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Abstract:

The
benefits of international trade and its positive effect on the economies of
states was first highlighted by Adam Smith in his book the wealth of Nations in
the 17th century (Cannan, 2000). Though Smith had articulated
the benefits of a liberal trade mechanism, the idea of trade liberalisation
prevailed after the world war 2 in which the countries focused on building
their nations from the destruction of war. Before the World war 2, prominence
was given to protectionist trade policies in which the state controlled all
trading behaviours in the countries through the mercantilist approach (Afonso, 2001). This was especially
found in countries in the Latin America and the Europe, but from the 1960’s
this approach was deemed unsuccessful since countries that adopted to a liberal
approach to trade had a faster growing economy (Afonso, 2001).

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Trade
liberalisation has made an increasingly significant contribution to the
economic growth of countries through its adaptation of a more openness
mechanism (Foster, 2004).  This can be seen in countries such as the
United States, China, Germany and Singapore. The world has experienced a rapid
expansion of dramatic economic growth which made the countries target the world
as whole as the market (Peng & Almas , 2010).

With
the successfulness of the liberal trade approach adapted by the countries after
the world war 2, there was the common thought that international trade does
increase the economic growth of the countries. However, many economists now
argue that even though international trade raise the income per capita of the
country, it does not mean that the situation is same for all countries. According
to the endogenous theory, there are several other factors that could affect the
growth rate of a countries economy (Zahonogo, 2017).  It is argued that even under free trade or the
liberal trade approach, the country’s economic growth can be lower if the
country only has comparative advantage over a certain goods. This thought is
most provocative in developing countries where there is the dynamic comparative
disadvantage in terms of potential productivity and technological advancements (Foster, 2004).

Looking
at the positive outlook of trade on the economic growth, Free trade promot

 

 

 

Introduction:

The
debate in which whether trade leads to growth is one of the conundrums that
economists are indulged in since several centuries ago. The common view that
trade improves the economic growth has a long history. When we look back to the
History, Adam Smith one of the most famous philosophers in the field of economics
and human behaviour expressed that trade can act as a vent that widens the
market for the surplus production (Zahonogo, 2017). Since then, this
topic has remained the key subject of debate in many research and policy discussions
which has led to the ample theoretical and empirical literature on the trade
growth nexus (Were, 2014).

With
all debates circling around trade-growth nexus, most of the economists and
institutions in the world such as World Bank, International Monetary Fund
promotes trade liberalization as a tool for economic growth, it is important to
note that theoretically the impact of trade openness on the growth of economy
is ambiguous (Maelan & Raju, 2014).

With
the globalization which has been characterised by the trade liberalization and
the intensive trade integration and the technological advancements, there is a
reason to revisit the role of trade in economic growth. Technological advancements
in the sector of transportation, communication has lead to the growth of
opportunities for the global production and distribution systems in which all
countries are considered as value chains (Were, 2014).

Trade
become an important part of economic growth due to the participation of
developing economies such as South Asian and South East Asian countries which
emerged after these countries got their independence from the colonial powers
in the 1960s. These countries adopted to a more export oriented trade policy in
which economies of countries such as China, Malaysia, Bangladesh and Thailand
grew exponentially.

In
this report, I am going to analyse the effect of trade on the economic growth
both in the perspective of liberal approach and mercantilist approach and try
to determine whether trade has a long-term benefit for the economic growth of
countries.

 

 

 

 

Literature Review on
Trade and Economic Growth Nexus

The
integration of countries in to the world economy has been regarded as the most
important milestone that has been achieved in the field of development across
the countries (Busse & Jens, 2012).

While
looking at the empirical evidence of trade and economic growth, it is important
that the definitions of these terms are well explained. Trade can be defined as
the exchange of goods and services across two or more parties in the aim of
getting a monetary or another return. Though the definition of trade is very
simple, international trade happens when trade goes beyond the borders. Which
basically means that the exchange of goods and services happened between
countries and nations. Free trade is a system in which the trade of goods and
services between or within countries flows unhindered by government-imposed
restrictions and interventions. Interventions include taxes and tariffs,
non-tariff barriers, such as regulatory legislation and quotas, and even
inter-government managed trade agreements such as the North American Free Trade
Agreement (NAFTA) and Central America Free Trade Agreement (CAFTA) (contrary to
their formal titles.) Free trade opposes all such interventions (Regine Adel ,
2012).
Protectionism, in the other hand is an economic policy of restricting trade
between nations. Trade may be restricted by high tariffs on imported or
exported goods, restrictive quotas, a variety of restrictive government
regulations designed to discourage imports, and anti-dumping laws designed to
protect domestic industries from foreign take-over or competition (Regine Adel ,
2012).

Although
there is no specific definition for economic growth and development, many
economists and philosophers assume that the economic development as a process
in which it generates economic, social, political changes in which the national
economy and the society cumulatively and durably increase the national product (Petronela,
2012).
 In simple terms economic growth can be explained
as the process of increasing the size of national economies (Petronela,
2012).

Among
the economists and political scientists there is the consensus that trade
positively contributes to the economic growth of a country. For an instance,
from the cross-country studies that have been published, it provides an
overwhelming positive relationship between trade and economic growth. But it is
important to note that other economists who doesn’t believe that there is a
direct relative connection among trade and economic growth believes that the
economic growth can only be benefited if the trade policies adapted by the
countries are better.

According
to Zahonogo 2017, Traditional trade theories predict that the growth which are gained
from the liberal trade approach are due to the reason that the country adapt to
specialization, investment and innovation, productivity and resource
allocation. But on the other hand, Neoclassical growth model such as Solow’s
Growth Model which consider technological advancements and changes as having an
external origin and articulates that trade policies do not impact the economic
growth (Zahonogo, 2017). Or in other words traditional
theories suggest that trade policies have a direct relation with economic
growth while neoclassical theories depict that trade policies and economic
growth does not have a direct relationship (Zahonogo, 2017).

Protectionism
or Liberalism?

There
is 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 trade
liberalization, it would have a negative effect on the local companies due to
international competition. However, it is also believed that if the country
invested in the industry it would allow them to gain comparative advantage
through the protectionist regime (Regine Adel , 2012).

 

A
strong argument lies on infant industries, where if developing countries have
industries that are relatively new, then now these industries would struggle
against international competition. However, if they invested in the industry
then in the future they may be able to gain Comparative Advantage. Protection
therefore would allow them to progress and gain (Regine Adel ,
2012).

 

 

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