Openness is not Enough

This article is written as a sequel to the article Economic Justification of Increase International Trade published about month prior to this. In that article I discussed many of the common arguments that I hear about why free trade is hurting the economy and I explained the economic theory behind the opposing view of those arguments. I was in no way saying that these theories hold at all times, but was merely stating that the economic theories to illustrate to the non-economists that I hear using these articles may understand better why free trade is important, but this trade must come under the correct circumstances for an economy to experience increased growth from removing trade barriers.More...

In recent years countries have put a focus on becoming more open to international trade in hopes to reap the gains of access to larger markets providing technological improvements, cheaper imports, and higher net exports. In theory this should be the case, but in reality this theory only holds when under the correct circumstances. People see the economies of countries like China and India opening their borders and experiencing growth rates of more than 10% each year and believe that all they need to do to experience these gains is to open their borders and sit back and watch as their economy begins to grow. Obviously there are a few problems with this, and countries must not blindly open their borders without a well developed plan for growth and that plan must begin with sound domestic reform.

Both China and India developed their economies under closed borders and slowly began removing trade restrictions. Why must this be the case?

1. Requirements to participate in international trade
2. Developing countries often want to export low-value goods (agriculture and other low-skilled labor products)

Since the 1970's there have been many reforms to the requirements of countries for them to participate in global trade. These reforms include:

* Social safety nets
* Administrative reforms
* Labor market reforms
* Technological assistance
* Training programs
* Financial transparency
* Monetary policy
* Banking regulations

A typical developing economy also spend about $150 million on a World Trade Organization agreement which is $150 million that the nation DOESN'T have to spend on their physical infrastructure, instituting technology, and education, which are the critical to have well established before opening borders to trade.

Can opening borders too early hinder development?

Poorly developed country are likely to export agricultural and low-skilled labor goods. These goods are likely to be subject to protectionist policies in the countries that they would like to export them to, such as tariffs or even government subsidies to protect domestic production of those goods. This could easily lead to even less economic growth because of opening to trade too early. This is why it is critical for nations to develop their economies under closed borders, and only after they have better developed their human capital, built a stable infrastructure, and implemented advanced technologies to catch up to the rest of the world that they can experience the benefits and growth of international trade.

Chris Schmitz - TalkEcon.com