Dec.

16, 2005
Eddie Terrenzi
Prof
PSC 445

International Trade and Global Development

Introduction

One of the main drives behind globalization is international trade. However there

cannot be trade without globalization. Globalization opens up country boarders and with

it comes the flow of ideas and culture. These ideas and culture, also known as cultural

diffusion, expose citizens to lifestyles and standards of other countries around the world.

This exposure creates a demand for other lifestyles and standards and therefore goods

associated with other cultures are desired. Economies run on supply and demand, the

more demand for goods the more supply of goods are needed. The way for a country to

obtain what its economy cannot produce is through international trade. International trade

also allows a country to specialize in the production of some goods to trade for other

goods to meet its economy’s demands. For less developed countries and developing

countries this means that a country can increase their production of goods that they most

efficiently produce knowing that there is a larger market than their domestic market to

exhaust their production in excess of domestic demand. International trade has benefits

for developed and developing countries. What we see today is more countries opening

their markets to foreign goods and an increase in global trade. The problem, as I will

discuss in this analysis, is that unfair trade practices and regulations are negatively

affecting some countries and prohibiting development.

Benefits to Trade

International trade increases the production of some goods for countries. An

increase in production results in an increase in employment and increase in wages. A

portion of wages is saved and a portion of wages is consumed. The portion of wages that

is consumed is put back into the domestic economy by the purchase of other goods. The

portion that is saved is invested (saved) in banks which lends out the money to business

and people to purchase capital and other investments. The Solow growth model is a well

known economic model that calculates economic growth based on savings and

investment through capital accumulation. Course the Solow Growth model does not take

into account technological growth and population growth, both which are more prevalent

today with globalization. So the model that I speak of here is the modified Solow Growth

model. For developed countries, capital accumulation and investment are critical for their

development. International trade provides a link for their economies and the global

markets, where there maybe more demand for their goods. International trade also makes

goods cheaper to buy because, through specialization, production is more efficient which

means that goods are produced at a lower cost. This is best seen by medical supplies,

food, and medicine. All of these goods are vital to a countries survival. They are also key

components in raising life expectancy, reducing mortality rates, and fighting starvation.

Another key component in development is education. Trade can make education supplies

more cheaply available. An increase in wages, due to production increases, means that it

is less likely for country to have their youth employed. When children are not needed to

work they are able to go to school and get an education. Education increases the
productivity of future generation worker, thus making the human capital more efficient.

These are the many benefits of international trade for a developing country. Trade

benefits a country’s economy and its people both directly and indirectly. Trade inherently

increases the standard of living for a country by making available resources and

technology that are abundant in the developed countries.

Evidence of Development

International trade has grown 15 fold in the past 50 years (Wakeford. 1996). Also

in the past 50 years global poverty levels have declined. India and China are good

examples of gradual opening of markets and standard of living increases. China and India

both were poor countries 50 years ago. Both of these countries had opened up their

markets and allowed foreign direct investment. Today both countries are heavily engaged

in international trade and have had an increasing GNP and GDP over the years. Studies

have shown that greater openness to international trade is positively related to growth in

developing countries (Nyahoho. 2001). There are several reasons why openness to trade

promotes growth. Arvind Panagariya points out two reasons I agree with that are most

important. First, entrepreneurs are forced to become efficient to compete in global

markets; and second, openness provides access to technology and allows countries to

specialize in their best produced goods (Panagariya. 2003). Both of these reasons resort

back to the idea of most efficient means of production. The more efficient a country can

produce goods, the more competitive they are in the global market and the lower the cost

of goods due to lower costs of production. Take Taiwan and Japan for instance, they both

specialized in electronics. Japan specialized in cars and electronics and has become
efficient in creating jobs and efficient in production, making them a leader in these areas.

Taiwan specialized in the production of silicone chips and the result was the same.

Regions such as Malaysia have experienced increasing economic growth in the last 15

years. This is because they have engaged in more international trade and have made

themselves more efficient in the production of certain good.

It is also important to remember that open markets are not the only component to

development. Good macroeconomic policy and good governance are vital to economic

growth. Government can make or break a growing economy. A good example of this is

Nigeria. Nigeria is an oil rich country that has one of the worst income gaps and has

experienced negative economic growth. Most of the problem with Nigeria’s development

lies with its corrupt government. Corrupt governments reap the benefits of trade and

hinder the spread of wealth that is gained by trade. In corrupted government countries the

economic potential is stifled because the resources are hoarded by the few rich and elite

within the country. This results in inefficient production and lack of development due to

the distribution of wealth and resources. Most of the money in elitist countries is invested

outside the country and goods purchased by the elitists are usually from other countries.

This counters development because money gained from trade doesn’t go into the

domestic economy but rather is leaked foreign investments. Inefficient government and

bad policies are the main hinders to development despite how well a country may trade

and how resource abundant a country may be.

Unfair Trade Practices

 In recent times there has been an increase in trade blocks. International trade has

moved from a multilateral approach to a more bilateral or regional approach (Gibb and

Michalak. 1997). The E.U., NAFTA, and FTAA, are examples of regional trade blocks.

These organizations set standards for trade amongst themselves. Members or countries

within these regional trading blocks have a form of most favored nation (MFN) status

with each country within the block. The movement from multilateral trade to bilateral

trade agreements leaves some developing countries out in the cold. To credit the E.U.,

some goods exported to the E.U. from certain developing countries are tariff exempt or

are given lower rates. The regional blocks get leverage in the international markets be

excluding and including countries in trade engagement. The result is that some countries

do not benefit from trading due to higher tariffs on exports and selective trade by these

trade blocks. If open markets are the goal then the there should be no double standards.

Unfortunately when it comes to trade disputes the WTO is slanted towards the views of

the developing world, most of who are in regional trade blocks. Most countries now

negotiate bilateral free trade agreements (FTA) to get the most out of free trade (Schott.

2003). When FTA’s are made between developed countries and developing countries it is

usually because the developed country can exploit the cheaper good producing

developing country. Sometimes these FTA’s are made for one good or few goods so that

a country can protect its other good. Protectionism hurts both the consumers and the

development. The consumers could have access to more goods and prices for goods could

be less for consumers if tariff and protectionists ways were not in action. Protectionism

hurts development in that it minimizes competition and in turn efficiency is not

maximized.
 Anti-Dumping duties are a more prevalent form of unfair trade practices. The U.S.

is most notorious for this. The U.S. has imposed anti-dumping duties on shrimp for

Vietnam and duties on all imports of chloroprene. The developed countries use anti-

dumping duties as a form of protectionism for their domestic producers. The duties are

usually imposed on developing countries. However, nothing is done when developed

countries create global surpluses of goods causing global market prices to fall for certain

goods, which in turn affect an entire country and not just one producer. A few years ago

the E.U. and U.S. flooded the market with coffee beans. This drove the price of coffee to

levels that were not profitable for coffee growers in developing countries. Brazil brought

this issue to the WTO dispute forum. The result was the E.U. and U.S. were responsible

for flooding the market but no other action has been taken since. Developed countries

also use subsidies to protect their industries. Subsidies flood global markets as well.

Subsidized producers produce as much as they can because they are subsidized.

Developing countries are unable to compete in certain goods, such as staple goods,

because subsidies make production costs low for developed countries while developing

countries production costs remain the same. The result is that global prices fall and

developing countries are unable to compete in the global market. The E.U. is most

notorious for its agricultural subsidies and high tariffs on agricultural products. This

raises problems for developing countries whose main exports are mostly agricultural in

nature. These unfair trade practices bring hesitance to developing countries in opening

their markets. They see developed countries asking them to open their markets and lower

tariffs when they themselves are maintaining high tariffs. Oxfam has even argued that the

rules of international trade are in favor of the rich (Smerdon. 2002).

The E.U. and New Legislation

When the E.U. enacts new legislation it is applicable to all member states. The

recent E.U. legislation enacted in 2005 was the battery directive and WEEE/RoHS. All

member states are to be in compliance by July 2006. The WEEE is the Waste Electrical

and Electronic Equipment legislation. In this legislation the EU decided to set up a

removal of expired electronic devices. The US has something similar, but not enforced.

The directive outlines a waste removal and collection system for electronic devices. The

member states are to set up a collection system and register local manufacturers and

imports of electronic devices. The catch is that the producers bear the cost of the waste

removal and collection. The Restriction of Hazardous Substances legislation restricted

certain hazardous heavy metals from being allowed in electronic devices and set limits on

other hazardous materials such as lead, chromium, and mercury. The restrictions allow a

certain percentage by weight of each metal. Producers of electronic devices, that want to

export to Europe, to change the content of their product and possibly redesigning their

product altogether. This could be a costly process for producers. The last legislation that

has recently passed is the battery directive. The battery directive sets limits on the

hazardous content of batteries. This is like the Rohs legislation where the allowed

amounts are percent by weight. The directive also sets forth a collection procedure to

dispose of batteries. The collection costs are also the responsibility of the producer. There

is further legislation on this issue to expand the legislation to completely restrict all

batteries coming into the EU with certain hazardous materials. Of course, this would be

very difficult and very costly to Europe and any global producer that exports to Europe.
These legislative initiatives will have a major impact on the whole world. In order for

countries to be able to trade with any E.U. member state they must comply with the new

legislation. Producers must now adjust their production process and may even have to

redesign their whole product to export to the E.U. The impacts affect multiple groups.

First, most developing countries will not be able to redesign their products for

compliance due to the cost. Small firms will go out of business and GDP growth,

depending on the size of the affected industries in the country. The other group that will

be affected is the consumers of member E.U. states. Costs of production will go up for

those producers who can adjust their product for compliance. The cost will then get

passed on to the consumer. If the E.U. continues to pass legislation costly to international

trade then European markets will become undesirable for foreign exporters.

Conclusion

International trade is important for the development of less developed countries

(LDC). International trade is also a driving force behind globalization. Trade spreads

ideas, culture, and goods. The only way to raise the standard of living for the entire world

is to give equal access to all goods to meet that standard of living. Those goods can only

be obtained by one of two ways, through trade or domestic production. In closed

economies goods can be produced domestically but not always efficiently. Efficiency

reduces the price of goods. Specialization can be achieved through trade. What one

country can produce better than another is specialization. Specialization promotes

efficient production. This makes LDC’s more competitive in the production of some

goods over most developed countries (MDC). When there is an even playing field in
international markets then and only then can everyone benefit from trade. Countries can

have a competitive advantage when there is equal, unrestricted, and unbiased access to all

markets. Getting countries to open their markets is not the goal. This will be achieved

when MFN status, unfair trade practices, and regional blocks are done away with. All

these things make it undesirable for LDC’s to open their markets. If LDC’s are to

advance then MDC’s must treat them as equals in the international political economy.

The WTO and other global economic organizations should be the leveler of the playing

field. For international trade to be successful it must strengthen the economies of all those

participate. As for development, the market forces should be left to work themselves out

with outside interference. It is the duty of developed countries to aid the rest of the world

in development. This can best be accomplished by sharing the benefits of international

trade with no restrictions, regulations, or rules that are not equally abided by.
 References

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The World Economy. Annals of the Association of American Geographers. 87:
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2. Nyahoho, Emmanuel. 2001. Globalization and Economic Goals. The Journal of Social,
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3. Panagariya, Arvind. 2003. International Trade. Foreign Policy. 139: 20-28.

4. Schott, Jeffrey. 2003. Special Report: Unlocking the Benefits of World Trade. The
Economist. 369: 85-90.

5. Smerdon, Peter. 2002. Trading Places. Far Eastern Economic Review. 165: 26

6. Stoper, Michael. 1992. The Limits to Globalization: Technology Districts and

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7. Wakeford, David. 1996. The Hidden Strength Behind International Trade (GATT)
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