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A discussion on Import Substitution Strategy and Export-led Growth Strategy

Introduction
Since the economic reform in China, based on the comparative advantage theory, the factor endowment theory, product life cycle theory in international trade and rapid development of “four Asian tigers” using export-oriented economy, China has implemented the export-led growth strategy, and spared no effort to carry out foreign trade policies for foreign exchange. Although such foreign trade policy has greatly developed the Chinese economy, there are also some shortages and applicable scope in this strategy. China should, based on the domestic requirement, reduce the dependence on foreign trade and implement foreign trade policy with both the import substitution and export orientation.

Detailed analysis on export led growth strategy
Export-led growth strategy is sometimes called “export substitution strategy”, and its core idea is leading the country’s industrial production to face the world market, and using the export of manufactured products to substitute the export of primary products. This strategy is based on the theory of comparative advantage – by extending the export of products with comparative advantage, the country could improve resources allocation within the country, get more profit from international trade and help to develop the economy. The advantages of this kind of economic development model, putting the country’s products into the international competition, are undoubtedly obvious. Most of the countries using this development model obtained a rapid economic growth, which proves that the view that only import substitution can lead to the development of traditional industries is totally wrong.

Actually, the advantages of an export-led growth strategy are accepted by most people: in an underdeveloped economy with insufficient capital and technology and narrow markets, most people work in agriculture. Choosing export-led growth strategy can help the country to utilise foreign resources which will connect the country’s absolute advantage—the labour resources to produce the products with comparative advantages in foreign markets (Krugman, 2008); it also helps the country to develop its comparative advantages, improve its industrial structure and get the benefit of scale economy. Also, through international trade, people in the country will get more economic welfare to improve their life conditions; what is more, after the extension of external markets, the country can promote the related industries and departments, which can solve the problem of surplus products and unused resources. However, there are also some disadvantages and applicable scope in the export-led growth strategy. (Yiwen Li. 2007)

First of all, export-led growth strategy is different in large countries than it is in smaller countries. Basically, small countries, as they have small area, small population and small markets, can get larger scale economy profit by using export orientated strategy. Besides, the amount of the unemployed labour force, the surplus products and unused resources in small countries is comparatively small than large countries, they only need to realise a small export scale to solve these problems. However, in large countries, their domestic markets can help any kinds of products to reach the requirement of scale economy. Countries such as the USA and China can ensure their domestic supply meets the domestic demand and don’t need to be so reliant on foreign markets’ demand. Furthermore, the number of unemployed people and surplus products is huge in large countries, and a large increase in export cannot solve these problems.

Secondly, if the development of economy relies on a large amount of export, it may increase the dependence of the economy on to foreign markets, and lose the control of the economic development. Regardless of whether they are developed countries or developing countries, in economic development, if they keep considering export as the motivity of economic development, it will eventually reduce or even lose the self-development ability of the economy. This kind of risk is obvious, especially for developing countries. Firstly, the level of international trade in developing countries is based on the level of economy development, which means a developing country cannot have a high level of export as this will surely reduce the profit from comparative advantages. Secondly, developing countries are treated unequally in the international political and economic system, and the unequal trade position gives them a small profit. The deteriorated terms of trade forced some countries into the trap in international trade. Third, in export-led growth strategy, it is normal that many multinationals intervene in developing countries’ export substation, thus it is also easy for these companies to control the ownership, sales and management of the products in developing countries. This is bad for the development and growth of strategic industries in developing countries and may harm the economic security in these countries.

Thirdly, the function of export-led growth strategy is restricted by the development of markets. There are some special historical backgrounds to the success of export-led growth strategy in some Asian countries. In some countries, its export orientation is based on the demand in foreign markets, especially the markets in developed countries. In the 1970s and 1980s, most of the developed countries were adjusting their industrial structure, and after this upgrading process, some traditional industries left the market. At that moment, implementing the export-led growth strategy, putting the traditional industries into developed markets can fill the shortage of traditional products in those markets. Furthermore, before the 1980s, only a few countries implemented the export-led growth strategy, which means the market of traditional industries isn’t saturated, thus, compared with the countries not using this strategy, those few countries can easily get profit from the unsaturated traditional products markets. After the 1990s, more and more countries began to implement the export-oriented strategy, and so those countries have to compete not only with the high-productivity rivals in developed countries but also with other developing countries, which means the export decline is certain.

Lastly, the export-oriented development model, to some extent, may strengthen the characteristic of dualisation in developing economies. Export-led growth strategy can change the export countries’ regional economic structure. One of the reasons that developing countries use export-oriented strategy is for correcting and eliminating the “dual structure” in the developing economy by mechanism in international markets. However, if this strategy leads to an enlargement of the regional economic differences and unequal distribution, it will strengthen this dualisation. For large developing countries, as they all have large areas and populations, when implemented export-oriented strategy, because the total profit is smaller than the small countries, they may strengthen their dualisation. The reason is evident, international trade may only happen directly in some developed areas and may be hard to spread all over the country. Developed areas can obtain more profit from the trade while the poor areas only benefit a little.

The detailed analysis on import substitution strategy
Import substitution strategy means  developing the production of some industrial products, developing countries can substitute these products from import. This strategy is consistent with the strategies of protecting some strategic industries and realising the industrialisation in developing countries (Chunling Yang. 2003), it helps those countries to change the over-reliance to the foreign market, promote the domestic demand, improve the structure and conditions of international trade and help to upgrade the industrial structure in developing countries.

Firstly, import substitution strategy helps to motivate the domestic demand. Basically, consumption demand, investment demand and foreign demand are considered the most important factors in economic development, and the percentage of domestic demand should be more than 75%. One of the characters of import substitution strategy is , through country’s work and protection, to utilise the national resources to produce the industrial products whose demand is large in that country. After using such strategy, large scale production and investment will start. Once the successful substitution is realised, the large demand to foreign market will change to the same large demand of the same products in the domestic market. This is important to exploit the domestic market and motivate domestic consumption.

Secondly, import substitution strategy will create the necessary conditions to develop the strategic industries and achieve industrialisation. From the vertical trade relationship between developed and developing countries, it requires developing countries to improve its import-export structure, which should start from developing the inferior industry departments to substituting the import of industrial products. Thus, by import substitution strategy, the countries can learn and cultivate lots of technical and management people continuously, promote the diversification and modernisation of the domestic industries and realise the autarky. Meanwhile, the countries can reduce the payout of foreign exchange and accumulate the capital for domestic construction and develop the strategic industries.

Thirdly, import substitution strategy will also improve the country’s international trade. By import substitution strategy, the countries can provide a stable domestic market for those trying to participate in international competition. With the domestic companies’ growth, its products will have more powerful international competitiveness. Because the different domestic demand is one of the reasons to international trade, the country will export the products whose demand is large in domestic market, while such products are also the object of import substitution. The companies are sensitive to the domestic market and domestic consumers, so when the domestic consumers require the companies to improve their products, the companies have to be continuously innovative and creative, then those products will become more competitive in international markets.

According to the above analysis, we can say that import substitution strategy is the key factor in developing countries’ development. In economic globalisation, many people think that free trade with lower-tariff and non-tariff trade barriers can motivate the economic increase, because international trade brings in not only the capital and technology but also the competition, which will help the domestic companies to increase the competition. However, from the successful experience in economic development, two experiences are important (Chunling Yang. 2003): one being the essential factors necessary to stimulate economy, such as the high investment, stable macro-economy; the other is the correct economic policies.

The trade strategy in China
Since 1979, the large amount of export has greatly improved China’s economy, however, the negative aspect of this export-oriented strategy also emerged gradually in recent years.

China’s degree of dependence on foreign trade was higher than 30% in the 1990s (Xuebei Jin, Genyan Zhou. 2000). The economy development is highly influenced by a fluctuation in international markets, because of the trade protection in other countries, some industries and products are restricted in international markets.

Export-led growth strategy strengthens the dualisation in China. In the southern part of China, due to the advanced technologies, high education and high qualified labour force, the economy is flourishing, while in the middle and western parts of China, the huge export and import doesn’t bring in huge improvement. The difference between the south and west of China has enlarged in the past 30 years. ( Ruilong Yang, Xiushan Chen, Yu Zhang. 1999)

After the Asian financial crisis in 1997, China took lots of measures to enlarge the domestic demand, which is the reason that China successfully overcame the crisis both in 1997 and 2007. Thus, from the long-term view, China should be based on the domestic demand, utilising import substitution as the main development strategy. But there are also some disadvantages in this strategy. In facing the economic globalisation and fierce global competition, no country couldn develop by itself. China needs to continue the opening up process to get the opportunities and challenges in economy globalisation.

In a word, China should enlarge the domestic demand and reduce the degree of dependence on foreign trade. It should consider import substitution as the main strategy and also use export-oriented strategy as an assistant strategy. But we need be aware that import substitution doesn’t means denying the opening, but means eliminating the uncertain factors in economic development. By having interaction between the domestic economy and international economy, the country’s economy can develop rapidly, healthily and sustainably.

Reference
Chunling Yang. (2003). The reconsideration of the import substitution strategy and export substitution strategy. Foreign trade economics, international trade. Journal 2.

David L. Lindauer. Dwight H. Perkins. Steven Radelet. (2006) Economics of Development (Sixth Edition). W. W. Norton & Company. ISBN-10: 0393926524

Krugman. (2008) International Economics Theory and Policy. Sixth edition. China renmin university press.

Michael P. Todaro. Stephen C. Smith. (2005). Economic Development (9th Edition). Addison Wesley. ISBN-10: 0321278887

Ruilong Yang, Xiushan Chen, Yu Zhang. (1999). Socialist economy theory. China renmin university press.

Xuebei Jin, Genyan Zhou. (2000). The relocation of China’s foreign trade strategy model. Shanghai Economic Review.

Yiwen Li. (2007). The foreign trade strategy: import substitution or export substitution. Foreign trade economics, international trade. 49-50.