Trade can be a key factor in economic development. The prudent use of trade can boost a country's development and create absolute gains for the trading partners involved. Trade has been touted as an important tool in the path to development by prominent economists. However trade may not be a panacea for development as important questions surrounding how free trade really is and the harm trade can cause domestic infant industries to come into play.
Importance The current consensus is that trade, development, and poverty reduction are intimately linked. Sustained economic growth over longer periods is associated with poverty reduction, while trade and growth are linked. Countries that develop invariably increase their integration with the global economy. while export-led growth has been a key part of many countries' successful development strategies.
Continents, countries and sectors that have not developed and remain largely poor have comparative advantage in three main areas:
natural resource exploitation, i.e. running down of natural capital such as rain forest timber; low-education labor-intensive manufacturing, due to high population densities and little suitable land per person; agriculture, due to low population densities and relatively large areas of suitable land per person.
Crucially for poverty reduction, the latter two at least are labor-intensive, helping to ensure that growth in these sectors will be poverty-reducing. However, low value-added, price instability and sustainability in these commodity sectors means they should be used only temporarily and as stepping stones in the path to economic development.
Digital trade
Digital Trade for Development 2023 Report In 2023, the "Digital Trade for Development" report by the IMF, OECD, UNCTAD, The World Bank, and the WTO detailed the influence of digital trade on developing economies. It highlighted the necessity of international cooperation to maximize digital trade benefits and tackle associated challenges.
Key statistics from the report include:
Digitally delivered services have grown nearly fourfold since 2005, with an annual growth rate of 8.1% from 2005 to 2022, accounting for 54% of total services exports by 2022. Less developed regions like Africa hold less than 1% of the global share of digitally delivered services exports. About 67% of the global population, or 5.4 billion people, were online in 2022, but 2.6 billion remain offline, mostly in lower-income countries. Aid for Trade commitments to the ICT sector were around US$ 2.16 billion for 2021-22. By the end of 2022, 116 regional trade agreements included digital trade provisions, representing 33% of all such agreements.
Agriculture In many developing countries, agriculture employs a large proportion of the labor force, while food consumption accounts for a large share of household income. The United Nations Conference on Trade and Development (UNCTAD) notes that this means that “even small changes in agricultural employment opportunities, or prices, can have major socio-economic effects in developing countries”. Thus whatever the development strategy a particular country adopts, the role of agriculture will often be crucial. In 1994, the agricultural sector employed over 70% of the labor force in low-income countries, 30% in middle-income countries, and only 4% in high-income countries (UNCTAD 1999).
In poor countries with low population densities and enough suitable land area, which includes most countries in Africa and Latin America, agriculture is central to the economy. In poor regions and rural areas within middle-income developing countries, the concentration of poverty in rural areas of otherwise better-off developing countries makes the development of agriculture vital there. Finally, in Net Food Importing Developing Countries (NFIDCs), there is a positive link between growing agricultural exports and increases in local food production, which makes agricultural development if anything even more important, as food security and the financial stability of the government are also at stake. In Vietnam in the 1990s, increases in production and export of coffee of 15% a year contributed to a nearly 50% rise in food production in the same period. As agricultural GDP grew 4.6% per year, rural poverty fell from 66% in 1993 to 45% in 1998 (Global Economic Prospects 2002:40).
Anderson et al. (1999) estimate annual welfare losses of $19.8 billion for developing countries from agricultural tariffs – even after Uruguay Round reforms. This is three times the loss from OECD import restrictions on textiles and clothing. A combination of better market access, and domestic reforms and foreign aid to enhance the ability of developing countries to take advantage of it, could have a significant impact on poverty reduction, and help to meet the Millennium Development Goals.
The largest beneficiaries of agricultural liberalization would be OECD countries themselves: welfare losses of $62.9bn a year are estimated as resulting from the distortionary policies (Binswanger and Ernst 1999:5). Nor is the traditional objective of OECD agricultural subsidy (supporting small farmers) achieved by this system in a manner that could be characterised as efficient: most of the producer support incomes goes to better-off farmers, with the poorest 40% receiving just 8% of the support spent.
Market access
Market access to developed countries The issue of market access to high-income countries is a thorny but crucial one. The issues fall into three main groups: first, those relating to deliberately imposed barriers to trade, such as tariffs, quotas, and tariff escalation. Second, barriers to trade resulting from domestic and external producer support, primarily in the form of subsidies, but also including, for example, export credits. Third, those relating to indirect barriers to trade resulting from developing countries’ lack of institutional capacity to engage in the global economy and in multilateral institutions (e.g., the World Trade Organization) on equal terms.
Barriers to trade High tariffs are imposed on agriculture: in high-income countries, the average tariff rate on agriculture is almost double the tariff for manufactures. And more than one third of the European Union's agricultural tariff lines, for instance, carry duties above 15% . Tariff peaks within agriculture occur most frequently on processed products and temperate commodities, rather than the major export crops of least developed countries (unprocessed fruits and vegetables and tropical commodities). However, many developing countries in temperate zones have the potential of competing as lower-cost producers in temperate commodities. Thus liberalization could open up new development-through-trade possibilities. Strong tariff escalation is typically imposed on agricultural and food products by high-income countries. This strongly discourages the development of high value added exports, and hinders diversification in particular as well as development in general. In high-income countries, tariffs on agricultural products escalate steeply, especially in the EU and Japan. ('Tariff escalation' is the imposition of higher import tariffs on processed products than the tariffs applied to unprocessed ingredients. ) Complex tariffs make it more difficult for developing country exporters to access industrialised-country markets because of the disadvantages developing countries face in accessing, and in their capacity to process, information. Not only are price signals distorted, they are often unclear, subject to change (for example seasonally) and difficult to interpret. Tariff-rate quotas (TRQs), introduced by the Uruguay Round with the aim of securing a minimum level of market access, have performed poorly. Average fill rates have been low and declining, from 67% in 1995 to 63% in 1998, with about a quarter of TRQs filled to less than 20%. The low fill rate may reflect high in-quota rates. Overall, the UR tariffication process which produced them has not resulted in the increased market access developing countries hoped for.
Producer support Support to agricultural producers remains sizable, at about five times the level of international development assistance - $245 billion in 2000. Total support to agriculture, as defined by the OECD, reaches $327 billion - 1.3% of OECD countries’ GDP. To some extent these can be justified by “multifunctionality” arguments, but it remains a priority to find means of support which effectively meet the primary objectives without the negative developmental and environmental consequences that have been seen in the past. The dumping of unwanted production surpluses onto the world market through export subsidies has depressed prices for many temperate agricultural commodities, with EU surpluses of exportable wheat a prime example. (Despite several Common Agricultural Policy reforms, domestic support for wheat - as measured by OECD producer support estimates - declined only marginally from an average 52% of gross farm receipts in 1986-88, to around 48% in 1998-2000. ) The URAA has been relatively unsuccessful in disciplining export subsidies, with the proportion of subsidised exports in total exports increasing in many products of export interest for developing countries: for example for wheat, from 7% in 1995 to 25% in 1998. The cost to developing country production and exports is considerable, and only partially offset by the lower food prices available to NFIDC consumers. This form of transfer from high-income country taxpayers to low-income consumers is in any case rather inefficient, and the lower prices may harm production for local consumption even in NFIDCs. Agricultural reform as a whole, including the removal of export subsidies, would only result in quite small price rises for developing-country consumers. The counter-cyclical nature of producer support is also harmful to developing-country producers. High-income farmers are insulated from changes in world prices, making production less responsive to swings in demand. As a result, world commodity prices are more volatile, and the burden of adjustment falls disproportionately on developing-country producers.
Lack of capacity This includes non-tariff barriers such as food regulations and standards, which developing countries are often not (or not effectively) involved in setting, and which may be deliberately used to reduce competition from developing countries. In any case, the lack of capacity to meet implement regulations and ensure compliance with standards constitutes a barrier to trade, and must be met by increasing that capacity.
Researchers at the Overseas Development Institute have identified many capacity related issues that developing economies face aside from tariff barriers: Traders and potential traders must know about an agreement and its details, however, the interests and skills of good producers lie in production and not in legal rules, only the largest firms can afford policy advisers. Markets and suppliers must share information - producer associations, industrial organisations, and chambers of commerce exchange information among their members and this information exchange must then take place across borders (as seen between Brazil and Argentina after Mercosur). A successful agreement must be flexible and governments need to accept that it will need to evolve. Trade agreements must generate relevant reforms in areas such as customs documentation, but also more fundamentally in relaxing rules for cross-border transportation. Selling to new markets requires adequate finance. Poor or wrong infrastructure can restrict trade Governments can support producers or traders in other ways.