The relationship between openness to international trade and development Introduction: Openness to International trade Is the popular choice among different countries for their own development, especially after the establishment of the World Trade Organization (WTFO) in 1995, globalization is a trend for different districts, and a country is difficult to develop its economy in a closed circumstance.
According to Razor and Reface (2013, IPPP), International trades will benefit the people and institutions of the countries, because the specialization of the production of goods ND services will increase the productivity and lead to higher Income and better living standards. The competition and cooperation between countries also will allocate the resources in a more efficient way, so the whole world would have a higher level of welfare from the international trades.
Kickball (2013, IPPP) also states that openness to international trade leads to the human development, for the technology, ideas and cultures are exchanged when the countries are exchanging goods and services. The globalization make the views competed and the cultures fused, providing a better choice for the world population. If the border of the nation Is open to trade, economic freedom will lead to the economic growth. Liberalizing promotes specialization and division, thus increasing the productivity and income and bringing greater efficiency.
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The communication between different countries not only provides the advanced technology and ideas, but also creates the chance to develop the knowledge and cultures. This essay focuses on the positive development outcomes of the openness to International trade from the aspects of economic growth, Institutional progress and Industry structural optimization, and It also explores the negative aspects through the Income Inequality and Inflation. Benefit 1 : openness generates economic growth Openness to the international trade means the whole economic activities of the countries are related with each other under the globalization.
Most of the countries which have an openness policy are experiencing a rapid development, especially China which creates an economic “miracle” In the last 30 years. What Is shown In the figure 1 is the contrast of GAP per capita between China and India, with a result of more rapid increase of China than India. It is demonstrated in the figure 2 that the agree of openness increased from 12% to 40% in India and started from 15% too much higher level of 60% in China, where the “degree of openness” (O) is defined as the index that dividing the sum of exports (X) and Imports (Q) by GAP: O = (X+Q)/Y (Marcella and Signore, 2011, IPPP).
What Is exhibited in the contrast of the two countries Is that the higher degree of openness will lead to a more significant growth of GAP per capita. Although there are differences of culture and politic circumstances in the two countries, the similar geography, large population and openness policy in tooth countries make them a successful contrast to show the importance of openness for the economic growth in a country. Source: processing of MIFF statistics.
The openness also plays a crucial role in promoting the development of developed countries. Since the taking effect of the North American Free Trade Agreement (NONFAT) in 1993, the trade among America with Canada and Mexico has increased to nearly double from $299 billion in 1993 to more than $550 billion in 1999. Particularly, after the establishment of WTFO, the exports of America risen to $2,350 billion in 1999, accounting nearly 25 percent of its whole GAP and more than 15 recent of all global trade. Forging, 2000) The international trade makes the cheap products easier to enter to the market of Canada and Mexico, in exchanging for the abundant nature resources, so the developed countries also will a large of the benefit from the openness to the international trade. It is generally believed that as openness will lead to economic growth through the optimal allocation of resources, technological innovation and productivity improvement. Trade liberation’s among the world would provide specialization and more efficient allocation of resources.
A country has a comparative advantage of productivity of different goods, the production with lowest opportunity cost is what it can specialize in. The Hecklers- Olin theorem also states that the labor intensive goods is relatively cheaper in the poor countries and rich countries may focus on exporting the capital intensive goods. Openness provides an environment for the exchange of the technology and views which would lead to technical progress, and innovation.
The competition from the openness also will make the companies invest more on the research to produce utter commodity to satisfy the consumers, and the average cost will decrease due to the economies of scales. Intellectual properties are protected and economic crimes are defended, which will build a suitable circumstance for the competition and cooperation among the international trade. Benefit 2: openness promotes institutional progress Openness to international trade makes a contribution to improve the quality of institutions and the progressed institutions will further strengthen the openness to international trade.
According to Johnson, Story and Submarine (2007, up), greater openness will make contribution to institutional quality through reducing rents, providing the conditions for reform, and specializing the goods to meet different demands. Openness will challenge the institutions from all kinds of aspects, and they are pushed to reform to adapt to the new circumstance, so the property rights are identified, investors are protected and contracts are enforced to meet the requirement of the specialization and cooperation among the international trade.
After trade opening, better institutions will obtain the rents by producing the institutionally intensive good, while inferior institutions will lose the rents, thus there s a “race to the top” in institutional quality which means the institutions will improve the better institutions who can capture the rents rather than their inferior trading partner in the international trade, so the competition are fostered, spurring the innovation among the companies to provide better products and services.
It is the progress of technology and administration that will make the companies retain and increase their market share and obtain the rents. Improved institutions will further promote the openness and economic development in the international trade. The rise of Western Europe since 1500 is not only due to he substantial trade with Africa and Asia but also due to the institutional progress that meets the requirements of modern economy.
Atlantic trade creates huge commercial profits due to institutional progress which makes it easier to access the Africa and Asia (Guacamole, Johnson, and Robinson 2005, IPPP). Specially, the building of Joint stock company disperse the risks of international trade by innovation, which promotes the world trade to a higher level. The foundation of the financial systems in New York allocates the capitals in a more efficient way, which unites the whole international trades and flourishes the world economy. Institutional progress is associated with the improvement of economic environment.
Greater openness requires the reform of institution to satisfy the challenge of intense competition. Intense competition will lead to increasing innovation such as the improvement of computer ability and the optimization of internet, which simplifies the institution and expands the market among the world. Optimal institutions are the sources of comparative advantage for a country, which will create the special rents. Opening trade makes the rents become harder to earn, and further promote the institution progress to obtain comparative advantage.
Eventually, the technologies and knowledge are advanced, the prices of goods are lower, and the living standards of people are improved due to the complementation of openness and institutional progress. Benefit 3: openness optimize the economic structure The optimization of economic structure is the basic requirement for the developing countries to faster their economic growth under the openness of international trade. The differences of change rates of different industries in a country will lead to the change of economic structure, and the openness will lead to the industry structure progressed to meet its comparative advantages.
The comparative advantages are changeable among different countries and the imbalance of advantages from regions will lead to the change of economic structure. Chinese economy is relied on the international market, on the one hand, its total value of import and export is increased at 26% every year from 2002 to 2008. On the other hand, primary products share less proportions of its export and the share of manufactured goods is rising constantly.
Further, the advantageous goods are transferring from labor intensive products into capital and technology intensive products in China (Gene and Shah, 2013, up). Openness to international trade is a determinant for the industrialization of a country. Optimization of economic structure comes from the reasonable utility of comparative advantages, technological progress and product specialization. Advantageous industries, and the technology and management progress will afford the factories ability to provide the products which are technology intensive.
Structure progress depends on the liberalizing of trade, which adjust the world market and promote technology improvement. Openness also promote the financial integration among the countries in the last several decades. The foundation and completion of financial system is an innovation inside the economic structure. International capital markets aggregate the capitals around the world and allocate them efficiently, which will increase economic development through improving the access of companies and strengthening the supervision.
Fischer, and Valuable (2013, IPPP) points out that cheaper international funds will active the competition of the financial systems, as it provide lower interest rates and allow borrowers have more access to loans, while shortage of competition from the international market will fail to afford enough funding. Globalization is characterized by the integration of financial systems, for funding is the most liquid capital and is the easiest to transport in the global, so financial integration will optimism the market structure by effectively allocating the capitals.
Moreover, the formulation of financial systems is specialized from the economic structure due to the enhancement of international trade, aiming at serving the modernization of the global, so openness will intensify the financial integration and improve the economic development. Openness will adjust the economic structure, tend to introduce industrialization and deterioration to the country. The countries who once exports mainly primary and agricultural products are gradually changing to export manufactured goods.
The investment will produce more profit when the inputs transfer into high rewording economic departments, which is the curial reason to optimize the industrial structure. Especially after the building of the financial system, the price becomes a more significant sign to adjust the international supply and demand, allocating the resources more efficiently. Openness will progress the economic structure, which is tryingly related to the specialization of international trade and it will improve the efficiency and develop the technology and of promote the development eventually.
Disadvantages of openness to international trade In recent decades, trade openness and reforms are becoming a basic method to develop in the developing countries. The resources are reallocated more efficiently and the innovation is stimulated, but the disadvantages are also obvious associated with the development such as the wide income gap and inflation. China, with a success in its openness and reforms, is suffering from increasing income gap. The Gin coefficient of urban residents is estimated 0. 33 in 1980, while it arrives at the critical point of 0. In 1994, and the coefficient rises to 0. 49 in 2007 (Lu and CIA 2011, IPPP). The income equality is seriously increasing in the last 30 years in China, where has experienced a successful reform to open to the international trade. This is mainly due to the skilled labors are preferred by the foreign direct investment, obtaining a progress of technology. The optimization of economic structure also will make the workers lose their Jobs in the disadvantaged industries, to make sure the most efficient allocation of resources.
Openness to international trade improves the availability of choices and increases the economic growth, but it also enhances the inflation. Inflation has always created economic uncertainty, caused market imperfections and unequal distribution of welfare. An evidence of inflation positively associated with trade openness comes from 8 small open economies in Caribbean during the period 1980 to 2009. It suggested that when the output increases by IIS$I million, the price will rise by 0. 4% to 0. 5%, and the inflation rates of Caribbean countries is nearly 4. 3 percent between 980 and 2009 (Thomas, 2012, IPPP).
Cheaper imports will decrease the domestic price level, if the country is opened to the international trade. The domestic producers can accept cheaper inputs and experience more intense competition, so the price of product is turned down, leading to the inflation. When openness brings the rapid economic growth, what is accompanied is the financial inflation, and the solution of it relay on the further openness to the international financial market. The liberalizing of trade is the basic requirement of the economic development, but the negative outcomes can not be ignored.
The distribution of income is increasingly unequal as the market rewards all the inputs whatever it belongs, so the income distance is enlarged due to the market efficiency. The inflation is accompanied with the economic growth, what can not be avoided, and the suitable management of inflation will further promote the development of economy. Free trade focus on the optimization of exports and imports to gain the most benefit, but the balance of payments should be in attention in case of the trade conflict.
The specialization also should not concentrate on a narrow range of products, the market imperfection will easily lead to the economic crisis. The openness to international trade generates the significant increase of the economic growth, while the globalization will enlarge the risk and create the conflicts, so when the market is used to maximize the utility, the cooperation between governments is extremely important to control the risk and solve the economic crisis.
Conclusion: Since the foundation of the WTFO in 1995, the world has integrated into a global market, and the development of a country can not ignore the openness to the international trade. This article focus on the positive outcomes from the economic Roth, institution progress and the optimization of economic structure. Specialization of the production due to the comparative advantages will advance the productivity, boost up technical capacities, fully utilize the employed resources and bring the economic welfare to the population.
Greater openness also will improve institutional quality through the more active competition, providing the conditions for reform and strengthen the comparative advantages. The more efficient allocation of the resources further optimize the economic structure, the effective utility of the Especially the building of global financial system promotes the integration of the capital market and allocates the capitals efficiently. However, the disadvantages are also obvious accompanied with the development.
Skilled labors tend to obtain higher wages, while the unskilled labors may lose their Jobs due to the progress of technology. The inflation from economic growth would lead to economic uncertainty, unequal distribution of welfare and distort the role of the global market. What should be done is that the government should be introduced to promote the imports and sports, it is the complementary of market of government what can adjust the income inequality and control the inflation.
Further, the cooperation among the countries is needed to regulate the investment risk and solve the trade conflicts, the market failure relies on the adjustment from the global cooperation. Openness to international trade promotes the development of the economy from all aspects, and the ideas and knowledge are expended through the exchange with each other. The human development depends on the technology progress and specialization of produce, which is contributed from the greater of openness to international trade.