International Trade and Development

Abstract

OVERVIEW• Orthodox theories of comparative advantage imply that free trade benefits all countries, but only on the unrealistic assumptions of balanced trade and full employment; even then, trade creates losers as well as winners and may increase inequality within countries.• In the heterodox view, because balanced trade and full employment are rarely observed in reality, trade usually follows absolute rather than comparative advantages; as a result, countries that achieve more rapid export growth and/or trade surpluses often benefit at the expense of others.• Changes in the terms of trade (international prices) redistribute the gains from trade between nations. Commodity price booms may benefit countries that are specialized in primary commodities, but can also result in what is called the "Dutch disease" of currency appreciation leading to deindustrialization.• Efforts to promote export-led economic growth are usually successful only in a limited number of countries at a time as a result of a "fallacy of composition"; the only way that all countries in the global economy can grow faster together is by the adoption of more https://doi.org/10.17606/dft2-z726 2 expansionary macroeconomic policies worldwide. WHY THIS TOPIC IS IMPORTANTInternational trade has been an important feature of the economic growth process since the dawn of modern capitalism. The colonial empires of the sixteenth through the early twentieth centuries were built on a very unequal form of trade, primarily involving the exchange of natural resources from the colonial areas for manufactured goods from the imperial powers. The countries that have grown most rapidly in recent decades, such as Japan, South Korea and China, have relied on exports of manufactures as a key part of their growth strategy. Supporters of the global trading system argue that unfettered trade leads countries to specialize in the products that they can produce most efficiently, resulting in higher productivity and increased consumption levels in all countries. Critics, however, charge that the global trading system often widens income gaps between more advanced and less developed nations, and can also exacerbate inequality in the distribution of income within countries.The share of internationally-traded goods and services in global GDP has increased dramatically over the past half century, as shown in Figure 13.1. [INSERT FIGURE 13.1 HERE]This tremendous expansion of trade has been driven by several factors, including deliberate 3 efforts by governments to open up markets by negotiating reductions in trade barriers -a process known as trade liberalization -as well as changes in technology that have revolutionized how products are made, how cheaply goods can be shipped, and how easily firms can communicate with production facilities around the world. This chapter is concerned with theories that try to identify the relationship of international trade to longrun growth objectives and other core macroeconomic issues such as unemployment. THE ORTHODOX APPROACH: THE THEORY OF COM...