What Is the Relationship between Trade and Economic Development?

Peter Hann

Trade and economic development are linked, but trade policy must be carefully managed. By opening up to international trade, countries can earn export income and gain access to imported goods. Prices are lower because there is more competition, consumers have more choice, and goods that are not produced in a country can be imported. Companies within a developing country may grow and benefit from economies of scale when their goods have access to large international markets. This means trade and international development are closely related, though conditions for developing countries on the international market are often very difficult because of tariff barriers and unfavorable terms of trade.

The flag of Hong Kong, one of the first tiger economies.
The flag of Hong Kong, one of the first tiger economies.

A growth strategy for any economy is to open up to international trade and boost earnings by increasing exports. As demand for exports increases, domestic industries can grow and penetrate international markets. The increased sales may increase national income. Policies to foster export-led growth include trade liberalization with reductions in tariffs and quotas, liberalization of capital flows and government deregulation.

Infrastructure to support trade includes factors like good airports, security, hotels and roads.
Infrastructure to support trade includes factors like good airports, security, hotels and roads.

For historical or geographical reasons, developing countries are often restricted to production of a few primary products, such as agricultural crops. They may aim to achieve growth by exporting primary products, though this may leave the developing country vulnerable to fluctuations in commodity prices. Export-led growth is more likely to be successful if the exports are manufactured goods. Developing countries have often been successful at finding overseas markets for their manufactured goods as a result of the low production costs, which are especially the result of low labor costs. The link between trade and economic development can be seen in the Asian Tiger economies of Hong Kong, Taiwan, Singapore and South Korea, which grew in this way.

Trade and economic development do not necessarily go together. The income earned from exports does not automatically benefit the whole population. Exporting companies may earn increased profits, but this may lead to increased inequality of incomes by benefiting a small group of people rather than whole populations. Economic development requires development of an infrastructure such as a legal, financial and political system that can translate increases in national income into public welfare. For example, development requires a taxation system that raises funds for government and enables stable institutions and an efficient administration to be built up.

Although free trade is normally beneficial to all trading countries, there is an argument for protection of pioneer industries in developing countries, imposing tariff barriers on relevant imported products until the domestic industries have reached a certain level of maturity. This matter is the subject of negotiation between industrialized and developing countries in international organizations such as the World Trade Organization (WTO). Other important matters concerning trade and economic development include the reduction of subsidies and tariffs in the industrialized world.

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