Impact of foreign trade in economic growth

Foreign trade enlarges the market for a country’s output. Exports may lead to increase in national output and may become an ‘engine of growth’. Expansion of a country’s foreign trade may energize an otherwise stagnant economy and may lead it on to the path of economic growth and prosperity. Increased foreign demand may lead to large production and economies of scale with lower unit costs. Increased exports may also lead to greater utilization of existing capacities and thus reduce costs which may lead to a further increase in exports. Expanding exports may provide greater employment opportunities. The possibilities of increasing exports may also reveal the underlying investment in a particular country and thus assist in its economic growth.

Rising exports and the consequent increase in domestic output may lead to an increase in domestic income and employment. This will lead to the creation of new effective demand for a number of commodities in the domestic market. As a result, all the industries producing for the domestic market will also get a big boost. Some of the infrastructure specially erected for the development of export industries like new transport facilities; training facilities etc may also assist the development of domestic industries. In recent years, newly industrializing economies (NIC) of Asia namely Hong Kong, Singapore, Taiwan, Malaysia, Thailand and South Korea have achieved remarkable growth by exports of manufacturers. Thus foreign trade has a multiplier effect on economic growth.

India also has had its share of prosperity due to the development of foreign trade. From times immemorial, India was considered as the workshop of the world. Articles produced by India’s skilled artisans were considered worth their weight in gold. That explains why, even in the absence of plentiful gold mines, India was a repository of gold.

The opening of Suez Canal in 1869 led to a reduction of distance between India and Europe which led to an increase in the demand for India’s commercial crops. As a result, production and exports of commercial crops increased. The process was encouraged by the import of foreign capital for the provision of irrigation facilities and railway lines to connect the interior with the port towns. The rise in the output of such agricultural crops as oilseeds, cotton, jute and tea, was largely due to a flourishing export trade. This initiated the process of economic growth in India, albeit on not very desirable lines.

Even now foreign trade continues to engender growth in India. For example, many export processing zones and special economic zones have been established to facilitate manufacture or reprocessing for export. All such efforts create a lot of employment opportunities and lead to an increase in incomes which lead to the demand for many new products which are very often manufactured in the country itself.

Foreign trade induces economic growth in other ways too. The appearance of imported commodities in a country invariably creates new demands. This provides an inducement to the people in general to work hard and earn enough money to be able to purchase some of the imported articles. This necessarily leads to economic growth. Again, there is an urge in enterprising industrialists to produce the things imported in the country itself. Japan provides an excellent example of this type. It is said Japan never imports a manufactured article twice. This has happened in almost all countries including India. In fact, this natural urge for import substitution provides a strong stimulus to economic growth. The strategy behind India’s earlier development plans was mainly one of import substitution. The existence of a large domestic market also provides a strong incentive for import substitution as, for example, consumer industries in India. In the case of basic and strategic industries, economic independence and self reliance have been the motive force behind import substitution, and in these cases cost becomes a secondary consideration. In many a case, successful import substitution adds to the export potential. Many of the new industrial products manufactured in India are exported.