CHAPTER2

Instruments of Trade
and Industrial Policy

2.1 Introduction
Like Chapter 3, this is a scene setting chapter. In Chapter 3 we provide an
overview of the links between trade policy and economic development,
paying particular attention to the influences that have shaped particular
strategies. In this chapter we review in a functional manner the economic
effects of a range of instruments of trade and industrial policy. It should be
emphasised at the outset that the aim is not to provide a 'ready reckoner' of
analyses of different instruments. In the context of the present volume that
would be both over-ambitious and in fact unnecessary. There are many
texts devoted entirely to the microeconomics of commercial policy. As we
emphasised in the introduction, this is a book devoted to applied aspects of
commercial policy analysis and a basic familiarity with the microeconomics
of alternative forms of intervention will therefore be assumed. Our inten-
tion in this chapter is simply to offer a brief refresher on the material by
way of background.
Commercial policy can be directed at protecting firms in import
substitute activities or in export oriented activities. As we shall see later,
governments often believe, quite erroneously, that they can pursue both
simultaneously. The distinction between the two is a useful one analytically
and forms the framework for organising the material which follows. Sec-
tion 2.2 examines the economic effects of a range of instruments of import
substitution, whilst Section 2.3 does the same for instruments of export
promotion. Section 2.4 discusses how instruments are often bundled
together into policy packages in support of chosen strategies. In this
section we will emphasise the key feature of protection as a relative
concept. Finally Section 2.5 closes the chapter with some concluding com-
ments.

7
D. Greenaway et al., Trade and Industrial Policy in Developing Countries
© David Greenaway and Chris Milner 1993
8 Trade and Development

2.2 Economic effects of instruments of import substitution

Table 2.1 provides a list of instruments of import substitution currently in
use, to a greater or lesser degree, in many developing countries. The list is
fairly exhaustive. It divides interventions into tariff and non-tariff barriers.
The former probably remain the most pervasive form of import protection,
although non-tariff barriers of various forms are common, especially in
countries following inward oriented policies.

Tariff measures
PREVALENCE

Import tariffs are simply indirect taxes which apply, on a discriminatory

basis, to imports. They may be ad valorem or specific. The former have the

Table 2.1 Instruments of import protection

Barriers Instruments
Tariff Ad valorem import tariff
Specific import tariff
Seasonal tariff
Tariff quota

Non-tariff Special levies

Variable levies
Border tax adjustments
Anti-dumping duties
Countervailing duties
Prohibitions
Global quotas
Bilateral quotas
Seasonal quotas
Non-automatic licensing
Import authorisations
Voluntary export restraints
Import surveillance
Advance payment requirements
Regulations on terms of payments
Minimum pricing
Price surveillance
Sole importing agency
Special entry procedures
Additional customs formalities
Customs valuation procedures
Standards and regulations
Local content requirements

Source: Based on Laird and Yeats (1990) Appendix 4.