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Import substitution / inward-oriented strategies / protectionism

The protection of jobs and the promotion of growth might be best served by concentrating on producing import substitutes. Countries need foreign exchange and if they can produce substitutes for imports, this will release foreign exchange. To encourage import substitution, many countries will adopt protectionist policies. (See section 4.2 on the arguments for protectionism).

Critics of this suggest that there will be some short-term gains in job protection but, in the longer term, output will be lower than under a free system of exchanging trade. Comparative advantage allows gains form trade via specialisation. However, domestic producers may have little incentive from foreign competitors forcing them to be dynamic. Countries, which have adopted import substitution policies have tended to record lower growth rates than those who have selected the export-led strategy. (See section on the arguments against protectionism).