Tariff Structures and Effective Protection A principal mechanism

Tariff Structures and Effective Protection

Ø A principal mechanism of import substitution strategy is the erection of protective tariffs or quotas behind which IS industries are permitted to operate Ø Basic economic rationale for such protection is infant-industry argument Ø Tarif protection is needed, in order to allow the higher-priced domestic producers enough time to ; I. learn the business, II. achieve economies of scale in production, III. and external economies of learning by doing to lower unit costs & prices Ø With enough time and sufficient protection, infant will eventually; I. grow up, II. be directly competitive with Dd. C producers, and III. no longer need protection Ø Ultimately, like formerly protected IS industries in S. Korea & Taiwan, domestic producers will be able to produce not only for domestic market without a tariff wall or government subsidies but also to export their now lower-cost manufactured goods to the rest of the world.

Ø Ø Ø 1. 2. 3. Thus, for Dy. Cs an IS strategy becomes prerequisite for an EP strategy It is for this reason, that IS has been appealing to so many Dy. Cs Other Factors for IS strategy in Dy. Cs are desire to; ↓ dependence and attain greater self-reliance, build a domestic industrial base, and ↑ing substantial tax revenue from tariff collections Ø Consider Figure Ø The top portion of the figure shows standard domestic supply and demand curves for the industry in question (say, shoes) if there were no international trade—that is, in a closed economy. The equilibrium home price and quantity would be P 1 and Q 1. If this country were then to open its economy to world trade, its small size in relation to the world market would mean that it would face a horizontal, perfectly elastic demand curve. In other words, it