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#3 - Trade stabilises the economy of developing nations

Trade, amongst other factors, can facilitate export diversification by allowing developing countries to access new markets and new materials which open up new production possibilities. There are different definitions of export diversification but what is usually meant is, that a country varies its mix of export products or destinations. A paper published by the World Bank Institute argues that diversification contributes to stabilising and expanding export earnings, upgrades value added and thereby enhances economic growth. Furthermore, “There is a growing consensus in economic literature that outward-oriented policies combined with selective market friendly interventions can help countries grow more, and reap the benefits of trade liberalisation.” The success stories of many high performing Asian economies are testament to this claim. The European Union’s trade policy contributes to such developments by reducing trade barriers and costs for developing countries.

This has worked for India. The figures to show this are astounding.

The European Commission has published the following figures on tariff liberalisation and exports in a paper entitled “Benefits of trade for developing countries”:

India cut import duties from an average of 90% in 1991 to 30% in 1997. This gave Indian manufacturers access to a variety of intermediate and capital goods. Imports of intermediate goods increased by 227% over the period. Two thirds of the intermediate goods imported were products Indian producers could not buy before 1991.

As a result, industrial output grew by 50% with new products accounting for 25% of the total.” This arguably worked better than the attempt to protect domestic industry from foreign competition. (See the paper on benefits here.)

This is the third of ten messages on international trade, which we will publish over the coming weeks. If you like this please give us a star below. If you wish to respond, please send us a message via our contact form.

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