Trade Policy: Export Promotion, Import Substitution & Protectionism

30 question-and-answer flashcards covering definitions, reasons, methods, advantages, and disadvantages of export promotion, import substitution, and protectionist policies as discussed in the lecture notes.

What is the main idea behind export promotion?

Government actively encourages and incentivises producers to sell goods and services in international markets.

State two key reasons governments pursue export-led economic growth.

1) To enlarge a country’s production capacity by accessing larger world markets. 2) To improve its balance of payments through higher export earnings.

How does larger export market size affect domestic prices?

Large‐scale production for export allows economies of scale, which can reduce unit costs and therefore lower prices.

Name three non-financial export incentives governments can offer.

Information about new markets, concessions on transport costs, and reduced regulatory barriers in export processing zones.

Give two examples of direct or indirect export subsidies.

Government grants that lower production costs, and tax rebates/exemptions that raise exporters’ after-tax profits.

What is meant by 'trade neutrality' in export promotion?

Creating special export processing zones where inputs and outputs move freely without standard tariffs or quotas.

List four advantages of an export-promotion strategy.

1) No size limits – firms can scale for global demand. 2) Production based on comparative advantage boosts efficiency. 3) Backward linkages stimulate other sectors. 4) Realistic, market-determined exchange rates.

How can export promotion improve employment?

By expanding production for foreign markets, firms hire more workers, creating new jobs domestically.

Identify three disadvantages of export promotion.

1) Conceals the real cost of production behind subsidies. 2) May provoke retaliation or anti-dumping charges. 3) Withdrawal of incentives can cause firm closures.

Why might export promotion hinder competition?

Protected exporters may rely on subsidies rather than efficiency, reducing pressure to innovate or cut costs.

Define import substitution.

A set of policies that encourage domestic production of goods that would otherwise be imported.

Mention three reasons developing countries adopt import substitution.

1) Diversify the economy beyond primary products. 2) Create jobs and industrialise. 3) Correct balance-of-payments deficits by cutting imports.

How do tariffs function in import substitution?

They raise the domestic price of imported goods, making local alternatives more competitive.

What is the role of quotas in import substitution?

They set a physical limit on the quantity of a good that can be imported, protecting local producers.

Give two non-tariff methods used to foster import substitution.

Exchange controls restricting foreign currency for imports, and physical controls such as outright import bans.

Differentiate between voluntary and forced import substitution.

Voluntary: consumers or firms choose local goods. Forced: government policies exclude foreign suppliers from the domestic market.

List four advantages claimed for import substitution.

1) Job creation spurs economic growth. 2) Greater product variety and diversification. 3) Positive impact on the trade balance. 4) Easy implementation via tariffs and quotas.

How can import substitution improve foreign-exchange availability?

By reducing spending on imports, the country saves foreign currency for essential items like capital goods.

Identify five disadvantages of import substitution.

1) Draws capital and talent away from sectors of true comparative advantage. 2) May use outdated or borrowed technology. 3) Reduces competitiveness and invites further protection demands. 4) Can keep exchange rates overvalued. 5) Domestic consumers face higher prices and limited quality.

Why can import-substitution projects become costly and uneconomical?

Lack of competition encourages inefficiency and the pursuit of prestige projects that fail to achieve scale economies.

Explain the revenue argument for protectionism.

Import duties provide a significant portion of government revenue in economies with narrow domestic tax bases.

What is dumping, and how does protectionism address it?

Dumping is selling exports below home-market cost, often due to subsidies. Protective tariffs or antidumping duties shield domestic firms from such unfair competition.

Describe the infant-industry argument.

New industries need temporary protection until they achieve economies of scale and can compete internationally.

Why might declining industries be protected?

To allow time for labour and capital to transition to growing sectors, cushioning social and economic disruption.

How can protectionism safeguard employment?

By limiting imports, domestic demand shifts to local producers, sustaining or creating jobs.

What is meant by ‘effective protection’ in labour-intensive industries?

Tailored tariffs or quotas that specifically shield sectors employing large numbers of workers, preserving livelihoods.

Give one criticism of protectionism linked to consumer welfare.

Consumers often face higher prices and fewer choices when imports are restricted.

How can over-protection distort exchange rates?

Sustained import barriers may lead policymakers to keep the currency overvalued to make imported capital goods cheaper for favoured industries.

State a long-term risk of maintaining subsidies for exporters.

Firms become dependent on government support and may collapse when subsidies are removed.

Summarise the core difference between export promotion and import substitution strategies.

Export promotion focuses on selling domestically produced goods abroad to expand markets, whereas import substitution focuses on replacing foreign goods with domestic production to reduce imports.