RUNNING HEAD: International Trade: Impact in Economic Growth

International Trade: Impact in Economic Growth

Mary Ann Joy B. Cato

Florinda G. Vigonte, Ph.D,

Marmelo V. Abante, Ph.D, DIT, MBA

World Citi Colleges, Graduate School Department

960 Aurora Blvd., Bagumbuhay, Quezon City

Abstract

As the rise in international trade has driven this growth, recent decades have seen rapid growth in the world

economy. The increase in business is, in turn, the result of both technological developments and concerted efforts

to reduce trade barriers. Some developing countries have opened their economies to take all advantage of the

opportunities for economic growth through trade, but many still need to. The remaining trade barriers in industrial

countries are concentrated in the agricultural products and labor-intensive manufactures in which the developing

countries have a more comparative advantage. Further trade liberalization in these areas, mainly by industrial and

developing countries, would help the poorest escape from extreme poverty while benefiting the industrial

countries.

Keywords: Economy, Economic Growth, Economic Policy, International trade

Introduction:

Economic growth occurred in the Philippines because of policies designed to coordinate, support, and
promote trade and other economic activities. The Philippines' economy overgrew in the 19th century owing to
considerable advances in marketing from increased coastal and inland trade.

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

This study analyses the impact of international trade on economic growth. Undertook a review of
empirical research conducted in other countries to investigate the effects of various economic indicators. For
people in our country to know more about the impact of international trade on economic growth.
Empirical evidence suggests a significant long-term relationship exists between trade openness, foreign
investment, and economic growth in Nigeria. The study conducted by Munir (2018) aimed to assess the impact of
non-oil exports on economic growth for thirty years, spanning from 1981 to 2010. The results indicate that non-
oil exports still need to meet the anticipated level of performance, leading to skepticism regarding the
effectiveness of the implemented export promotion tactics. The authors noted that the economy has yet to achieve
significant diversification from its reliance on crude oil exports, resulting in the crude oil sub-sector remaining the
primary contributor.
The following research publications have been the subject of a literature review by the researchers:
 Economic Growth
 International Trade and Economic Growth
 Foreign Direct Investments
 International trade: A Philippine Context

This literature review raises knowledge about the impact of international trade on economic growth.
Additionally, this would be an avenue to enhance and expand the Philippines' current knowledge about economic
development and international trade.

Methodology

(Figure 1). Data gathered utilizing PRISMA Diagram

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

For this research, which includes quantitative and qualitative studies, the researchers employed the

Preferred Reporting Items for Systematic Reviews and Meta-Analyses (PRISMA) appropriate to mixed

methodologies systematic reviews methods.

Results and Discussion

Economic Growth

Empirical evidence suggests that there is a significant long-term relationship between trade openness,

foreign investment, and economic growth in Nigeria. The study conducted by Munir (2018) aimed to assess the

impact of non-oil exports on the economic growth over a period of thirty years, spanning from 1981 to 2010. The

results indicate that non-oil exports have not met the anticipated level of performance, leading to skepticism

regarding the effectiveness of the implemented export promotion tactics. The authors noted that the economy has

yet to achieve significant diversification from its reliance on crude oil exports, resulting in the crude oil sub-

sector remaining the primary contributor to the economy.

In a 2018 study, Navarete looked at the effects of international trade on real gross domestic product

(RGDP), which is a measure of economic growth. The study conducted an analysis of time-series data spanning a

period of 27 years, utilizing statistical techniques such as the Augmented Dickey-Fuller (ADF) test, Ordinary

Least Square (OLS), Johansen co-integration test, and Granger causality test. The findings indicate a positive

correlation between the variables and the presence of cointegration among them. The Granger causality test

identified a unidirectional relationship, indicating that RGDP is the cause of Granger export, while import

Granger causes RGDP and export. The present study also undertook a review of empirical research conducted in

other countries. The study conducted by Nguyen (2020) examined the correlation between foreign trade and the

Gross Domestic Product (GDP) growth in East China over a span of 27 years, from 1981 to 2008. Utilizing the

unit root test, co-integration analysis, and error correction model, the researchers determined that foreign trade is

a significant factor contributing to both the long-term and short-term growth of GDP. However, their findings did

not provide substantiation for the existence of long-term stationary causality between import trade and GDP.

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

The study conducted by Okenna (2020) aimed to assess the impact of global trade on the economic

advancement of China by analyzing the enhancements in productivity. The study utilized both econometric and

non-parametric methodologies, drawing from a 6-year balanced panel dataset encompassing 31 provinces within

China, spanning the years 2002 to 2007. The research exhibited that augmenting involvement in worldwide

commerce facilitated China to obtain the static and dynamic advantages, thereby invigorating swift national

economic expansion. The findings of the study indicate that China's regional productivity experienced a positive

impact because of increased international trade volume and a shift towards high-tech exports in the country's

trade structure.

The study conducted by Wabiga (2018) aimed to investigate the effects of various economic indicators,

such as total exports to GDP ratio, import to GDP ratio, terms of trade, trade openness, investment to GDP ratio,

and inflation, on the economy of Pakistan. The researchers utilized time-series data spanning from 1973 to 2010

for their analysis. By utilizing the Chow test and Ordinary Least Square methodology, the obtained outcomes

indicate that each of the explanatory variables exerts a positive and statistically significant influence on Pakistan.

The findings of the study indicate that the augmentation in the importation of raw materials had a positive impact

on the manufacturing process, workforce, and overall productivity of Pakistan.

In Prabhakar (2020) study, a re-examination of the empirical evidence regarding the correlation between

trade openness and long-term economic growth was conducted. This analysis differed from prior research, which

primarily concentrated on the time frame of 1970–1990, by encompassing the sample period of 1960–2000. The

research employed a range of openness metrics as recommended in scholarly literature, as opposed to relying on a

limited number of surrogate variables. The results of the cross-national examination revealed that numerous

indicators of openness exhibit a positive and statistically significant association with sustained economic

advancement. The study posited that the association between openness and growth is fragile, as the significance

of openness variables becomes insignificant when other determinants of growth, such as institutions, population

heterogeneity, geography, and macroeconomic stability, are taken into consideration.

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

International Trade and Economic Growth

Neoclassical economists have stressed the importance of trade as a catalyst for economic growth. From

these, various researchers have taken an interest in investigating the relationship between international trade and

economic growth - especially innovation and intra-border trade. Research has shown that trade can boost

efficiency through resource reallocation.

Ortiz (2018) studied the link between global commerce and economic development in European countries.

They measured international trade through imports, exports, and export coverage. They employed simple

regression analysis for each variable and multiple regression analysis for the whole research, and OLS (Gauss-

Newton) was used for estimation. Piana (2014) used panel data from 28 European Union countries from 1998 to

2018 and used OLS multivariate analysis with fixed effects to estimate the impact of trade balance deterioration

on economic growth. They discovered that a declining trade balance had a considerable negative effect on

economic growth, regardless of whether it began as a deficit or surplus.

Prabhakar (2020) discovered that Germany is the most reliant on trade, followed by the US, China, and

Russia. Despite prior losses, the population's well-being continues to increase, negating the importance of

international commerce to China. The role of international trade on a country's overall economic condition differs

by country. Quimba (2020) asserted that GDP is related positively to exports and imports, whereas GDP is

negatively related to the exchange rate. Their research found that long-term economic progress in underdeveloped

nations requires international trade. However, for developing countries to succeed through international

commerce, they must adopt localized trading policies.

A study has found that international commerce and economic growth are positively related. Raghutla

(2020) investigated the contribution of international trade to Nigeria's economic growth. OLS (Ordinary Least

Squares) regression analysis and Granger Causality were used to evaluate causality between the regress and

regressor. Furthermore, Ali and Nasir (2020) looked at how FDI affects economic growth in Pakistan—utilizing

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

time-series data from 1991 to 2015 and estimated data using Johansen Integration and Granger causality. The

research revealed that International Trade, FDI, and Economic Growth are positively related in Pakistan.

Ridzuan (2018) concludes that the correlation between trade and development is strong and would bring

radical changes in the economy; however, this would depend on policymakers' decisions, resource development,

and investments that facilitate resource development. Kim (2018) concluded that Vietnam's export activity

improved its balance of payments, controlled inflation, and generated employment showing that export had a

beneficial influence on the Vietnamese economy from 2000 to 2018. Vietnam's initiatives to participate in

international commerce created the stage for a favorable scenario, increasing company exports (Kim, 2020). The

linkage between trade and economic growth lies greatly in the creation of job opportunities fostered by foreign

investments, and this reduced unemployment in Ghana (Wiedmann, 2018). Ghana's economy has grown

significantly over time, mostly due to corporate expansion and free trade improved the country's efficiency and

distribution of resources and materials. On the other hand, (Wiedmann2018) asserted that due to a lack of

capacity for economic infrastructures, a country faces low employment, slow social progress, and excessive

inflation despite growth.

Both developed and developing countries have established links between trade and economic growth. The

impact of international trade differs by country, meaning that certain trade rules and strategies are only effective

in one country but not in another. The importance of trade indicators in improving economic growth will be

emphasized in the following section.

Foreign Direct Investments

Despite substantial progress in liberalizing FDI policy, barriers to foreign investment persist.

Constitutional limitations restrict foreign investment in certain sectors, such as the media, small-scale mining,

private security firms, and pyrotechnic devices. A tightening of investment and property ownership restrictions

exacerbated corruption, harming the Philippines' reputation with FDIs (Parcon-Santos, 2019).

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

Jebli (2015) investigated the long-run relationship between FDI, exports, and GDP in selected Asian

countries. Their results demonstrated that the lack of long-term forcing linkages between foreign direct

investment and GDP exports was not the sole reason for their economic success. According to Jebli (2015), FDIs

are independent long-term capital movements driven by economic objectives, with profit as the primary goal.

Foreign Direct Investment can give various economic benefits to foreign investors, including reduced

transportation costs (both inputs and completed goods), cheaper labor costs, and relative proximity to customers.

ASEAN-5 countries have shown that foreign firms establishing operations in these countries play a major

part in strengthening their technological capabilities (Ridzuan et al., 2018). Gross domestic investment (GDI) is a

more potent source of capital than neoliberal foreign direct investment (FDI) for boosting economic growth. The

presence of South Korea in terms of FDI stems from the country's rapid economic development and expertise in

new information and communication technologies. Kolk (2016) concluded that Foreign Direct Investment (FDI

inflows) have resulted in higher growth and lower pollution levels in South Korea.

Feenstra (2015) conducted a study focusing on the contribution of FDI to short and long-term economic

growth rather than the FDI-output volatility correlation. They asserted that various occurrences of economic

distortions might compromise FDI's utilization as a vehicle enabling advanced technology transfer. Aharoni

(2015) stated that the contribution of FDI to economic growth is found to be distinctive in every country due to

inadequate human capital, geography, trade policies, and other factors. Leamer (2017) concluded that FDI had

made strides in recent years via input accumulation but not through total factor productivity growth.

Transport and logistics infrastructure make a significant contribution to developing countries' FDI and

long-term sustainable economic growth (Copeland, 2020). As a result, their findings may assist developing

country's decision-makers in designing and implementing modern transportation and logistics systems that will

attract more FDI.

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

International trade: A Philippine Context

Economic growth occurred in the Philippines because of economic policies designed to coordinate,

support, and promote trade and other economic activities. The Philippines' economy grew rapidly in the 19th

century owing to huge advances in trade from increased coastal and inland trade (Abueg, 2017).

Although the Philippines initiated trade liberalization and market-based reforms early on, no tangible

results were apparent (Serafica, 2019). Due to the massive increase in manufactured goods demand, big countries

restructured their economies, focused on shifting resources from agriculture to industry, a process called

structural transformation.

According to Serafica (2019), a nation's export basket is significant in its long-term economic progress.

Emerging economies need to prioritize investing in human resources, infrastructures, and trade. The export

success is more likely connected to the nation's ability to stimulate foreign direct investments (FDI). Philippine

studies assert that trade has significantly changed the Philippine economy. Global value chains and free trade

agreements have improved industrial processes. This improvement enabled the Philippines to engage in bigger-

scale manufacturing, resulting in economic growth, more employment, foreign currency inflow, and reduced

poverty (Quimba, 2020).

Philippines' free trade agreements (FTA) allowed for the zero-tariff importation of several items,

benefiting the economy by increasing worker productivity (Quimba ,2020). The data show a substantial link

between industry expansion and worker productivity..

Conclusion

Philippine researchers found that international trade positively impacts the Philippine economy.

Acquiring knowledge, stronger networks, and the transfer of technology help the nation boost its export ladder.

Alburo (2018) mentioned that countries which engage in trade are more likely to accelerate their economy due to

access to comparative advantages. The presence of poor rural producers taking advantage of trade opportunities

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

impacts the trade itself in the rural sector. The evidence of unequal opportunities can be exhibited in the form of

poorly established infrastructures for transport which includes roads, port facilities, etc. (Sta. Romana, 2017).

There is a lack of understanding of whether trade has a relationship with the livelihoods of underprivileged

individuals. The country does not have an adequate macroeconomic database. This means that more studies are

needed to have a better understanding of the macroeconomic variables, which can improve the formulation of

economic policies (Parcon-Santos, 2019).

References:

Munir, K. & Ameer, A. (2018). Effect of economic growth, trade openness, urbanization, and technology on the
environment of Asian emerging economies. Emerald Insights.
https://www.emerald.com/insight/publication/issn/1477-7835

Navarrete, A.F.C., Tatlonghari, V.M. (2018). An empirical assessment of the effects of the Japan–Philippine
Economic Partnership Agreement (JPEPA) on Philippine exports to Japan: a gravity model approach.
Economic Structures .https://doi.org/10.186/s40008-018-0129-8

Nguyen, H. H. (2019). Impact of foreign direct investment, trade openness and economic institutions on growth
in emerging countries: The case of Vietnam. Journal of International Studies. 12. 243-264.
10.14254/2071-8330.2019/12-3/20.

Nguyen, H. H. (2020). Impact of Foreign Direct Investment and International Trade on Economic Growth:
Empirical Study in Vietnam. The Journal of Asian Finance, Economics, and Business, 7(3), 323–331.
https://doi.org/10.13106/jafeb.2020.vol7.no3.323

OECD. (2022). Foreign Direct Investment (FDI). OECD iLibrary. Retrieved February 28, 2022, from
https://www.oecd-ilibrary.org/finance-and-investment/foreign-direct-investment-fdi/indicator-
group/english_9a523b18-en

OECD Statistics. (2022). OECD Glossary of statistical terms - gross capital formation definition. Retrieved
February 28, 2022, from https://stats.oecd.org/glossary/detail.asp?ID=1158

Okenna, N. P. (2020). The Importance of International Trade to the Economies of Developing Countries. SSRN
Electronic Journal, 9:5(2020), 1–5. https://doi.org/10.2139/ssrn.3664322

Ortiz-Ospina, E. (2018). Does trade cause growth? Our World in Data. https://ourworldindata.org/trade-and-econ-
growth.

Parcon-Santos, H., (2019). Trade and Investment in the Philippines. Retrieved from https://www.dlsu.edu.ph/wp-
content/uploads/2019/03/2011-015

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

Wabiga & Nakijoba (2018). High Technology Exports, Gross Capital Formation and Economic Growth in
Uganda: A Vector Auto Regressive Approach, International Journal of Business and Economics Research.
7,(6). 191-202. DOI: 10.11648/j.ijber.20180706.13

Piana, V. (2014). Exchange rate: a key concept in Economics.

http://www.economicswebinstitute.org/glossary/exchrate.htm.

PHIL-HISTORY.ORG. (2020). The Galleon Trade. Galleon Trade: Philippine History. https://www.philippine-
history.org/galleon-trade.htm.

Prabhakar, A. C., Kaur, G., & Erokhin, V. (2020). Regional trade and development strategies in the era of
globalization. Business Science Reference.

Quimba, F.M., Barral, M.A., Rosellon, M.A. & Calizo, S. (2020). Impact of FTA on Philippine Industries:
Analysis of network effects. Philippine Institute for Development Studies.
http://hdl.handle.net/10419/241020

Raghutla, C. (2020). The effect of trade openness on economic growth: Some empirical evidence from emerging
market economies. Journal of Public Affairs. 20. e2081. 10.1002/pa.2081. [63] Ramaiah, T.S., & Reddy,
T.K., (2020). The Impact Of Gross Capital Formation On Economic Growth: Evidence From India. Indian
Journal of Economics & Business, 19(1):57-69.http://www.ashwinanokha.com/resources/ijeb%20v19-1-4

Nasir, M.A. (2020). Role of natural resource abundance, international trade, and financial development in the
economic development of selected countries. Elsevier. https://doi.org/10.1016/j.resourpol.2020.101591

Ridzuan, A. R., Khalid, M. W., (2018). The Impact of Foreign Direct Investment, Domestic Investment, Trade
Openness And Population on Economic Growth: Evidence from Asian-5 Countries. International Journal
of Academic Research in Business and Social Sciences, 8(1), 128–143.10.6007/IJARBSS/v8-i1/3799

Roser, M. (2013, November 24). Economic Growth. Our World in Data. https://ourworldindata.org/economic-
growth.

Serafica, R. B. (2019). Facilitating Structural Transformation through Product Space Analysis: The Case of
Philippine Exports. Philippine Institute for Development Studies Research Papers, 2019(6)

Abueg, L. (2017). An Econometric History of Philippine Trade: 1810-1899. DLSU Business & Economics
Review 26(2) 2017: 125–146.

Quimba, F.M., Barral, M.A., Rosellon, M.A. & Calizo, S. (2020). Impact of FTA on Philippine Industries:
Analysis of network effects. Philippine Institute for Development Studies.
http://hdl.handle.net/10419/241020

Alburo, F. (2018). Export promotion policy and economic growth in the Philippines: A comparative context,
UPSE Discussion Paper, No. 2018-05, University of the Philippines, School of Economics (UPSE),
Quezon City. http://hdl.handle.net/10419/202521

Ridzuan, A. R., Khalid, M. W., (2018). The Impact of Foreign Direct Investment, Domestic Investment, Trade
Openness And Population on Economic Growth: Evidence from Asian-5 Countries. International Journal
of Academic Research in Business and Social Sciences, 8(1), 128–143.10.6007/IJARBSS/v8-i1/3799

Electronic copy available at: https://ssrn.com/abstract=4461422

The Government Economic Policy: The Philippines Post-Pandemic Economic Growth

Sta. Romana, L. (2017). Trade and Poverty Issues: A Country Case Study of the Philippines. Munich Personal
RePEc Archive. https://mpra.ub.uni-muenchen.de/78432/

Parcon-Santos, H. (2011). Trade and Investment in the Philippines.

Jouini, J. (2015). Linkage between international trade and economic growth in GCC countries: Empirical
evidence from PMG estimation approach. The journal of international trade & economic development,
24(3), 341-372.

Kim, D. W., Yu, J. S., & Hassan, M. K. (2018). Financial inclusion and economic growth in OIC countries.
Research in International Business and Finance, 43, 1-14.

Wiedmann, T., & Lenzen, M. (2018). Environmental and social footprints of international trade. Nature
Geoscience, 11(5), 314-321.

Jebli, M. B., & Youssef, S. B. (2015). The environmental Kuznets curve, economic growth, renewable and non-
renewable energy, and trade in Tunisia. Renewable and Sustainable Energy Reviews, 47, 173-185.

Kolk, A. (2016). The social responsibility of international business: From ethics and the environment to CSR and
sustainable development. Journal of World Business, 51(1), 23-34.

Feenstra, R. C. (2015). Advanced international trade: theory and evidence. Princeton university press.

Aharoni, Y. (2015). The foreign investment decision process. In International Business Strategy (pp. 10-20).
Routledge.

Leamer, E. E., & Stern, R. M. (2017). Quantitative international economics. Routledge.

Copeland, B. R., & Taylor, M. S. (2017). North-South trade and the environment. In International Trade and the
Environment (pp. 205-238). Routledge.

Electronic copy available at: https://ssrn.com/abstract=4461422