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The relationship between international trade and development is a complicated one and varies widely based on the particular systems and structures in place in any given country. In a best-case scenario, international trade and development fuel one another, with gains made from beneficial trading arrangements being used to bolster internal economic development and increase overall gross domestic product. Other cases are possible, however, in which trade has little impact on development, or even serves to hinder development.
Ideally, trade allows developing nations to acquire capital from abroad in return for either natural resources or cheap labor. This foreign capital, when all goes well, can then be invested in local industry, agriculture, infrastructure, and social improvements. Gains in these fields, in turn, can foster additional profits and capital inflows from trade, and a positive feedback loop can be produced, leading to steadily rising standards of living and economic output.
This type of relationship between international trade and development can be seen in several nations. China is a textbook example of a development success story and managed to make excellent use of trade and foreign investment to enhance domestic economic conditions and living standards while also increasing the overall size and technical quality of its manufacturing base. Trade, in this case, was not free trade, as China followed an essentially mercantilist policy of using tariffs to aid domestic manufacturing against foreign competition.
Free trade can produce similarly positive economic development outcomes, in some cases. Mexico is an international trade and development success story and has benefitted greatly from the easing of trade restrictions with the rest of North America. Trade brought more jobs to Mexico and led to rising standards of living and productivity in areas where jobs linked to international trade were concentrated.
Trade is not always a blessing for developing nations, however. In cases where corruption is rampant, the proceeds of foreign trade are often siphoned off through graft and corruption, and no significant economic development takes place. In some cases, the wealth generated by trade, especially trade based on extractive industries, such as oil or mining, actually destabilizes nations through civil wars and criminal activity and leaves nations weaker rather than stronger.
Nations which are forced to trade at a disadvantage also often see a less positive relationship between international trade and development. British India is a classic example of this phenomenon. Before the growth of a British cotton industry, India possessed a great deal of domestic fabric production. The British used military and political power to limit the ability of Indian manufacturers to compete with British products, and India’s level of industrial production actually decreased as a result of this unequal and largely involuntary trade.