Adverse effects of foreign trade on the National Economies

It has often been argued that international trade has a strong backwash effect as less developed countries i.e. its operations are fundamentally biased in favour of the richer and progressive regions and is in disfavour of less developed countries. It has also been pointed out by the economists that international trade leads to international transfer of income from poor to rich countries. The UN report (1998) on human resource indicators shows a widened gap in the living standards of the people of rich and poor nations. This widening of gap has increased in the last decade ever since globalization of the world economies started. Also, international trade can adversely affect the process of capital formation in underdeveloped countries.

However, there is still a lack of empirical evidence to prove that the development of export sector has been at the cost of domestic sector. Foreign trade has not always stood in the way of domestic investment. The adverse effects seem to have been exaggerated. It may be mentioned that in today’s environment, globalization is a reality and it is important to accept it in the right perspective instead of nurturing the old protectionist beliefs.