Importance of Trade in Developing Countries
International trade helps developing countries build links with global trade partners, thus gaining many benefits. These include leveraging comparative advantages, economies of scale, improvements in technology, increased employment, better utilization of manufacturing capacities, increased domestic savings and improved potential for foreign direct investment. Overall, international trade has the potential to spur real economic development and improvements to standards of living.
Comparative Advantage, Economies of Scale & Enhanced Capacity Utilization
Comparative advantage refers to the idea that if a country is better suited to producing some kind of good or service than its peers, it will produce more of it while consuming less of it, resulting in a surplus that can be exported. This results in trade partners being able to access these goods or services more economically than if they were to produce it themselves and vice versa.
Economies of scale are the cost advantages achieved by producing a good or service at scale, thus reducing per unit cost and providing a competitive advantage to the most efficient producer. This ties in with capacity utilization as economies of scale can most efficiently be achieved when production capacities are fully-utilized
Improved Employment & Technology
Increased employment opportunities are a natural by-product of thriving businesses and serve to reduce poverty and improve standards of living overall. Also, with increased revenue and income for businesses and the innovative nature of thriving workforces, the potential for technological advancement and innovation is improved, which then creates a positive feedback loop.
Domestic Savings & Improved Foreign Direct Investment
Strong manufacturing and services sectors can help to create an attractive environment for foreign companies to set up shop in developing countries mark. This is often achieved through FDIs, which provide long-term benefits for the country.
By producing more within the country, while concurrently accessing other goods and services required at the lowest possible price, there is ample potential for domestic savings too.
Ultimately, trade helps developing countries overcome the limitations of their domestic economies, while increasing healthy competition and spurring economic growth.