In the beginning of the 18th century, the world witnessed the first industrial revolution. Fast transport and quick manufacturing in bulk quantity became possible. The growth rate of industrialist countries was rising significantly. But, this idea created a tension in the underdeveloped world. The increasing import volumes and declining exports resulted in increased fiscal deficits. As a result, the states went for protectionism to guard their local industry. They imposed heavy tariffs and restrictions on imports and gave subsidies to their export industry. But, this did not benefit anyone. Ultimately the countries moved towards free-trade. The Trade liberalization increased the World’s GDP. However, there came some opposite voices as well. Since then, it has been debated that either it is inward trade or outward trade, which guarantees economic development?

Economic Arguments on Inward Trade Orientation

Static Gain from Resource Reallocation

The international trade helps countries in optimal allocation of resources. The production possibility curve and indifference curves would shift upward as a result. Let Suppose, Country A is producing Wheat and Cotton by applying their all resources. Whereas, the combination of resources (land, labor, capital, environment etc.) in country A indicates that it can only produce Wheat at lower cost with higher quality.

Meanwhile, Country B specializes in Cotton. It can give fine cotton at a lower price. If country B applies resources in wheat production, the results may not be as good as in Country A.

Dynamic Gains from Specialization

The idea of specialization, helps every country to produce the goods which they are best at. The countries would produce more specialized goods by trading off the other goods. It will create economies of scale and, hence the cost of production would decrease. The decrease in cost of production would increase global consumption and income.

Hence, dynamic gains from specialization would force the countries to export the goods which they are producing efficiently. Every country exporting their specialized goods and importing the cheaper and high quality which other country specializes, would increase economic activity in the world.

Knowledge Spillovers

The outward trade enables the flow of information and technology all over the world. Let suppose, Country is in a developing stage having cheap labor and struggling to take off. For this, it needs to invest in capital accumulation as Harrod Domar Growth Model states. Similarly there is a country who specializes in technology and machinery. As a result the free-trade allows spillover of labor and technology between two states. The movement of knowledge and information brings innovation and creativity in the manufacturing process and would benefit the entire globe in-spite of single state.

Economic Arguments on Inwards Trade

External Shocks and instability in Export Prices

By looking at the current scenario of COVID-19, it is evident that how volatile the market is. The oil price-crash has given a huge loss to OPEC countries. The decline in demand of goods due to lockdowns all over the world has put major multinational companies under financial stress. These are shocks which developing countries cannot absorb. Hence, it is argued that, despite being involved in international trade, a country should be self-sufficient.  

Protect Infant Industry

The developing countries argue that, due to heavy subsidies and advanced technology, the developed countries can produce much cheaper products. But, when these products are allowed to be imported, then they cause a real threat to local manufacturers. It is because, local industry being in an infant state can neither produce quality nor low cost products. So, there are chances that these industries may suffer losses. This would ultimately result in laying off the employees and causing social distress. Hence, the governments impose tariffs on imports and restrictions for MNCs to enter the local market.

Going from Inward to Outward

The implementation of trade liberalization has many costs and impacts to be faced. But all of them are for short-term.
First of all, the trade liberalization would cause temporary job-loss due to increased cost pressure and decreased margin. Secondly, Fiscal Depletion; a country depending heavily on taxes, may face decline in taxes and undergo fiscal deficits as well. Thirdly, the Exchange rate depreciation; as a fact, the developing countries import more compare to exports. The local currency would depreciate due to lower demand. Fourth, low Supply Side Elasticity: inelastic supplies cause disturbance in chain.

However, the impacts may vary in long-term. The trade liberalization ensures growth and innovation in long-term because of accumulation of more capital by developing state. Thus the exports will also increase. The increase in exports with specialized goods as discussed earlier would create a win-win situation for every country.