Trade and economic development – understanding the relationship

There are strong links between a country's trade policy and its economic development. Properly designed, open international trade can contribute to increased growth and reduced poverty in a country. This requires that the country also has a national policy that ensures that development benefits everyone – including those groups that are negatively affected by changing trade patterns.

Open trade is trade across borders that is not hindered by tariffs, import quotas or other measures. This can be achieved through measures such as trade agreements between different countries and regions. Liberalising trade can have many positive effects that help to reduce poverty and meet the goals of the 2030 Agenda. However, to achieve this, several actions are often needed simultaneously.

Tariff reductions – not a necessary evil

In many poor countries, import tariffs are an important contribution to government finances. Open trade usually means lower or no tariffs, and a common perception is that it makes the country poorer. But from a broader perspective, there are many good examples of how this is offset by increased economic development and increased tax revenues. A large number of countries have implemented trade liberalisation, resulting in large tariff reductions, and at the same time managed to reduce the proportion of extremely poor people. For Sweden, too, open trade has played a significant role in our positive development over time.

The importance of trade for Sweden's development

Imports are a prerequisite for exports

Open trade leads to increased competition. It may seem negative that imports of other countries' goods compete with domestic ones – perhaps offering both lower prices and higher quality. However, imports also provide increased access to what is needed for domestic production. Through imports, a country can gain access to raw materials, components and knowledge that are not available in its own country. This allows companies to produce additional goods and services for export, generating revenues that boost the economy.

Trade has indirect and direct effects

How a country trades with the rest of the world affects the people who live there in two ways: indirectly through the development of its economy and directly through changes in the labour market, for example. The indirect and direct effects occur simultaneously and affect poor consumers and producers in different ways, in the short and long term.

Indirect effects of trade in a country

The indirect effects of open trade are the largest and most important for human prosperity. Increased productivity, economic growth and increased prosperity are some of the indirect effects of liberalised trade – and they are closely linked.

  • Increased productivity
    When a country trades with the outside world, productivity increases. This is because the country in question gains access to a larger market, and both competition and specialisation increase. This results in more efficient use of a country's resources, such as labour, capital and natural resources.
  • Economic growth
    Increasing productivity is the key to trade that generates economic growth – in other words, the total value of all the goods and services a country produces increases over time. Many things affect a country's growth, but one thing is certain: economic growth over time requires openness to the outside world.
  • Increased prosperity
    A country that achieves economic growth is well placed to create greater prosperity for its citizens. But for growth to contribute to prosperity, it must also be sustainable. Sustainable economic growth takes into account both income distribution and environmental impacts. To achieve this, other regulations are required in a country.

Direct effects of trade in a country

When trade in a country becomes freer, it also affects people directly, for example through changes in prices, employment and wages. This has direct effects on poor consumers, workers and entrepreneurs.

  • For consumers
    Consumers are often the big winners when a country opens up to freer trade. Not only do they get access to a better range of more goods, but often also better quality goods at a lower price. Freer trade without tariffs can reduce the cost of living for the poorest people, which can give rise to benefits such as more children being able to go to school. Lower tariffs make a particularly big difference for goods that poor households spend a large part of their income on, such as food, clothes and shoes.
  • For workers
    When a country becomes more open to the outside world, it leads to increased competition and access to a larger market. This results in competitive companies to meet the needs of a larger market. Thus, more workers are needed – and new jobs are created, often with higher wages. At the same time, domestic companies may be squeezed out, which in the short term could lead to unemployment and worsen the living conditions of those affected.
  • For entrepreneurs
    Trade can have a major impact for entrepreneurs. In developing countries, many people work in small or very small businesses. Naturally, they face increased competition when there is open trade. Some will be squeezed out and lose their livelihoods. Others will gain access to a larger market and cheaper inputs, which may allow them to produce cheaper and better products.

Efforts are needed for an equitable distribution of income

If resources are to be used efficiently and production located where it is most favourable, some groups will lose out from trade. Some production may be shut down because others do it better and cheaper. The new jobs that are created may require a different level of education and be concentrated in new geographical areas – meaning that jobs are lost in other areas. In this way, trade can lead to increased income inequality in a country – unless other measures are taken at the same time. Examples include labour market measures, new infrastructure, education and training, and expanded social safety nets that allow the entire population to benefit from the advantages of trade.

How the National Board of Trade contributes to sustainable development

The National Board of Trade works to create favourable conditions for developing countries to participate in international trade and contribute to sustainable development. We do this through long-term cooperation with developing countries, educational initiatives and export promotion activities. We also work to influence the EU's trade policy in a way that is favourable to developing countries and promote an equitable trade system. But no two countries are the same. What works in one country does not necessarily work in another. It is therefore important to analyse trade policy and its consequences at a national level. Cooperation with the National Board of Trade can, for example, mean that the partner country receives support in making such an analysis.

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