Think Again: International Trade

Why have disagreements between rich and poor nations stalled the global trading system? Because vapid debates over "fair trade" obscure some inconvenient facts: First, notwithstanding their demands for equity, poor countries are more protectionist than advanced economies. Second, if rich nations cut their self-defeating agricultural subsidies, their own publics would benefit, but consumers in many poor countries would not. Finally, despite criticisms to the contrary, the WTO can help promote economic development in low-income countries -- but only if rich nations let the global body do its job.

BY ARVIND PANAGARIYA | NOVEMBER 1, 2003

"Economies That Are Open to Trade Grow Faster"

True. In low-income countries, openness to international trade is indispensable for rapid economic growth. Indeed, few developing nations have grown rapidly over time without simultaneous increases in both exports and imports, and virtually all developing countries that have grown rapidly have done so under open trade policies or declining trade protection. India and China are the best recent examples of countries that started with relatively closed trade policy regimes in the 1980s but subsequently achieved accelerating growth while opening up their economies. From the mid-1950s through the mid-1970s, industrial countries also enjoyed rapid growth while dismantling their high post-World War II trade barriers and embracing new technologies. Japan offers the most dramatic example, but countries such as Denmark, France, Greece, Italy, the Netherlands, Norway, and Portugal exhibited similar patterns.

Openness to trade promotes growth in a variety of ways. Entrepreneurs are forced to become increasingly efficient since they must compete against the best in the world to survive. Openness also affords access to the best technology and allows countries to specialize in what they do best rather than produce everything on their own. The fall of the Soviet Union was in no small measure due to its failure to access cutting-edge technologies, compete against world-class producers, and specialize in production. Even as large an economy as the United States today specializes heavily in services, which account for 80 percent of total U.S. output.

Of course, openness to trade is not by itself sufficient to promote growth -- macroeconomic and political stability and other policies are needed as well -- so some countries have opened up their markets and still not seen commensurate increases in economic growth. That has been particularly true of African countries such as the Ivory Coast during the 1980s and 1990s. But such instances hardly disprove the benefits of openness. Economists do not understand the process of growth well enough to predict precisely when the opportunity will knock on a country's door. But when it does knock, an open economy is more likely to seize it, whereas a closed one will miss it. Even globalization skeptics such as economists Dani Rodrik and Joseph Stiglitz recognize this point; neither chooses trade protection over freer trade.

 

Arvind Panagariya is professor of economics and codirector of the Center for International Economics at the University of Maryland, College Park. He is coauthor of Lectures on International Trade (Cambridge: MIT Press, 1998) with Jagdish Bhagwati and T.N. Srinivasan.