Abstract:Thebenefits of international trade and its positive effect on the economies ofstates was first highlighted by Adam Smith in his book the wealth of Nations inthe 17th century (Cannan, 2000). Though Smith had articulatedthe benefits of a liberal trade mechanism, the idea of trade liberalisationprevailed after the world war 2 in which the countries focused on buildingtheir nations from the destruction of war. Before the World war 2, prominencewas given to protectionist trade policies in which the state controlled alltrading behaviours in the countries through the mercantilist approach (Afonso, 2001). This was especiallyfound in countries in the Latin America and the Europe, but from the 1960’sthis approach was deemed unsuccessful since countries that adopted to a liberalapproach to trade had a faster growing economy (Afonso, 2001). Tradeliberalisation has made an increasingly significant contribution to theeconomic growth of countries through its adaptation of a more opennessmechanism (Foster, 2004). This can be seen in countries such as theUnited States, China, Germany and Singapore. The world has experienced a rapidexpansion of dramatic economic growth which made the countries target the worldas whole as the market (Peng & Almas , 2010).
Withthe successfulness of the liberal trade approach adapted by the countries afterthe world war 2, there was the common thought that international trade doesincrease the economic growth of the countries. However, many economists nowargue that even though international trade raise the income per capita of thecountry, it does not mean that the situation is same for all countries. Accordingto the endogenous theory, there are several other factors that could affect thegrowth rate of a countries economy (Zahonogo, 2017). It is argued that even under free trade or theliberal trade approach, the country’s economic growth can be lower if thecountry only has comparative advantage over a certain goods. This thought ismost provocative in developing countries where there is the dynamic comparativedisadvantage in terms of potential productivity and technological advancements (Foster, 2004).Lookingat the positive outlook of trade on the economic growth, Free trade promot Introduction:Thedebate in which whether trade leads to growth is one of the conundrums thateconomists are indulged in since several centuries ago.
The common view thattrade improves the economic growth has a long history. When we look back to theHistory, Adam Smith one of the most famous philosophers in the field of economicsand human behaviour expressed that trade can act as a vent that widens themarket for the surplus production (Zahonogo, 2017). Since then, thistopic has remained the key subject of debate in many research and policy discussionswhich has led to the ample theoretical and empirical literature on the tradegrowth nexus (Were, 2014).Withall debates circling around trade-growth nexus, most of the economists andinstitutions in the world such as World Bank, International Monetary Fundpromotes trade liberalization as a tool for economic growth, it is important tonote that theoretically the impact of trade openness on the growth of economyis ambiguous (Maelan & Raju, 2014). Withthe globalization which has been characterised by the trade liberalization andthe intensive trade integration and the technological advancements, there is areason to revisit the role of trade in economic growth. Technological advancementsin the sector of transportation, communication has lead to the growth ofopportunities for the global production and distribution systems in which allcountries are considered as value chains (Were, 2014). Tradebecome an important part of economic growth due to the participation ofdeveloping economies such as South Asian and South East Asian countries whichemerged after these countries got their independence from the colonial powersin the 1960s. These countries adopted to a more export oriented trade policy inwhich economies of countries such as China, Malaysia, Bangladesh and Thailandgrew exponentially.
Inthis report, I am going to analyse the effect of trade on the economic growthboth in the perspective of liberal approach and mercantilist approach and tryto determine whether trade has a long-term benefit for the economic growth ofcountries. Literature Review onTrade and Economic Growth NexusTheintegration of countries in to the world economy has been regarded as the mostimportant milestone that has been achieved in the field of development acrossthe countries (Busse & Jens, 2012). Whilelooking at the empirical evidence of trade and economic growth, it is importantthat the definitions of these terms are well explained. Trade can be defined asthe exchange of goods and services across two or more parties in the aim ofgetting a monetary or another return. Though the definition of trade is verysimple, international trade happens when trade goes beyond the borders. Whichbasically means that the exchange of goods and services happened betweencountries and nations.
Free trade is a system in which the trade of goods andservices between or within countries flows unhindered by government-imposedrestrictions and interventions. Interventions include taxes and tariffs,non-tariff barriers, such as regulatory legislation and quotas, and eveninter-government managed trade agreements such as the North American Free TradeAgreement (NAFTA) and Central America Free Trade Agreement (CAFTA) (contrary totheir formal titles.) Free trade opposes all such interventions (Regine Adel , 2012).Protectionism, in the other hand is an economic policy of restricting tradebetween nations.
Trade may be restricted by high tariffs on imported orexported goods, restrictive quotas, a variety of restrictive governmentregulations designed to discourage imports, and anti-dumping laws designed toprotect domestic industries from foreign take-over or competition (Regine Adel , 2012).Althoughthere is no specific definition for economic growth and development, manyeconomists and philosophers assume that the economic development as a processin which it generates economic, social, political changes in which the nationaleconomy and the society cumulatively and durably increase the national product (Petronela, 2012). In simple terms economic growth can be explainedas the process of increasing the size of national economies (Petronela, 2012).Amongthe economists and political scientists there is the consensus that tradepositively contributes to the economic growth of a country. For an instance,from the cross-country studies that have been published, it provides anoverwhelming positive relationship between trade and economic growth.
But it isimportant to note that other economists who doesn’t believe that there is adirect relative connection among trade and economic growth believes that theeconomic growth can only be benefited if the trade policies adapted by thecountries are better. Accordingto Zahonogo 2017, Traditional trade theories predict that the growth which are gainedfrom the liberal trade approach are due to the reason that the country adapt tospecialization, investment and innovation, productivity and resourceallocation. But on the other hand, Neoclassical growth model such as Solow’sGrowth Model which consider technological advancements and changes as having anexternal origin and articulates that trade policies do not impact the economicgrowth (Zahonogo, 2017). Or in other words traditionaltheories suggest that trade policies have a direct relation with economicgrowth while neoclassical theories depict that trade policies and economicgrowth does not have a direct relationship (Zahonogo, 2017). Protectionismor Liberalism? Thereis a strong belief that if a country is in the early stages of development,where the industries in the country is relatively new and in the infant stage,if the country opens its doors to foreign countries through tradeliberalization, it would have a negative effect on the local companies due tointernational competition. However, it is also believed that if the countryinvested in the industry it would allow them to gain comparative advantagethrough the protectionist regime (Regine Adel , 2012).
Astrong argument lies on infant industries, where if developing countries haveindustries that are relatively new, then now these industries would struggleagainst international competition. However, if they invested in the industrythen in the future they may be able to gain Comparative Advantage. Protectiontherefore would allow them to progress and gain (Regine Adel , 2012).