International Economics Study Set 8

Business

Quiz 10 :

Trade Policy in Developing Countries

Quiz 10 :

Trade Policy in Developing Countries

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Which countries appear to have benefited the most from international trade During the last few decades? What policies do these countries seem to have in common? Does their experience lend support for the infant industry argument or help to argue against it? 3
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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.

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"Japan's experience makes the infant industry case for protection better than any theory. In the early 1950s, Japan was a poor nation that survived by exporting textiles and toys. The Japanese government protected what at first were inefficient, high-cost steel and automobile industries, and those industries came to dominate world markets." Discuss critically.
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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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A country currently imports automobiles at $8,000 each. Its government believes that, given time, domestic producers could manufacture autos for only $6,000 but that there would be an initial shakedown period during which autos would cost $10,000 to produce domestically. a. Suppose each firm that tries to produce autos must go through the shakedown period of high costs on its own. Under what circumstances would the existence of the initial high costs justify infant industry protection? b. Now suppose, on the contrary, that once one firm has borne the costs of learning to produce autos at $6,000 each, other firms can imitate it and do the same. Explain how this can prevent development of a domestic industry and how infant industry protection can help.
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India and Mexico both followed import-substitution policies after World War II. However, India went much further, producing almost everything for itself, while Mexico continued to rely on imports of capital goods. Why do you think this difference may have emerged?
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What were some of the reasons for the decline in the import-substituting industrialization strategy in favor of a strategy that promotes open trade?
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