How International Trade Can Boost Economic Development
The most developed countries on earth participate heavily in international trade. Increased trade has also significantly propelled the economic rise of China, which has become the world’s largest export nation.
Trade enables international specialization
Ethiopia grows coffee beans, Saudi-Arabia has vast oil resources, and the U.S. is a world leader in technology. Would it make sense if the U.S. and Saudi-Arabia supplied their own coffee beans? Probably not. Instead, the international economy and individual nations can benefit more if they specialize in whatever their competitive advantage is. Each country specializes and provides its commodities to the international market in exchange for what other nations can produce at a lower cost.
Access to larger markets allows companies to grow and reap the benefits of scale
International trade enables businesses to increase their reach and sell products and services to new customer groups. As a result, companies grow larger, which enables them to benefit from their scale. Production costs go down and productivity goes up as a result of the greater division of labour and a higher degree of mechanization.
Learning from other stimulates innovation
Trading with other nations leads to a steeper learning curve. Companies can observe what production methods manufacturers in other countries use, what innovations they come up with, and how they market their products. This learning effect is especially important for developing nations as it allows them to learn from their more developed competitors. Economists refer to this phenomenon as the “catch-up effect,” and it plays a significant role in the development of developing and emerging economies.
Startups have access to more funding and investors can support the best ideas
Some nations are capital-rich, meaning there is more than enough money in circulation to fund businesses, while fundraising is significantly more difficult in other countries. Being part of the international community means having access to foreign funding, not just domestic investors. In an open economy, capital can get allocated not only to domestic businesses but to businesses worldwide. As a result, funds flow to those companies with the best ideas and value propositions, not to those that have the best location. Foreign Direct Investment (FDI) plays a major role in particular in emerging markets. Vietnam’s economy, for example, has greatly benefited from foreign investments in the past 20 years, which is one reason amongst others for Vietnam’s currently high growth rates.
Healthy competition keeps monopolies in check and enforces innovation
International competition can be healthy, keeping inefficient monopolies in check and improving businesses’ efficiency. Increased competition also stimulates innovation, as companies are forced to come up with new products and services to keep up in an increasingly crowded marketplace. The more competitive an economy, the more efficient it will be.
International trade also has its downsides, but overall, trade has various positive effects on economic developments. EXIMA’s mission is to further improve international trade by providing an educational resource and networking opportunity for import and export businesses around the world.