International Trade and Economic Growth in Developing Nations

Introduction: Trade as a Path to Development

The benefits of international trade for developing countries are many, but there are possible problems along the way as well. This paper examines how developing nations can and do promote economic growth through trade, and reviews some of the drawbacks that accompany that process.

Economic Benefits of Open Trade Policies

According to the Office of the United States Trade Representative (USTR), per capita real income grew nearly three times faster — almost 5% annually on average — in the 1990s when developing countries lowered their trade barriers. When developing countries did not lower trade barriers or adopt free-market strategies, their per capita income grew at just 1.4%. Moreover, in developing countries where international trade has expanded, inflation has been lower because "real depreciation is more costly in terms of inflation" in open economies, making those countries less likely to risk excessive money creation (USTR, 2006).

In terms of globalization, the World Bank — quoted by the USTR — asserts that approximately half of the global economic benefit from free trade is enjoyed by developing countries.

Potential Income Gains and Poverty Reduction

The World Bank estimates that, if developing countries engage in free international trade, the potential increase in annual income by the year 2015 would be $142 billion out of $247 billion (49%) in static measurement, and $259 billion out of $461 billion (56%) in dynamic measurement.

The USTR press release also references a University of Michigan study showing that trade services are the future of developing countries because they represent the fastest-growing component of total GDP. The global impact of opening trade barriers is enormous: Columbia University Economics Professor Xavier Sala-i-Martin estimates that the number of people living in poverty in developing countries declined by 350 million over the last three decades due to international trade. Sala-i-Martin points specifically to China's open markets, which helped reduce the number of people living in poverty by 377 million over the last 30 years.

Julio J. Nogues, Associate Banker at the European Bank for Reconstruction and Development in London, England, writes that the Uruguay Round of negotiations between industrialized and developing countries was unfair to developing nations. The concessions made by developing countries "were more valuable than those they received," Nogues explains. Part of the reason this unfairness occurred is that developing countries lack negotiating experience and "knowledge on economic impacts" (Nogues, 2002).

Unequal Negotiations and Bargaining Power Disadvantages

When there are unequal exchanges between industrial and developing countries, two economic costs are likely: first, a lower degree of access to foreign markets, hampering globalization efforts for the developing world; and second, a weakening of bargaining power through excessive concessions to more experienced, more powerful industrial nations. Developing countries ultimately pay a cost both in lost revenue potential and in diminished public perceptions of their stability in the global market.

Conclusion: Fairness as a Foundation for Trade Success

Participating in the global market through more open trade policies can and does help developing countries. But there is a cautionary note: those countries need to develop greater sophistication in international trade negotiations to ensure they receive a fair deal. As this paper has shown through international trade data, institutional analysis, and the Brazil case study, fairness is nearly as important to any trade agreement as the products and services being negotiated — and without it, the promise of economic development through trade remains only partially fulfilled.