Trade openness is a concept that has been generally accepted in the world of economics. Despite being a well-known concept in economics, particularly in international economics, definitions for trade openness are not so clear. In simple words, trade openness involves the lifting of or reduction in trade barriers to promote more trade.
In other words, having no barriers to international trade as nations engage in trade amongst themselves. Edwards (1998:384) defines trade openness as the absence of any barriers to international trade among trading nations. Examples of barriers to trade include trade tariffs, import quotas, licences, exchange rate controls.
The concept of trade openness is strongly associated with trade facilitation1 and trade liberalisation2. As trade facilitation improves the easiness of doing trade among nations, a nation’s volume of trade (the sum of a nation’s imports exports) tends to increase. The implementation of policies that facilitate international trade, lead to higher levels of trade openness in an economy. In other words, trade facilitation and liberalisation promotes both exports and imports leading to more openness to trade.
Generally, the ratio of trade volume to GDP is used as a common measure of trade openness. Besides this, the ratio of exports to GDP and the ratio of imports to GDP and
1 Trade facilitation: This is related to costs and easiness of doing trade among nations which in turn affect gains from trade. Improving trade facilitation is desirable in any economy. This is because when trade facilitation improves, all trade activities are carried out in an efficient, transparent and predicable way.
Trade facilitation involves the integration of procedures and roles of border agencies, simplification of trading for small–scale traders, improvement in the legal and regulatory framework and the provision of systems, infrastructure and the development of trade corridors which are supportive to trade (Seventh National Development Plan [7NDP], 2017, 92).
2 Trade liberalisation is the rendering free of international trade among nations from any sort of trade barriers. In other words, it is the existence of free trade with no intervention from government leading to significant increases in the volume of trade among trading nations. Trade liberalisation also involves the removal of restrictions on imports.
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trade openness index are among other measures of trade openness3. From these measures, it can be deduced that the higher the ratio, the higher is the level of trade openness and the lower the ratio, the lower is the level of trade openness in an economy. Besides, the level of integration among natıons also helps in determining the level of trade openness for an economy (Kader, 2013:48). The levels of trade openness among nations are of varying degrees. Some economies have relatively higher degrees of trade openness than other economies. Below are some of the benefits that can accrue to a nation as it becomes more open to trade.
1.1.1 BENEFITS OF TRADE OPENNESS
Economies of scale: In the classical theory of trade with assumptions of constant returns to scale and perfect competition, international trade among nations occurs on the basis of comparative advantage. However, under new international trade theories with assumptıons of increasing returns to scale and imperfect markets, in addition to comparative advantage, international trade among nations occurs on the basis of economies of scale accruing to firms, technology levels and product differentiation (Karluk, 2003:91). The firms that operate with economies of scale tend to relatively have higher efficiency levels and lower costs of production. This gives such firms an advantage to increase output as well as sale their products at relatively lower prices. This leads to the driving out of inefficient firms from the market (that is, they are forced to shut down due to losses). Thus, as international markets expand through trade, efficient firms benefit from economies of scale and products are offered at lower prices. In this way, trade openness ensures an increase in consumer welfare and only a few and efficient firms remain in the market (Bayraktutan, 2003:182-183).
Change in economic structures: Trade openness enables trading nations to interact more with each other. Through this interaction, trading nations exchange information related to the production and consumption of goods and services. For instance, exported and imported goods and services (consumed goods and services) can be used to determine the needs and behaviours of consumers. This indirectly entails changes in the production of goods and services in order to meet consumer needs
3 Other measures of trade openness include: tariff rates, non-tariff barriers, export taxes and subsidies, trade openness composite indexes, black market premium.
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domestically and internationally. Thus, as international trade increases interaction among nations, firms change their production structures and the consumers change their behaviour and needs. In this way, trade leads to structural changes in an economy (Seyidoğlu, 2007:104). For instance, suppose two nations A and B are engaged in trade.
Nation A produces and exports good X to nation B. Nation A discovers that it enjoys a large market for its product X in nation B. Due to this market share, nation A can start producing and exporting good Y (as a differentiated product) to nation B. Nation A can end up producing and exporting more goods to nation B (so can nation B produce and export to nation A). As this process continues, the economic structures in these two nations may go through changes which may improve social welfare.
Increased competition: As nations become more open to trade, the market size firms face increases. This is because trade increases the quantity of foreign products entering a country. This occurrence tends to lead to more competition for local firms as they have to compete for the domestic market with foreign firms (Mammadov, 2016:22).
Increased competition can in turn stimulate trading firms to produce quality goods and services with efficiency in order to remain in the market. Thus, the firms participating in international trade are likely to improve the quality of their products as well as engage in innovative actions which may differentiate their products from those of their rivals. This is likely to improve consumer welfare in trading nations. Thus, as international competition increases, a nation’s efficiency in production increases. In other words, through the productivity gains due to competition, a nation’s total output increases. In this way, a nation can benefit from more openness to trade.
Technological advancement: Economic growth theories agree that technological advancement affects growth positively in the long run. Actually, the differences in factor productivity among nations is said to originate from differences in the levels of technology entering the production process (İbid: 22). International trade tends to increase technology transfer among trading nations. Nations that have low levels of technology for their production tend to benefit more from technologies present in foreign firms/nations as they interact more through trade. This is because of the increasing marginal returns of technology in nations with low levels of technology. In this way, developing nations are likely to benefit more from trade because of their low levels of technology. As a nation opens up more to the outside world, trade tends to act as source
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of innovation. This is achieved through knowledge spill-overs among trading nations.
Furthermore, more openness to trade leads to learning of new products and productive methods for producing goods and services. In other words, through integration with the outside world and supply chains, nations tend to easily adopt new technologies and new methods of production (Almeida and Fernandes, 2007:701-702). Thus, as the level of trade openness increases, technology can easily be transferred from one nation to another.
In addition, through trade, firms are able to import intermediate inputs and capital goods. This enables firms to develop their own technologies to incorporate in the production process. In a similar way, exporters interact with more informed and different consumers. In this way, exporting firms are able to get new information which they can use to develop new technologies for their production of goods and services. In short, as importing and exporting firms remain in competitive international markets, with time they are likely to develop new technologies thereby increasing production efficiency and produce high-quality products (Caselli and Coleman, 2001:2-13). Salvatore (2013:336) summarises the benefits of trade openness as follows;
Increased trade openness enables EMDEs benefit from the technology/innovation from AEs.
Increased trade openness tends to increase the benefits from Research and Development (R&D).
Increase in the level of trade openness enables trading nations/firms to enjoy economies of scale in their production of goods and services
As trade openness increases, price distortions are eliminated and production efficiency is enhanced.
As trade openness promotes production efficiency, there is more specialisation in production among trading economies.
Increased trade openness supports the development of new products.