Trade and Growth

Increasing Trade Liberalisation

Trade liberalisation: the reduction or removal of barriers to trade between countries, such as tariffs and quotas.

Barriers have fallen in three ways. Countries have agreed tariff cuts through the World Trade Organisation (WTO), joined trading blocs (unit 3.1.3), and cut tariffs on their own as they opened up. India's average tariff on imports fell from 56% in 1990 to under 5% by 2022, and China's from 32% in 1992 to about 2% (World Bank).

The trend can go into reverse. Since 2018 the US has raised tariffs, first on Chinese goods and in 2025 on imports from most countries. When the UK left the EU single market, its firms faced new customs checks on trade with Europe.

Specialisation by Country

Countries specialise in the goods and services where they have a comparative advantage, and trade for the rest (unit 2.4.3). Bangladesh specialises in clothing, India in IT services and the UK in financial and business services.

Specialisation is increasing because it now happens within a single product as well. A smartphone can be designed in the US, use chips made in Taiwan and South Korea, and be assembled in China or India. Each country does the stage it does most cheaply, so parts cross several borders before the phone is sold.

• The gain: each country focuses on fewer tasks → workers and firms get better at them and produce on a larger scale → lower unit costs → cheaper goods and more exports.
• The risk: production depends on every link → one country's factories close or its ports are blocked → parts stop arriving → firms elsewhere have to cut output. In 2021, a shortage of chips forced car factories around the world to halt production.

Trade Liberalisation and Economic Growth

Trade raises growth through exports, bigger markets and competition (unit 2.4.3). Liberalisation is what opens those routes up. When a country cuts its trade barriers:

• Cheaper inputs: tariffs on imported materials and machinery fall → firms' costs fall → their goods become more competitive at home and abroad → more exports and higher output.
• New export markets: trading partners cut their tariffs in return → firms sell to many more customers → they expand and gain economies of scale → more jobs and investment.
• More competition: imports compete with protected home producers → inefficient firms must cut costs or close → resources move to firms that use them better → productivity rises, and so does the economy's capacity to grow.

Vietnam is a clear case. It began opening its economy in 1986 and joined the WTO in 2007. Its exports rose from about 7% of GDP in 1986 to about 90% in 2024 (World Bank), and its economy grew by an average of 6.4% a year from 2000 to 2025.

How much liberalisation adds to growth depends on:

• Whether home firms can compete: new industries may be wiped out by established foreign rivals before they grow large enough to survive. This is the infant industry argument for keeping some protection (unit 3.1.4).
• What the country can sell: one that exports mainly raw materials gains less than one that can build manufacturing and services, and its growth swings with world prices.
• Who gains: workers in industries that lose protection can lose their jobs. If the gains go to a few, GDP rises but many people are no better off.

Foreign Direct Investment (FDI) and Growth

Foreign direct investment (FDI): investment by a firm in another country to set up, buy or expand a business it controls there (unit 2.4.1).

Liberalisation makes FDI easier, because a foreign-owned factory can import parts and export its output freely. Nissan began building cars in Sunderland in 1986, partly to sell tariff-free into the European market. When a multinational builds a factory in a country:

• More capital: money flows in to build and equip the factory → the country can produce more → its productive capacity grows.
• Jobs and incomes: the factory hires local workers and buys from local suppliers → their incomes rise and they spend more → demand and output grow further, a multiplier effect (unit 4.4.1).
• Technology and skills: the multinational brings new methods and trains its staff → workers and suppliers learn them → productivity rises in local firms too.

The effect on growth depends on:

• Where the profits go: profits sent back to the parent company leave the country, so less of the gain stays at home.
• The type of work: simple assembly jobs transfer few skills. If the factory imports most of its parts, local suppliers gain little.
• How long it stays: a multinational can move to a cheaper country when wages rise or a tax break ends, taking the jobs with it.