How can a developing country will benefit from the removal of trade restrictions?
International trade is one of the most contentious issues in development economics. Developing countries tend to have more trade restrictions on their product.
Removing trade restrictions may be beneficial to an economy in several ways:
➣The removal of trade restrictions on the country’s products can enable a country to specialise in the products it is best at producing.
Traditional trade theory implies that countries should specialise in producing those items in which they have a comparative advantage: i.e. those goods that can be produced at relatively low opportunity costs. For most developing countries, this means that a large proportion of their exports should be primaries. They can be sold at a lower price which may increase demand in foreign markets.
➣ The removal of trade restrictions that the country imposes may mean it can purchase raw materials and capital equipment at a lower price, reducing costs of production.
Certain raw materials, capital equipment and intermediate products that are necessary for development can be obtained only from abroad. Others could be produced domestically, but only at a much higher cost. Thus removal of trade restrictions will help firms lower their cost of production and produce better quality and quantity of goods and services. This leads to economic growth.
➣Consumers may enjoy a greater variety of products greater availability of products at lower prices.
The removal of trade restrictions unable local consumers to purchase a wider range of foreign products at a cheaper price. Foreign products may also be of better quality.
➣ Domestic firms may respond to greater competition by becoming more efficient.
With more trade, domestic firms will face more competition from abroad. Therefore, there will be more incentives to cut costs and increase efficiency. It may prevent domestic monopolies from charging too high prices. If an economy protects its domestic industry by increasing tariffs industries may not have any incentives to cut costs.
➣ The removal of trade restrictions may increase inward investment and attract MNCs
Most free trade agreements also reduce restrictions on foreign investment. This change allows foreign firms and financiers to more easily provide funds for in-country projects. With new capital entering a developing country, it begins an upward productivity cycle that stimulates the entire economy. An inflow of foreign capital can also stimulate the banking system, leading to more investment and consumer lending.