In recent times, the term “Import Substitution” was making news. Which among the following is / are correct statements in this context?
1. It means that a country should attempt to substitute products which it imports (mostly finished goods) with locally produced substitutes.
2. Import substitution protects domestic industries from import competition
Select the correct option from the codes given below:

Answer: [C] Both 1 & 2

Import Substitution refers to a trade and economic policy based on the premise that a developing country should attempt to substitute products which it imports (mostly finished goods) with locally produced substitutes. This often times involves government subsidies, high tariff barriers and/or artificially maintained domestic currencies to protect local industries. Import substitution is also a policy strategy, e.g. as an attempt to utilize underused capacities, reduce regional unemployment or protect infant industries.

This form of economic protectionism has helped some countries industrialize in the past, (such as South Korea and Taiwan) but these steps can be fraught with economic risks, most notably potential economic inefficiencies, uneconomical use of available resources, and ultimately leading to higher prices.

  • During 60’s and 70’s import substitution strategy became popular in developing countries like such as Argentina, Brazil, and Mexico. Some nations still use it today. It extensively uses trade barriers to protect domestic industries from import competition and can lead to complete self sufficiency. For e.g. if fertilizer imports occur import substitution may call for establishment of a domestic fertilizer industry to produce replacement of fertilizer imports.
  • Advantages: Risks of establishing home industry to replace imports are low, easier to protect domestic manufactures against foreign competitions; it provides jobs and reduces import expenditures.
  • Disadvantages: Import substitution breeds corruption as the economy is more protected and within, for small nations, for indigenous development cost becomes very high of setting up own units, due to trade restrictions there are no incentives to increase efficiency as they are away from competition.

This question is a part of GKToday's Integrated IAS General Studies Module