Trade is the buying and selling of goods and services between two or more countries. Exports are the goods and services which leave your country whereas imports are the ones which enter. Therefore export promotion includes incentives to produce exports, eg subsidies. Import substitu-tion is a policy which replaces imports with domestically produced goods eg by implementing tariffs and quotas on imports. Both strategies promote growth but they both have many advantages and disadvantages as explained throughout this essay.

Import substitution industrialisation is a popular way, especially in Latin America from the 1950s to the 1980s, of promoting growth since it has many merits. Free trade, ie with no barriers to trade, means that domestic infant industries, which don’t benefit from economies of scale or learning-by-doing, can’t compete with larger foreign firms. Therefore the government will impose a tax on for-eign imported goods called a tariff to increase their price. In figure 1, there is a domestic supply curve (ie what the domestic firms are producing) and a world supply curve (what the foreign firms are producing) which is perfectly elastic. Wp (world price) is the same as the world supply. from 0 output until the point where domestic supply intersects with world supply, is quantity supplies by the domestic firms since the price is lower. From this point until where domestic demand intersects with world supply is quantity demanded ie imports. However now, having imposed a tariff, Wp will increase to Wp + tariff. This causes quantity supplied to increase whilst decreasing quantity de-manded from foreign firms. Thus imports will decrease by Qd-Qd1 and exports will increase by Qs1-Qs.

Figure 1: Tariff diagram

Another form of import substitution are quotas. This is a limit on the quantity of imported goods which is implemented through the government