Quiz 11: Trade Policy in Developing Countries

Business

International trade i.e. the free movement of goods and services among various countries has flourished over the years due to the benefits it bestows upon the different countries of the world. It accounts for good part of a country's gross domestic product. More recently, international trade has helped developing countries to become centers of economic growth and to make trade an important source of funds. A small but influential group of developing countries like Indonesia, Hong Kong, Taiwan, South Korea, and many others are emerging among the biggest world traders. Though there is a great diversity among these developing countries, they have some policies in common. They include: • Development of domestic manufacturing industries, • Desire to foster economic growth and • Improve living standards. As a key goal of economic development, many developing countries plan to protect and develop the manufacturing sector. The reason behind is the infant industry argument. The infant industry argument states that developing countries have a potential comparative advantage in manufacturing and can realize that potential through an initial period of protection. As a result, many nations have attempted for import substitution. During 1950s and 1960s, this strategy was popular and resulted into a reduction in imports in some countries. However, the overall result was a failure. Thus, the infant industry argument does not hold good all the time, as protection has allowed young industries to survive, but could not make them efficient.

The infant industry argument suggests that an industry is temporarily protected by the government of a nation against the increasing competition from the international competitors or producers. Such a policy was successfully implemented in Japan after World War II. The Japanese example goes against the arguments provided by the people who believe that protectionism is a disaster for an economy. It was widely believed that the key to the once backward Japan was "Protectionism". Japan was an exceptional nation that had emerged into the ranks of advanced nations before World War II, and was recovering from wartime devastation. A host of infant industries, which started from autos and shifted to steel, had the potential to be the world competitors. Without protection, they might have been strangled in their cradles. Indeed, the ripples effects stimulated the other industries as each industry grew. Unfortunately, Japan continued to follow these promotional policies even after achieving the status of development. That is, it gradually shifted from promoting winners to protecting losers. However, it is not demonstrated by the fact of Japanese success that the protectionist trade policy was responsible for their success. It is argued that the economic success would have come anyway. Thus, the apparent success of protection represents a "pseudo-infant-industry" case.

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