International Trade and Global Inequalities

How countries are connected through trade

International trade is the exchange of goods and services between countries. An export is sold to another country; an import is bought from another country. The same transaction is therefore an export for the seller and an import for the buyer. Services also cross borders: a British business providing banking services to an overseas customer is exporting a service.

Countries trade because they have different resources, climates, skills and industries. The UK can import bananas grown in warmer climates, while exporting services or manufactured goods. Trade gives producers access to more customers and allows countries to obtain products they cannot easily produce themselves.

However, countries do not all earn the same benefits. What they sell, how much value they add and the conditions under which they reach overseas markets help explain uneven development.

Different positions in the trading system

The UK, a high-income country, exports high-value services and advanced manufactured goods. It trades heavily with other high-income countries in Europe and North America; the United States is its largest single export market. High-value exports support skilled employment and generate income that can be invested in businesses and public services.

India, used here as a newly industrialised country, trades in both manufactured goods and services. Its links with Asia, the European Union and the United States reflect a more diversified economy: it does not depend on selling only one type of product. Nevertheless, trade-driven growth is concentrated in coastal and information-technology hubs. Places with export infrastructure and investment gain opportunities that less-connected rural areas may not share. Trade can therefore increase national income while widening inequalities within a country.

Malawi, a low-income country in southern Africa, relies heavily on agricultural exports. Its leading goods exports in 2023 included tobacco, black tea, groundnuts and raw cane sugar. Raw materials accounted for about 63% of its goods export value. Important imports included petroleum products, fertilisers and worn clothing; it also imports equipment and medicines.

Malawi trades with countries at different levels of development. In 2023, Belgium was its largest goods export market, followed by Tanzania. China and South Africa were its largest suppliers of goods imports, with India also an important supplier. The UK is another trading partner. This shows that an LIC’s trade is not simply an exchange with wealthy countries: regional neighbours and emerging economies also matter.

In 2023, Malawi’s reported goods exports were worth about US$966 million, compared with imports of US$3,141 million. Imports therefore exceeded exports by about US$2,175 million: a goods trade deficit. Imports can support development—for example, fertiliser helps farming and equipment supports production—but Malawi needs foreign currency to pay for them. Foreign-currency shortages can restrict access to fuel and equipment, disrupting businesses rather than helping them expand.

Trade partnerships, blocs and tariffs

A trade partnership establishes agreed trading conditions between countries. A trading bloc brings several countries together to reduce barriers between members. Examples include the European Union and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, usually shortened to CPTPP. After leaving the EU, the UK developed a network of trade agreements and joined CPTPP to strengthen links with economies around the Pacific.

Malawi belongs to the Southern African Development Community (SADC) and the Common Market for Eastern and Southern Africa (COMESA). It also ratified the African Continental Free Trade Area agreement in 2021. These arrangements offer opportunities to improve access to regional markets.

Lower barriers can make imported materials cheaper and help exporters reach larger markets. Businesses may then expand and employ more workers. However, preferential treatment creates insiders and outsiders: a producer outside an agreement may face higher costs than a competitor within it.

A tariff is a tax on imported goods. It raises their cost and can help domestic producers compete against imports. This may protect jobs and industries, but it can also increase prices for consumers and businesses using imported materials. For an overseas exporter, a tariff can make products less competitive and reduce sales. Tariffs therefore have different effects depending on whose position is being considered.

Barriers are not only taxes. Product standards and customs procedures can also make exporting difficult. Meeting requirements may involve costs that small producers struggle to afford.

How trade can widen development gaps

Many low-income producers sell agricultural products or raw materials, while wealthier economies have greater capacity to process, manufacture and market high-value products. Processing and specialist services can generate more income than supplying the original material. If producers cannot undertake these stages, more of the value is earned elsewhere.

Malawi illustrates the risks of dependence on a narrow export base. Tobacco accounts for around 40–60% of its exports. A fall in tobacco prices or demand can therefore have a large effect on export earnings. Rain-fed agriculture is also vulnerable to drought: poor harvests can reduce the quantity available to sell. Lower earnings limit farmers’ investment and the foreign currency available to buy essential imports. A country with a wider range of exports has more alternative sources of income.

Market access matters too. Malawi is landlocked, so goods must travel through neighbouring countries to reach seaports. Limited road connections increase the difficulty and cost of transporting exports. Unreliable power also makes processing harder. These disadvantages can reinforce one another: low earnings limit investment, and weak infrastructure makes future trade harder.

Within countries, well-connected ports and industrial centres may benefit more than remote areas, as India’s uneven trade-driven growth demonstrates. Trade can widen both the gap between countries and the gap between regions within them.

How trade can reduce inequalities

Trade can create jobs, raise incomes and generate tax revenue for public services. Export earnings also help countries purchase machinery and communications technology that improve productivity. These benefits are more likely when countries can increase the value of their exports and spread opportunities beyond their strongest economic centres.

Reducing tariffs or giving poorer countries preferential market access can help their exporters compete. Malawi’s regional trade agreements provide opportunities for this. However, removing a tariff alone achieves little if goods still cannot reach customers reliably.

Aid for Trade supports improvements such as transport infrastructure, border systems and producers’ ability to meet product standards. In Malawi, better transport and reliable electricity would help producers reach markets and undertake more processing. Diversifying exports would also reduce dependence on tobacco. Malawi’s development plans aim to expand commercial agriculture and industrialisation; these are aims, not proof that diversification has already been achieved.

Free trade offers opportunities, but it is not automatically fair. Local businesses may face competition from larger, more efficient overseas firms. Whether it reduces inequality depends partly on producers’ ability to compete and on how the resulting income is distributed.

Fair trade: changing the terms of exchange

Fair trade aims to improve producers’ payment and working conditions. Fairtrade is a particular certification system with standards covering areas such as safe conditions, workers’ rights and democratic producer organisations.

Where a Fairtrade Minimum Price applies, it provides a safety net when market prices fall; producers can still benefit when market prices rise. The Fairtrade Premium is additional money that producers decide collectively how to use, including for schools, healthcare or farming improvements. More stable income helps households plan, while collective investment can benefit the wider community.

A concrete example of producers strengthening their position is the Gumutindo Coffee Cooperative in eastern Uganda. It enables coffee to be milled before roasting, adding value and increasing farmers’ incomes. This illustrates why organising producers and undertaking processing can matter, rather than simply exporting more of an unprocessed crop.

Fairtrade can improve livelihoods, but its reach depends on buyers purchasing Fairtrade products. It also cannot replace national investment in infrastructure or opportunities in other industries.

Overall, trade is most likely to reduce inequality when improved market access is combined with higher-value production, support for smaller producers and investment that spreads the benefits. Greater trade alone does not guarantee fairer development.

Country contrasts

• UK: high-value services and advanced manufacturing; strong trade with Europe and North America; USA is its largest single export market.
• India, NIC: manufactured goods and services; links with Asia, EU and USA. Export and IT hubs benefit more than less-connected rural areas.
• Malawi, LIC: agricultural exports, especially tobacco; imports include fuel, fertiliser and equipment. In 2023, Belgium was its largest goods export market; China its largest goods import supplier. Goods exports: US$966 million; imports: US$3,141 million.

Trade arrangements

• Partnerships and blocs reduce barriers between members; examples: . Outsiders may remain disadvantaged.