Impact of International Trade on Economic Growth

Abstract

This dissertation assesses the correlation between trade openness and economic growth in 26 countries between 1990 and 2019 and uses panel data econometric techniques to analyze the interrelationship between globalization and economic factors at the country level. Trade openness is considered one of the most important factors for economic growth; however, its impacts are still under debate; especially paying attention to the institutional settings, structural, and developmental frameworks. The use of trade and constructs growth, and the degree to which labour force participation, gross capital formation, secondary school enrolment, and value added (agriculture, industry, and services) are trade growth enabling factors. The results clearly show that the country benefits of trade openness are not equally shared. Smaller open economies such as Austria, Belgium, and Switzerland capitalized on and sustained growth through participation in global valued chains and advanced knowledge intensive industries. On the other hand, larger economies such as the United States and India were still able to thrive by capitalizing on the diversified industrial bases and strong domestic demand, which indicates that openness is not the only determinant of growth. In these countries, like China and Chile, policymakers showed that if you add the faster financial development and the expansion of education, the positive outcome of the openness becomes substantially bigger. On the other hand, many countries in African faced the problem of ‘openness’ not being able to sustain growth because of weak institutional settings, low levels of investment, and structural bottlenecks. This is particularly important for the African perspective, trade openness provides the country with growth opportunities, Trade openness secures much quicker growth, but appropriate domestic readiness, the quality of the institutions, and its human capital formation becomes important. Investing in education and retraining, building up the institutional framework, developing the economic structure, increasing capital formation, and promoting development of inter-country cooperation are all essential factors in this process. Countries can cross the center line to development if they are able to connect their trade policies, development of the country, and use the protective framework of globalization.