CHAPTER 9TRADE STRATEGY

PowerPoint byMuhammad Ismail Hossain

TRADE STRATEGY

Trade strategy refers to the system of government interference in foreign trade. The nature of government interference or trade policy has very broad implications----- impact on the volume and composition of export and import-- pattern of investment and direction of development-- competitive conditions, cost conditions-- entrepreneurial and business attitudes-- consumption patterns

TRADE STRATEGY

The choice of trade strategy is one of the most important economic policy decisions a developing country has to make due to its wider implications.

The trade policy is only one of the elements of the macroeconomic policy mix where all the elements of the mix should be mutually supportive for the development strategy to be successful.

TRADE STRATEGY: OUTWARD & INWARD 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, not between purchase of domestic goods and foreign goods.

It is an open policy where neutrality is its essence.

TRADE STRATEGY: OUTWARD & INWARD ORIENTED STRATEGIES

An inward oriented or inward looking strategy is characterized by a bias of trade and industrial policies in favor 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’.

An inward oriented strategy discourages export in the following ways:

TRADE STRATEGY: OUTWARD & INWARD ORIENTED STRATEGIES

a. The cost of some exportables increases because of the high cost of imported items used in exportables.

b. Cost of exportables increases also because of the general rise in prices in the economy due to protection.

c. The ‘lucrativeness’ of the protected domestic market discourages exports.

d. The sellers market that emerges from protection often results in the neglect of cost and quality.

e. The emphasis on import substitution may lead to the relative neglect of industries with export potential.

TRADE STRATEGYExtent of Strategy Orientation

strongly outward oriented

moderately outward oriented

moderately inward oriented

strongly inward oriented

TRADE STRATEGYIndicators of Trade Strategy

Effective rate of protection

Use of direct controls

use of export incentives

degree of exchange rate overevaluation

TRADE STRATEGYPolicy InstrumentsThe inward oriented strategy is implemented by means of several policy instruments like

- commercial policy- industrial policy-foreign exchange policy-fiscal and monetary policy

The outward orientation in contrast with inward orientation is an open strategy. It links the domestic economy to the world economy.

TRADE STRATEGYEvaluation of Inward OrientationMeritsa.Conservation and socially justifiable use of the scarce foreign exchange resources.b.Import regulation was usually necessary to support the resource allocation strategy of a developing country, particularly in the early stages of development.c.Protection of infant industries.d.Efficient import substitution could help foster industrialization and economic development.

TRADE STRATEGY

Evaluation of Inward OrientationDemeritsa.Due to its inherent bias against exports, it has some adverse effects on exports as pointed earlier.b.It generally breeds high cost, inefficiency, neglect of quality and customer service.c.Negligence in regards to competition deters the country to have world class local MNE’s.

TRADE STRATEGYEvaluation of Outward OrientationMeritsa.It encourages competition and innovation, and thereby promotes economic efficiency.b.Permits countries to take better advantage of the technological opportunities available to them.c.Prevents a country ‘from making some of the costly mistakes often associated with inner oriented, restrictive, trade and industrialization strategies’.d.Better economic performance by the private sector.e.The industry provides more jobs in the outward oriented economies than inward oriented economies.

TRADE STRATEGYPrerequisites for an Open/Outward Orientationa. The government policy cannot be half hearted.b. There must be a clear cut communication from the government side that it is undertaking an export oriented strategy.c. A realistic exchange rate.d. Removal of quantitative restrictions.e. Exporters should have ready access to the international market.f. Good communications and transport infrastructure.d. Functioning of labor market in response to market forces.e. Early identification of the industries having high success potential.

TRADE STRATEGYLessons of Trade Liberalization

a.Trade liberalization must involve large shifts of resources, but it has not always raised unemployment by as much as it commonly supposed.b.Strong and decisive reforms have carried greater credibility and have been better sustained than more timid reforms.c. replacing QR with tariffs is a useful first stage of trade liberalization.d. providing a realistic exchange rate is vital.e.The scope for successful trade liberalization depends on complementary reforms in the domestic economy– especially in financial and labor markets.

ARGUMENTS FOR FREE TRADE

a.Free trade leads to the most economic utilization of the productive resources of the world.b.Under free trade, division of labor occurs on international scale leading to greater specialization, efficiency and economy in production.c.As there will be intense competition under free trade, the inefficient producers are compelled either to improve their efficiency or to quit.d. free trade helps to break domestic monopolies and free the consumers from exploitation.e.Free trade benefits the consumer in different ways. i.e. cheaper products, greater varieties.f.Less scope for corruption.

ARGUMENTS FOR PROTECTIONInfant Industry

DiversificationImproving the terms of tradeImproving Balance of Payment

Anti-DumpingBargainingEmployment

National DefenseKey IndustryKeeping money at home

The Pauper LaborSize of the home market

Equalization of costs of production

DEMERITS OF PROTECTION

a. It is against the interest of consumers as it increases price and reduces variety and choice.

b. It makes producers and sellers less quality conscious.

c. It encourages domestic monopolies.d. Even inefficient firms may feel secure under

protection and it discourages innovation.e. Protection leaves the arena to corruption.f. It reduces the volume of foreign trade.g. It leads to uneconomic utilization of world’s

resources.