international trade and development

international trade and development

1. Trade Strategies

   • Import substitution (producing goods domestically instead of importing)
     • Advantages
       • Protects domestic jobs and can increase domestic employment since foreign firms are prevented from competing so domestic firms dominate
         • Protects the local culture and social habits by isolating the economy from foreign influence
           • Protects the economy from the power and influence of MNCs
     • Disadvantages
       • It may only create jobs in the short run, in the long run economic growth may be lower and this could lead to lack of job creation
         • Country does not have access to comparative advantage and specialization so production may be relatively inefficient
           • no competition could lead to inefficiency and lack of R & D
             • may lead to inflation due to domestic aggregate demand supply constraints
               • may cause other countries to take protectionist measures
     • Necessary conditions
       • government adopted policies of organizing the selection of goods to produce (normally labour intensive, low skill manufactured)
       • Subsidies are made available to encourage domestic industries
       • Protectionist system with tariff barriers to keep out foreign imports
   • Export Promotion
     • increasing exports should lead to an increase in GDP and in turn higher incomes and eventually growth in domestic and export markets
       • Country needs to adopt liberalized trade to open up domestic markets to international competition in order to gain access to foreign markets
         • Liberalised capital flows: reduce restrictions on FDI
           • Floating exchange rate
             • Investment in the provision of infrastructure to enable trade to take place
               • Deregulation and minimal government intervention
     • Disadvantages
     • Advantages

2. Trade Liberalization (removal/ reduction of trade barriers that block the free trade of goods and services between countries- elimination of trade barriers, quotas, export subsidies and administrative legislation

3. Diversification

   • solves the problem of over-specialization or PPD
     • Aims to move away from primary product exportation to the production and export of semi-manufactured products
       • Protects the country from volatile prices, stabilizes and increases export revenue and employment- there will be an increased use of technology and demand for more highly skilled workers
     • Barriers
       • tariff escalation from other developing countries and the need for a highly skilled more qualified work force in order to produce relatively more sophisticated products

4. Free trade (aims to ensure that producers receive a fair price when they sell their products)

   • minimum price that covers production costs and provides a living income
     • trader must be commited to a long-term contract which in turn gives security to the producer