The Benefits and Drawbacks of Import Substitution

The Benefits and Drawbacks of Import Substitution, Import substitution, or policy of encouraging domestic production by raising barriers to the import of goods from other economies, has been popular since the 1970s, but its impact is limited. While it is an effective tool to increase local production, the policy can have a number of drawbacks. This article examines the benefits and drawbacks of import substitution. And, it argues that the policy may be making a comeback. You may also find some interesting facts about this policy.

Import substitution is a policy of encouraging domestic production by raising barriers against the import of goods from foreign economies

Historically, advanced countries have adopted the ISI strategy to reduce dependence on foreign economies. For example, Alexander Hamilton used tariffs to promote domestic manufacturing while simultaneously reducing British reliance. In response, his European rivals began to worry about the abundance of British goods and sought to impose trade restrictions. Moreover, the governments began to mobilize domestic capital for state-sponsored industries. Later, Japan and Russia followed suit.

The goal of ISI is to decrease a country’s dependence on foreign goods and increase its national productivity by fostering local industries. This policy is usually implemented by allowing national and foreign investment in industries and bolstering production channels. While ISI is often associated with development economics policies of the 20th century, its theory has roots in the 18th century. Since it focuses on increasing domestic production of industrial goods, ISI is a key component of development economics.

It was popularized in Latin America

In the 1930s and 40s, most nations in Latin America adopted import-substitution policies. The impact of the Great Depression, which prevented the import of industrialized goods, served as a motivation to increase domestic production. In Latin America, the ECLA report became a founding document of structuralism and a virtual manual for import-substitution industrialization. Despite the difficulties that followed, import-substitution industrialization was widely used in the region for decades.

Although the import substitution movement had been in place before the Second World War, the economic crisis exacerbated the practice. The wartime trade barriers had resulted in a deterioration of the terms of trade. Afterwards, the manufacturing sector began to play a larger role in the economy. However, manufacturers continued to argue for stronger commercial protection and government subsidies, as long as the terms of trade improved. With the aid of the OPEC, import substitution became the most popular economic policy in Latin America.

It has its drawbacks

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It may be coming back in vogue

The concept of import substitution may be making a comeback. Some African countries have signaled that they support this concept, while others promote domestic manufacturing and exclude imports. But if this method has become a trend in other countries, it might not be long before it is embraced in the U.S. as well. Here’s what you need to know. This is an overview of the key issues surrounding import substitution.

The earliest supporters of the importozameshchenie scheme argued that it was a response to the events in Crimea. But Stadnik (2021) claims that the rationale behind import substitution is the Snowden revelations from 2013.

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