ChainWhat it assumes · how to break it
Start
A developing economy cuts its tariffs and opens up to world trade, as China did when it joined the WTO in 2001.
1
As a result, the country specialises in goods where it has a comparative advantage and sells them to much larger world markets.
comparative advantage · export-led growth
comparative advantage · export-led growth
Best link to attack
Assumes: Its comparative advantage lies in goods with growing world demand and stable prices.
Assumes: Its comparative advantage lies in goods with growing world demand and stable prices.
But: Many developing economies specialise in primary commodities whose prices are volatile and which have tended to fall relative to manufactured goods, worsening their terms of trade.
2
This means export earnings rise, providing foreign currency to import capital goods and technology.
foreign currency gap
foreign currency gap
Assumes: Rich-country markets are open to its exports.
But: Developed economies often keep high tariffs and subsidies in agriculture, where many developing economies have their comparative advantage.
3
Consequently, multinational firms invest in the country as a low-cost base for exporting, bringing jobs, capital and skills.
FDI · technology transfer
FDI · technology transfer
Assumes: FDI brings lasting skills and links with local firms.
But: Multinationals may send profits home, import their inputs and employ local workers only in low-skilled jobs.
4
Therefore, incomes rise and more people move out of absolute poverty, and higher spending on health and education raises the HDI.
absolute poverty · HDI
absolute poverty · HDI
Assumes: Higher incomes are spent on health and education.
But: If gains go mainly to a small elite or to urban areas, poverty in rural areas may fall little.
End
Higher export earnings, investment and incomes reduce poverty and raise living standards, promoting development.
Evaluation chain
- E1However, the benefit depends on what the country specialises in.
- E2If its comparative advantage lies in primary products such as coffee or copper, export earnings rise and fall with volatile world prices, and its terms of trade may worsen over time.
- E3As a result, government revenue and investment become hard to plan, and the country struggles to move into higher-value industries.
- E4So trade liberalisation supports development most where countries can move into manufacturing, as many East Asian economies did, and much less where they remain dependent on primary commodities.
Another way to attack it: Cutting tariffs also cuts government revenue, which is a large share of tax receipts in many low-income economies, and exposes infant industries to established foreign competitors before they can grow.
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Questions this answers
- Evaluate trade liberalisation as a strategy for economic development.
- Assess the impact of joining the WTO on a developing economy.
- Discuss whether primary product dependency limits the gains from free trade.
Diagram
No standard diagram. Data on export growth, FDI, GDP per capita and HDI over time make good evidence.
Reverse and related
Protection → infant industries may grow behind tariffs, but at the cost of less competition and fewer export earnings.