International Trade's Contribution to Economic Development and Growth

This essay provides a comprehensive analysis of the contribution of international trade to economic development. It begins by introducing the concept of international trade and its significance, referencing key theories from economists such as Adam Smith and David Ricardo, while also examining t...Read More

M T C M CRUNNING HEAD: DEVELOP EN E ONO I S 0
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Introduction
International trade has been part of development for centuries, because it has the ability to be
an important force for reducing poverty at the global level by stimulating growth of economy,
reducing prices, creating jobs, acquiring new technologies and increasing the variety of goods
for consumers (McGovern,2018). Development and growth of any economy mainly depend
on the international trade and most of the contribution mainly in developed countries are of
international trade. It is experienced by most of countries that appropriate trade policies lead
to an educated work force, infrastructure development, productive employment, women
empowerment, food security and reduction in inequality (Viner,2016). This essay focuses on
the contribution of international trade in development and growth of economy. In order to
understand the concept of international trade and its contribution to development different
theories are used and some examples are given with proper implication.
Literature Review
According to International trade is considered as the exchange of services and goods between
countries as per the trade policies set at the global level and between different countries.
Trade at the global level provide opportunities to countries and consumers to exposed to
services and goods that are not available in their countries (Low,2016). The concept of
International trade was recognized by David Ricardo and Adam Smith. But some economists
on the other side argue that trade at global level across countries prove to be bad for smaller
nations and might impact negatively on the growth of smaller nations on the world stage.
Dean (2017), said that international trade gives rise to the world economy, because it impact
on demand and supply, prices of goods and services, and all these are affected on the basis of
external forces at the global level. The concept of international trade includes two broad
terms that are exports and imports. According to (Low,2016), trade is a crucial part in the
development and survival of countries that have limited resources such as Hong Kong and
Singapore or countries that have plenty of resources such as West Asian regions and the
Caribbean. However, with diversified resources such as the US, India, the UK and China.
Hence, involvement of countries in trade is a necessity in order to ensure de3velopment and
growth of countries (Hazari,2016).

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Figure 1: Relation between trade and economic growth at the global platform
Source: (Burstein et.al,2019).
Theories on Trade and Environmental sustainability
International trade become significant part of development of countries because of free trade
policies. According to Adam smith’s (1986), the three important elements in development
and prosperity of nation are enlightened self-interest, limited government interference and
free market economy. Trade theory given by Smith emphasized on the free market principles
by allowing free trade across countries and by keeping taxes low. He described that trade
between countries give an absolute advantage as production takes place in one country with
limited resources that will contribute in the development of the country as domestic
production increase, demand for product or service increase and that leads to more
production and consumption at the global level, thus it contribute to the growth and
prosperity of nations (Milward,2019).
Further, Mercantilism trade theory is another theory that was popularized by Adam Smith.
This theory emphasized on encouragement of exports by a nation and discouragement of
imports in the country in order to increase the wealth of the country. Moreover, increasing
wealth is an indicator of development and prosperity of nation. The criticism of this theory
was that it only benefitted to one country.
On the other side, David Ricardo provided a theory of comparative advantage that focus on
the aspect that if one country has absolute advantage and other country has no absolute

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advantage than this resultant in benefit and development of both countries. A country can
produce some commodities but not all the commodities, due to that significance of
international trade develop. The free market and trade leads to fulfillment of demand of
people, adoption of new technologies, development of infrastructure, more foreign reserves
and all that contributes positively to the development of nation and country.
There are many ways in which foreign trade or international trade contribute in the economic
growth that are; the role of international trade is to know ways by which procurement of
capital goods become cheaper, import of capital goods is the first stage of development.
Further, international trade increase flow of technology in the country which resultant in
efficiency in operations and short-term multiplier effect. The encouragement of foreign trade
is essential because it generates force for competing in the global markets through exports
and this also ensure efficient allocation of resources.
Moreover, exports by countries resultant in efficient utilization of capacity that leads to
economies of scale, change in demand, different production pattern, and fuller use of new
technologies. The trade also plays part in the welfare of workers as more exports leads to
inflow of foreign currency in the nation that leads to increase in wages as dependency of
companies on workers become high. At last, trade contributes majorly in poverty reduction in
developing countries as employment opportunities increase that leads to equal distribution of
wealth in the country that somehow reduce poverty in the country (Milward,2019).
Hence all the factors that are stated above contribute independently on economic growth but
these factors are all depend on the international trade. Thus, the role of international trade in
development can be measured on the basis of above factors. In a nutshell, international trade
ensures growth through economic welfare and by encouraging better utilization of factors
endowments of different nations and by making goods available to people from efficient
supply sources.
International trade contribution
The role of international trade in development of economy can be analyzed by looking into
the impact that exports and imports of services crested on developed and developing
countries. Firstly, looking into the role of international trade and policies that the US
implemented in order to boost its trade in the country. Further, the impact of policy
development and implementation on the economy and growth has been analyzed.

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Examples of Developed countries
The US is amongst the largest economies in the world, that indicate that international trade is
benefitting the whole economy of the US as international trade contribute to 11.7% to GDP
of the US. According to WTO, the four components that contributes to the development of
the country are business investment, personal consumption, net exports and government
spending. On an average, the exports contribute to 12% to 13% to GDP of the country.
According to US Chamber of Commerce, “America cannot have developed or lift the wages
and incomes of citizens. Further, the trade leads to generation of 39 million jobs in the US.
Moreover, trade improved the manufacturing output of the country by 80% and leads to
growth of 300,000 US companies that are medium and small sized. Exports by the country in
2018 accounted for $1.4 trillion in 2018 (Hayward,2019). Import is also benefitting the US
economy growth and development as it increases choices and alternatives of production at
lower cost that leads to offering of good in the market at lower prices. This improve
consumer purchasing power and improve standard of living. Imports in the US boosted the
purchasing power of consumers by $18,0000 annually. Free trade agreements (FTA) are the
platform that boost up free trade between 290 countries that are listed. This agreement is
made because in the 21st century trade become inevitable part of the world and contribute
mainly to the development of the economy at the domestic level and at the global level.
Figure: 2 Goods and Services Trade in the US
Source: (Hayward,2019)
China is also a developed country, the economic reforms that the country implemented is the
major reason that contributed in the growth and development of the country since 1978 (Hang
and Yun,2017). The reforms that China implemented includes privatization and opening up
of 100 sectors for trading and adoption of policies of free trade in the country by reducing

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subsidies on export and import. China international trade contribute approximately 17% -
20% to GDP of the country (Bhattacharya and Bhattacharya,2019). The contribution of
international trade in the development is higher in China amongst all countries and some of
positive impacts of international trade that the country experienced are technology
advancement, increase in workers’ wages, improving standard of living, and reduction in
poverty and efficient utilization of resources of the country.
Figure 3: Share of exports in GDP of China
Source: (Feng et.al,2017)
Hence, from analyzing the trade policies, implementation and development factors of both
developed countries it can be said that international trade contributed to the maximum in the
development and growth of the economy, Further, it is identified that there are many
dependent and independent factors related to international trade that also contribute in the
growth and development of the country.
Example of developing countries
From various examples it is seen that the stronger open trade policies enable economic
growth and development of the country. Now, looking into the developing countries and their
trade policies, implementation and its impact on economic development. The trade openness
also affects growth of developing countries in order to understand this aspect Sub Saharan

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Africa trade policies and growth rate and development is considered. Feng et.al,2017 argued
that relationship between international trade and development is controversial in case of
developing countries. The trade contribution by Africa in GDP was 2.5% in 2018 (Justin and
Evan,2019). This indicate that contribution of the international trade in GDP in developing
countries is low as compared to developed countries. If developing countries also focus on
opening up of the economy for international trade and implement policies that leads to boost
in the economy than this will resultant in higher growth and development of the country. The
share of South Africa in world trade was 0.49% in 2018 and this was the lowest contribution
in the international trade.
International trade both in developing countries and developed countries contributed mores as
the positive impacts of trade includes international specialization. This means that when a
country has competitive advantage in producing a product it gains benefit such as increase in
real income and rise in standard of living. Many economists support the relation between
international trade and development because productivity in the domestic market increases
because of foreign trade and efficiency in operations resultant in higher degree of
mechanization, division of labor and boost in innovation. Further, it is observed that foreign
trade widens the market scope and permits innovation, higher use of technology and enables
trading country to enjoy economic development and increasing return (Feenstra,2018).
Role of Stakeholders
The stakeholders in the international trade are countries that are involved in the agreement,
research communities, funding agencies, and local government. The policies related to trade
directly impact on exporting countries and importing countries and businesses that involved
in it. Any changes in trade policies at the global level or by local government directly impact
on the stakeholders that are connected to the businesses. Such as opening up of China for
international trade and privatization and liberalization impacted on stakeholders of businesses
in many ways. For instance, due to international trade, role of the workers in the organization
become increased as production for the company will increase (Kohl et.al,2016).
Further, the governments are the one who fixes the rules of trade and change the payment of
taxes, agreements between countries and many more are the factors that impact on the
development of policies and impact on government. One more stakeholder that is impacted
by international trade is non-governmental organizations, the impact can be seen on the
environments as more production leads to more use of resources and this impact on the

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human rights, industrial development and economic development and due to that negative
impact, the role of non-government organizations also changed.
In a nutshell, the stakeholders that get affected by international trade are government,
shareholders, employees and non-government organizations. As international trade impact
on each and every aspect of the economy and due to that stakeholder’s role increases as
shareholders value get increased, involvement of employees increases and the role of
government also get affected a government intervention in controlling of trade is required.
Due to that stakeholders also contribute in the development of the country but independently
and indirectly.
Impact of international trade on environment sustainability
Development and growth through international trade also has direct impact on the
environment. The impact on environment can be seen as more production leads to
degradation of natural resources and increase pollution. Moreover, liberalized trade leads to
more activities in one country that impact on the environmental policies of the country. On
the other side, boost to international trade leads to adoption of more stringent environment as
growth in export sector changes the environment and leads to more issues in the country such
as changing climate, exploitation of natural resources and increasing pollution and
greenhouse gases (Pauwelyn et.al,2016).
Due to the impact of international trade on environmental sustainability, there are various
provisions and standard that WTO included. The changes that are made in this framework
are negotiation tariff reductions in environmental services and goods. Multilateral
environment agreements and seeking disciplines on fisheries subsidies. With that WTO is
encouraging trade by reducing its impact on the environment. Further, WTO also included
environment provisions in regional trade agreements and bilateral agreements, all that leads
to harmonization in environmental regulations between developing countries and developed
countries.
Conclusion
It is concluded from the analysis that international trade plays an important role in economic
development of countries. As considering different trade theories such as competitive
advantage trade theory, Mercantilism trade theory and absolute advantage trade theory, it is
analyzed that both the countries that are involved in imports and exports or international trade
get benefits. This statement gets support from the examples that were given in the above

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essay that includes international trade contribution in development of both developing and
developed economies. It is known that growth and development of developed countries such
as the US and China depends mainly on international trade. Further, contribution of
developing countries in trade is less than 2%, this indicate that countries with more
contribution of trade in GDP leads to more growth and development. It is also concluded
from essay that more dependency of countries in international trade is not good and has
several negative impacts such as impact on environment. Hence, the role of international
trade in development is crucial and become inevitable in this century, so countries whether
developing or developed need to focus on boosting the international trade in order to ensure
development and growth in the country.

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References
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Burstein, A., Morales, E. and Vogel, J., 2019. Changes in between-group inequality:
computers, occupations, and international trade. American Economic Journal:
Macroeconomics, 11(2), pp.348-400.
Dean, J.M., 2017. International Trade and the Environment. Routledge.
Feenstra, R.C., 2018. Alternative sources of the gains from international trade: variety,
creative destruction, and markups. Journal of Economic Perspectives, 32(2), pp.25-46.
Feng, S., Li, H., Qi, Y., Guan, Q. and Wen, S., 2017. Who will build new trade relations?
Finding potential relations in international liquefied natural gas trade. Energy, 141, pp.1226-
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Hang, Z. and Yun, L., 2017. Economic Growth and International Trade Effect on Fiscal
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Hayward, D.J., 2019. International trade and regional economies: The impacts of European
integration on the United States. Routledge.
Justin, V. and Ivan, T., 2019. The contribution of services to trade and development in
Southern Africa (No. wp-2019-37). World Institute for Development Economic Research
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Kohl, T., Brakman, S. and Garretsen, H., 2016. Do trade agreements stimulate international
trade differently? Evidence from 296 trade agreements. The World Economy, 39(1), pp.97-
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Low, P., 2016. International trade and the environment. UNISIA, (30), pp.95-99.
McGovern, E., 2018. International trade regulation (Vol. 1). Globefield Press.
Pauwelyn, J.H., Guzman, A. and Hillman, J.A., 2016. International trade law. Wolters
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Viner, J., 2016. Studies in the theory of international trade. Routledge.

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