International Trade and Uneven Development

How international trade can support development

International trade connects countries through the buying and selling of goods and services. An export is sold abroad; an import is bought from abroad. The same shipment is therefore an export for the selling country and an import for the buying country.

Exports bring income to producers and can support employment and government tax revenue. Imports can also support development: machinery helps businesses produce goods, fertiliser can improve crop yields, and pharmaceuticals support healthcare. Imports are not simply a loss to an economy. Their value depends partly on whether they help people and businesses become healthier or more productive.

These flows create interdependence. An exporting country depends on overseas demand, while an importing country depends on overseas supplies. Trade can raise incomes, but it does not benefit every country, region or household equally.

Two contrasting developing economies

Malawi and India provide contrasting examples of how international trade affects development. Both are included in this course’s country lists: Malawi as a low-income country (LIC) and India as a newly industrialised country (NIC). These are the historical classifications used for the course, rather than claims about their current income categories.

An LIC has low average income per person. An NIC is a middle-income country with relatively rapid economic growth, expanding manufacturing, rapid urban growth, strong trading relationships and foreign-owned multinational companies. The contrast matters because countries with different productive resources and industries cannot necessarily take equal advantage of the same trading opportunities.

Why trade can widen the development gap

Many low-income countries depend heavily on primary commodities, such as crops and raw materials. Their prices can fluctuate as global supply and demand change. Dependence on a narrow range of exports makes national earnings vulnerable: falling prices can reduce farmers’ incomes and the money available for investment.

Processing materials into manufactured goods can add value. Newly industrialised countries have expanded manufacturing, giving them opportunities to earn more from processed products and diversify their economies. However, developing these industries requires investment, technology, reliable infrastructure and access to buyers. Countries without these advantages may struggle to move beyond primary exports.

Income is also unevenly distributed along a trading chain. A farmer growing an export crop may receive only a small share of its final selling price, while processing, transport and retailing generate additional income elsewhere. Increasing exports therefore does not automatically mean that the poorest producers gain substantially.

Malawi: export dependence and obstacles to development

Malawi is a landlocked country in sub-Saharan Africa. Its trade experience around 2001 illustrates the difficulties facing a low-income economy reliant on agricultural exports.

Tobacco, tea, sugar and coffee accounted for about 90% of merchandise exports, with tobacco the main export. This concentration exposed export earnings to changes in commodity prices. Merchandise export earnings fell from US$442 million in 1999 to US$310 million in 2001. Agriculture supported about 85% of the population, so difficulties in farming and agricultural trade affected livelihoods widely.

Malawi imported vehicles, petroleum fuels, machinery, fertiliser and pharmaceuticals, among other products. These imports included essentials for transport, production and health. High input costs, weak infrastructure, limited technology and poor access to finance made it difficult for producers to compete.

This explains why opening markets is not enough on its own. Even if an overseas country removes its import barriers, a Malawian farmer still needs to produce sufficient goods, transport them to market and meet the buyer’s requirements. Better market access and stronger domestic production capacity need to work together.

Political relationships shape trading opportunities

Geo-political relationships influence who can trade, on what terms, and who has the power to shape those terms. Governments negotiate agreements, offer preferential access and decide how strongly to protect domestic industries.

The World Trade Organization, or WTO, provides a forum for negotiating international trade rules and settling disputes. It is not a trade bloc. Participation can give developing countries opportunities to challenge barriers and influence agreements. However, countries do not have equal negotiating capacity.

In Malawi’s early-2000s experience, officials faced shortages of specialist staff, analytical resources and representation at WTO meetings in Geneva. These constraints made it harder to follow negotiations and assess proposals. Donors and international organisations offered technical assistance, but effective participation also required lasting domestic skills and institutions.

Malawian officials argued that high tariffs and trade-distorting subsidies in developed countries disadvantaged their exports. This connects political power to uneven development: access to wealthy markets matters, but the rules governing that access can favour some producers over others.

Trade blocs: larger markets, but unequal access

A trade bloc is a group of countries that agrees to reduce trade barriers between members. The European Union is an example. Easier trade within a bloc can widen markets for producers and improve access to supplies, encouraging investment and employment.

However, countries outside a bloc may face less favourable access than members. Businesses within the bloc also face increased competition from other members. The benefits therefore depend on a country’s ability to sell competitively, not simply on having an agreement.

Malawi participates in the Southern African Development Community, SADC, and the Common Market for Eastern and Southern Africa, COMESA. Their trade arrangements offer access to regional markets. SADC’s free-trade arrangements, including a specific Sugar Cooperation Agreement, helped expand Malawi’s sugar trade during the period examined up to 2014. COMESA’s arrangements did not deliver the same clear benefit: remaining non-tariff barriers and safeguards restricted sugar trading opportunities. Membership therefore does not mean that every barrier disappears.

Preferential access can also be granted to countries outside a bloc. If tariffs subsequently fall for all competing countries, that special advantage becomes smaller. Malawi’s officials identified this loss of preference as a concern: wider trade liberalisation could reduce the advantage previously enjoyed by some Malawian exports.

Protectionism: protecting producers can create other costs

Protectionism aims to shelter domestic producers from foreign competition. Three important tools are tariffs, subsidies and quotas.

A tariff taxes an imported product, making it more expensive relative to domestic alternatives. It can protect jobs and generate government revenue. However, consumers may pay more, and businesses importing machinery or other inputs may face higher production costs. Around 2000–01, Malawi’s applied tariffs ranged from 0% to 25%, with lower rates generally applied to necessities. This shows how governments can distinguish essential imports from products they want to protect more strongly.

A subsidy gives financial support to a producer. By lowering costs, it can help farmers or new industries survive and expand. However, subsidies cost public money, and poorer governments have less money available than richer governments.

A quota limits how much of a product can be traded. An import quota can protect domestic producers by restricting competing supplies, but it may reduce choice and raise prices. An export quota can restrict producers’ overseas sales. Malawi had removed export taxes and quotas by the late 1990s, reducing these particular restrictions on exporters.

Some quotas define the quantity allowed access on favourable terms, rather than an absolute ban on further sales. Malawi’s sugar trade shows why this distinction matters.

Malawi’s farm subsidy: better food security at a substantial cost

Many Malawian smallholders could not afford enough fertiliser to improve maize yields on their small, nitrogen-poor plots. Their harvests often failed to meet their families’ annual food needs. National shortages also led to late, expensive maize imports and higher food prices.

The Agricultural Input Subsidy Programme, begun in 2005/06, aimed to improve productivity, increase food production and reduce hunger. Coupons enabled targeted farmers to buy fertiliser and improved seed at reduced prices. In 2006/07, farmers paid about 28% of the full fertiliser cost, with government covering the remaining 72%. Just under 175,000 tonnes of fertiliser and 4,500 tonnes of improved maize seed were distributed.

An estimated 670,000 tonnes of additional maize was attributable to the 2006/07 subsidy. More household food production, lower food prices and higher rural wages helped poorer households. The proportion reporting a major shock from high food prices fell from 79% in 2004 to 20% in May/June 2007. These improvements reflected the combined effects of the fertiliser and seed programmes and abundant, well-distributed rainfall. Higher maize prices in early 2008 subsequently reduced some of the gains.

This subsidy therefore supported development through food security and rural incomes, rather than simply increasing export sales. Raising domestic food production could also reduce vulnerability to costly imports, although it did not eliminate the need for them.

The costs were substantial. The 2006/07 programme cost government and donors just under US$91 million, with 87% funded by Malawi’s government. Its budgeted government cost already represented just over 40% of the agriculture ministry’s budget, and actual government expenditure exceeded that planned cost by 25%.

Late deliveries and shortages delayed planting or fertiliser application. There were reports of coupon diversion, and some subsidised purchases replaced commercial purchases that farmers would have made anyway, reducing the additional production gained from public spending. The programme’s financial and management demands also impaired delivery of other agriculture ministry services.

Across later years, the farm subsidy absorbed around 3–6% of GDP, and spending on programmes such as irrigation, research, agricultural advice and roads was cut. This is an opportunity cost: money devoted to the subsidy could not also fund those investments.

The balanced judgement is that subsidised inputs helped poorer households, but benefits depended on timely delivery, effective targeting, rainfall and the increase in crop yields. Support that substantially raises production can promote development; expensive support that adds little output risks becoming an unsustainable drain on resources.

Malawi’s sugar: the effects of preferential quotas

Historical relationships between European countries and African, Caribbean and Pacific countries shaped Malawi’s access to the European market. Under the Sugar Protocol, the European Community, later the EU, agreed to buy specified quantities of sugar at guaranteed prices with duty-free access. This offered participating exporters a more secure market and income than relying entirely on changing world prices.

By 2007, Malawi’s Sugar Protocol allocation was 20,000 tonnes, alongside additional access under other preferential arrangements. The allocation secured favourable access for that quantity, but also limited how much sugar could benefit under this particular arrangement.

Reforms initiated in 2006 and the decision to end the protocol in 2007 changed these opportunities. During the transition, expanded access benefited Malawi, a low-cost sugar producer. In 2011/12, it exported five times the old 20,000-tonne allocation to the EU, and earnings from EU sugar exports reached US$131 million. Wider access therefore enabled an actual increase in export sales, rather than merely offering a theoretical opportunity.

Yet Malawi’s advantage partly depended on protection affecting its competitors: EU production quotas and high tariffs on non-preferred suppliers still sheltered its access. Selling to more EU countries also did not remove dependence on the EU market. The case shows how a preferential arrangement can support export earnings while leaving an economy vulnerable to later policy changes.

India: opening trade while retaining protection

India began a major programme of economic reform and trade liberalisation in 1991. It reduced barriers particularly on industrial inputs and capital goods, such as machinery used in production. Easier access to these imports could help Indian businesses improve production and compete in export markets. Petroleum imports also supplied an important input to the economy.

India’s average tariffs fell from 71% in 1993/94 to 35% in 1997/98. Lower tariffs reduced protection for domestic producers, exposing them to more overseas competition, but also reduced the tax cost of imported supplies. This illustrates why the same policy can create opportunities for some businesses and pressure for others.

The reforms were associated with greater international trade and strong industrial recovery. Between 1993/94 and 1996/97, real economic growth averaged about 7% annually, while merchandise export earnings grew by about 20% annually in current US-dollar terms. Trade reform contributed to this expansion, but was not its only cause. Infrastructure bottlenecks later constrained industrial activity and exports.

Liberalisation was uneven across sectors. Agricultural policy retained support for farmers and low-cost food supplies. In 1997/98, applied agricultural tariffs averaged 26%. These could shelter domestic farmers, but protection could also make imported food more expensive.

India’s quotas: sheltering producers and restricting opportunities

India also used quantitative restrictions on imports, administered through restrictive import licensing. These were quota-type barriers: they restricted the quantities entering the country, rather than simply adding a tax. In 1997, restrictions maintained for balance-of-payments reasons covered products in 2,714 tariff lines, meaning product categories in the customs classification. They included agricultural, textile and industrial goods; remaining restrictions mainly covered consumer goods.

India’s stated reason was to limit spending of scarce foreign currency on imports. Restricting foreign supplies also sheltered domestic consumer-goods producers, helping them retain sales and employment. The trade-off was reduced consumer choice and weaker competitive pressure on protected businesses to improve quality or efficiency.

The gradual opening of products illustrates this balance. Goods could first move to a Special Import Licence list, exposing producers to limited foreign competition, before becoming freely importable. This gave producers time to adjust, but delayed the full benefits of competition and access to imported goods.

The United States challenged India’s restrictions at the WTO in 1997. Following rulings against them, India removed most of the disputed restrictions by 1 April 2000 and the remaining 715 items on 1 April 2001. Removal widened import opportunities and exposed formerly protected producers to stronger competition. International rules therefore changed the protection available to India’s industries.

India also faced quotas imposed by trading partners. Textile quotas under the Multi-Fibre Arrangement restricted access to overseas markets. India identified these quantitative restrictions as a major barrier to its trade. Such limits constrained potential textile export growth, reducing opportunities for firms to expand production, employment and foreign-currency earnings. Quotas could therefore support some Indian producers at home while restricting others’ opportunities abroad.

India’s subsidies: support has an opportunity cost

India maintained export incentives including subsidised credit and income-tax exemptions. Subsidised credit reduces borrowing costs, while tax exemptions allow eligible exporters to retain more income. These measures aimed to help businesses sell abroad and could support production and employment. India’s authorities also described export incentives as compensation for the disadvantages created by import restrictions.

However, assistance has a cost. Subsidies require spending or reduce government revenue that could otherwise support infrastructure and public services. India’s overall subsidy structure was estimated to cost around 14% of GDP in 1998. That figure covers the wider subsidy system, not just export subsidies.

Extensive support also risked misallocating resources: businesses might expand because assistance made their activities profitable, rather than because they were genuinely competitive. India therefore faced a balance between supporting producers and building an efficient economy capable of competing without continuing assistance.

Judging whether protection helps development

The central question is who gains, who loses and for how long. Protection may give a developing industry time to become competitive, or support vulnerable producers. Yet prolonged protection can keep prices high and reduce incentives to improve efficiency.

For Malawi, protecting producers must be weighed against the cost of essential imports and the needs of households buying food. Its input subsidy improved food production and livelihoods, but absorbed resources needed for other development investments. Preferential sugar access supported export earnings, while dependence on a market governed by overseas policy created vulnerability.

India’s experience shows that reducing trade barriers can support industrial expansion, especially when firms can import productive inputs. Its import quotas sheltered domestic producers but restricted competition and choice, while overseas textile quotas limited export opportunities. Subsidies intended to support producers could also absorb substantial public resources.

Overall, neither unrestricted trade nor protectionism guarantees development. Trade is more likely to improve living standards when market access is combined with productive investment, diversification and policies that spread benefits beyond a small group of exporters.

Trade and uneven development

• Exports earn overseas income; imports supply machinery, fuel and medicines.
• Dependence on a few primary commodities exposes earnings to price fluctuations.
• Manufacturing and diversification can increase value added and reduce dependence.
• Greater trade does not guarantee benefits for poorer households.

Political relationships and trade blocs

• Governments negotiate market access; negotiating capacity is unequal.
• Trade blocs reduce barriers between members; outsiders may face less favourable access.