The last few decades have been characterised by an unprecedented expansion of trade, which has come to great prominence on the global agenda as one of the most important drivers of economic growth. The effects of trade on economic performance have been the centre of political debates of both rich and developing economies. There are many advocates of trade as a proxy for growth on one side, and sceptics who doubt that trade promote long and sustainable growth, on the other side. Thus, this essay aims to provide and analyse different approaches that tackle this subject, considering both the positive and negative impacts of trade on economic growth. Moreover, a number of evidences and empirical data which support the theoretical models shall be presented.
To begin with, from the Ricardian model, one of the oldest theories in economics, which showed that two countries will be both better off if each specialises in the industry where it has a comparative advantage, and then trade with one another, many other economists have pleaded for a positive correlation between international trade and economic growth. As an example, OECD (1998: 36) states: "More open and outward oriented economies consistently outperform countries with restrictive trade and [foreign] investment regimes.” In the same train of thought, Sun and Heshmati (2010: 2) highlight that, nowadays, “Due to liberalization and globalization, a country’s economy has become much more closely associated with external factors such as openness”. Hence, leading a study regarding the reflection of international trade on economic growth would be of highly importance in this globalised era and would be of great use for policymakers in order to determine the root of productivity gains with respect to international trade.
In this regard, it would be easily noticeable that free trade leads to higher competition among domestic companies as the market power of monopolies and oligopolies would be weaken. To continue, through trade firms are enabled to sell into larger markets, which would increase the total output produced as well as the variety of the goods offer, resulting into a rise in employment and a decrease of average production costs, and ultimately into a fall in the prices of goods. In addition, expanded markets not only generate more scope for “learning by doing”, which would allow firms to improve their productivity with practice and repetition, but also offer more opportunities of investment in research and development. Nevertheless, being exposed to other new techniques in the production of goods, might lead to higher improvement and innovation incentives within companies regarding their own products. Thus, free trade could be regarded as a driver of knowledge and technology diffusion across the globe. (The Economist, 1st October 1998)
Consistent with the statements above is Didier and Pinat’s (2013) work, in which they claim that international trade is a favorable factor in a country’s...