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free trade and protectionism
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Chapter 5(Protectionism//Free trade)The 2 main trade policies of developing countries are Import substitution & export
promotion i.e. policies to increase economic growth/development
Trade Policy is all laws about trade between countries
Export Promotion:
Is any form of incentive given by government to promote firms to increase exports
It is outward looking & promotes industrialization
Reasons are:
o Exports promote export-led economic growth
o Greater employment as production increased
o More production allows prices to drop
Methods of export promotion:
o Export subsidies // amount the state pays to producers to compensate the, for their
expense allowing them to sell their goods at a cheaper price in foreign countries. They
increase production.
o Tax concessions // reduction in taxes on profits and volumes exported
o Tax-Free grants // compensate exporters for extra costs while exporting
o Identifying markers // state gives exporting industries info about all markets i.e. trade
shows
Advantages of export promotion:
o Export-led economic growth // GDP increases
o Industrialization is sped up with creation of world market
o More jobs created
Disadvantages of export promotion:
o Subsidized industries have unfair advantage over un-subsidized ones
o Subsidized industries struggle to compete in world trade when subsidies are lifted//
can’t survive competition
o Countries react by placing high tax on imported goods
o Countries accused of dumping, which is selling goods in a foreign country at a lower
price than the country of origin
Trade neutrality:
A policy where incentives given to exports and imports on whole are equal
Occurs when no incentives or protection are offered in trade
Export Processing Zones (EPZs)
Is a type of free-trade zone, usually set up in developing countries by the state to
promote industrial/commercial exports
They make exports less complicated , offer incentives, usually near harbor or airport for
direct export
, Import Substitution:
Goods that were previously imported are replaced by locally made goods where
possible
Inward-looking
Aims to promote economic development but doesn’t stress trade relations with other
countries
Achieved by protection i.e. free trade is restricted
Reasons for import substitution:
o Development of industries because it gives local businesses a market for their
product // exports too pricy
o Country becomes more self-sufficient
o Increases employment and training for industrial skills
o State uses import duties as a form of tax revenue
Methods used to promote:
Import or custom duties:
Achieved by taxes, quotas, restrictions and deposits
Import/custom duties are taxes added onto price of goods from other countries
so that they become more expensive then local products
This encourages people to buy local goods first
Charged according to value of good or weight and size
Done to raise revenue for state // protect local industry // prevent dumping
Import deposits:
Importers have to deposit a percentage of the value of the goods they want to
import with the South African Revenue Service
Import Quotas:
Reduce quantity of imports so that local production is sold first
Import Restrictions:
Prevent certain goods such as habit forming drugs from entering the country
Effects of Import Substitution:
o During apartheid it was necessary to promote industrial development to provide
products that at a stage weren’t available because of economic sanctions.
Advantages:
o More local businesses established
o Domestic manufacturing expands
o Increase employment
o Greater Variety of business
Disadvantages:
o Protected industries are less able to compete with foreign produced goods // become
inefficient , no incentive to use latest technology
o Protected industries have no idea what it means to compete
o Prices of goods increase i.e. no competition
o Non-protected industries at disadvantage
o Efficient producers can be forced out of the market as they cannot compete with
protected producers
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