ECO 321 ASSIGNMENT 1 : GROUP 15

NAME (S) STUDENT NUMBER (S)

NDLOVU. S 201924638
GENSTANE. S 201910327
SIGWILI. Y 201927147
MPHAHLENI. S 201823402
KASI. L 201806121
LATONI. N 201927787
SOKHASI. N A 201927622
NTSHIDI. A 201801284

Question 2

a) In light of the above, you are required to review literature (both theoretical and
empirical) on the impact of international trade on economic growth in South Africa.
b) Based on the findings from the literature reviewed in (2a), recommend relevant
policies to the South African policy makers.

Table of Contents
1.Introduction.............................................................................................................................1
2.Literature review.....................................................................................................................1

2.1The theoretical review.......................................................................................................1

2.1.1 Mercantilist view.......................................................................................................2

2.1.2 The Classical economist view....................................................................................2

2.1.3 Neoclassical economist view.....................................................................................2

2.2 Empirical review: South African Literature.....................................................................3

3.Conclusion...............................................................................................................................3

4.Policy recommendations.........................................................................................................4

5.Reference list...........................................................................................................................5
1.Introduction
International trade has been studied for a very long time in an attempt to understand the
impact it has on economic growth (Alfonso,2001). Krugman (1994) defines international
trade as when two or more countries engage in exchange of goods and services, whereby the
exchange takes the form of imports and exports. It has been argued that, for a country to
engage in beneficial exchange with other nations it needs to have a competitive advantage
over countries in that space. In this regard, international trade can foster economic growth
from the supply side (Malefane,2018).

In the South African context, it can be noted that during the Apartheid era, it was a closed
economy with the very limited trade that was taking place with the rest of the world. The end
of the Apartheid era in 1994 brought a new chapter to the South African economic growth as
the economy started engaging in trade agreements with international space (Ziramba,2011).
However, with trade agreements brought to life after the Apartheid era, South Africa
experiences underperforming exports in the international space due to lack of
competitiveness. In this regard, several economics experts asserted the need for South Africa
to engage in an export promotion program so that it can realise the fruits of engaging in
exchange on the international profile (Angomoko, 2017). An investigation of the literature on
international trade and economic growth is a critical part of this study, which will further
facilitate action on trade policies for policymakers in South Africa.

2.Literature review

An analysis of literature relating to foreign trade's contribution to economic growth is

presented here. With the theoretical framework examined first, and then empirical research
particularly to the South Africa context follows.

2.1The theoretical review

Presented in this section is the theoretical part which serves as the background to the
empirical investigation particularly on how international trade has impacted economic growth
of South Africa. Below is an overview of the various economic schools of thought that have
discussed trade and economic growth.

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2.1.1 Mercantilist view
As per mercantilism, the only way a country can become wealthy and powerful is by not
importing as many goods and services, but rather by encouraging more exports to other
nations. In the view of mercantilists, as long as exports keep growing and imports remain
low, countries would be able to maintain a favourable balance of trade that would translate
into national prosperity and the development of the economy. As such, mercantilist
proponents believe that one way to economic prosperity is seeking a trading partner
(Krugman,1994).

2.1.2 The Classical economist view

In the realm of international trade, classical economists notably Smith and Ricardo in their
fundamental principles of absolute and comparative advantages respectively argued that
countries involved in trade mutually benefit, albeit some will do so more than others. In their
findings, they both concluded that countries would mutually benefit from international trade
given they specialize, export goods which they have a relative cost advantage, and importing
those in which it has a comparative cost disadvantage (Ratombo,2019). It has been argued
that dealing in trade with other nations, will increase efficiency and economic development
by introducing new technology and skills. As well as this, classical theory argues that trading
partners will grow economically, as each country can benefit from trade (Afonso, 2001).

2.1.3 Neoclassical economist view

Neoclassical theory has advanced the classical assertion of trade and economic growth. Based
on the neoclassical theory, the Heckscher-Ohlin model pointed out that as countries open up
to free trade, mutual gains, as well as a spur to global economic growth, go hand in hand
(Malefane,2018). It was Heckscher-Ohlin's belief that the most important factor that
determines trade between nations is the differences in factor endowments and factor prices.
Based on this, it is recommended that each country should specialise in the production of
commodities in which it has an abounding factor endowment. According to Usman (2011)
the Heckscher-Ohlin theory holds that a nation with abounding factors intensity can grow
economically if it specializes and exchange with other countries.

As expounded throughout the history of economic thought, from mercantilism to classical

and modern theories of trade have argued the case for a world of commerce. Based on the
foregoing theoretical framework, all of the theories indicate that free trade benefit both
trading partners, so it is recommended that each country should specialize in a commodity

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that it is good at so as to reap the mutual benefits in the international space. It is important
that countries cooperate in order to promote the growth of global output which in turn result
in the improvement of welfare. As Angomoko (2017) points out, it is based on these trade
theories that each nation is able to identify what they should produce to benefit from free
trade and boost their economic growth. These theories state that trading partners can benefit,
provided that each country chooses the right kind of commodity and trading partners.

2.2 Empirical review: South African Literature

International trade has been the subject of several empirical studies to test its contribution to
economic growth. Literature has been devoted to the impact of foreign trade, specifically to
the growth of South African economy. The empirical evidence supports Feddersen and Botha
(2017)'s contention that international trade promotes economic growth by allowing each
country to fully utilize its capabilities towards the sectors it does better.

According to the study conducted by Ziramba (2011) in which the South Africa’s export
variables were tested to determine their relationship with economic growth. A study found
that South Africa's exports strongly contribute to the growth of its economy (Osei-Assibey
and Dikgang, 2020).

Likewise, Greis et al. (2009), conducted a study to test how far does the financial deepening,
and trade openness are causally linked to Sub-Saharan countries’ economic growth. It has
been found that free trade opens up the possibility of economic growth. Based on these
findings, it has been found that the growth of South Africa’s economy was also strongly
linked to trade opening (Malefane, 2018).

It has been shown empirically that international competition and trade policy greatly reverse
South Africa's trade competitiveness. In this regard, Angomoko (2017) cited United States
International Trade Commission 2008, as evidence of strong foreign competition for South
African exporters where it reported that South African and Chinese exports became stiff
between 2002-2006.

3.Conclusion
From the foregoing, theoretical and empirical literature was examined regarding international
trade's impacts on economic growth. This study concludes that South Africa's economic
growth is in large part influenced by international trade. The empirical findings further
revealed that economic growth of South Africa is correlated to increase in its exports. This

3
means that with international trade, South Africa's economy can be better off than it would be
without trade. 

4.Policy recommendations
Several policy implications can be suggested based on the empirical findings. From the
empirical analysis, exports in South Africa have been seen to have an impact on the growth
of its economic. It is therefore recommended that policymakers focus on policies that
promote exports. Exports and competitiveness must be the driving forces behind such
initiatives. In this way, engaging in trade agreements with different trading partners may
assist South Africa in increasing exports to different markets.

As a second recommendation, South African policy makers should consider liberalization

trade policies as an instrument to promote economic growth, diversifying exports, creating
jobs, thereby reducing poverty. This promote economic growth from the fact that tariff
liberalization is capable of boosting productivity, export performance, and diversification.

There are and can be other aspects of trade policies that the policy makers might consider;
provision of sound infrastructure, education, supporting research and development and
promoting international trade exhibitions.

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5.Reference list
Afonso, O. (2001). The Impact of International Trade on Economic Growth. Vol. 6. FEP
Working Papers, 2001

Angomoko, B. B. (2017). The effect of Chinese economic growth on South Africa's exports to

China (Doctoral dissertation, University of South Africa).

Feddersen, M., Nel, H., & Botha, F. (2017). Exports, capital formation and economic growth
in South Africa. African Review of Economics and Finance, 9(1), 213-244.

Greis, T., Kraft, M., & Meierrieks, D. (2009). Linkages between financial deepening, trade
openness, and economic development: causality evidence from Sub-Saharan Africa. World
development, 37(12), 1849-1860.

Krugman, P. R. (1994). Rethinking international trade. MIT press.

Malefane, M. R. (2018). Impact of trade openness on economic growth: Empirical evidence

from South Africa.

Osei-Assibey, K., & Dikgang, O. (2020). International Trade and Economic Growth: The
Nexus, the Evidence, and the Policy Implications for South Africa. The International Trade
Journal, 34(6), 572-598.

Ratombo, N. E. (2019). The effects of international trade on economic growth in South

Africa (2000Q1 to 2017Q2) and econometric view (Doctoral dissertation).

Usman, O. A. (2011). Performance evaluation of foreign trade and economic growth in

Nigeria. Research Journal of finance and accounting, 2(2), 4-13.

Ziramba, E. (2011). Export-led growth in South Africa: Evidence from the components of
exports. Studies in Economics and Econometrics, 35(1), 1-13.