Trade has often been viewed as an integral part of economic development for poorer countries. But the merits and de-merits of different trade policies for developing countries remains a controversial issue.

Trade and growth

During the 1990s, the annual growth of GDP for the developing countries as a whole increased to 4.3 per cent from 2.7% in the 1980s, and some of this acceleration in economic growth is attributed to the success of a number of countries in liberalising their economies, becoming more open to global trade and successfully competing and integrating with the rest of the global economy.

Global trade expanded rapidly during the 1990s with global exports growing at an average rate of 6.4 per cent, reaching $6.3 trillion in 2000. Trade in manufactured goods and in services has continued to grow at rates far in excess of national output implying an increased dependency on trade for countries rich and poor.

Trade in manufactured goods has risen by a huge amount in the last ten years and the share of manufactured exports taken up by developing countries has continued to rise reflecting their increasing success in building up manufacturing production and export capacity. Despite this change, many of the world’s poorest countries remain partially dependent on exports of primary commodities and therefore vulnerable to price volatility in world markets.

In 2004 global merchandise trade amounted to $8.9 trillion with $6.6 trillion accounted for by manufacturing and $783 billion of agricultural products. The remainder is taken up by fuels and mining products. $2.1 trillion worth of commercial services were exported around the world economy in 2004.

World trade in goods

Rank	Exporters	Value $ bn	Share	Rank	Importers	Value $ bn	Share
1	Germany	912.3	10.0	1	United States	1525.5	16.1
2	United States	818.8	8.9	2	Germany	716.9	7.6
3	China	593.3	6.5	3	China	561.2	5.9
4	Japan	565.8	6.2	4	France	465.5	4.9
5	France	448.7	4.9	5	United Kingdom	463.5	4.9
6	Netherlands	358.2	3.9	6	Japan	454.5	4.8
7	Italy	349.2	3.8	7	Italy	351.0	3.7
8	United Kingdom	346.9	3.8	8	Netherlands	319.3	3.4
9	Canada	316.5	3.5	9	Belgium	285.5	3.0
10	Belgium	306.5	3.3	10	Canada	279.8	2.9
11	Hong Kong, China	265.5	2.9	11	Hong Kong, China	272.9	2.9
12	Korea, Republic of	253.8	2.8	12	Spain	249.3	2.6
13	Mexico	189.1	2.1	13	Korea, Republic of	224.5	2.4
14	Russian Federation	183.5	2.0	14	Mexico	206.4	2.2
15	Taipei, Chinese	182.4	2.0	15	Taipei, Chinese	168.4	1.8
16	Singapore	179.6	2.0	16	Singapore	163.9	1.7
17	Spain	178.6	2.0	17	Austria	117.8	1.2
18	Malaysia	126.5	1.4	18	Switzerland	111.6	1.2
19	Saudi Arabia	126.2	1.4	19	Australia	109.4	1.2
20	Sweden	122.5	1.3	20	Malaysia	105.3	1.1

Source: World Trade Organisation, world trade statistics 2005 edition

World trade in services

Rank	Exporters	Value	Share	Rank	Importers	Value	Share
		$ bn	%			$ bn	%
1	United States	318.3	15.0	1	United States	260.0	12.4
2	United Kingdom	171.8	8.1	2	Germany	193.0	9.2
3	Germany	133.9	6.3	3	United Kingdom	136.1	6.5
4	France	109.5	5.1	4	Japan	134.0	6.4
5	Japan	94.9	4.5	5	France	96.4	4.6
6	Spain	84.5	4.0	6	Italy	80.6	3.8
7	Italy	82.0	3.9	7	Netherlands	72.4	3.5
8	Netherlands	73.0	3.4	8	China	71.6	3.4
9	China	62.1	2.9	9	Ireland	58.4	2.8
10	Hong Kong, China	53.6	2.5	10	Canada	55.9	2.7
11	Belgium	49.3	2.3	11	Spain	53.7	2.6
12	Austria	48.3	2.3	12	Korea, Republic of	49.6	2.4
13	Ireland	46.9	2.2	13	Belgium	48.3	2.3
14	Canada	46.8	2.2	14	Austria	47.1	2.2
15	Korea, Republic of	40.0	1.9	15	India	40.9	2.0
16	India	39.6	1.9	16	Singapore	36.2	1.7
17	Sweden	37.8	1.8	17	Denmark	33.4	1.6
18	Switzerland	36.8	1.7	18	Sweden	33.0	1.6
19	Singapore	36.5	1.7	19	Russian Federation	32.8	1.6
20	Denmark	36.3	1.7	20	Taipei, Chinese	29.9	1.4

Source: World Trade Organisation, world trade statistics 2005 edition

The geographical distribution of trade in goods	Value	Share of world trade
	2004	1990	2000
	$ bn	%	%
World	8907	100.0	100.0
North America	1324	16.6	19.5
United States	819	11.6	12.5
South and Central America	276	3.1	3.1
Brazil	96	0.9	0.9
Europe	4031	-	42.0
European Union (25 countries)	3714	-	38.9
Commonwealth of Independent States (CIS)	266	-	2.3
Russian Federation	183	-	1.7
Africa	232	3.1	2.3
South Africa	46	0.7	0.5
Middle East	390	4.1	4.3
Asia	2388	21.8	26.4
China	593	1.8	4.0
Japan	566	8.5	7.6
Memorandum items:
ASEAN (10 countries)	552	4.2	6.9
MERCOSUR (4 countries)	136	1.4	1.3

 

Trade and Economic Development – Import Substitution and Export Promotion

One of the main aims of developing countries is to pursue industrialisation by expanding their industrial sector. And trade provides a means by which this development strategy can be pursued. There are two main strategies that countries can follow with regards this problem.

Import substitution:

The idea is to domestically produce what was previously imported from elsewhere. There are some economically sound reasons for doing this; producing rather than importing will save valuable foreign exchange and ease the balance of payments deficit that most poor countries have. Moreover, there is obviously a ready-made market for the product, because people are already buying it from abroad.

In theory, new firms would start by importing ‘capital goods’ - plant and machinery and the latest technology - ‘intermediate goods’ [raw materials and other components], and technical expertise. Once off the ground, the industry would be able to import capital goods to make all the necessary machinery themselves. The government would remove the tariffs once the industry was ready to compete with producers from around the world (see the later section on import protectionism and the infant industry argument).

In reality, firms have rarely got beyond the first stage. Import tariffs have remained in place, since producers were unprepared to face global competition – and so they had no incentive to become efficient and competitive.

Export Promotion

This was the approach adopted by the ‘East Asian Tiger’ economies in their expansion of hi-tech manufacturing industries. Countries try to find markets in which they can successfully exploit their comparative advantages and sell their products to buyers elsewhere in the world.

1. Production centred on labour-intensive technologies (for the comparative advantage!) – I.e. production has been based on much lower unit labour costs.
2. Industry made up of private-sector firms driven by the profit motive.
3. Government provides incentives for firms to export.

Many of the Asian Tiger economies have been incredibly successful in implementing export promotion strategies and for them the process of globalisation has been a huge stimulus to their economic growth and development over the last ten – twenty years.

The New Globalizers

Many developing countries—sometimes known as the ‘new globalizers’— have made huge progress in building and sustaining a strong position in world markets for manufactured goods and services. For example there has been a sharp rise in the share of manufactured goods in the exports of developing countries: from about 25 percent in 1980 to more than 80 percent today and a decline in the dependency of some countries on exporting primary commodities.

These ‘new globalizers’ have managed to exploit their competitive advantage in manufacturing based on a fast growth of labour productivity, much lower unit labour costs, high levels of capital investment, (much of it linked to inward investment) and crucially a reduction in the tariff levels imposed by industrialised economies.

Technological progress has also speeded up the expansion of trade in manufactured goods from developing economies with improvements in containerisation and airfreight reducing the costs of transportation.

Developing countries have become important exporters of manufactures

Many developing countries have successfully exploited the rapid growth in demand for transistors, valves, semi-conductors, telecommunications equipment, electrical power machinery, office machines, computer parts and other electrical apparatus. These are all fast-growing industries, although in many cases, price levels are falling as production shifts across the globe to lower cost production centres. The huge increase in out-sourcing of manufacturing production has been a major factor behind the speedy growth of export industries in many developing countries, not least the emerging market economies of south East Asia and more recently in eastern Europe.

Further evidence on the extent to which developing countries are building and then harnessing new comparative advantages in many manufacturing industries is shown in the following table of data again drawn from information published by UNCTAD.

Two industries where this ‘global shift’ in manufacturing production has become ever more transparent are in the transport equipment sector and in textiles and clothing.

The expansion of trade from developing countries is not focused solely on manufactured goods the share of services in developing country exports has grown from 9% in the early 1980s to 17% at the end of the 1990s. For rich countries, the share of services in total exports is only a little higher at 20%. Relatively low-income countries such as China, Bangladesh, and Sri Lanka have manufactures shares in their exports that are above the world average of 81 percent. Others, such as India, Turkey, Morocco, and Indonesia, have shares that are nearly as high as the world average.