Import substitution is a strategy that is normally applied by the developing countries in controlling imports. The government replaces its foreign imports with domestic production. Import substitution is important because it helps the country reduce its foreign dependency. Specialization, on the other hand, refers to a situation where a country chooses one line of production and perfects it. The country produces one type of good or service, exports, and uses the proceedings to import what it does not have (Ball et al. 7). One of the major advantages of import substitution is that the country creates a favorable environment for domestic firms to grow.
This leads to a rise in employment opportunities, in addition to reduced dependence on foreign aid. The country also creates a local market for locally produced goods and services. If the country is able to satisfy the local market, then it can export the surplus and earn foreign income. This facilitates the growth of the domestic economy. Specialization, on the other hand, does not necessarily protect the local industry, thus it may not be as beneficial to the economy as the import substitution strategy. Therefore, the developing country should use the import substitution strategy.
NAFTA stands for North American Free Trade Agreement. It is an agreement that was signed by American nations, including the United States, Canada, and Mexico. It is an agreement that protects the environment, as well as labour rules in the international trade.
The European Union (EU) is a union that has both political and economic objectives in Europe. The EU facilitates trade between the member nations. It reduces trade barriers in these states to facilitate free trade.
Climate is important in the international trade as it determines the kind of activities to be carried out. Any activity that is likely to affect the climate is avoided. The kinds of raw materials available also depend on the climate. Culture is significant as it varies in each country and affects communication and the cognitive component.
Country risk assessment refers to the risk factors that a country will consider before investing in another country. It is dependent on the political, environmental, and economical factors of the destination country. Countries will always invest in a less risky nation, which influences international trade (Ball et al. 34). Traditional hostilities in a country, on the other hand, also affect international trade as they repel international investors. They affect the flow of natural resources and destabilize the local economy.
Assuming that $1.22 cents could buy one Euro in 2010, but the same one Euro was equivalent to $1.33 in 2011, then it means that the dollar weakened compared to the Euro because one would be required to pay more dollars for every one Euro. It implies that the value of the dollar had gone down compared to that of euro. The impact on an importer to the US was that the importer would pay more for the imported products; the imports would become more expensive. On the other hand, exporters from the US to the EU would make more money as they would get more dollars for each Euro.
Tariff barriers refer to the trade barriers that are caused by the changes in tax rates for exports and imports. The desire to shield local industries from competition from foreign industries may motivate a country to impose tariff barriers. For instance, if a country produces a certain good, then it will increase the import tax on the good to increase the costs of importing, thereby avoiding competition from foreign goods (Ball et al. 20). This reason is justified as it will help the local industries thrive. It will also facilitate efficient utilization of the country’s resources. However, the consumers will not have a wide variety of goods to choose from.
Works Cited
Ball, Donald A., Michael Geringer, Minor S. Michael, and Jeanne M McNett. International Business: The Challenge of Global Competition, 13th Edition. London: McGraw-Hill Higher Education, 2012. Print.