What is trade openness and what is the effect of trade openness on economic/financial development?

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karythcara's profile pic

Karyth Cara | College Teacher | (Level 1) Senior Educator

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Trade openness is a measure of economic policies that either restrict or invite trade between countries. For example, if a country sets a policy of high trade tariffs, thus restricting the desirability of international trade, this restrictive policy will inhibit other countries from sending exports and accepting imports from that country. According to dominating economic theory, this restrictiveness, this lack of trade openness, will have an economic effect of slowing economic development/growth. Conversely, according to economic theory, trade openness will have an economic effect of increasing economic development and growth.

Current economic theory further holds that countries with trade openness that receive loans and aid from global non-governmental organizations, collectively called NGOs (e.g., Oxfam and CARE International), and from governmental organizations, like the World Bank and the International Monetary Fund, in order to improve their transportation, communication and technology (i.e., Internet) infrastructures--providing access to means of transporting goods, to means of telephone and mobile line communication, to means of global order-taking and -sending--will experience economic development and growth. This economic development and growth will be further aided by aggressive government policy that removes trade barriers, especially trade tariffs, that make trade with other countries less profitable and more undesirable. Theory holds that development and growth will be further aided by reduction in business taxes that make it less desirable for companies to build and operate in other countries.

There are many studies researching the actual outcomes of the implementation of this economic theory. Many studies support the theory of trade openness resulting in economic development and growth, but many organizations refute the theory because they find a strong correlation between this policy and economic, ecological, human and cultural exploitation. This form of exploitation, illustrated in recent decades by oil companies' exploitation in Nigeria, has been termed "economic colonialism" or "neocolonialism."

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kplhardison's profile pic

Karen P.L. Hardison | College Teacher | eNotes Employee

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Trade openness refers to the outward or inward orientation of a given country's economy. Outward orientation refers to economies that take significant advantage of the opportunities to trade with other countries. Inward orientation refers to economies that overlook taking or are unable to take advantage of the opportunities to trade with other countries. Some of the trade policy decisions made by countries that empower outward or inward orientation are trade barriers, import-export, infrastructure, technologies, scale economies and market competitiveness.

The degree of global trade openness existing in countries is measured on a number of economic issues and tracked in the Open Markets Index (OMI). The OMI grades four central categories of economic issues:

  • Trade openness (including trade to GDP ratio and real growth of imports)
  • Trade policy regime (including applied tariffs, tariff profile, border efficiency)
  • Openness to foreign direct investment (FDI) (including FDI inflow to GDP and ease of business establishment)
  • Infrastructure open for trade (including logistics performance, communications infrastructure, telephone lines, Internet)

Economic Effect of Trade Openness

Economic research has focused on the economic effect of openness to trade over the last decade, and there is no firm consensus on the economic effect of trade openness. Theories of economics held that open economies would experience increased economic growth while closed economies, those with restrictive tariffs and not open to trade, would experience no economic growth. Many studies have been performed wherein the theory of openness-to-growth correlation has been upheld.

An example is the early economy of Ghana. In a span of time covering the 1960s through the 1980s, when Ghana had restrictive economic policies inhibiting trade openness, their economy struggled and did not grow. Efforts to reshape economic policy so that it favored openness resulted in increasing economic growth. Measures Ghana took included:

  • assistance from the World Bank and the International Monetary Fund in the way of loans and aid.
  • improvement of infrastructure for logistics and various communications.
    stabilization of currency in the foreign exchange market (FX).
    removing of distortions in trade restrictions (reconfiguring trade tariff policy). 
  • correcting imbalances between economic structure and macro-economic factors, some of which are GDP, output, investments, savings, and international trade.

Ghana set an 8 percent economic growth target for 2020 (later amended to 2015). The 8 percent growth target, in 2005, had not been approached, with growth at only 5.1 percent. With this slow growth--after the initial resuscitating economic growth of the 1980s--economic policy makers in Ghana are now divided on the role of trade openness.

Notwithstanding, the theory still holds sway in academic discussion that (1) non-restrictive tariff policy, (2) active involvement of the World Bank and the IMF, and (3) openness and accessibility of infrastructure and communications affect an increase in economic growth, such as was seen in the 1980s in Ghana (where growth leveled out thereafter).

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