MANM013 International Trade Essay Sample

MANM013 International Trade

Rationale:

This module provides students with both a theoretical and practical understanding of International Trade. This is done through the assessment of International Trade from different angles, predominantly from the state’s perspective, the international trade regime perspective (the GATT and WTO) as well as from the perspectives of regional cooperation and of business and industry.

Scope:

This coursework (CW) is an individual assignment weighted at 50% of the module mark. The 2000-word (+/-10%) CW should be structured in the form of a report to include a cover page, introduction, critical analysis, conclusions, recommendations, references, and appendices if appropriate. The cover sheet, references, and appendices do not count towards the word-limit.

This report will assess the following intended module aims:

• To provide an understanding of the theoretical foundations of international trade.

• To provide a practical overview of the most important issues in international trade, partly through highlighting those in previous trading regimes, but predominantly through featuring the current international trading regime.

• To enable students to identify the main actors in contemporary international trade issues and assess their interaction and the consequences of such interactions for the world economy.

• To feature the interests of and national dynamics involving politics and business in order to enable students to critically assess various aspects of international trade.

Assessment Question

In the light of past experiences and prospective judgement, should developing countries adopt an import substitution industrialisation growth and development policy, an export-led growth policy, or should they pursue some combination of both? What are the arguments for and against these alternative trade strategies for economic development?

You should be critical in your synthesis of the literature and support your arguments with examples wherever necessary.

Solution

1. Introduction

This report aims to evaluate the trade strategies of import substitution industrialisation (ISI), export-led growth (ELG) and their combination for economic advancement in evolving countries. This report will assess the arguments for and against each strategy based on past experiences and judgements. As per the MBA Assignment Expert, This report will identify the theoretical basics of international trade with a realistic view of the essential issues in international trade by emphasising former trading regimes with current international trading regimes. This report will help in identifying the key actors in modern international trade and their interactions and assess the effects of these connections on the world economy. Additionally, it will include the interests of and national subtleties connecting politics and business in order to enable an important assessment of various aspects of international trade. This report will provide an informed and balanced understanding of everything associated with the strategies.

2. Import Substitution Industrialisation (ISI) Strategy

2.1 Arguments for ISI

Arguments for ISI Importing Replacement industrialisation (ISI) is an approach to trade designed to promote the growth of economies in underdeveloped countries through decreasing dependability on imported commodities while promoting the growing number of native manufacturing industries.
Advocates of ISI put forth several arguments in favour of this approach:

Encouraging Homegrown Enterprises: The ISI attempts to expand and fortify homegrown businesses, which may bring about a number of positive effects (Fishwick, 2019). Underdeveloped countries may boost their manufacturing capabilities, generate jobs, and minimise their dependence on importation by facilitating the development of sectors like manufacturing, farming, and service industries. Thus, economic expansion and eradication of impoverishment could be achieved.

Industrial multiculturalism: ISI can promote industrial variety by promoting the expansion of numerous industries within the national marketplace. Nations can lessen their sensitivity to outside forces, such as fluctuations in the price of commodities, by supporting an array of businesses. Diversification makes A more equitable and durable economy less reliant on just one industry possible.

Technological Advancement: ISI offers underdeveloped countries opportunities to gain and advance technological capacity (SIDDIQUI, 2021). Countries can foster creativity, facilitate technology transfer, and modernise their manufacturing systems by investing in local manufacturing sectors. The continuing technological development has the potential to boost efficiency, boost competition, and encourage the expansion of greater added-worth businesses.

Mexico, Brazil, and the Republic of Korea represent three instances of nations that efficiently applied ISI at various stages of their economic growth. As an outcome of ISI policies, many nations had tremendous industrial development, technological advancements, and economic variety.

2.2 Arguments against ISI

These factors draw attention to possible issues that may arise with ISI:

Lack of Competitiveness and Inefficiencies: Critics contend that regulations implemented by ISI may cause inefficiency in regional sectors and a lack of competence (Cruz, Gahn and Morlin, 2022). Defensive policies, like excessive tariffs and grants, can impede development and hinder competitiveness because they might discourage local businesses from enhancing both performance and quality. The result may lead to increased manufacturing expenses, reduced efficiency, and decreased ability to compete in overseas markets.

Limited Accessibility to International Markets: Through emphasising substitution for imports, nations may encounter obstacles to achieving global markets for the goods and services they produce. Trade obstacles and stringent rules reduce prospects for economic development and hamper trade. This exclusion from worldwide markets can eventually result in lost chances for innovation in technology, sharing of information, and small-scale economies.

Dependence on Governmental Involvement: ISI strategies frequently necessitate heavy-handed government interference, such as the implementation of restrictive legislation, financial assistance, and centralised management (Gomes and Pinho, 2019). This reliance on the authorities so heavily can result in mismanagement of resources, fraud, and unproductive bureaucracy. Furthermore, government agencies may not be able to adequately supervise and coordinate growth in the industry throughout fields, which might lead to less-than-ideal results.

Latin American nations who had encountered an economic downturn in the course of the 1980s are a few instances of nations that struggled with ISI. Stagnation in the economy and economic distress in these economies were caused by severe safeguarding, ineffectiveness, and restricted utilisation of international markets.

3. Export-Led Growth (ELG) Strategy

3.1 Arguments for ELG

The growth driven by exports (ELG) conduct strongly emphasises fostering the growth of shipments as a significant factor in the success of economies in emerging nations. ELG supporters offer the following justifications for their position:

Exposure to Bigger Marketplaces: Export-focused businesses give emerging nations a foothold in bigger global marketplaces (Dhiman and Srivastava, 2021). Nations can increase the number of customers outside of their national physical boundaries by focusing on global demand. Accessibility to broader marketplaces offers an opportunity to boost revenue, achieve advantages of size, and have long-term economic expansion.

Economic Diversity: ELG encourages nations to create a variety of sectors focused on exports in order to broaden their financial systems. This variety lessens reliance on just one industry, decreasing sensitivity to external forces and shifts in commodity costs. By broadening their trade bases, nations can reduce hazards while establishing a more durable and diversified economy.

Technical Upgrading: For success on a worldwide scale, export-driven firms frequently need better levels of technical ability and merchandise quality (Odhiambo, 2022). As businesses strive to satisfy the demands of global markets, adopting an ELG approach may spur technical advancement. In the long term, this could result in the exchange of technology and expertise, thereby boosting local technological abilities and production.

East Asian economies like the Republic of Korea, Taiwan, and the nation of Singapore are exemplary nations that have effectively followed ELG. Those nations achieved significant prosperity by concentrating on export-driven businesses, utilising their unique selling points, and luring foreign capital.

3.2 Arguments against ELG

These arguments describe potential issues and difficulties with ELG:

Vulnerability to Global Market Volatility: ELG makes nations incredibly reliant on the state of the world economy, which makes them prone to outside shocks and changes (Tofu, Woldeamanuel and Haile, 2022). Fluctuations in global demand, economic crises, or changes in trade policies can impact export-oriented economies. Economic instability, job losses, and lowered growth expectations can all be caused by this susceptibility.

Limited Economic Diversification: Economic diversification could be challenged by dependence on export-oriented businesses. Countries can disregard the growth of other sectors in favour of only those with a competitive advantage for exports. This concentration can result in an unstable economy that is more vulnerable to risks specific to certain industries and has fewer prospects for inclusive and sustainable growth.

Neglected Domestic Markets: The development of home markets can suffer if there is an increased focus on exports. Infrastructure, healthcare, education, and other important sectors for domestic welfare can suffer from insufficient funding if regional markets are ignored. Avoiding the local marketplace can worsen social injustices and limit the economy's growth overall.

Terms of Trade Challenges: Countries that are dependent on export can face challenges in upholding positive terms of trade (Fu, McMahon and Xue, 2020). The changes in commodity prices or growing competition in foreign markets can decrease export prices and negatively impact export revenues. This can impact the ability of the country to support its development projects and accomplish economic growth.

The Asian Financial Crisis in the late 1990s, which demonstrated the weakness of export-oriented economies and dependent on consumer demand, is one example of a challenge faced by nations pursuing ELG.

4. Combination of ISI and ELG

A thoughtful approach to economic growth can be obtained by combining import substitution industrialisation (ISI) and export-led growth (ELG) strategies. The two strategies support one another by solving some of their individual flaws, which produces a more thorough and lasting approach to economic growth. 

4.1 Arguments for a Combination

Here are some arguments for the combination of ISI and ELG: 

Diversification of the Economy: By combining the focus on local manufacturing for the replacement of imported goods and exports, ISI and ELG together can help in encouraging economic diversity (Bozatli, Bal and Albayrak, 2022). This strategy can help a country grow stronger and more resilient so that it can handle sudden events. By combining the two strategies, nations can encourage local production for import and export while increasing exports to produce foreign exchange.

Promotion of Competitiveness: The development of competition can be helped by the combination of both strategies. ELG focuses on improving export competitiveness, while ISI focuses on encouraging home manufacturing and reducing import dependency. Combining the two approaches can help raise domestic and export production's competitiveness, boosting the economy's efficiency and output.

Technology Transfer: Combining ISI with ELG may help the transfer of technology. ELG can offer an environment for advanced technologies, but ISI can encourage technological progress. Combining the two strategies can lead to more welcoming technical transfer and advancement surroundings.

China, India, and South Korea are a few instances of countries that have effectively merged ISI and ELG. These nations achieved impressive economic growth due to a balanced strategy that supports both the domestic and export sectors.

4.2 Arguments against a Combination

These justifications show potential difficulties and inconsistencies that can result from attempting to employ both methodologies at once:

Conflicting Objectives: The objectives of ISI and ELG are essentially different. While ELG places emphasis on export-oriented growth, ISI attempts to lessen dependency on imports and support domestic industry (Duru and Siyan, 2019). Combining the two approaches may result in aims that are incompatible since the promotion of the home industry may call for protectionist measures that go against the objective of export competitiveness.

Resource Allocation: Using both tactics simultaneously can put pressure on limited resources. The combined support of home industries and the promotion of exports can result in ineffective use of resources. It becomes difficult to divide up resources between the export and import replacement sectors, which could lead to decreased ideal results for both.

Trade-Offs in Policy Implementation: Policymakers must carefully balance openness and protectionism to combine ISI with ELG. Finding the correct balance can be difficult, though, as export competitiveness can be hampered by protectionist measures meant to assist domestic sectors and vice versa. Finding the correct balance in a connected and globalised society grows quite difficult.

Although many countries have tried combining ISI and ELG, it is important to note that the effectiveness of such a strategy can be context-specific and depends upon a number of factors, including institutional capability, economic circumstances, and the will of the government.

5. Conclusion

In conclusion, this report discussed the trade strategies of import substitution industrialisation (ISI) and export-led growth (ELG) and their combination for economic improvement in evolving countries. A thorough analysis of the arguments for and against each strategy is discussed, with their benefits and limitations. A trade-barrier-supporting economic theory is import substitution industrialisation. In an effort to replace finished imported items, local goods are being used instead. The effective export of products and services from one country to another is what is known as "export-led growth," in which a sizable portion of the growth of the real GDP, employment, and per capita incomes results. A combination of ISI and ELG represents a balanced approach that makes use of the benefits of both strategies. Overall, this report offers an important summary of the research to assist developing nations in selecting trade strategies that will guarantee equitable and long-lasting growth in the economy in the larger context.

6. Recommendations

Based on the analysis of both import substitution industrialisation and export-led growth, the following recommendations are discussed: 

Develop a Tailored Approach: The best trade strategy should be chosen after careful consideration of the particular circumstances of each nation, including organisational strength, market circumstances, and political will. It is ineffective to take an approach that fits all.

Enhance Domestic Capabilities: Investing in local abilities, like educational facilities, infrastructure, and technological advances, are essential based on the strategy used. This will increase the abilities of local industries to remain competitive overseas and support overall growth in the economy.

Promote Diversification: Countries should work towards economic diversification, which will help in reducing the dependency on a small number of sectors. This can be done by helping both import and export-oriented businesses, supporting innovation and increasing entrepreneurship. 

References

Bozatli, O., Bal, H. and Albayrak, M., 2022. Testing the export-led growth hypothesis in Turkey: New evidence from time and frequency domain causality approaches. The Journal of International Trade & Economic Development, pp.1-19. Accessed from: https://www.tandfonline.com/doi/abs/10.1080/09638199.2022.2144932

Cruz, M.M., Gahn, S.J. and Morlin, G.S., 2022. State-owned and multinational enterprises partnership as an import substitution strategy: A narrative ARDL approach to the case of oil contracts in Argentina (1958–1962). Structural Change and Economic Dynamics, 63, pp.213-223. Accessed from: https://www.sciencedirect.com/science/article/abs/pii/S0954349X22001151

Dhiman, R. and Srivastava, V., 2021. Developing a conceptual framework for determinants of export competitiveness in Emerging Markets. In Doing Business in Emerging Markets (pp. 31-53). Routledge India. Accessed from: https://www.taylorfrancis.com/chapters/edit/10.4324/9781003199168-3/developing-conceptual-framework-determinants-export-competitiveness-emerging-markets-rahul-dhiman-vimal-srivastava

Duru, I.U. and Siyan, P., 2019. Empirical Investigation of Exports and Economic Growth: Evidence from Sane Countries, 1980-2016. Asian Development Policy Review, 7(4), pp.318-354. Accessed from: https://www.researchgate.net/profile/Uchechukwu-Duru/publication/349466005_Empirical_Investigation_of_Exports_and_Economic_Growth_Evidence_from_SANE_Countries_1980-2016_InnocentUDuru_1/links/60829071881fa114b41fb315/Empirical-Investigation-of-Exports-and-Economic-Growth-Evidence-from-SANE-Countries-1980-2016-InnocentUDuru-1.pdf

Fishwick, A., 2019. Labour control and developmental state theory: A new perspective on import‐substitution industrialisation in Latin America. Development and Change, 50(3), pp.655-678. Accessed from: https://onlinelibrary.wiley.com/doi/full/10.1111/dech.12407

Fu, J., McMahon, J.A. and Xue, H., 2020. More Restriction or Facilitation on PPE amid COVID-19: Limitations and Options of International Trade Law. Policy Hackathon on Model Provisions for Trade in Times of Crisis and Pandemic in Regional and Other Trade Agreements. Accessed from: https://www.unescap.org/sites/default/files/46%20Final%20Team%20Jiangyuan%20Fu-Hong%20Kong_0.pdf

Liu, M.H., Margaritis, D. and Zhang, Y., 2019. The global financial crisis and the export-led economic growth in China. The Chinese Economy, 52(3), pp.232-248. Accessed from: https://www.tandfonline.com/doi/abs/10.1080/10971475.2018.1548144

Nitsche, B., 2021. Embracing the Potentials of Intermodal Transport in Ethiopia: Strategies to Facilitate Export-Led Growth. Sustainability, 13(4), p.2208. Accessed from: https://www.mdpi.com/2071-1050/13/4/2208

Odhiambo, N.M., 2022. Is the export-led growth hypothesis still valid for sub-Saharan African countries? New evidence from panel data analysis. European Journal of Management and Business Economics, 31(1), pp.77-93. Accessed from: https://www.emerald.com/insight/content/doi/10.1108/EJMBE-06-2020-0156/full/html