December 9, 2013

Three ways how the economy can reduce imports

Import substitution policy

A policy or initiative to reduce import should be imposed so imports can be reduced. Businesses should be able to produce goods locally. Probably raw materials would still be imported but raw materials can be manufactured to other goods, of which it has its own sellable value and create demand from other countries to be exported out.

Given good infrastructures and communication facilities, Government may also encourage Foreign Direct Investment by getting business corporations to invest on establishing a manufacturing or operating facility in Malaysia. Other than providing jobs to the local, goods produced may also be exported out. Other than goods, products like services, talent and machinery items can be locally produced with a lower cost since duties, transportation cost and management cost can be reduced. These manufactured goods or services that produced with lower cost can be exported to further create trade surplus.

This is a long term solution that can economically improve the economic situation of a country further.

Supporting Trade Policy

Government may impose supporting trade policy like import tax, higher duty and so on. This action will help to increase price of imported goods thus discouraging market from continuing using all the imported goods.

Market is not only reducing consumption of imported items, locally manufactured goods will also be strongly supported locally thus strengthen the local manufacturer to continue manufacture their goods, thus increased the foreign importers to continue buy their goods from the manufacturer.

Governments often work with other country’s government to deal on agreements that will benefits both or more parties. ASEAN countries signed a treaty called AFTA to regulate the trades between participating countries. It would often help all participating countries to improve their trade scenarios. As per AFTA treaty, will have to impose lower import tax for goods traded from a participating country to another participating country

Exchange rate policy

Using this policy, a government will always attempt to lower its currency value. By doing this, it will discourage import thus more goods can be exported out as the currency exchange rate will be lower, thus other country will be able to obtain the goods at a better price. Anyway, this is not a good policy to exercise as it will actually lower the buying power of the people and will cause inflation.

This would normally be used as a short term solution, could be due to certain economic condition of a country. When it is used for long, inflation will further increase price of goods so the purpose of lowering price of goods will no longer be achieved.

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