What Is the Relationship between International Trade and Development?

Gregory Hanson
Gregory Hanson
Goods are constantly being imported and exported across the US-Mexico border.
Goods are constantly being imported and exported across the US-Mexico border.

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.

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Discussion Comments


@fBoyle-- I think they are allowed to participate. International trade organizations may have criteria that countries have to meet in order to be a member. But that's not to shun anyone out but rather to establish stability in global trade.

As the article mentioned, many poor, developing countries have a corruption problem. They are given opportunities to trade but corrupt politicians use the money for personal gain rather than investing in infrastructure that will benefit the economy. And some countries are in conflict which prevents foreign companies from doing business and investing there. This is the case with many poor African countries.

International trade is good for development, but only if it's used wisely. We can't blame everything on trade now can we?


If international trade is good for development, why are poor, developing countries not allowed to participate in global trade through the WTO and other organizations? How can they develop without trading?


I didn't know about Britain limiting cotton production in India to develop the British fabric economy. I guess this was why Gandhi encouraged people to make their own fabric at home instead of buying it from the British. The same goes for salt, Gandhi encouraged people to make sea salt so that they didn't have to rely on the British for it. These were actually huge steps toward Indian independence.

Should we take this to mean that trading for everything is not good and actually undermines development and independence in the long run? It's good for countries to be self-sufficient in some areas isn't it?

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    • Goods are constantly being imported and exported across the US-Mexico border.
      Goods are constantly being imported and exported across the US-Mexico border.