What are the different merits of inward looking strategies and outward strategies of international trade as vehicle of development?
With reference to the government policy towards trade, trade strategies may be broadly divided into two groups, viz., outward oriented and inward oriented strategies.
An outward oriented or outward looking strategy is one in which trade and industrial policies do not discriminate between production for the domestic market and exports, or between purchase of domestic goods and foreign goods.
As Krueger observes, an outward oriented strategy is “not a government decree that exports are desirable. Rather, it is an entire set of policies oriented toward encouraging the production of goods and services efficiently.”
An outward oriented strategy is, thus, a neutral strategy and it does not mean an export oriented or export promotion strategy as is sometimes mistaken, although such a strategy could pave way for an export- led growth as experienced by some of the south-east Asian countries.
An outward oriented policy discriminates neither in favour of exports nor is it against import substitution. It is an open policy Neutrality is its essence.
An inward oriented or inward looking strategy is characterised by a bias of trade and industrial policies in favour of domestic production as against foreign trade. As import substitution is the key element of the inward oriented strategy, it is often described as the ‘import substitution strategy.’
Protection of domestic industries from foreign competition is an essential feature of the inward oriented strategy. Protection may be accorded by tariffs, quantitative methods, etc. However, quantities methods and such administrative restrictions as licensing are very dominant under the inward looking strategy.
Nobody doubts today that world competition can only grow in the future. Competitiveness has thus become the name of the game. That is precisely what the Europeans have been striving for as they develop their community.
It is what Japan has been so successful in doing with the growing number of links and agreements it has been developing with virtually all nations throughout Southeast Asia.
The very concept of a global economy has become conceivable precisely because of the enormous, and rapidly increasing, number of integrated manufacturing processes across borders.
Production sharing, low cost and high quality goods, as well as free trade agreements of varying sorts have all become central components of the global economy. In this context, the ability of firms and countries to compete has become paramount.
None of these issues is alien to the United States, Canada or Mexico. The three countries, each for very different reasons, have found themselves confronted with a new economic reality – the global economy.
They also have a decreasing, or very little, ability to compete successfully with the European and particularly with Japanese manufacturing giants in electronics, automobiles and so on. The United States has lost its predominant share of world trade at the same time total world trade has grown exponentially.
In the mid-1980s Canada proposed and got a free trade agreement with the United States in order to obtain access to its foremost market.
Mexico, never a significant player in the international economy, shifted from being a very protected, inward-looking economy to an all-out free-market, export-oriented economy, only to find itself in a series of never-ending trade disputes with its foremost trading partner, the United States. All three, in spite of their differences, face the same challenge: becoming successful in the global economy.
Over the years, both Canada and Mexico have negotiated framework agreements, antidumping codes and the like, to avoid unnecessary trading conflicts. Individual firms have gone well beyond what the three governments have been willing to do, particularly in the case of the United States and Mexico.
In order to increase price competitiveness, some 500 American firms have established joint ventures and in-bond production-sharing facilities in Mexico.
The so-called maquiladora programme was started in the 1960s when a series of changes in the U.S. tax and customs codes made it possible for firms to export parts and components, have them assembled elsewhere, and then import them back into the United States, paying duty only on the value added abroad.
Mexico, in turn, matched the U.S. regulation, permitting the duty-free importation of goods for re-export as long as firms established themselves within a space of two hundred kilometres along the border.
Thus, many American firms were able to maintain a significant portion of their domestic manufacturing processes in the United States, largely because of the cost advantage their maquiladora operations conveyed to the rest of their production.
Most U.S. firms with maquila operations, in Mexico and elsewhere, claim that they would have ceased being competitive in the absence of these facilities.
Presently, the United States, Canada and Mexico are negotiating a broad free trade agreement that would go beyond all previous trade negotiations (at least as it pertains to Mexico).
The proposed free trade agreement would recognise the ongoing economic interaction across the three borders, would eliminate the existing barriers-tariff and nontariff-to trade, and would create a legal framework for further interaction to become possible.
Although each of the three nations is pursuing different goals, they all share the same basic objective: to increase the welfare of their people by making their economies more competitive.
Mexico, the country whose initiative led to the current talks, has been experiencing a profound and traumatic process of change during the past decade. Today, Mexico has become an aggressive player in the international trading arena, fostering the opening of new markets for its products. For those who have followed Mexico for several years, the ongoing economic reform constitutes a dramatic transformation;
For decades, the Mexican economy developed under the theoretical auspices of the Economic Commission for Latin America (ECLA), a United Nations agency charged with the mandate to help develop the Latin American nations in the aftermath of World War II. Up to the 1930s, Mexico had been an exporter of various types of raw materials and an importer of all sorts of manufactured goods.
Although some industry had begun to grow and develop since the late 1800s, e.g., beer and steel, by and large Mexico’s industrialisation began when imports became unavailable as the war effort in the Allied nations consumed all that was produced.
Because at the time imports were not available, nobody even suggested the need to change the then existing trading regime. Substitutions for imports became a natural and logical response to the international environment. By so doing, a new domestic constituency was born: one for an inward looking focus of government policy.