It is argued that a country which already has a tariff can use it as a means of
bargaining to obtain from other countries lower duties on its exports.
 ARGUMENTS FOR PROTECTION

• Employment
Protection has been advocated also as a measure to stimulate domestic economy and
expand employment opportunities
• National Defence
Even if purely economic factors do not justify such a course of action, certain
industries will have to be developed domestically due to strategic reasons
• Key Industry
• It is also argued that a country should develop its own key industries because the
development of other industries and the economy depends a lot on the output of
the key industries.
  DEMERITS OF PROTECTION

The following defects are generally attributed to protection:

• Protection is against the interest of consumers as it increases price and reduces

variety and choice. · Protection makes producers and sellers less quality
conscious.
• It encourages domestic monopolies.
• Even inefficient firms may feel secure under protection and it discourages
innovation.
• Protection leaves the arena open to corruption.
• It reduces the volume of foreign trade.
• Protection leads to uneconomic utilisation of world’s resources.
 
INTERNATIONAL
ECONOMIC INTEGRATIONS
  ECONOMIC INTEGRATIONS
• Trading Blocks – a group of countries that join together and
agree to increase trade between themselves.
• Economic Integration – Process whereby countries
coordinate to reduce trade barriers and to harmonise
monetary and fiscal policy (regional trade agreement - RTA).
• There has been a proliferation of agreements among groups
of nations to increase intra-group trade and, in some cases,
other economic activities
 • RATIONALE AND OBJECTIVES

• Although multilateralism is generally accepted, in principle, as the

best option, Governments opt for RTAs for a variety of reasons.

• When possibilities for trade liberalisation or other forms of co-

operation in certain areas at the multilateral level may be absent or
attenuated
•  Dissatisfaction with global liberalisation prompt regionalism
• They may prefer to remove all trade barriers rather than just reducing
some.
Objectives

• To obtain economic benefits from achieving a more efficient production.

• To pursue non-economic objectives such as strengthening political ties and managing

migration flows.

• To ensure increased security of market access.

• To promote regional infant industries which cannot be viable without a protected

regional market
 
• The structure of regional agreements varies hugely, but all have one
thing in common – the objective of reducing barriers to trade
between member countries.
  Forms of International Economic Integration

1. .Preferential Trade Agreement (PTA) .

2. Free Trade Agreement (FTA) .

Level of
3. Customs Union (CU) Integration
Increases

4. Common Market (CM)

5. Economic Union (EU)

6. Political Union (PU)

  Impact of Economic Integration

 Trade-Creation Impact
• Formation of an Economic integration (PTA/FTA) results in the expansion of
consumption opportunities by making available low-cost goods.

 Trade-Diversion Impact
• Formation of an Economic integration (PTA/FTA) results in trade diversion to
its members from non-members since the elimination of import tariffs
among member countries makes sourcing of goods from member countries
more attractive compared to non-members, even at the cost of production
efficiency.
• Differences between Trade Creation and Trade Diversion
• Trade creation refers to the newly created trade between the member countries of the
customs union, whereas
• Trade diversion refers to some old trade being diverted from a foreign country to a
member country, consequent upon the formation of the trading block.
• Secondly, trade creation is beneficial to welfare whereas trade diversion is detrimental to
it.
 .

 1. Preferential Trade Agreement (PTA)

Member countries in a PTA lower tariff barriers to imports of identified products from one
another e. g. ECOWAS, GSTP, COMESA, etc.

 2. Free Trade Agreement (FTA)

Form of economic integration in which member countries seek to remove all tariffs and
non-tariff barriers for cross-border trade of goods and services among themselves e.g.
NAFTA, etc.

• However, each member is left free to determine its own commercial policy with non-
members
 .

 3. Customs Union (CU)

Countries not only eliminate tariff barriers among themselves but also
apply common external import tariffs for non-members e. g. CARICOM,
CACM, etc.
 adopts a uniform commercial policy against the non-members.
 4. Common Market (CM)
In addition to free trade among members and uniform tariff policy for
non-members in a common market, it involves elimination of all restrictions
on cross-border investments, movement of labour, technology transfer,
management, sharing of capital resources, e.g. COMESA, MERCOSUR, etc.
 .

 5. Economic Union (EU)

It enjoys much greater level of economic integration where free exchange
of goods and services takes place. The member countries in an economic
union also maintain a fiscal discipline, stability in exchange, and interest
rates by way of unified monetary and fiscal policies. e.g., European union
 6. Political Union (PU)
As a culmination of economic integration, the member countries strive to
harmonize their security and foreign policies. A common parliament is
created with representatives of member countries who work in
synchronization with an individual country’s legislature.
  Limitations / disadvantages of Regional Economic Integrations

• A major problem of RIAs is that they promote regionalism at the expense of

multilateralism.

• A multiplicity of regional agreements safeguarding varying levels of protection against

external third parties will almost certainly engender a degree of trade diversion.

• The growing number of overlapping bilateral and plurilateral agreements risks the
transparency of trading rules, thus posing a threat to one of the fundamental principles
of the WTO
  Limitations / disadvantages of Regional Economic Integrations

• It can create an incentive for even further discrimination, which

eventually will hurt all trading partners.
• PTAs cannot solve systemic issues, such as rules of origin, anti-
dumping, agricultural, and fisheries subsidies. These issues simply
cannot be handled at the bilateral or regional level.
 Limitations / disadvantages of Regional Economic Integrations

• The proliferation of Regional Trade Agreements can greatly complicate the

trading environment, creating a web of incoherent rules.

• To many small and weak developing countries entering into a PTA with a powerful

big country means less leverage and a weaker negotiating position as compared

to that in the multilateral talks.

  India’s Participation in PTAs
• SAARC Preferential Trading Agreement (SAPTA)
• South Asian Free Trade Agreement (SAFTA)
• Comprehensive Economic Cooperation Agreement (CECA) between
India and Singapore
• Framework Agreement on Comprehensive Economic Cooperation
between the Association of South East Asian Nations (ASEAN) and
India
• Indo-Sri Lanka Free Trade Agreement (ISLFTA)
• Asia-Pacific Trade Agreement (APTA)
(Bangkok Agreement)
  Major Regional Trade Agreements

• European Union (EU)

• North American Free Trade Area (NAFTA)
• MERCOSUR (Mercado Comun del Sur)
• Gulf Cooperation Council (GCC)
• Asia-Pacific Economic Cooperation (APEC)
• Association of South East Asian Nations (ASEAN)