Discuss in detail export promotion (Protectionism and Free Trade). Free trade and protectionism represent two opposing approaches to international trade. Free trade emphasizes the removal of trade barriers, promoting economic efficiency and market access. Protectionism aims to protect domestic industries but can lead to higher prices and reduced consumer choice
Discuss in detail export promotion (Protectionism and Free Trade)
INTRODUCTION
Export promotion refers to measures taken by governments increase production of goods and services that can be exported. The government provides incentives to encourage production 🗸🗸
[Max 2]
BODY: MAIN PART REASONS:
- Export promotion measures lower cost of production which makes it easier to compete on the international market 🗸🗸
- Achieve significant export-led economic growth🗸🗸
- Export enlarges production capacity of country because more and larger manufacturing industries are established. 🗸🗸
- The first step to export-led economic growth is to implement policies that encourage the establishment of industries to produce goods and services for export markets🗸🗸
METHODS:
Exports are promoted through:
Incentives🗸
- Export incentives include information on export markets, research with regard to new markets, concessions on transport charges, export credit and export credit guarantees and publicity commending successful exporters🗸🗸
- This will encourage manufacturers to export an increased volume of their production🗸🗸
- Trade missions help to market SA products abroad🗸🗸and supply SA companies with information about potential markets 🗸🗸
Direct Subsidies🗸
- Described as direct because it involves government expenditure. 🗸🗸
- Include cash payments to exporters, refunds on import tariffs and employment subsidies.
- The aim is to increase the competitiveness of exporting company🗸🗸 reduce cost of production🗸🗸and explore and establish overseas markets🗸🗸
Indirect subsidies
- Regarded as indirect because it results in the government receiving less revenue🗸🗸 e.g. general tax rebates,
- Tax concessions on profits earned from exports or on capital invested to produce export goods, refunding
- Of certain taxes e.g. custom duties on imported goods used in the manufacturing process🗸🗸
- Allows companies to lower their prices and enables them to compete in international markets🗸🗸
- Challenge for governments to design incentives and subsidies in such a way that prices of export goods can’t be viewed as dumping prices🗸🗸
Trade neutrality 🗸
- Can be achieved if incentives in favour of export production are introduced
- Up to point that neutralises the impact of protectionist measures in place🗸🗸
- E.g. subsidies equal to magnitude of import duties can be paid🗸
Export processing zones (EPZs) 🗸
- Is free-trade enclave within a protected area –
- Is fenced and controlled industrial park that falls outside
- Domestic customs area, and usually located near harbour or airport 🗸🗸
NOTE: For the response with regard to the effectiveness of export promotion methods, a maximum of 5 marks can be allocated.
ADVANTAGES
- No limitations on size and scale since world market is very large🗸🗸
- Cost and efficiency of production based on this and organised along lines of comparative advantage🗸🗸
- Increased domestic production will expand exports to permit more imports and may result in backward linkage effects that stimulate domestic production in related industries🗸🗸
- Exchange rates are realistic and there is no need for exchange control and quantitative restrictions🗸🗸
- Value can be added to natural resources of the country 🗸🗸
- Creates employment opportunities 🗸🗸
- Increase in exports has positive effect on balance of payments 🗸🗸
- Increase in production leads to lower domestic prices, which benefit local consumers🗸🗸
DISADVANTAGES
- Real cost of production 🗸 subsidies and incentives reduce total cost of production which must be met from sales🗸🗸 real cost is thus concealed by subsidies🗸🗸products cannot compete in open market 🗸🗸
- Lack of competition 🗸 businesses charge prices that are so low that they force competitors out of the market 🗸🗸
- Increased tariffs and quotas 🗸can be against spirit of provisions of WTO🗸🗸overseas competitors retaliate with tariffs and quotas🗸🗸 goods are sold domestically below their real cost of production (export subsidies and dumping) 🗸🗸
- Protection of labour-intensive industries 🗸 developed countries maintain high levels of effective protection for their industries that produce labour-intensive goods in which developing countries already have or can achieve comparative advantage 🗸🗸
- Withdrawal of incentives often leads to closure of effected companies. 🗸🗸
- Incentives often lead to inefficiencies in the production process, since companies don’t have to do their best to compete🗸🗸
- Can be seen as dumping 🗸🗸 [Max 26]
BODY: ADDITIONAL PART
How successful is South Africa in protecting the local textile industry against foreign competition?
- Not successful: 🗸
Many domestic textile manufacturers closed down due to unfair international competition 🗸🗸
Many wholesalers make use of suppliers from abroad 🗸🗸 e.g. Woolworths/Walmart🗸 - Dumping still occurs – European manufacturers still dump clothing in Africa out of season at prices below cost 🗸🗸
Job losses due to a lack of protection in this industry 🗸🗸
[Accept any motivation relating to success indicators]
[Max 10]
CONCLUSION
South Africa’s international trade policy facilitates globalisation thereby impacting positively on the balance of payment. 🗸🗸
[Accept any other relevant conclusion]
[Max 2]