The Impact of International Trade on Developing Economies:

Opportunities and Challenges

Minh Huy - Thien Nhan - Thao Quyen - Xuan Thao - Thanh Hien
November 23, 2023

Abstract
This article examines the impact of international trade on developing countries and explores
the trade-offs between trade and environmental sustainability. It considers various perspectives
on the benefits of trade for developing nations and the potential drawbacks they may face. Addi-
tionally, it analyzes the complex relationship between trade and the environment, acknowledging
the potential environmental costs associated with increased trade activities. The article highlights
the importance of understanding these dynamics and formulating policies that promote inclusive
and sustainable development in the context of globalization.
Keywords: International trade; development; growth; liberalization; exports; environmental
sustainability.

1 Introduction
The impact of global trade is readily apparent when we observe the availability of South African wine,
Brazilian coffee, and bananas from Costa Rica on the shelves of our local stores. The exponential
growth of international trade over the past half-century has inevitably sparked discussions about how
trade has influenced the lives of people worldwide. Scholars have been investigating this complex issue
for decades, yet a consensus remains elusive among the diverse range of responses.
In reality, the central question that captures our attention is not whether engaging in trade with
other nations is beneficial or detrimental to development, but rather what forms of trade are advanta-
geous for each specific country. Consequently, the focus shifts towards understanding how trade can
promote development for specific groups within a nation and how international trade can contribute to
overall development. By addressing these more focused questions, we can gain a clearer understanding
of the intricate relationship between trade and development.
This article aims to provide a comprehensive exploration of the significance of trade in the economic
development of developing countries, emphasizing its pivotal role in fostering economic growth. By
delving deeper into this subject, we seek to shed light on the multifaceted aspects of trade that influence
the development trajectory of nations and highlight the potential benefits and challenges associated
with engaging in international trade. Through this analysis, we hope to contribute to a more nuanced
understanding of the intricate dynamics between trade and development, paving the way for informed
policy decisions and strategies that can harness the potential of trade for sustainable and inclusive
development in developing countries. The expedition will be guided by two essential questions: ”Is
trade good for developing countries?” and “Is there a trade-off between international trade and the
environment?

2 Is trade good for developing countries?

From 1990 to 2017, the share of global exports from developing countries rose from 16 percent to
30 percent, while the global poverty rate dropped from 36 percent to 9 percent. Trade has played
a significant role in lifting around 1 billion people out of poverty. Developing countries, which are
generally defined as nations with low economic resources and standards of living, can benefit from
strategic free trade agreements to advance their economies.

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 Figure 1: Value of exported of goods and services, 2021 [10].

2.1 Advantages of International Trade for Developing Countries

Global trade is essential to the development and well-being of developing countries because it provides
a multitude of benefits that are intricately linked to the rapid expansion of their economies. Examining
the intricacies of this complex phenomenon reveals a range of advantages that spur development and
transformation:
• Economic Growth: It is commonly acknowledged that trade is a growth engine that boosts
economic opportunity, lowers poverty, and produces better jobs. By increasing market access,
trade can stimulate economic growth by boosting production and generating more income for
companies. According to the World Bank [16], trade liberalization increases economic growth by
an average of 1.0 to 1.5 percentage points, resulting in 10 to 20 percent higher income after a
decade.
• Diversification of Economies: International trade can help countries diversify their economies,
reduce dependency on specific sectors, and enhance resilience to economic shocks. For example,
African countries can link high-value service trade with other sectors to diversify their economies.
According to the United Nations Conference on Trade and Development (UNCTAD) [14], African
countries can diversify their economies by implementing policies to better link trade in high-value
services with other sectors, especially manufacturing.
• Technology Transfer: Trade facilitates the transfer of technology and knowledge, improving
productivity and efficiency. Trade agreements with technology provisions can significantly boost
trade volume. According to a research paper published in the Review of World Economics [6],
trade agreements that include technology-related provisions can generate a significantly higher
volume of trade than those that do not, after controlling for the depth of the agreements.
• Foreign Direct Investment (FDI): Openness to trade can attract foreign direct investment (FDI),
which can bring in capital, technology, and managerial expertise, contributing to economic devel-

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 opment. FDI can help developing countries diversify their economies, create jobs, and improve
infrastructure. FDI is an important channel for the transfer of technology between countries,
promotes international trade through access to foreign markets, and can be an important vehicle
for economic development. In fact, some policies on trade openness might produce a significant
impact in attracting FDI. For example, through the implementation of free trade agreements
(FTA) [4], several Latin American countries have been able to attract greater flows of foreign
direct investment.
A properly structured international trade agreement has the potential to benefit both countries in-
volved. Such agreements can promote economic cooperation, enhance market access, and foster mu-
tually beneficial trade relationships. David Ricardo, in 1817, claimed that, in the case of countries
specializing in the production of goods in which they have a comparative advantage, there is gain from
trade. In the so-called Ricardian model, countries have different technologies that create a differen-
tial in labor productivity that, necessarily, gives each one a comparative advantage, that is, relative
efficiency in producing a good.

Figure 2: Value of exported goods as share of GDP, 1827 to 2014.

Picture two countries, country A and country B. Consumers in each country like to eat a mixture
of rice cakes and banana bread. In country A, the workforce could make 1,000 rice cakes, or they could
bake 3,000 loaves of banana bread. Or, they could split the workforce in half, and make 500 rice cakes
and 1,500 loaves of banana bread. In country B, the same size workforce could also produce 1,000 rice
cakes, but if they were to instead make only banana bread, they could only make 2,000 loaves. Or, if
they split their workforce in half, they could produce 500 rice cakes and 1,000 loaves of banana bread.
In this example, if each country split their workforce between the production of rice cakes and banana
bread, they would make, in total, 1,000 rice cakes and 2,500 loaves of banana bread. But if country B
were to make enough rice cakes for both nations (1,000), country A could make 3,000 loaves of banana
bread, for a final total of 500 more loaves. According to Ricardo, a properly structured international
trade agreement could work out for both countries, even if country A is more efficient at making both
banana bread and rice cakes.

2.2 Disadvantages of International Trade for Developing Countries

While there are undoubtedly benefits to international trade for developing nations, a more nuanced
perspective must acknowledge the drawbacks and difficulties that come with this kind of economic

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activity. Examining the intricacies, the ensuing highlights several significant disadvantages, providing
a thorough understanding of the diverse aspects of global commerce.

2.2.1 Income inequality

• Trade benefits may not be distributed equally within a country, leading to increased income in-
equality. Certain sectors or groups may benefit more than others, exacerbating social disparities.
• International trade can have a negative impact on earnings and employment for some groups
of people [13], which is usually interpreted as evidence that trade is a major driver of income
inequality.
• The International Monetary Fund (IMF) has also been working on reducing inequality through
its policies, including promoting inclusive growth, reducing gender inequality, and increasing
access to education and health care.
• For example Liberalization would benefit the top 20 more than the bottom 20 in 37 countries,
including Benin and Uzbekistan. In Uzbekistan, all income levels gain, but the rich benefit more.
In Benin, the poor lose income while the rich gain. In 17 countries, liberalization would decrease
inequality, with the Central African Republic being an example where it particularly benefits the
poor.

Figure 3: The distribution of the gains from trade.

2.2.2 Dependence on Global Markets

• Dependence on global markets can expose developing countries to risks such as price volatility
and demand shocks
• The COVID-19 pandemic has exposed the vulnerabilities of global supply chains and the risks
of depending on a single country or region. As a result, manufacturers globally are facing
increased pressure to enhance domestic production, create more jobs in their home countries,

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 reduce reliance on perceived risky sources, and reconsider lean manufacturing strategies that
minimize inventory in global supply chains.

Figure 4: The impact of alternative Lockdown decisions in excess demand for Groceries in Germany.

2.2.3 Terms of Trade

• Developing countries may find themselves at a disadvantage in international trade negotiations,
leading to unfavorable terms of trade. This can hinder their ability to benefit fully from trade
relationships. The terms of trade refer to the ratio of export prices to import prices.
• A decline in terms of trade indicates that a country needs to export a greater quantity of goods to
afford the same quantity of imports. The Prebisch-Singer hypothesis posits that certain emerging
markets and developing nations face this decline due to a widespread drop in commodity prices
compared to the prices of manufactured goods.

2.2.4 Environmental Concerns

• If sustainable practices are not followed, increased production for exports could worsen the
environment. The population’s well-being and the environment may suffer long-term effects
from this.
• Increased greenhouse gas emissions, the introduction of invasive species, particulate pollution
that harms human health, the energy required for transportation, and indirect environmental
effects are just a few of the negative effects of trade on the environment.
• In order to guarantee that environmental sustainability and economic growth coexist, trade and
the environment are complicated topics that call for an all-encompassing strategy.
In order to handle these complexities, one must be strategic and adaptable. In addition to leverag-
ing the benefits of international trade, developing countries need to implement robust policies that
effectively address these inherent challenges and ensure that the gains are equitable, long-lasting, and
conducive to sustained economic growth.

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 Figure 5: Annual global greenhouse gas emissions expected to 2100 [11].

2.3 Case study

2.3.1 Zambia
The production and export of copper from Zambia is undoubtedly one case study illustrating the
difficulties a developing nation may encounter when attempting to participate in international trade.
Zambia is a developing nation in Sub-Saharan Africa whose economy is largely dependent on the
copper industry. Zambia is a major copper exporter. Zambia encountered a number of difficulties and
drawbacks when it opened up to international trade [7].
• Price Volatility: Zambia discovered the drawbacks of being overly dependent on one export good
[2]. The nation was exposed to economic instability due to fluctuations in the price of copper
globally, which had an impact on government revenue and the economy as a whole.

• Infrastructure Strain: Zambia’s infrastructure, especially its ports and transportation networks,
was severely strained by the increased demand for logistics and transportation brought on by
international trade. This created logistical difficulties and hindered the nation’s ability to export
its goods effectively.

• Dutch Disease Effect: The influx of revenue from copper exports led to an appreciation of the
Zambian Kwacha, making other sectors of the economy, such as manufacturing and agriculture,
less competitive due to increased costs for imports and reduced competitiveness for exports.
• Environmental Impact: The growth of copper mining for global trade brought about environ-
mental problems that impacted nearby communities and ecosystems, such as habitat destruction
and water pollution.

To address these disadvantages, Zambia has implemented various strategies such as economic diversifi-
cation, investment in infrastructure, and the reform of trade policies. These efforts aim to mitigate the
country’s reliance on copper exports and address the challenges posed by international trade. This case
study illustrates how a developing country, heavily reliant on a single commodity, faced significant dis-
advantages when engaging in international trade. It underscores the importance of strategic planning
and policy measures to overcome such challenges and achieve sustainable economic development.

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 Figure 6: Change in per capita CO2 emissions and GDP, Zambia, 1990 to 2021 [11].

2.3.2 Vietnam
Vietnam is undoubtedly a prime example of a developing nation that benefited from increased trade
with other nations. Vietnam has benefited in a number of ways from its integration into the world
economy [1].

• Economic Growth: Since joining the World Trade Organization (WTO) in 2007 and embracing
international trade, Vietnam has experienced rapid economic growth. The country’s GDP has
been steadily increasing, and it has become one of the fastest-growing economies in Southeast
Asia [15].
• Job Creation and Poverty Reduction: Increased international trade has led to the creation of
job opportunities and contributed to poverty reduction in Vietnam [8]. The manufacturing and
export sectors, particularly in textiles, electronics, and agriculture, have expanded, providing
employment and lifting many people out of poverty.
• Foreign Direct Investment (FDI): International trade has attracted significant foreign direct
investment into Vietnam. Foreign companies have established manufacturing facilities and op-
erations in the country, driving technology transfer, skills development, and the modernization
of industries.
• Access to New Markets: International trade agreements have provided Vietnam with improved
access to global markets. The country has diversified its export destinations, reducing reliance
on any single market and fostering resilience in the face of economic fluctuations.

• Technological Advancements: Through international trade, Vietnam has gained access to ad-
vanced technologies and best practices from trading partners. This has contributed to the mod-
ernization of industries and enhanced productivity.

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 Figure 7: CO2 emissions by fuel or industry type, Vietnam [11].

Vietnam’s experience shows how a developing nation can take advantage of global trade to generate
significant social and economic gains. Through robust engagement in international trade and the
adoption of favorable policies, Vietnam has enhanced its economic outlook and positioned itself as a
desirable location for investment and trade alliances.

3 Is there a trade-off between international trade and the en-

vironment?
Although it is frequently praised for promoting economic growth, international trade has many negative
effects, especially when it comes to the environment. The complex relationship that exists between
international trade and environmental health demands a thorough analysis. Trade-based economic
growth may unintentionally result in environmental deterioration. Cross-border transactions exacer-
bate the tension between environmental concerns and economic prosperity because of their intricate
supply chains and resource usage. To achieve a balance for sustainable development and lessen the
impact on ecosystems, a thorough investigation of the relationship between international trade and
the environment is essential.

3.1 Trade and the environment: The commutations

International trade, while a potential driver of economic development, comes with environmental
consequences. The expansion of trade can directly impact the environment, causing elevated pollution
and depletion of natural resources. Trade liberalization may foster specialization in pollution-intensive
activities, especially in countries with varying environmental policies, known as the ”pollution haven
hypothesis [3].”
As trade expands, environmental externalities on national, regional, and global scales increase. Pur-
suing comparative advantage through trade, though economically beneficial, can lead to drawbacks such
as heightened pollution, resource degradation, changes in agricultural patterns, and secondary effects
like community disruption and increased migration. Industrial pollution may vary, either increasing,
decreasing, or shifting regionally due to trade.
The higher production levels driven by increased trade often result in the intensive exploitation of
natural resources, contributing to environmental degradation. Transportation of goods across borders

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 Material Recycled GHG Benefits (MMTCO2E)
Paper and Paperboard 45.97 (155.17)
Glass 3.06 (0.90)
Steel 6.36 (15.50)
Aluminum 0.67 (6.12)
Other Nonferrous Metals** 1.69 (7.54)
Total Metals 8.72 (29.16)
Plastics 3.09 4.13
Rubber and Leather† 1.67 0.17
Textiles 2.51 (2.56)
Wood 3.10 (3.30)
Totals 68.12 (193.26)

further exacerbates environmental issues, with fossil fuel use contributing to greenhouse gas emissions,
climate change, and air pollution. According to a World Bank study, carbon dioxide emissions and
municipal wastes continued to increase with economic growth. Clearly, trade-led growth can have sig-
nificant environmental impacts. Although economic growth may increase the capabilities of nations to
promote environmental protection, avoiding unacceptable levels of environmental damage will require
specific policies to reduce pollution.

Figure 8: Plastic waste generation, 2010 [11].

Intensive production for export markets can lead to habitat destruction and biodiversity loss.
Agricultural and logging industries may expand to meet international demand, encroaching on natural
ecosystems and threatening plant and animal species.
In both industrial and developing countries, trade-related policies impact agriculture. In indus-
trial countries, price support, trade protection, and subsidies result in reduced crop variety, chemical
pollution, soil erosion, and water pollution. Conversely, in developing countries, where agriculture is
often taxed, low prices encourage cultivation on marginal lands. Generous subsidies for fertilizers and

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pesticides may offset this bias but contribute to soil erosion and excessive chemical use.
Increased production also generates more waste, including industrial and packaging waste. Im-
proper waste disposal poses a threat to local ecosystems, emphasizing the interconnectedness of trade
and environmental impact. In 2017, for instance, the Environmental Protection Agency calculated the
United States’s total generation of solid waste to be around 267.8 million tons, ultimately representing
a 5.7 million waste increase since 2015.

3.2 Trade and the environment: The positive side

From another perspective, it is essential to emphasize that the trade-environment relationship is not
absolute; there is another positive aspect to consider. As living standards rise, consumers have more
choices, prioritizing high-quality goods, especially those with eco-friendly labels. Consumers, in this
process, become agents of choosing environmentally friendly products, avoiding harm to the ecological
environment.
In global competition, businesses adopt cutting-edge technologies like biotech, nanotech, and Indus-
try 4.0, reducing reliance on pesticides, promoting renewables, and optimizing non-renewable resource
efficiency, thereby minimizing adverse ecological impacts [9]. International trade is increasingly fo-
cused on liberalization, facilitation, and non-discrimination through numerous Free Trade Agreements
(FTAs). These agreements prioritize mutual development and exhibit a growing commitment to en-
vironmental protection, with preferential treatment for goods meeting specific environmental criteria
in areas such as certification, traceability, and packaging. Technical trade barriers are now placing
greater emphasis on safeguarding the ecological and social environment [12].

Figure 9: Number of parties in multilateral environmental agreements[11].

Global financial institutions, including the World Bank, the International Monetary Fund (IMF),
and financial investors, prioritize investing in projects ensuring environmental protection. These sig-
nals affirm that as international trade aligns with global integration, environmental protection gains
prominence, safeguarding the ecological environment through determined measures [5]. There exist
methods to alleviate the environmental impact of global trade:

• Environmental Regulations: Strict environmental regulations are essential to ensure that indus-
tries operate in an environmentally sustainable way.

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 • Green Technologies: Investing in and adopting green technologies can make production processes
more environmentally friendly, reducing the overall environmental impact of economic activities.
• Sustainable Practices: Encouraging and incentivizing sustainable practices in agriculture, forestry,
and other industries can help balance the benefits of trade with environmental conservation.
• International Cooperation: Collaborative efforts between countries to establish and uphold envi-
ronmental standards, as well as to address transboundary environmental issues, can contribute
to a more sustainable global trade system.

In summary, although a trade-off may exist between international trade and the environment, it
is feasible to adopt policies and practices that foster sustainable development, thereby reducing the
adverse environmental effects linked to heightened trade. Striking a balance between economic growth
and environmental conservation is essential for achieving enduring prosperity.

4 Conclusion
Trade, as a fundamental economic practice, serves as the lifeblood of global economic relations, foster-
ing the exchange of goods between nations unhindered by government intervention. The elimination of
barriers such as tariffs and import/export restrictions propels countries into the intricate web of inter-
national trade. While the advantages of participating in global commerce are evident, it is paramount
to ensure that these benefits permeate every stratum of society and endure over time.
For developing nations, international trade can be a transformative force, offering a gateway to eco-
nomic growth and development. However, the realization of these gains necessitates a comprehensive
approach that addresses deep-rooted issues like income inequality, environmental sustainability, and
susceptibility to external shocks. The overarching goal should be the creation of an environment where
the dividends of global trade are distributed justly, fostering societal harmony and shared prosperity.
Income inequality stands as a formidable challenge, demanding targeted policies that promote fair
wealth distribution and fortify social protection systems. Achieving this balance requires strategic
initiatives that afford equal opportunities for all members of society to actively participate in and reap
the benefits of international trade. By ensuring that the advantages are not concentrated in the hands
of a few, developing nations can lay the groundwork for a more equitable and sustainable future.
Environmental sustainability is another critical facet that demands careful consideration in the
realm of international trade. Balancing economic growth with environmental preservation requires
policy coherence, mitigating the potential for competitive disadvantages or adverse effects on less de-
veloped countries. The intricate dance between trade and the environment underscores the importance
of responsible governance in navigating this delicate terrain.
Trade expansion, as a driver of economic growth, can exert direct pressure on the environment
through increased pollution and resource depletion. The specter of the pollution haven hypothesis
looms large, emphasizing the need for stringent environmental rules that do not inadvertently shift
pollution-intensive activities to countries with lax regulations. Striking a delicate balance is imperative
to prevent environmental degradation while fostering equitable trade practices.
Paradoxically, trade can also be a catalyst for positive environmental change. Economic growth
spurred by open markets enhances a nation’s capacity to manage its environment effectively. Access
to new technologies becomes a gateway to more efficient production processes, reducing reliance on
environmentally harmful inputs. The evolution of industries towards sustainable practices aligns with
the broader goal of fostering environmental resilience.
In conclusion, the potential for developing nations in international trade is vast, but the journey
goes beyond mere participation. Robust governance, infrastructure development, and strategic policies
are indispensable in harnessing the advantages of global trade. By addressing issues of income inequal-
ity, environmental sustainability, and vulnerability to external shocks, and by adapting proactively to
the dynamic global trade landscape, developing nations can unlock the full potential of international
economic engagement. In doing so, they pave the way for sustainable, inclusive, and resilient devel-
opment that transcends mere economic transactions, enriching the fabric of societies and securing a
more equitable future.

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