1. The Effects of InternationalTrade on
Poverty and Development
Haley Wadel
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The Effects of International Trade on Poverty and Development
Haley Wadel
Independent Study
Fall 2015
University of Wisconsin-Milwaukee
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1. Abstract
Poverty alleviation is one of the primary goals of developing countries and international
assistance agencies. The eradication of poverty and the promotion of sustainable development
represent two of the most important challenges facing the world in the 21st century.
Achievement of this goal requires attention to a variety of objectives such as: raising education
levels, offering comprehensive medical services, improving lifestyles, and a nation’s openness to
trade and investment. The combination of low economic growth, poor family planning and
uneven distribution of wealth that leads to poverty is endemic to areas with stagnant economies.
Access to larger and richer foreign markets helps domestic firms generate the level of demand
required to exploit economies of scale that create opportunities for sustained economic growth.
However, trade benefits vary significantly across countries and some developing nations do not
get the positive impacts of the volume and diversity of their exports. This paper examines the
effects of international trade on poverty and development across the globe.

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2. Introduction
Poverty is defined as the general scarcity, absence, or the state of one who lacks a certain
amount of material possessions or money (Merriam-Webster). Poverty is more than a lack of
income; it is a multifaceted concept that includes social, economic, and political elements.
Absolute poverty refers to the deprivation of basic human needs while relative poverty is defined
as economic inequality in the location or society in which people live.
Development deals with poverty eradication because it is inter-related to other problems
of underdevelopment. But what exactly do we mean by development? Well, there a few
traditional economic measures that we use to measure development:
 Gross National Income (GNI)
o The total domestic and foreign output claimed by residents of a country.
 Gross Domestic Product (GDP)
o The total final output of goods and services produced by the country’s economy.
within the country’s territory
 Income per Capita
o Total gross national income of a country divided by its total population.
 Utility of that income
o Jobs, economic opportunities, and a wider distribution of social benefits.
However, there is more to describing a developing nation than just using numeric measures. We
can also describe the developing world as having the following characteristics:
1. Lower levels of living productivity
2. Lower levels of human capital
a. Health, education, skills

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3. Higher levels of inequality and absolute poverty.
4. Higher population growth rates.
5. Greater social fractionalization.
a. Significant ethnic, linguistic, and other social divisions within a country.
6. Larger rural populations, but rapid rural-to-urban migration.
7. Lower levels of industrialization and manufactured exports.
8. Adverse geography.
a. Resource endowments (A nation’s supply of useable factors of production,
including mineral deposits, raw materials, and labor).
9. Underdeveloped financial sector and other markets.
a. Imperfect Markets- a market in which the theoretical assumptions of perfect
competition are violated by the existence of incomplete information, barriers to
entry, etc.
b. Incomplete information- the absence of information that producers and consumers
need to make efficient decisions resulting in an underperforming market.
10. Colonial legacy and external dependence (OECD 2011).
An example of these characteristics would be in urban areas, people may have access to health
and education, but problems are made worse by overcrowding, unhygienic conditions, pollution,
and unsafe housing (Love & Lattimore 2009). On the other hand, rural communities pose the
complete opposite issues. Rural areas have poor access to education and health but people
usually live in healthier and safer environments.
Developing countries depend upon national and global economic growth to achieve poverty
eradication. Poverty is one the most crucial plagues of our time and it is commonly agreed that in

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order to reduce the proportion of people living on less than $1 a day, developing nations need to
considerably accelerate their economic growth by opening their markets. In this regard,
international trade is recognized as a powerful tool to stimulate economic progress and alleviate
poverty. However, trade alone is not sufficient enough to provide sustained growth and poverty
alleviation.
Contributing factors such as education, infrastructure, governance, and institutions all
play a major role in poverty eradication (Love & Lattimore 2009). It is only when advancement
is made in each of these points that developing nations may reap the benefits that come from
integration in to the global trade and investment system.
3. Trade and Poverty
How can trade help people to improve their standard of living? How do the developed
nations help developing countries take advantage of opportunities from trade openness? We can
say that access to larger and richer foreign markets helps domestic firms generate the level of
demand required to exploit economies of scale that create opportunities for sustained economic
growth. This applies the most to low-income countries that possess small domestic markets.
More importantly, international trade allows developing nations to access technology that is
essential for improving their competitiveness and productivity. The greater efficiency that results
from this technology benefits customers by lowering prices.
What is important to consider is that trade benefits economic growth and poverty
differently in each country. Some of the least developed nations have been integrating into the
global economy more than other groups of developing nations, but do not experience positive
impacts on their exports. Also, many low and middle-income countries have been destroying
trade barriers over the decades, but still do not see sustained export growth. This poor

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performance of low income countries in regards to trade, as well as their consistent poverty,
appears to be the result of factors other than insufficient trade liberalization.
The World Bank Growth Commission sought to gather the best understanding there
was about the policies and strategies that underlie rapid, sustained economic growth and poverty
reduction. In view of the commission, trade is one of the five important factors to achieve
spectacular development. The other equally important factors consist of stability, government
credibility, and savings and reliance on markets (Love & Lattimore 2009). As stated before,
trade affects each country differently and there is no one set of guidelines a country can follow in
order to develop quickly. However, all five of those factors seem to be present in each of the
fastest growing developing countries. The issue with this is that if even one of the factors is
missing, development tends to be slow. All ingredients must be there and they all need to be
managed in ways that meet the requirements of historical, cultural, social, and institutional
context of any country (OECD 2011).
There are other domestic obstacles that can further damage developing countries’
capability internationally. Geographical constraints, lack of infrastructure, poor governance,
inefficient institutions and skills also play a large role. Transaction costs (such as
communication, transportation, and energy) also tend to be higher in developing countries.
Two other main factors should be considered when discussing international trade’s
capability to relieve poverty:
1. Many low-income countries have a high proportion of the informal sector in the
domestic economy and cross-border trade. Informal sectors are unregulated and
thrive because of that freedom. However, it is still much harder for informal firms

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to gain access to financing and technology, which is required if firms are to
become internationally competitive.
2. More than half of the population, and three quarters of the poor live in rural areas.
In these rural areas agriculture makes up 50% to 90% of household income (Love
& Lattimore 2009). If you are able to connect poor farmers to markets and enable
them to sell their crops, a country will experience significant benefits. Physical
and institutional constraints must be removed so farmers can specialize in crops
where they have a comparative advantage and instead purchase crops that would
otherwise be costly for them to grow. A boost in agriculture can also help other
sectors, especially by creating jobs in industries like processing and transport
(OECD 2011).
4. Trade and Inequality
It is usually a developing nation’s goal to achieve rapid economic growth and trade
liberalization. Those two factors can ultimately achieve poverty eradication, however, inequality
can increase. An example would be, food price increase can benefit the poor farmer, but a poor
person in an urban setting, who spends a majority of their income on food, is now worse off.
This situation displays how a lack of infrastructure and other factors does not make the most of
opportunities.
The 2005 OECD Trade and Structural Adjustment Project said that the most successful
trade reforms had been accompanied by help for those suffering the worst of the changes (Love
& Lattimore 2009). The most effective assistance programs have defined time limits and a clear
strategy for how to end the program. They are not linked to production and are focused on re-
employing displaced workers. We can use Mauritius as an example of a small developing nation

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that integrated vocational training for workers that were affected by economic reconstructing in
the Aid for Trade strategy. By transforming its traditional sectors, like textiles and sugar,
promoting growth in existing sectors, and developing higher value-added industries, Mauritius
radically restructured its economy (Love & Lattimore 2009).
Labor productivity and mobility is also greatly affected by education. China is a great
example of how better education makes mobility from farm to non-farm sectors that much easier.
One additional year of schooling in China boosts a worker’s chance of leaving poverty by 14%.
Finally, the research and development front is very uneven with the majority spent in the
US, EU, and Japan. R&D is typically devoted to high-income countries’ technologies, including
laborsaving technology. Developing countries do not need labor-saving technology, but more
capital-saving technology for their initial development. Developing nations can be tempted to
import this laborsaving technology, but this would result in rising economic inequality (OECD
2011).
Incomes are needed to grow in order for institutions and their resources to produce
homegrown technology. R&D has to be combined with education and skill-acquisition to make
better use of technology. Ultimately, education is not the first step, but health status and access to
basic amenities is in order to get people to school and keep them there.
5. Trade and Growth
The expansion of knowledge is what provides long-run economic growth. But how does
trade contribute to that expansion? Well, trade helps to pass on the knowledge that people have
put into goods. An example would be when you buy a computer; you are also buying a share of
the research that went into building and selling the final product. But knowledge is not just
restricted to physical objects. In fact, trade in services is one of the most convenient ways of

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transmitting knowledge. If the computer you just bought has an issue, you call customer service,
which may have a call center in another country, thus importing that after-sales service.
Licenses are also another way to acquire knowledge. The technology is not transferred,
but the information that is needed to use it is. Today, foreign technology accounts for the
majority of domestic productivity growth in many countries. The smaller the country, the more
prominent foreign technology is.
Trade liberalization also allows the most productive firms to expand into bigger markets.
The least productive firms will not be able to profit from the new opportunities and they may be
forced out of business completely from the heightened competition (Love & Lattimore 2009).
However, it can be argued that higher level of productivity in firms that export has little to do
with trade since the firms that take advantage of opportunities have to be more productive and
adapt to change in their traditional markets to begin with. This means that there is a self-selection
of exporting firms.
The division of labor and the specialization of firms are also encouraged from
international trade. We can use the automobile industry as an example. In the past, a single firm
made most of the parts that go into the vehicle. However, a Model-T Ford had only 700
components whereas a modern car has over 30,000. It doesn’t make sense today for a single firm
to try and develop all of the components. This is how we see that specialization takes places
among firms instead of within firms (Love & Lattimore 2009).
The expansion of potential markets shows that a firm may specialize more narrowly and
still find customers. This results in a deeper division of labor and a small country firm prospering
in activities normally restricted in its home market. How much a country or firm can benefit

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from global chains depends upon the cost of trade. This is not only in tariffs, but also the time of
transportation and logistics.
6. Trade, Investment & Technology
In order for a nation to benefit from trade liberalization, a country must invest. Trade
liberalization helps countries profit the most from investment by enabling open countries to have
more access to larger markets. This access makes it worthwhile to invest in capital-intensive
industries, because fixed costs are spread out over larger numbers of unit of output.
Trade liberalization also helps smooth the way for the import of cheaper foreign-
produced intermediate goods and services. From this drop in the price of goods and services, the
production of capital equipment is then concentrated in small nations and trade liberalization
provided access to this. The success of developing countries as exporters is not possible without
sources of intermediate goods (OECD 2011).
Also, foreign capital is an important addition to local savings. Trade and investment
liberalization stimulates foreign direct investment (FDI) from firms looking to justify their
production and benefit from economies of scale. In conjunction with that, high trade barriers
encourage FDI, also known as “tariff jumping.” “Tariff jumping” is investing in a country that is
impossible to export from in order to get around trade barriers. However, investment is mainly
concentrating on producing for the domestic market (Love & Lattimore 2009).
FDI is also an important source of international technology disbursement. This allows an
economy and its workers to learn from technology and use it as an input for domestic production.
The foreign industry uses FDI in order to get the technology it needs to improve the supply of its
inputs.
Multinationals are important regarding technology from trade and FDI for three reasons:

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1. They possess more advanced production technology and methods.
2. They possess a large network of international suppliers, customers, and contracting firms.
This links skilled people all over the world and help the transfer of knowledge.
3. Immeasurable assets like management and marketing skills that are the source of their
value (Love & Lattimore 2009).
The production process has changed drastically over the past 20 years with the reduction
in transport and communication costs and trade barriers making it easier to spread out parts of
the production process over many nations. This makes specialization possible and explains 21%
of world trade today. It has significantly increased FDI flows and has encouraged many
relationships that help our global economy.
International outsourcing is the second idea that has pushed for the disbursement of
technology through trade. This is also related to specialization and global value chains; the only
difference is that outsourcing creates trade flows versus creating FDI flows. This is known as
services trade instead of goods trade. The relationship between trade, FDI, and outsourcing is
that many companies that utilize outsourced services are subsidiaries of multinationals that have
benefited greatly from technology.
The other side that must be taken into consideration is that FDI and technology are
normally only attracted to sectors where productivity and productivity growth is already high and
strong. Firms only want to invest in industries that are promising for the future. This impact on
domestic firms has an upside as well as a downside. On the upside domestic firms will
experience a growth in productivity from technology but on the other hand they will see
increased competition from foreign firms. This increased competition may diminish their

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productivity and take a large market share from them. Thus, FDI can be negative or positive
when it comes to the productivity of domestic firms.
Most studies only view the manufacturing sector, even though services are becoming
more and more the main industry and are increasing their openness to trade. Knowing this, we
must examine a few conclusions that have been found to generate technology and under which
circumstances:
 Technology is more likely in joint-companies whose capital is shared between foreign
and domestic investors.
 Technological spillovers will only happen if interactions take place between foreign and
local producers or workers.
 Export-oriented FDI is correlated to positive effects than FDI that only seeks to jump
tariff barriers and exploit local markets.
 Productivity difference cannot be too large between international firms (OECD 2011).
7. Conclusion
Trade is directly linked to poverty and development, but there is no one standard as to
how it affects each country. Characteristics, policies, the quality of institutions, and political
environment all play a factor into how trade affects a developing nation. Trade helps alleviate
poverty by enhancing the productive capacity of an economy by more efficient integration into
global and domestic markets. It makes the availability of technology more prominent as well as
providing more goods and services at a cheaper cost. Trade requires that investment be made on
all fronts including human capital, rural infrastructure, technical assistance, access to credit, and
policies that promote stability. These policies help reduce the susceptibility of people and allow
them to take advantage of opportunities created through their personal attributes.

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Trade also ignites domestic growth, improves accessibility to good and services, and
opens many doors to global markets. Trade helps to promote specialization and distribution of
economic functions into different entities. However, even though trade is a necessity for growth,
it is only one aspect in growing an economy and creating a higher standard of living.
Specialization, a skilled workforce, and good infrastructure are also all necessary additions to
trade. Even if a new technology is imported, if no one is available to carry out maintenance work
then there is no point.
We cannot say for sure that trade is a cause for growth, an effect, or possibly even both.
We can say however that when a new product or service appears trade helps to spread it and thus
knowledge is spread. Knowledge is power and this power can transform a nation into a
prosperous economy.

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Works Cited
Love, Patrick., Ralph Lattimore “Trade and Development.”
International Trade: Free, Fair and Open, OECD Publishing. 2009.
Love, Patrick., Ralph Lattimore.“Trade and Growth.”
International Trade: Free, Fair and Open, OECD Publishing. 2009.
“Partnership for Development: Africa and International
Trade”, OECD Papers , Vol. 7/12. 2008.
“Poverty.” Merriam-Webster. 2013.
“Trade”, Better Policies for Development: Recommendations for Policy Coherence, OECD
Publishing. 2011