Trade policies refer to the processes and procedure that monitor the movement of

trade in and out of the country. They have been the crucial deciding factor for any

countries success as they can make or break the economy. Moreover they significantly

impact the major economic indicators of the economy such as GDP, inflation,

employment etc.

There are two ways in which countries can strengthen their industries and progress to

industrialization.

 Inward looking trade policies

 Out ward looking trade policies

Both these policies are used to gain economic growth and industrialization however

they are very different in their essence. The policy maker and the economist have to

view various factors and decide which policy would best fit their own economy.

INWARD LOOKING POLICIES:

Inward looking trade policies focuses on building and developing domestic industries. The

government is interested in protecting and helping the infant industries grow and become

competitive in the world market by gaining comparative advantage. This can be achieved

when the opportunity cost of producing that good is lower than other countries. This is

achieved through high trade barriers and high tariffs on imported goods. There is low level of

foreign direct investment into the country

They provide subsidies to domestic firms and try to build on economies of scale in order to

lower their cost of production. This makes the country more competitive when the

government decides to lower protectionism and enter foreign markets.

ADVANTAGES OF INWARD LOOKING POLICIES:

PROTECTION OF INFANT INDUSTRIES:

Inward policies uses import substitution to protect inf

SHEILDS ECONOMY FROM EXTERNAL SHOCKS:

It acts as a buffer and shields the economy from external forces. Hence the country is less

volatile towards outside recessions and booms, resulting in stable and sustainable growth.

REDUCES BALANCE OF PAYMENT DEFICIT:

The inward policies increase tariffs and quotas restricting imports or making it more

expensive for people to buy. Hence they rely more on locally produced goods rather than

foreign goods.

BUILDS A BASE FOR FUTURE:

Barriers will stay as they are until local firms are able to compete in terms of size & have

acquired the know-how techniques to be productively efficient.

DISADVATAGES OF INWARD LOOKING POLICIES

INEFFICIENT RESOURCE ALLOCATION:

The inward policies lead to inefficient resource allocation which results in welfare loss within

the economy. This is because the goods and services available in the world market are

cheaper still the people are forced to buy them at a higher price from the domestic market or

bare the cost of tariffs imposed.

OPPORUTUNITY COST OF SUBSIDIES:

The resource utilized in providing subsidies to the domestic firm has high opportunity costs.

These resources could’ve been used elsewhere such as in infrastructure, education, health

care or to improve the standards of living.

LOW LEVEL OF FOREIGN DIRECT INVESTMENT

Low level of FDI means slower transfer of technology and knowledge which restricts growth

within the country. Moreover there isles accumulation of capital stock which leads to slower

economic growth.

CAPITAL COST:

The cost of importing capital machinery is higher due to increased tariffs and quotas in form

of protectionism. This may also result in worsening the BOP deficit rather than improving it.
OUTWARDLOOKING TRADE POLICY
These are the opposite of inward trade policies. Countries that implement it focus on

international trade, reducing protection, lifting subsidies and increasing FDI. Singapore,

Taiwan and Hong Kong are successful examples of implementations of outward policies. They

adopted it because of the limited scope from the small domestic market. They focus on

exporting more goods and services in which they have a comparative advantage and hence

more profits can be made. It focuses on export promotion and developing its competitiveness

in the international market.

ADVANTAGES OF OUTWARD LOOKING POLICIES:

Create employment:

Many of these factories are located in urban areas & they are labor-intensive. It provides

great employment opportunity to not only people in town but also to rural migrants. They can

develop their small scale industry and export their products in the foreign markets.

Also it reduces the level of absolute poverty Influence

Aggregate Demand:

An export-oriented economy will expect an increase in its exports over imports, thus creating

net exports. As now the country will be catering to domestic as well as international market

the aggregate demand will l increase

Financing capital goods:

An increase in exports over imports can improve its terms of trade. Terms of trade means

ratio of export prices to import prices. The country need to export lesser to finance the same

amount of imported goods e.g. machineries.

Exploit Economies of Scale:

Since local manufacturers are producing on a large scale to world market, it is able to

significantly exploit EOS. This will give the developing countries an advantage

on top of its cheap labor. It will be able to compete easily at international scale with its cost

competitiveness. Ex:China

Learn from rivals:

By competing with multinational companies, local firms will be able to improve its

competitiveness. There will be more efforts put into R&D.

DISADVATAGES OF OUTWARD LOOKING POLICIES

Environmental degradation:

Developing countries are often accused by Western economies as the major contributors to

global warming, especially China. Rich Western economies have already reached

the desired level of income. As such living in a cleaner environment is now their priority.

Meanwhile, for poor but booming countries they have to sacrifice environment at the expense

of economic growth & development. Besides, industrialists in developing economies are not

that well educated. As such their level of environmental awareness is very low

Fall in export prices.

This is assuming if all developing countries are trying to export their way out simultaneously.

Due to flooding of manufactured goods into the world market, its prices will be forced to

plunge, putting exporters in disadvantage

No protection against economic shocks

Export-led growth is not without its problems too. Its level of success depends a lot on the

pace of economic growth in rich Western countries. If U S is hit by a recession, then third

world countries could be the worst affected. Level of exports will slump. Unemployment will

escalate & the demultiplier effect will feed into the whole system.

Rich countries erect protectionism.

It’s unlikely that Western manufacturers are able to compete with low cost Asian economies.

Manufacturing sector is labor intensive and labor form a large portion of total costs. It’s one

of the major arguments as to why major Western economies are shifting their comparative

advantage to services sector. Others which still have manufacturing industry as their core

economic activity began to erect unfair protectionism