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Published on Feb 15, 2016


The aim of the project is to present an overview of Free Trade and Development through various writings and articles. The aim has been to identify the relationship between free trade and development and their relevance in the economic growth of a country.

Though the study of Economics is an immense project and pages can be written over the topic but due to certain restrictions and limitations I was not able to deal with the topic in detail.

One of the foremost challenges facing the world this century is dealing with the persistent problem of world poverty. A world in which a majority of the globe's population lives in impoverished conditions is unacceptable. What Adam Smith, wrote in relation to a country applies to the world at large:

"No society can be flourishing and happy, of which the far greater part of the members are poor and miserable."

In past decades, various schemes have been proposed as the key to promoting economic growth and development: development aid, population control, capital accumulation and investment in heavy industry, and the like. Each of these schemes has failed to unlock the door to greater prosperity in the developing world. As a result, the search for a single universal measure that will stimulate economic growth has given way to the less ambitious, but more realistic, search for the combination of policies that tend to encourage, though not guarantee, economic development.

This paper reviews this link between trade and development. It provides an overview of the recent evidence on the relationship between trade and growth, trade and poverty reduction, and trade and income distribution. The aim is to provide the background context for tackling more specific issues, such as the agenda for trade negotiations in key sectors such as agriculture and services, and the role of the World Trade Organization in fostering the interests of developing countries.

Trade Policy and Development

Economic theory can provide a framework for analyzing the relationship between trade and development, such as sorting out the various mechanisms by which one can affect the other, but theory does not offer guidance that is decisive when it comes to policy. In part, this is because of a tension between two alternative views of the impact of trade on development. The classical view, often associated with Adam Smith, is that free trade will lead to the most efficient use of a country’s resources and therefore yield the highest national income.

Openness to trade improve economic performance by increasing competition and by giving domestic firms access to the best foreign technology, which can be adopted to raise domestic productivity. An alternative view, associated with the nineteenth century political economist Friedrich List, suggests that developing countries should protect their infant manufacturing industries from foreign competition to foster their growth and allow them to catch up to industrial leaders.

This view suggests that government assistance to shift resources out of primary products and into manufacturing would promote economic development and prevent prolonged specialization in low value-added activities.

While economic theory provides a framework for thinking about these issues, the answer to the question of which trade regime best promotes economic development ultimately depends on empirical evidence: what have been the actual country experiences in terms of the impact of liberalization on economic performance?

In the past, the answer given has not always been favorable to open trade policies. For example, economic historian Paul Bairoch and others have argued that Friedrich List was correct in the nineteenth century: countries with relatively low tariffs (such as the Britain) grew relatively slowly while other developing countries (such as the United States, Canada, and Argentina) imposed high tariffs and grew rapidly. For the period 1870 to 1913, high tariffs and economic growth rates are positively correlated.

For both China and India, the results have been astounding. In both countries, the expansion of trade - both exports and imports - has been very rapid over the past decade. This rapid growth in trade has been accompanied by much faster rates of economic growth. In the twenty years after 1980, real GDP grew at an average annual rate of 10 percent in China and 6 percent in India. No other country grew as rapidly as China, whereas fewer than ten other countries grew more rapidly than India This rapid growth has translated into material improvements in the standard of living of these countries. For example, higher incomes have meant a sharp reduction in poverty. According to government statistics, the incidence of poverty fell from 28 percent in 1978 to 9 percent in 1998 in China, and from 51 percent in 1977 to 27 percent 1999 in India

Reference : • Manupatra • Hein Online • Westlaw International