International Trade of Development: Benefits and Disadvantages

Let us make an in-depth study of International Trade of Development:- 1. Benefits of Trade 2. Disadvantages of Trade.

Benefits of Trade:

Virtually, every nation finds it advantageous to trade with other nations.

They are linked to one another, in varying degrees, by trade flows and financial networks that surround the globe.

Benefits of trade are summarised here:

Gains from trade accrue from specialisation, i.e., division of labour. Division of labour and specialisation within a country make necessary a greater amount of exchange, so greater division of labour recessiates an extension of trade. Specialisation is the logical offshoot of exchange among nations Thus, a greater variety of products in larger quantities may be available. Thus, we have both production gain and consumption gain.

Every country produces goods maximum on the basis of comparative advantage. By exchanging these goods, nations can consume more than before trade. It was Adam Smith who first pointed out the advantages of trade in reaping the advantages of specialisation and the economic benefits flowing from it, viz.; improvement in production and productivity and hence national wealth/income of every participating country.

Secondly, a similar gain from trade, called ‘vent for surplus’, has been illustrated by Adam Smith. International trade increases the level of productive activity by stimulating efficient utilisation of resources. Countries may then experience surplus produce. Smith then argued that trade was a means of disposing of surplus produce for exports. Thus, trade, ‘vents’ a surplus productive activity that would otherwise go unsold in the absence of trade.

Thirdly, there are other three kinds of gains from trade:

(i) Those that remove the narrowness of domestic market, induce innovations, achieve the full advantages of economies of large scale production and increase productivity;

(ii) Those that make savings and capital accumulation easier; and

(iii) Those that acquire new knowledge, new ideas and cultures, new skills and entrepreneurship and disseminate technical knowledge.

Fourthly, empirical evidence suggests that trade can boost productivity which, in turn, raises the incomes and standards of living even of poor developing countries. The link between trade and productivity, being a potential one, can be identified with exports and imports. Through imports, countries stand to gain by importing machineries and various capital goods embodying new, modern technologies as well as by importing ideas that help rise in productivity.

Mastering and adaptability of new technologies require a learning process. It is through learning, benefits of technological improvement can be reaped. On the export side, we must say that market access supports the learning process. It is said that trade helps to promote specialisation and sustain production tempos of goods in which ‘learning effects’ are embodied. Thus, by opening up channels to the export and import markets, a country ‘can support technological upgrading via learning’. Trade-induced learning processes help all countries to improve incomes and, thus, economic welfare over the long run. This is what makes trade a powerful ‘engine of growth’.

Finally, trade is not considered as an important ‘engine of growth’, but also it can contribute to poverty alleviation by expanding markets, making larger investments in various fields, creating jobs, raising productivity which, in turn, raise incomes of the poor people. However, the link between trade and poverty reduction is a ‘potential’ one, rather than an automatic one. For all these reasons, it is said that ‘trade is an engine of growth’. There is no reason for any country to remain in isolation.

Disadvantages of Trade:

The ‘trade engine’ theory lost its ‘fuel’ in the developing countries after the World War II. Some economists suggested that gains from trade can never be unambiguous for all the trading countries—both developed and developing. Thus, the message runs—free international trade is harmful for the poor developing countries.

Raul Prebisch, Hans Singer, Gunnar Myrdal argued in the 1950s that the gains from trade are biased—rich countries gain at the expense of the poor countries. Their arguments are as follows: Poor LDCs are, by nature, primary goods producing countries while rich countries are producers of manufacturer articles.

Former buys manufactured goods from the latter countries by exporting their primary goods, at a low prices or at unfavorable terms of trade. Thus, these countries pay more to the developed countries for their imports while developed countries pay less to the developing countries for their imports.

In other words, gains from trade largely accrue to the developed countries. Benefits of lower prices of exportable of LDCs are transferred to the overseas consumers rather than producers of developing countries. It is thus, clear that LDCs cannot gain much from the export of primary commodities.

Secondly, some left economists argue that trade results in ‘dependent development’. In other words, trade between rich and poor nations is exploitative in nature. These economists argue that underdevelopment of poor countries is to be explained in terms of external factors rather than internal factors. Historically, colonial countries of the past say, Asia, Africa and Latin America, did not have economic independence where European capitalist imperialist powers ruled.

From these colonies, capitalist countries drew their economic resources and filled their coffers simply by exploiting them. For the existence of the capitalist order, existence and generation of surplus and then transferring them to their countries, was indispensable. Thus, without assisting the poor developing countries, capitalist imperialist countries flourished. This is called ‘development of underdevelopment’ as a deliberate consequence of free international trade.

Danger of dependence in often explained in the following way. A country may face economic depression if its international trading partner suffers from it and then it spreads from one country to another. The Great Depression that emanated during 1929-30 in the US economy swept all over the world and all counties suffered badly even if their economies were not caught in the grip of Depression. Such overdependence becomes catastrophic during war. Further, commercial rivalries resulting from trade may lead to war.

Conclusion:

Against this backdrop, one must not jump to a conclusion that poor LDCs must not trade with anyone, particularly developed nations. This is highly unrealistic since no country, whatever the size and whatever the level of development, is self-sufficient. Thus for survival, trade is essential. All countries trade. To reap the maximum advantages of trade right trade policies need to be adopted. In addition, cooperation among all countries can promote more benefits from growth. Sometimes, some form of trade and economic cooperation among equals may be suggested so as to get larger benefits from trade.