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The benefits of trade

Filed under: Business,Special Comments |
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By Henry Kyambalesa

Trade is an essential element in a country’s quest for heightened socioeconomic development. Among other things, it can enable a country to gain access to foreign goods, it can function as a conduit for a country’s potential surplus, a boon for job creation, a trigger of innovation, and a source of foreign reserves for the country. Besides, it can lead to economies of scale and scope, and can be more potent than foreign aid in a country’s quest to attain desired levels of socioeconomic development.

The rhetoric by Donald J. Trump, as a U.S. presidential candidate in 2016, for example, that he would renegotiate his countrys trade deals in order for the country to win big through trade is a clear message to existing and potential trading partners that he would want to make the U.S. a selfish giant that would care less about the interests of other countries.

Ideally, trade must be mutually beneficial to all countries involved if it is to be enthusiastically embraced by all participating countries as a worthwhile endeavor.

Access to Foreign Goods

Trade makes it possible for countries worldwide to gain access to goods from various regions of the world which are generally not available, or cannot be produced, locally. With respect to agricultural products, for example, Canada, the United States, and other countries in temperate regions of the world rely heavily on trading partners in tropical regions for avocados, bananas, coffee, sugar, and other tropical agricultural products.

And, as explained elsewhere in this chapter regarding intra-industry trade, trade also makes it possible for wealthy consumers (particularly in industrialized countries) who have tastes for special versions of products produced locally (such as automobiles) to have their needs for such products met through imports.

Besides, trade makes it possible for people who live near national borders to have access to less costly goods from neighboring countries instead of obtaining the same kinds of goods from local suppliers located farther away within their own countries, and which are likely to be more expensive due to transportation and selling costs. This aspect of trade is also discussed briefly elsewhere in this chapter under the theme cited in the foregoing paragraph.

A Conduit of Potential Surplus

International trade, as Myint (1971:124-139) has hypothesized, can function as a vent for surplus for developing countries which have abundant unemployed resources that cannot be fully harnessed due to their small domestic markets. In other words, international trade can, by and large, serve as a conduit for a resource-endowed developing countrys potential surplus production.

Contribution to Job Creation

Trade among nation-states can bolster the creation of new jobs in each of the countries involved. As economic units in each of the countries engaged in trade expand their production capacities to meet the demand for their product offerings in both local and foreign markets, they are more likely to hire additional employees in order to facilitate the production of higher volumes of their product offerings.

A Trigger of Innovation

Among a host of other benefits, trade among nations can generate competition in their domestic markets and consequently foster innovation and creativity among economic units in their domestic economies. Competition, which the Union Bank of Switzerland, quoted by Reinecke (1989:17), has described as the incentive to do better, is beneficial to a countrys economy in many ways; for example, it gives suppliers the incentive to be efficient in order to satisfy the changing and divergent needs and expectations of consumers.

Specifically, competition in economic settings leads to lower prices, high-quality products, and greater variety and abundance of products. Protection of local suppliers of import substitutes from cross-border competitors, therefore, can make such suppliers to be lax and complacent, a situation which is likely to culminate in gross inefficiency in protected local companies.

A Source of Foreign Reserves

In much of the developing world today, mass production of goods and the dispensation of services are partly fettered by inadequate foreign exchange reserves for importing essential production inputs. Countries which strive to promote trade in goods and services across national borders are more likely to earn enough foreign exchange reserves to meet the demand for such reserves by locally based economic units.

Economies of Scale and Scope

International trade can create opportunities for a countrys commercial and industrial undertakings to attain economies of scale, as well as economies of scope. The term economies of scale is used here to refer to reductions in the average cost of producing a particular class of products resulting from mass production of the products. On the other hand, the term economies of scope refers to cost savings gained through the production and/or distribution of a wide variety of products.

Trade versus Foreign Aid

The term foreign aidoften referred to alternately as foreign assistance, international aid, development aid, or development assistancerefers to any form of charitable assistance provided by an international donor agency and/or national government in one country to a national government of another country that is designed to support a particular cause in the recipient country, and which may include any of the following kinds of assistance:

(a) Advisory services relating to such fields as agriculture, decentralization, education, energy, macroeconomics, and/or environmental protection;

(b) Financial resources, such as low-interest (concessionary) loans and/or financial grants; and/or

(c) Material resources, such as computers, foodstuff, medicines, vehicles, and/or machinery and equipment.

According to Wikipedia (2016), foreign aid may be granted to a country by a donor country for reasons which may include the following: (a) to strengthen a military ally; (b) to reward a countrys government for behavior desired by the donor country; (c) to extend the donor countrys cultural influence to the recipient country; (d) to provide infrastructure needed by the donor country for resource extraction from the recipient country; and/or (e) as humanitarian emergency assistance, or merely for altruistic reasons.

Apparently, donor countries and agencies harbor the notion that the assistance or aid they extend to recipient countries can enhance such countries quest to uplift the livelihoods of the majority of their people. Kumar (2016) has expressed this notion in the following words: It is said that aid, and not trade, is the engine of growth in countries which receive the aid.

But an in-depth survey of existing literature contradicts such a notion. According to Wachai (2010), for example, the idea that foreign aid can lift recipient countries out of poverty is a fairy tale because, among other things, it actually perpetuates such countries over-dependency on donor countries.

And Ugandas Yoweri K. Museveni is quoted by Preble and Tupy (2010) as having nudged former U.S. President George W. Bush in the following words: I dont want aid; I want trade. Aid cannot transform society.

Moss (2007:204), too, has recognized the impact of trade on a countrys rate of economic growth: Based on cross-country analysis, higher levels of trade [rather than higher amounts of aid] seem to correspond with higher rates of economic growth.

Shikwati (2002), among a host of other scribes, has also made a persuasive argument against the notion that foreign aid is an essential element in a recipient countrys quest for sustained socioeconomic development in the following words: The developing world needs trade, not aid, to help the poor because aid does not stimulate development; only trade can foster economic growth, facilitate the creation of jobs, and contribute to the improvement of the livelihoods of a countrys citizens.

In his view, aid also gives unscrupulous government officials the resources with which to engage in violent and repressive deeds, and can become a source of additional wealth for the elite in recipient countries. Besides, he is concerned about the potential for aid that is in the form of foodstuff to be diverted to feed soldiers and the civil police whose major function is to suppress dissent and/or encroach on the rights and freedoms of the people.

He is also concerned about the potential for foreign aid to undermine government officials accountability to the people because it offers a non-tax source of financial and material resources which can be used or abused by the officials with little or no scrutiny by taxpayers and the general public, and its potential to foster cronyism, whereby kith, kin and political supporters can secure government contracts without any competitive bidding for the contracts.

Shah (2014), too, has misgivings regarding foreign aid because, among other things, [it] is often wasted on conditions that the recipient [country] must use overpriced good and services from donor countries.

According to Thapaliya (2005), the best thing wealthy nations can do for poor countries is, therefore, not to give them handouts but to engage in mutually beneficial trade with themtrade that should include a wide variety of agricultural products and labor-intensive manufactured goodsif they really expect to curb the astonishing poverty that has continued to haunt such countries.

However, as Jenkins (2002) has noted, the trade, not aid mantra does not necessarily imply that developing countries do not need industrialized nations occasional charity. In his contention, some African countries, for example, have long been cursed with famine, droughts and other exceptional and unforeseeable disasters and, therefore, need help in such spheres as education and training and healthcare and sanitation—particularly in the fight against HIV/AIDS, malaria, tuberculosis, and other deadly diseases.

Other important fields or spheres in which such countries may need a gesture of generosity include agriculture and food security, decentralization, governance, macroeconomics, the fragile natural environment, transportation infrastructure, financing of political parties, and, of course, greater access to markets for goods and services in industrialized donor countries.

Therefore, aid and trade, rather than the trade, not aid paradigm, could make a more meaningful and realistic contribution to developing countries quest to improve the vistas of the majority of their people.

In passing, it is important to guard against the temptation of faulting foreign aid for the socioeconomic ills facing less-developed countries worldwide, because such aid can be said to be a passive factor in any given recipient countrys quest to attain meaningful socioeconomic development. State actors are individually and collectively the active factor in this regard.

For African countries, for example, the actual cause of poverty and socioeconomic malaise in such countries, according to Preble and Tupy (2005), is a long history of crippling misgovernance [and rampant economic mismanagement] by government officials.

But scribes like Moyo (2009:28) would rather blame aid for Africas socioeconomic problems, as implied by the following statement: [Foreign] aid has failed to deliver the promise of sustainable economic growth and poverty reduction. And it is, in fact, not accurate to describe aid as an active and deliberate policy aimed at development [by donor countries] as Moyo (2009:49) has reasoned!

Elsewhere in her book, however, Moyo (2009:57) has apparently acknowledged the fact that government officials are actually the active factor in a countrys quest to improve the livelihoods of the majority of its people in the following words: The cornerstone of development is an economically responsible and accountable government.

But this is, of course, an academic argument because Moyo (2009) has actually made a huge contribution to the subject regarding foreign aid and its implications for a recipient countrys quest to improve the livelihoods of its people in her book.

Conclusion

Given the foregoing benefits that accrue from trade among nations, there is a need for national leaders worldwide to adamantly engage in trade with other countries, even if their countries incur trade deficits with trading partners, because trade is clearly not a zero-sum game as modern believers in ancient mercantilist ideals would portend.

The growing attitudes against globalization and trade across national borders among economists, legislators, and large segments of supporters of major political parties in the United Stateswhich are reported by Calmes (2016), Davis (2016), Schneider (2014), Carter and Grim (2014), Carter and McAuliff (2014), Sanders (2014), Stiglitz (2014), and Hufbauer (2016)are, therefore, unwarranted and, accordingly, need to be ignored.

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References

Calmes, Jackie, Economists Sharply Split over Trade Deal Effects, New York Times: http://www.nytimes.com/, Retrieved March 8, 2016.

Carter, Zach and Grim, Ryan, Noam Chomsky: Obama Trade Deal A Neoliberal Assault to Further Corporate Domination, The Huffington Post: http://www.huffingtonpost.com/, January 13, 2014.

Carter, Zach and McAuliff, Michael, House Democrats Balk at Efforts By Obama, Boehner On Controversial Pacific Trade Deal, The Huffington Post: http://www.huffingtonpost.com/, January 9, 2014.

Davis, Bob, Free Trade Loses Political Favor: Republican Backing Fades As Voters Voice Surprising Skepticism Pacific Pact Seen at Risk, The Wall Street Journal: http://www.wsj.com/, March 9, 2016.

Hufbauer, Gary C., Column: Why the Trans-Pacific Partnership Isnt a Bum Deal, Public Broadcasting Services: http://www.pbs.com/, February 5, 2016.

Jenkins, Simon, Dont Patronize Africa: Give Trade, Not Aid, http://www.worldtraveler.com/, February 2, 2010.

Kumar, Mahendra, Foreign Aid: Meaning and Types, http://www.economicsdiscussion.net/, August 8, 2016.

Moss, Todd J., African Development: Making Sense of the Issues and Actors (Boulder: Lynne Rienner Publishers, 2007).

Moyo, Dambisa, Dead Aid: Why Aid Is Not Working and How There Is A Better Way for Africa (New York: Farrar, Straus and Giroux, 2009), pp. 28, 49 & 57.

Myint, Hla, Economic Theory and the Underdeveloped Countries (London: Oxford University Press, 1971), pp. 124-139.

Preble, Christopher and Tupy, Marian L., Trade, Not Aid, Cato Institute: http://www.cato.org/, April 5, 2010.

Reinecke, J.A. et al., Introduction to Business: A Contemporary View (Boston: Allyn and Bacon, 1989).

Sanders, Bernie, Senator Bernie Sanders: The Trans-Pacific Trade (TPP) Agreement Must Be Defeated, December 29, 2014.

Schneider, Howard, For Controversial Trade Pact, Fire from the Left, the Right and Wikileaks, Washington Post: http://www.washingtonpost.com/, July 11, 2014.

Stiglitz, J., Two Models of Economic Reform, and Why Only One Worked, Newsweek Special Edition, December 1999 / February 2000.

Shah, Anup, Foreign Aid for Development Assistance, Global Issues: http://www.globalissues.org/, September 28, 2014.

Shikwati, James, The Developing World Needs Trade, Not Aid, To Help the Poor, African Liberty: http://www.africanlibert.org/, March 25, 2010.

Thapaliya, Bhuwan, Trade, Not Aid for Africa, Global Politician: http://www.globalpolitician.com/, April 2, 2010.

Wachai, Njoroge, Trade, Not Aid, for Africa, Washington Post: http://newsweek.washingtonpost.com/, April 5, 2010.

Wikipedia, Aid, http://en.wikipedia.org/, August 24, 2016.

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