ECONOMICS PROJECT – FINAL DRAFT

TOPIC: INTERNATIONAL TRADE AS AN ENGINE OF GROWTH

Name: Shraddha Chakraborty Submitted To: Prof. Rohit Jadhav

Enrolment Number: 2017 052

1. Introduction:

Although the rate of economic growth and the space and pattern of economic develop-ment
depends primarily on internal conditions in developing countries, international trade can
make significant contribution to economic development. The traditional theories of trade
examine how growth in production capabilities can affect international trade.

Clearly, growth can have a major impact on international trade. There is also likely to be an
impact in the other direction—from trade to growth. Exposure to interna-tional trade can have
an impact on how fast a country’s economy can grow and how fast its production facilities
are growing over time.

The classical economists like Adam Smith and David Ricardo first found interest in the role
of trade in economic development. They have sang the praise of free trade based on
compara-tive advantage. The principle of comparative advantage holds that each country will
benefit if it specialises in the production and export of those goods that it can produce at
relatively low cost. Conversely, each country will benefit if it imports those goods which it
produces at rela-tively high cost.

The classicists advocated the doctrine of laissez-faire (non-interference by the government)

even in international trade (and not just in domestic matters). Such adherence to completely
free trade, they thought, would promote the maximisation of welfare for the world and the
member countries in the world trading system.

Notwithstanding its limitations, the theory of comparative advantage is one of the deepest in
all types of economies. Those countries which disregard comparative advantage ultimately
have to pay a heavy price in terms of their living standards and economic growth.

As P. A. Samuelson and W. D. Nordhaus convincingly argue:

“Free trade promotes a mutually benefi­cial division of labour among nations; free and open
trade allows each nation to expand its production and consumption possibilities, raising the
world’s living standard. Protectionism prevents the forces of comparative advantage from to
maximum advantage.”

However, there is dissatisfaction among LDCs as to the virtue of completely free trade and
most such countries feel that it is not the ideal policy for them. They feel that they are
partners in global trade since the gains from trade are not equally shared by developed and
developing countries.

This very feeling gets reflected in the North-South conflict which has created the demand for
a new international economic order. Given their level of poverty and some special problems
which they have been facing over the years, developing countries often treat the laissez-faire
pre-scription as inappropriate.

So, any discussion of the role of international trade in promoting economic development must
take into account the special problems faced by the developing countries in international
trade and the policy constraints they face in tackling them.

Trade, undoubtedly, has several benefits. It promotes growth and enhances economic
wel-fare by stimulating more efficient utilisation of factor endowments of different regions
and by enabling people to obtain goods from efficient sources of supply. Trade also makes
available to people goods which cannot be produced in their country due to various reasons.

The role of trade in enhancing consumer’s choice (even delight) is tremendous. The foreign
trade multi-plier, shows how an injection of income arising out of trade can lead to economic
expansion.

According to A.C. Cairn cross:

“As often as not, it is trade that gives birth to the urge to de­velop, the knowledge and
experience that make development possible, and the means to ac­complish it.”

An Overview of the Developing Countries:

It may be noted at the outset that LDCs are not a homogeneous group. There are many
differences in levels of income, types of industrial structure, degree of participation in
inter-national trade (or the degree of economic openness) and types of problems faced in the
world economy.

In spite of the diversity among LDCs, a list of Characterizations of these countries is useful
for emphasizing that they are very different from the industrialised countries. In general, the
LDCs are characterised as having low per capita incomes and a relatively low per cent of
their population in urban areas.

In addition, population growth rate, the share of agriculture in GDP, and infant mortality rates
are higher and life expectancy is shorter than those in high- income countries. Finally, the
share of manufactured exports in total exports tends to be lower in devel-oping countries than
in high-income countries.

E. Haberler lists the following benefits of trade to stress the importance of trade to
development of the less developed countries:

1. Trade provides material means (capital goods, machinery, and raw and semi-finished
material) indispensable for economic development.

2. Trade is the means and vehicle for the dissemination of technological knowledge, the
transmission of ideas, for the importation of know-how, skills, managerial talents and
entrepreneurship.

3. Trade is also the vehicle for the international movement of capital, especially from the
developed to the underdeveloped countries.

4. Free international trade is the best anti-monopoly policy and the best guarantee for the
maintenance of a healthy-degree of free competition.

2. The Role of Trade in Economic Development:

In discussing the role of trade in fostering economic development, we have to examine

various different issues, viz, the static effects of trade, the dynamic effects of trade and export
pessimism or secular deterioration of the terms of trade of LDCs. In this context, we have
access to discuss trade policies of the developing countries.
 A. The Static Effect of Trade on Economic Development:

International trade enables an LDC to get beyond its PPC and improve its welfare. It can
consume more than what it is capable of producing through specialisation and exchange. An
LDC can improve its well-being by specialising in and exporting the relatively less expensive
domestic goods and importing goods which are relatively more expensive. Even if a
country’s production does not change at all, there are still gains from exchange if there is a
difference between internal relative prices in autarky and those which can be obtained
internationally.

In addition, the characteristics of the imported goods either in terms of quantity for
custom-ers or productivity in the case of capital and intermediate imports, may improve the
economy ‘s ability to meet consumer desires for better quality goods or larger volume of
goods made avail-able by improved technology. Imports may also help remove bottlenecks
and enable the economy to operate closer to its PPC—that is to say, more efficiency on a
consistent basis.

i. Employment Generation:

Due to specialisation there is a relative expansion of the sec-tors using relatively more
intensively an LDCs abundant factor—which is labour. For most LDCs, specialisation
according to comparative advantage helps to expand labour-intensive production instead of
more modern, capital-intensive production.

This means expanding traditional agriculture, primary products, and labour-intensive light
manufactures. International trade thus stimulates employment and puts upward pressure on
wages as has been suggested by the Heckscher-Ohlin (H-O) theorem. However, most LDCs
are labour-surplus countries. So, an increased demand for labour is unlikely to raise the wage
rate much.

ii. Export Instability:

Moreover, the relative growth in the production of traditional goods may not be desirable if
such growth is at the expense of modern manufacturing. Due to low income and price
elasticities of demand for such goods and the instability of supply of agricul-tural and
primary products due to natural (weather) conditions, greater specialisation in these goods
can result in a greater instability of income even in the short run.

iii. Adverse Terms of Trade:

In addition, since an LDC is a small country (in the sense that it cannot exert any influence on
the prices of its exports and imports), expansion of export supply may lead to undesired terms
of trade movements that will-reduce the static gains from trade. This may lead to a
distribution of gains from trade in favour of the industrially developed countries.

iv. Greater Dependency:

Finally, expanding production of basic labour-intensive goods and relying on the

industrialised countries for technology and skill-intensive manufactures and capital goods
often leads to excessive economic dependency. It also links the economic health of the
developing country to that of the industrialised country.

v. Vent for Surplus:

Both the classical (Ricardian) and the modern (H-O) theories of inter-national trade are based
on the assumption that production in each trading country takes place under conditions of full
employment. But full employment does not prevail in LDCs. So, trade theories cannot be
applied in such countries to predict the impact of trade on production, con-sumption,
distribution and social welfare.

Yet, there is another potential gain from trade, as has been pointed out by Hla Myint (1958).
According to Myint, due to unemployment on LDCs, actual output is less than its potential
output. By utilising its manpower fully an LDC can produce more products and its supply
may exceed domestic demand.

This excess supply can be disposed of in the form of export. In this sense a ‘vent for surplus’,
i.e., a larger market that will permit a labour surplus country to increase its employment and
output, as is shown by a movement from a point such as I (inefficient point), inside the PPC
to a point E (efficient point) on the PPC in Fig. 1.

Myint suggests that vent for surplus convincingly explains why countries start to trade, while
the theory of comparative cost helps to under-stand the types of commodities countries
ultimately ex-port and import. No doubt the gains in income, employment and needed
imports can render considerable help to the whole process of development.

In short, the static gains from trade for an LDC originates from the traditional gains from
exchange and specialisation as will follow from a vent for surplus. However, due to the lack
of sufficient flexibility in traditional (largely subsistence) economies and the nature of the
traditional labour-intensive exports, the relative gains from trade may be less than those from
more flexible and progressive industrial economies and may be further reduced by the
undesirable effects of increased economic instability and secular deterioration of the terms of
trade. No doubt in the process of economic development we find changes in the economic
structure and sectoral distribution of income.

This occurs in response to changes in relative prices brought about by international trade.
However, the economic systems of the LDCs tend to be somewhat unresponsive to changing
price incentives, at least in the short run.

So, factors of production may not move easily to the expanding low-cost sectors from the
contracting higher-cost sectors. In such a situation the process of adjustment assumes the
characteristics of the specific-factors model. Consequently, the gains from specialisation are
reduced correspondingly.
 B. The Dynamic Effects of Trade on Economic Development:

Perhaps the maximum potential impact of trade on development lies in its dynamic effects.
As D. Salvatore has put’ it- “While the need for a truly dynamic theory cannot be denied,
comparative statics can carry us a long way forward incorporating dynamic changes in the
economy into traditional trade theory. As a result, traditional trade theory, with certain
qualifications, is of relevance even for devel­oping nations and the development process.”

On the positive side, the expansion of output made possible by access to the wider
international markets enables the LDC to exploit econo-mies of scale that would not be
possible with a narrow domestic market.

This means that indus-tries which are not internationally competitive in an isolated market
may achieve competitive-ness by way of international trade if there are potential economies
of scale. If LDCs can take advantage of economies of scale, they can reduce costs of
production and sell their products at low prices in international market.

Promotion of Infant Industries:

Moreover, comparative advantage is a dynamic concept. In the real world, we find changing
pattern of comparative advantage over time. As a developing nation accumulates capital and
improves its technology, its comparative advantage shifts away from primary products to
sim-ple manufactured goods first and then to more sophisticated ones.

Thus, with economic development, international trade can foster the development of infant
industries and make them internationally competitive by providing the market size and
exposure to products and proc-esses that is unlikely to happen in closed (isolated) economy.
This is why the most important argument for protection in LDCs is the infant industry
argument. It is essentially an argument in favour of protection to gain comparative advantage.

This is why for protecting infant industries trade policy restraints in most LDCs are used, at
least in the early stages to restrict imports or promote exports. To some extent, this has
already happened in Brazil, Korea, Taiwan, Mexico and some other developing countries.
However, there are various problems with using the policy in practice. Infants never grow
adult in some high protected environments and there is need for continuation of protection for
ever.
Other Dynamic Influences:

Perhaps the maximum possible impact of trade on development depends on its dynamic
effects. Prima facie, the expansion of output brought along by access to the larger
international markets permits the LDC to take advantage of economies of scale that do not
arise in the limited domestic market.

Thus, industries which are not internationally competitive in a nar-row and isolated domestic
market may well gain competitiveness as a wider market created by international trade. Trade
creates an opportunity to exploit potential economies of scale. Fur-thermore, comparative
advantage keeps on changing over time.

Thus, as economic development takes place, international trade promotes the growth and
ensures the maturity of infant industries which become internationally competitive by being
able to exploit the wider market created by trade.

A wider market also exposes an LDCs products and processes in international market and
creates pressure on the industries of LDCs to improve product quality and reduce product
price so that these are accepted in the rest of the world. In short, international trade makes
protected domestic industries internationally competitive.

Other dynamic influences of trade on economic development arise from the positive
com-petitive effects of trade, increased investment resulting from changes in the economic
environ-ment; the increased dissemination of technology into the LDC (as has been suggested
by the product life cycle model), exposure to new and improved products and changes in
institutions accompany the increased exposure to different countries, cultures and products.
Trade fosters domestic competition and acts as an instrument of controlling monopoly.

Openness to trade can affect the technology that a-country can use. We may now discuss the
mechanism in detail. Trade policies give of country access to new and improved products. No
doubt capital goods are an important type of input into production that is largely imported by
LDCs at lower stages of development. Trade allows a country to import new and improved
capital goods, which “embody” better technology that can be used in production to raise total
factor productivity.
The foreign exporters can also enhance the process, for instance, by advising the importing
firms on the best ways to use the new capital goods. Some empirical studies show that the
gains from being able to import unique foreign imports that embody new technology can be
larger than the traditional gains from trade, highlighted by the classical theory.

According to T. A. Pugel, in a more general way, openness to international activities leads

the firms and people of the country to have more contact with technology developed in other
countries. This greater awareness makes it possible for an LDC to gain the use of new
technol-ogy—through purchase of capital goods or through licensing or initiation of the
technology.

Great economic openness is likely to have a favourable effect on the incentive to innovate.
Trade is likely to put additional competitive pressure on the country’s firms. The pressure
drives the firms to seek better technology to raise their productivity in order to achieve
greater international competitiveness.

Trade also provides a larger market in which to earn returns to innovation. Its sale into
foreign markets provides additional returns, then the incentive to inno-vate increases, and
firms devote more resources to R & D activities.

Openness thus can enhance the technology that a country can use—both by facilitating the
diffusion of imported technology into the country and by accelerating the indigenous
develop-ment of technology. Furthermore, these increases in current technology base can be
used to develop additional innovations in the future.

The current technology base becomes a potent source of increasing returns over time to
ongoing innovation activities. The growth rate for the country’s economy (and for the world
as a whole) increases in the long run.

In short, economic openness can accelerate long-run economic growth. This indicates an
additional source of gains from international trade (or from openness to international
activities more generally). Empirical studies show that there is a strong positive correlation
between the growth rate of a country and its international openness. This is not a proof of
causation, ‘but it is consistent with the theoretical analysis that suggests why openness can
raise growth.
Trade as a Hindrance to Growth:

Critics, however, have pointed out that conditions in developing countries are not very
differ-ent from those of industrial countries. So that the application of the static principle of
compara-tive advantage may not be helpful in providing appropriate guidelines for trade and
specialisa-tion in a dynamic LDC environment. While trade can be beneficial to nations and
the world as a whole, it can also have harmful effects on some countries and as also on the
world entire.

The international trading system is biased against the developing countries, particularly the
poor among them, because of factors like their weak bargaining power vis-a-vis the advanced
countries, the participation gap, dependence on the developed countries for various needs,
etc.:

The important harmful effects of trade are the following:

a. Trade may lead to indiscriminate exploitation of natural resource, particularly of

devel-oping nations. Trade has been resulting in the drain of resources from the
developing to devel-oped countries.
b. Trade also causes environmental problems because of the indiscriminate exploitation
of resources and location/relocation of polluting and hazardous industries in the
developing world for the benefit of the developed world.
c. The deterioration of the terms of trade of the developing countries causes large
income transfers from the developing to the developed countries.
d. International trade may also give rise to demonstration effect in the developing
countries. Demonstration effect, a term associated with Nurkse, refers to the tendency
of poor people to imitate the life styles of the rich.
e. In international economics, it refers to the tendency of the people of developing
countries to follow the consumption habits of the people of the advanced countries by
importing luxury goods. This could have harmful social and economic effects. It
could also have some favourable effect if it can encourage the development of the
domestic industries of the developing countries.
 f. Another important harmful effect of trade is what is described as the backwash effect.
Some of the domestic industries of the developing countries, particularly small scale,
which are unable to compete with the well-developed industries of the advanced
countries, could be destroyed or damaged by unregulated imports.

India has had a paradoxical policy of reserving many items for the small scale sector but
allowing the import of these items. The recent trade liberalisation is adversely affecting the
agricultural, often subsistence, sector of many develop-ing countries even as the agricultural
sector is heavily protected in the developed world.

Globalisation and free trade are now adversely affecting the developed countries, too
be-cause of the edge the developing countries have over the developed ones in the production
of many products. Trade also results in the introduction of pep and cola cultures to the
developing countries which have important social implications.

Two main reasons for not so remarkable improvement in growth due to trade in LDCs are:

(i) Absence of perfect competition (and the consequent distortion of commodity and factor
prices) and

(ii) The absence of full employment (due to existence of not only surplus labour but also
surplus productive capacity).

For these reasons, if we are to get a balanced view of the effects of international trade on
development we have to refer to some important disadvantages of free trade for an LDC,
more so in view of the fact that these problems can have important implications for trade
policy.

1. Externalities:

The static theory of comparative advantage ignores the very important fact that most markets
in LDCs are imperfect. This implies departure from the Pareto optimality conditions. Market
imperfections create an undesirable consequence. Private costs and ben-efits differ from
social costs and benefits mainly due to the existence of economic externalities.

Any reliance on market prices in such an environment can lead to the emergence of a pattern
of trade which, is largely inconsistent with both relative social costs-and long-term
development goals of the country, e.g., if the growth of an industry does considerable damage
to the physical environment.

2. Differential Impact of Trade:

In a more general way, the overall effect of growth in exports on the growth and development
of the entire economy is likely to vary from commod-ity to commodity. The reason is easy to
find out. In a broader dynamic context, the economy- wide production linkages vary among
different commodities or sectors.

Industries producing certain strategic inputs like steel, coal and power or oil may act as
leading sectors or ‘growth poles’ for the entire economy, while others—such as primary
products—will act as the lagging sectors having little or no linkage effect outside their own
sectors.

3. Variation in Returns to Scale:

Returns to scale may also vary among commodities. This means that an LDC is unlikely to
have a relative cost advantage in a particular product since the domestic market is too narrow
to permit cost-efficient production.

However, there might exist a comparative advantage in the same product at a higher level of
output. In a like manner, a product may have a relative cost advantage at present but its
production is characterised by decreasing returns to scale. So it may have very limited export
potential.

4. Market Imperfections and Government Policy:

The domestic supply and demand con-ditions that underlie both current and future
comparative advantage is likely to be influenced both by market imperfections and by
restrictive, and at times unrealistic, domestic economic policies.
5. Unequal Distribution of Gains from Trade:

Finally, the operation of markets and char-acteristics of traded goods differ between the
developing countries and the industrialised coun-tries. Such differences result in a
disproportionate share of the benefits of trade being captured by the industrialised countries.

What is worse is that such differences often lead to greater dependence of LDCs on DCs.
This is a major source of potential development problems for countries like India, Pakistan
and Bangladesh which have a colonial heritage and an enclave economic structure.

As D. Salvatore comments- “With developing nations specialising in pri­mary commodities

and developed nations specialising in manufactured products, all or most of the dynamic
benefits of industry and trade accrue to developed nations, leaving developing nations poor,
undeveloped and dependent.” Two issues related to these differences are export instability
and secular (long-run) deterioration of the terms of trade. In this sense, trade acts as
hindrance to growth.

It is to this issue that we turn now:

Export Instability:

Exports of LDCs tend to fluctuate more sharply from year to year than are found in
industrialised countries. Due to the relatively high degree of openness of many LDCs (i.e., a
high ratio of foreign trade to GDP), variability in the export sector leads to fluc-tuations in
GDP and the domestic price level. Thus, business cycles get transmitted from devel-oped to
developing countries through international trade.

This causes considerable uncertainty to producers and consumers. In addition, export

instability makes it more difficult to carry out planning for development. When export
earnings are high in ‘good’ years, new projects are started by importing necessary equipment.

But when export earnings subsequently decline, the planning process receives a severe jolt.
The reason is that foreign exchange is not available to complete and to operate the projects.
The end result is huge resource waste and, a serious distortion to the planning process.
Causes:

There are three main causes of export instability. There is a common link among the causes
since all originate from the fact that many LDCs are relatively more engaged in the export of
primary products than of manufactured goods. While the first two reasons pertain to price
fluctuations, the third one focuses on variations in total export earnings.

Immeserising Growth:

J. N. Bhagwati has even pointed out that a large country actually could be made worse-off by
an improvement in its ability to produce the products it exports. This is known as
immeserising growth. By expanding its ability to produce food as its export good the large
country increases its supply of exports (expands its willingness to trade). This reduces the
relative price of food in world markets. At the same time this causes an increase of the
relative price that it must pay for its imports of car.

The decline in the country’s terms of trade is so bad that it outweighs the benefits of the
greater ability to produce exportable goods. In short, growth that expands the country’s
Willingness to trade can result in such a large decline in the country’s terms of trade that the
country is worse off.

No doubt most of the gains from trade in the past have accrued to DCs. But this does not
mean that trade is actually harmful. There are cases where a balanced trade may actually have
hampered economic development. However, in most cases, it can be expected to provide
invaluable assistance to the development process.

Dutch Disease:

Booming primary exports may fail to stimulate development due to deterioration of the terms
of trade for a special reason, known as the Dutch Disease. This problem was first detected in
Netherlands in the 1960s when major reserves of natural gas were discovered.

The ensuing export boom and the balance of payments surplus pressurized new prosperity.
Instead, how-ever, during the 1970s, the Dutch economy suffered from rising inflation,
declining export of manufactures, lower rates of income growth, and rising unemployment.
Max Corden and Peter Nearly first described the strange phenomenon of the Dutch Disease,
in which a country that receives higher export prices or a larger inflow of foreign capital may
be worse-off than with-out the windfall.

Can foreign trade have a propulsive role in the development of a country? The issue dates
back to the period of economic development when Adam Smith makes an enquiry into the
nature and causes of Wealth of Nations (1776). His view is that international trade expands
market and facilitates divi-sion of labour. Division of labour is the key to industrial
development and thus trade has a beneficial role to eco-nomic development.

Stabilisation of Export Prices and Earnings:

Three main types of policies can stabilise prices of export earnings in LDCs.

(a) International Buffer Stock Agreement:

This is essentially a means of generating larger benefits for LDCs in the world economy.
Under such an agreement, producing nations (often joined by consuming nations) set up an
international agency endowed with funds and a stock of the commodity. If the world price of
the good falls below the flour the agency will buy it to bring the price up to the flour. On the
other hand, if the world price rises above the ceiling, the agency will sell the good to bring
the price down to the ceiling. If the agency achieves success, then both producing and
consuming nations will gain.

(b) International Export Quota Agreement:

Under an export quota agreement, producing countries choose a target price for the good and
make a forecast of world demand for the coming year. They then determine the quantity to be
offered for sale which will, in conjunction with estimated world demand, yield the target
price. If the forecast of demand is correct and supplying countries adhere to their quotas, then
the next year’s price will reach its target level.
The export quota agreement contains a mechanism for keeping prices stable. If the world
price falls due to a fall in demand, the export quotas of the supplying countries will be
tight-ened and the price will rise to the target level. Likewise, if the world price rises, the
quotas will be relaxed and the price will fall to the target level. Thus, this policy provides
some degree of stability to export prices.

(c) Compensatory Financing:

Under this scheme, an international agency is provided with necessary funds. It forecasts the
growth trend of the export earnings of each participating LDC. The IMF has such a facility
since 1963. Where export earnings of an LDC falls, the agency ensures that there is a steady
flow of foreign exchange to the LDC for the purchase of develop-ment imports. This method
is superior to international consumption agreements (ICAs) since compensatory financing
does not interfere with the allocative function of prices.

Conclusion

The important question is whether there should be free trade and not whether there should be
trade. Those who question the assumption of comparative cost model express the view that
the efficiency gained from free trade are unlikely to offset the tendency in a free market for
the comparative position of the developing countries to deteriorate vis-a-vis the developed
countries.

The success story of the Asian countries like South Korea, Taiwan, Hong Kong and
Singapore in the field of export have added new dimension to the analysis of relation between
trade and development. The experiences of these countries do demonstrate the potential of
exports and labour-intensive production.

The international trading system has enhanced competition and nurtured what Joseph
Schumpeter a number of decades ago called ‘creative destruction’, the continuous scrapping
of old technologies to make way for the new.

Although trade-growth debate is not new, the last two decades have witnessed intense trade
integration and expansion, coupled with a changing global trade landscape. The paper
complements the existing literature and provides new cross-country evidence on the effects of
trade on economic growth, taking into consideration the differential effects of trade. The
latter is analysed by categorizing countries by the level of economic development, including
LDCs as a sub-category of its own. The results on LDCs are particularly germane to African
countries, which constitute the bulk of this group of countries.

In general, the empirical analysis supports the increasing role of trade in economic
development. For all the trade indicators considered, the results show a positive and
significant impact of trade on economic growth. However, a disaggregated analysis shows
that effects of trade differ by the level of development—whereas the effect of trade
particularly exporting has had a significant positive impact on economic growth in developed
and developing countries, the impact is not significant for LDCs. The lack of significance
among this group of countries, most of which are in Africa, suggests that the structure and
pattern of trade need to be upgraded toward that in the other developing countries.

However, a further examination of other channels through which trade influences economic
progress shows a positive and statistically significant effect of trade on FDI for all categories
of countries including LDCs. The results further show that trade also plays a significant role
in promoting domestic investment in LDCs and developing countries. Thus, despite the
challenges that LDCs and African countries in particular face, trade still remains an avenue
through which LDCs can adopt new technologies and attract FDI as well as improve
domestic investment.

In general, the results are consistent with the emerging patterns of trade, including the
increasing link of trade to FDI and the increasing participation of developing countries in
global trade, especially the emerging countries in Asia and Latin America. With the growing
influence of regional and GVCs, trade is poised to play an even greater role in economic
development. The challenge, however, lies in how countries position themselves to reap
maximum benefits from global trade, and how the multilateral trading system can be levelled
and enhanced to ensure that the gains are shared by all, including LDCs and other low
income countries that are still lagging behind, particularly in Africa.

Effective trade integration is predicated on an effective multilateral trading system and a

level-playing field. In reality, however, this is often not the case and this is an area where
WTO, despite its efforts to level the playing field, still has a challenge. Effective multilateral
disciplines are essential to ensure that the benefits of trade liberalization are shared by all.
The issue is no longer whether to trade or not, but how to trade better and make trade
beneficial for all. Additionally, the expected benefits of trade are likely to be enhanced when
supported by conducive institutional framework and complementary national policies that are
trade and growth-enhancing. These include lower costs of doing business, investment in
infrastructure, human capital development, technological innovation and promotion of
entrepreneurship. In particular, Africa still lags behind both in intra and inter-trade, despite
the regional trade integration initiatives. The continent remains heavily dependent on the
export of a narrow range of goods, mostly primary commodities with less value addition,
most of which are also subject to price fluctuations in the world market. Africa should take
advantage of regional and global supply chains to unlock its trade and growth potential.

Notwithstanding the vast literature on the subject, there are still gaps and areas for further
research. For instance, measurement and quantification of trade policies, openness and trade
liberalization are still subject to debate. With the emerging patterns of trade, including the
focus on value addition and supply chains, the standard indicators of trade and trade openness
are unlikely to capture the depth and full impact of global trade. The dearth and lack of
accuracy of such statistics are demonstrated by Jerven (2014). Moreover, although world
average tariff rates have come down considerably in the last three decades, non-tariff trade
barriers and measures have become more fundamental than tariff barriers, and hence more
analysis is needed in this area. Future research should also explore the rising role of services,
including the impact of different types or categories of services on economic growth,
especially as more data on measurement of trade in terms of value added becomes available.