We live in a globalized world where goods and services are traded across international borders and consumers are able to purchase products with components produced in several countries. What is the role then of international trade in development?
Economists such as Adam Smith and David Ricardo articulated the economic advantage of free trade, which was primarily driven by the idea of “comparative advantage.” A country with a comparative advantage can produce certain goods and services more efficiently and cheaply than others. In terms of international trade, countries with comparative advantage will export goods and services they can produce more efficiently, while importing those they produce relatively less efficiently.
Through international trade, consumers can benefit from access to cheaper goods and services, while producers obtain entry to new markets and access to capital. International trade, according to the classical theory of comparative advantage, benefits development because it increases the living standards in both countries. According the United Nations, trade is one of the most effective mechanisms to pull developing countries out of poverty and make them less dependent on foreign aid.
A comprehensive, sustainable international development policy should therefore incorporate trade as well as aid initiatives. Aid-for-trade has gained new momentum internationally and as we think about how to lift millions of people out of poverty worldwide, trade becomes an important component towards achieving this objective.
At a recent event hosted by the Miller Center of Public Affairs, former United States Trade Representatives from five presidential administrations reiterated the broad-based economic merits of concluding two historic trade agreements: the Transatlantic Trade and Investment Partnership and the Trans-Pacific Partnership. As one of the most important players in international development, the United States is in a unique position to deepen economic ties with both developed and developing countries through the negotiation of trade agreements that promote pro-growth development policies.
Teodora Mihaylova is a Research Assistant at CIPE.