Foreign Trade as a Major Factor of Economic Growth

Trade is an important component of any economy, one of the largest sectors of the economy of any country, both in the number of people involved in it, and the volume of activity and contribution to the overall economic potential.

Trade has a significant influence on the development of production, as it most quickly respond to any changes in the economic and political situation in the country. As a sector of the economy, the most close to the end consumer, trade regulates the manufacturing process in the volume and range of products on the one hand and on another hand, it can analyze the structure of consumer preferences and opportunities, as well as the dynamics of living standards. In particular, through the economic component of the goods – the price, the economic development and the dynamics of inflation in the country can be judged.

Trade is an important engine of the economy and society as a whole. It is called engine of the economy.

Degree of Scientific Elaboration of Trade as a Factor of Economic Growth

Foreign trade as a driver of economic growth has played a significant role in the development of the economy. In the transitive economy, value of foreign trade increases. Such an economy is not stable, it only formed market-based institutional forms, and it develops under the influence of globalization, which implies a special role of foreign trade. This is due to the fact that not the traditional comparative advantages, such as the difference in the endowment of factors of production, the monopoly on natural and geographical conditions comes to the forefront, but those that are associated with innovation processes, new information technologies, the choice of the consumer, and the level of his income.

Theoretical study of foreign trade as a driver of economic growth was engaged in a number of areas of economic thought. Their elaborations are presented by teaching of mercantilists, physiocrats, classical direction, the neoclassical school, and neotehnological direction.

Representatives of mercantilism T. Man, A. Montchretien, A. Serra, G. Skaruffi, W. Stafford believed that foreign trade is the only way of accumulating monetary wealth of the nation. They identified wealth with money, and its increase they associated with protectionist trade policy.

Physiocrats Quesnay, Mercier de la Riviere believed that foreign trade is barren in terms of increasing national wealth.

Adam Smith, David Ricardo and John Stuart, Mill showed a positive effect of change in the country’s wealth from foreign trade. Under the concept of absolute advantages of Adam Smith, augmented by the concept of comparative advantage of David Ricardo, international trade leads to an increase in national wealth due to the international division of labor through the growth of consumption. Mill showed that the positive effect of the change of wealth from foreign trade is getting by country with the largest demand abroad for goods produced by it, least of all in need of imported goods. (Coelli et al., 2005)

Representatives of the neo-classical theory Heckscher and Ohlin in factor theory of foreign trade have revealed new aspects of the impact of trade on economic growth. They showed that foreign trade leads to an increase in consumption relative to the owners of the factors of excess production and exports, which causes economic growth. Heckscher-Ohlin theory was developed by Samuelson. He pointed out that the removal of all restrictions in foreign trade will lead over time to maximize the national income of the economy involved in foreign trade.

In the theories of the distribution of income from foreign trade (Stolper, Rybchinskiy and Johnson), there is no consensus on the impact of trade on economic growth. Stolper pointed out that foreign trade, world prices for which are rising, increases incomes of factors of production that are used extensively in the production of these goods, which causes economic growth. Rybchinskiy believed that foreign trade through increased exports, which is used in the production of relatively abundant factor of production, is leading to reduced production in other industries, for which this factor are not excessive in relation, that slow economic growth. Johnson pointed out that as a result of foreign trade factors specific to the export sector in each country will be developed, and the factors that are specific to the sector, competing with imports, decline. Accordingly, the income of owners of factors of production will change: in export industries such revenues will increase, in industries that compete with imports – decline, which can both increase economic growth, and slow it down (Diaz-Alejandro, 1978).

Theoretical critical views of the traditional theory of foreign trade for the developing countries were represented in the direction of radical leftist economics, namely in the works of Amin, and Wallerstein. The essence of their argument was that, that foreign trade is a special way of redistributing income from the periphery to the center of the global economy, on the one hand, accelerates economic growth of developed countries, and on the other – it slows down in the developing world.

We should note also the works of Russian economists, dealing with the questions of foreign trade as a driver of economic growth. There are works of Bulatov, Vinogradova, Vodianova, Isakov,  Queen, Lapenina,  Lvov, Obolensky, And Shchebarova. Influence is determined by whether the implementation of available comparative advantages in foreign trade leads to the displacement of economic resources in the areas of activity that fuel long-term economic growth, or turn drain on resources of these areas (Frankel & Romer, 1999).

Stepanov defined the economic content of the category of “foreign trade”, adequate to conditions of globalization. As the foreign trade he means form of international economic relations, which is a combination of exports of goods and services in the production of which the country has a comparative advantage, and imports of goods and services, in the production of which country does not have a comparative advantage, regulated institutions of the world economy and aimed at economic growth (Stepanov, 2004). Clarification facilitates including institutions of the world economy in the economic relations of subjects of foreign trade, which reflects the main trends in the global economy.

Foreign Trade as a Driver of Economic Growth

Based on systematic relationship of theories of foreign trade and economic growth the mechanism of influence of trade on economic growth can be revealed. Export leads to economic growth by stimulating aggregate demand and aggregate supply. Stimulation of aggregate demand is realized as a direct increase in net exports, and indirectly by increasing wages, profits of firms operating in export-oriented industries, the tax and customs duties. This leads to an increase in consumer spending, investment of firms and government spending, respectively. Stimulating of aggregate supply is going directly through increased production in export-oriented industries. Mechanism of the effect of imports on economic growth is ambiguous: on the one hand, the increase in imports reduces aggregate demand for domestic goods and services and reduces aggregate supply. On the other hand, import of high technology goods stimulates economic growth of the national economy through the intensive factors of economic growth. This mechanism allows distinguishing the direction of foreign policy to achieve economic growth and economic development (Arora & Vamvakidis, 2004).

Based on the analysis of theories of economic growth with the use of comparison features of the effect of trade on economic growth can be confirmed:

– Foreign trade is a special way of earning income from the periphery to the center of the global economy, which accelerates economic growth of developed countries and consequently, slows down a transitive;

– The reduction of trade barriers on imports of goods and services, in the production of the country that has a comparative advantage, is increasing the rate of economic growth;

Also of interest is the analysis of the link between foreign trade and economic growth in transitive economy:

– In the transitive economy value of exports in the current year has a positive effect on economic growth, other things being equal;

– In the transitive economy the volume of imports in the previous year have a positive effect on economic growth in the current year, all other things being equal.

It should be noted also that the financial flows is only one possible way to influence of the world economy on the process of economic growth in a country.

Another way is based on the impact of trade relations. In the discussions taking place from the 50’s and 60’s on strategy of development in poor countries and middle-income countries, there are the two opposing models of development: external orientation, as the country opens its markets to the world and promote exports, and internal orientation when the country creates significant barriers to foreign trade and directs its efforts to develop own industry to meet the needs of the domestic market. The latter is also known as a model of development through import substitution.

The positive impact of trade on economic growth can be argued that foreign trade. Firstly, allows more efficient use of available resources in the country, and, secondly, foreign trade opens new markets (especially for those countries that have a positive trade balance). However, the negative impact of foreign trade on GDP is possible due to the fact that imports may displace domestic producers (especially for those countries that have a negative trade balance) (Parikh & Stirbu, 2004).

Almost all of the studies conducted in the past twenty five years note significantly faster growth of outward-oriented countries. In empirical studies, which support these conclusions about the success of foreign policy orientation, the presence of significant correlation between the growth of the GDP and the growth of export earnings is revealed. Countries that have made progress in the development of the export market, also succeeded in achieving a more rapid aggregate growth. Anne Krueger from Duke University described this direction of development in her work that already became classic, on trade liberalization in developing countries. After analyzing the data on the experiences of a number of countries, she found out that the increase in the rate of growth of export revenues by 1% increases the growth rate of GDP by about 0.11% 35.

By now a lot of empirical evidence to support the fact that the external orientation leads to a more rapid growth of GNP is accumulated. But what is the basis of this relationship? There is one possible answer – the impact of trade on the manifestation of the effect of economies of scale. In developing countries, the domestic market is extremely small. For example, in a country such as Argentina, GDP, measured in dollars, is lower than in Philadelphia, and the output of Ecuador is about the same as in Rochester, state of New York. Under the import substitution policies, there is promotion of orientation of production of domestic firms in the domestic market. This reduces the scope of their operations, and they lose the opportunity to benefit from economies of scale. Transition to free trade expands market and local firms are able to grow by selling their products on world markets. In addition, new companies are emerging, targeting both the domestic and the foreign market. When economies of scale are significant, the inclusion in the global market may provide opportunities for industrialization and rapid growth (Lee, 1995).

The policy of free trade leads to increased competition from foreign firms, and its impact is another source of accelerated growth. Companies that are protected by artificial restrictions on competition with the world, can charge high prices and deliver shoddy goods. Moreover, in countries with protectionist economy businesses spend most of their time and energy to lobbying for protection, not to improve the performance of their firms. If we relax the barriers that firms in order to survive, will have to improve the quality of products or reduce prices. Moreover, competition can accelerate the introduction of technological improvements. Since the competition on the world market increases the rate of productivity growth, and not just the level, it can be a source of more rapid growth.

In the analysis of empirical data, a positive relationship between increased productivity and export orientation is observed. Such connections have been noted, for example, in the study of several industries in Korea, Turkey and Yugoslavia. Exploring the economy of twenty developing countries for the period after the Second World War, Hollis Chinery found that total factor productivity grew at an annual rate of more than 3% in countries that follow the policy of outward orientation and export development strategy, compared with only 1% a year in countries aggressively pursuing a policy of import substitution (Sachs & Warner, 1995).

Krueger offered another explanation for the fact of a better functioning of the economy, in case of maintaining a policy of outward orientation. In her view, the external orientation improves the macroeconomic policies pursued by the government. For example, if a country has a policy of export-oriented, the government should maintain the exchange rate at a realistic level so that the exported goods from that country were competitive abroad. If this need is ignored, then in order to increase the profitability of export, need for its subsiding should arise, and it can have be wasteful for the budget. In such cases, the government will take care to avoid excessive currency overvaluation.

The last and very important consideration on the relationship between external orientation and economic growth is the fact that the country that focus on the foreign market, is in close contact with foreign firms and, thus, have more opportunities for technological improvements achieved abroad (Grossman & Helpman, 1991). Developing countries are usually far behind developed countries in terms of the use of new technology, so foreign contacts that increase the speed of implementation of new technologies can be a major source of increased productivity. Economy closed to trade is usually closed also for new ideas and new technologies used in all other countries.

E-commerce and Its Application to Structural and Macroeconomic Management

We should separately note the rapid development of e-commerce throughout the world. Achievements in the field of e-commerce B2B and B2C and research on factors determining the growth of e-commerce, allow evaluating its impact on the economy and the possible use of e-commerce for the structural and macroeconomic management.

Trends in the development of electronic commerce, allow suggesting that the implementation of e-commerce transactions will reach a significant proportion of the consumer and business demands, while to determine accurately the number of electronic transactions is difficult.

Currently existing trends and prospects for further growth in e-commerce transactions and, as a result, achievement of a significant share in the total volume of all trade is just one component, which determines the growing interest in the Internet trade.

The open structure of the Internet and low cost offer businesses and consumers a more powerful information system and implement a new form of communication. In turn, a new form of communication increases the level and effectiveness of communication between buyers and sellers and is creating new markets and opportunities for the reorganization of economic processes. It also changes the presentation of goods to the buyer, distribution channels, distribution and exchange, and the search path and consumption of goods, both for business and individual customers.

E-commerce, because of its advantages over traditional forms of exchange for all contractors from the very start, is experiencing rapid growth and has already occupied a prominent place in the world economy, contributing to the globalization of the economy, improving national economies and better meeting of the needs of consumers. Known experts almost unanimously recognize its great potential for further development.

The development of e-commerce will have a positive impact on the structure and functioning of the labor market. Worldwide e-commerce served as a powerful impetus for the creation of new jobs. For example, in the U.S. since 1993 as part of the technology industry more than a million new jobs were created (Freund & Weinhold, 2011).

At the aggregate level productivity and economic growth can increase as a result of a more efficient supply chain and distribution channels, reduction of transaction costs, elimination of barriers to market entry and access to information. Moreover, even assuming that the impact of e-commerce on GDP is small and uncertain, we can state that it affects welfare through, for example, save time, increase the convenience of expanding access to greater choice of goods and services more focused on the needs of the individual customer (Clark & Wallsten, 2006).

Currently, the process of e-economy is inseparable from the processes of the real economy, and integration continues. However, against the background of the integration, in the electronic economy the number of proposed virtual goods and electronic money, which are not available for the real economy, is increasingly expanding. They are the new stage in the development of the information economy and the new field of research of the economic development and role of trade.

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