trade. Economic development has, from the earliest times, been manifest in and driven by trade, which has been one of the principal mechanisms by which prosperity has increased. One of the reasons for trade is specialization of production. Some examples are obvious. European countries are not very successful in growing bananas. Similarly, the distribution of natural resources like coal, iron ore, and oil has always been unequal. Thus each country specializes in producing those commodities in which it has a comparative advantage. Specialization allows economies of scale because it is more efficient to produce for a large world market than for a much smaller national market. Britain in the 19th cent. relied very heavily on export markets to sustain its textiles, engineering, and mining industries. Trade can be envisaged as an indirect form of production. The commodities imported rather than produced at home will always require less productive inputs than would be required under home production. Trade is thus an unqualified benefit to all parties, irrespective of whether trade is fair or a country is competitive.

But the fact that trade is universally advantageous does not mean that the benefits are equally distributed. Changes in the composition of output resulting from trade will produce both gains and losses. The impact of imperial free trade policies on 19th-cent. India boosted the export of raw cotton to Britain but had a devastating impact on Indian cotton manufactures. Similarly British manufacturers gained from access to overseas markets, while wheat producers suffered from competition from cheap grain from the USA. The overall gain is derived from the fact that, in principle, those who gain from trade could compensate those who lose and still be better off than they were initially. In an ideal world in which there existed unrestrained trade and free movement of labour and capital between countries, the price of inputs like labour and capital would be the same everywhere. There would be, in fact, a single integrated world market. In reality this is far from the case. Variations in natural resources, in which some countries are rich (Russia) and some are relatively very poor (Japan), and in technology, barriers to trade, and historical experience of development have maintained and augmented these differences.

There is little doubt that international trade and specialized production played a major part in the growth of the industrial economies in the 18th and especially the 19th cent. The depression of the 1930s was marked by the lowest level of international trade for centuries, while the boom in the 1950s and 1960s was as manifest in trade as in output and incomes. But many in the less developed countries have argued that trade has not been beneficial for them since they have been peripheral to those with greater comparative advantage. Indeed it has become a radical criticism of the free market system that it prospered through the exploitation of the less developed countries by the industrial nations. Attention is drawn to the experience of countries like Brazil or Egypt, which experienced growth without development through a comparative advantage in exporting raw materials, such as coffee, rubber, and cotton. Hence the support for import substitution policies and attempts to persuade the developed world to help by allowing trade on terms favourable to the less developed. Neither strategy was successful. But in the 1970s and 1980s the ‘four tigers’ of south-east Asia (Hong Kong, Singapore, South Korea, Taiwan) achieved unparalleled growth rates through the export of manufactures, from textiles to engineering and electrical goods, and thus provided a reminder of the benefits of trade.

Clive H. Lee