1.1 Background to the Study
Trade is generally accepted as a major engine of economic growth of countries. This has been the experience of Nigeria since 1960s even though the composition of trade has changed over years. Economists have been long concerned with what causes different countries to grow at different rates and achieve different level of economic growth and development. One of such factors is external trade in the work of Edwards (1992) external trade is referred to as buying and selling of goods and services between nationals of different countries, or trade agencies of the government of different counties.
According to Adewuyi (2000) external trade is the exchange of capital goods and services between countries. External trade allows a country or nation to expand her markets for both goods and services that may otherwise not have been available to her citizens.
External trade consists of export and import trade. Export trade involves sale of goods and services to other countries while import trade consists of purchases from other countries. When goods are traded by ways of imports and exports, the transactions are regarded as visible trade. External trade in service is referred to as invisible trade. Thus, for example, if Nigerian exporters avail of British shipping services for transportation of goods, they have to pay for transport services. Hence, services used may be called invisible import by Nigeria sale of services would also regarded as invisible exports. Likewise other services such as banking, warehousing, insurance and railway services are also required in external trade.
Nigeria is basically an open economy with international transactions constituting a significant proportion to her aggregate outputs. To large extent, Nigeria’s economic development depends significantly on the prospects of her export and import trade with other countries. Trade provides both foreign exchange earnings and market stimulus for accelerated economic growth of countries.
Several countries achieved significant increase in their economy through an export-led strategy. Small economics in particular have little opportunity to attain productivity and efficiency gains to support growth without tapping into larger domestic markets through external trade. Nigeria’s relatively large domestic market can support growth but alone cannot deliver sustainable growth at rates needed to make a visible influence on poverty reduction. Hence Nigeria has continued depend on foreign markets as well (World Bank, 2002). Many economists widely agree that openness to foreign trade accelerates economic development. The more rapid growth may be a transition effect rather than a move or a change to different steady state growth rate. Clearly, the transition takes a couple of decades or more, so that it is reasonable to speak of trade openness accelerating growth rather than merely leading to a sudden adjustment in the real income (Dollar and Kraay, 2001).
External trade is an issue that cannot be over-emphasized in the context of international economics and the world economy. Foreign trade has been enhanced through since 1950; there has been a massive liberalization of world trade first under auspices of the General Agreement on Tarriff and Trade (GATT) established in 1497 and now under the auspices of the World Trade Organization (WTO) which replaced the general Agreement on Traiffs and Trade (GATT) in 1993. Traiff in high-income developed countries have dramatically come down, and now average approximately 4%. Traiff level in developing countries have also been reduced, although they still remain relatively high averaging 20% in the low and middle income countries. Non tariff barriers to trade such as quotas, licences and technical specification are also being gradually dismantled, but rather more slowly than tariffs. The liberalization of trade has led to massive expansion in the growth of world trade relative to world output. While world output (GDP) has expanded fivefold, the volume of the world trade has increased 16 times at an average compound rate of just over 7% per annum. In some individual countries, notably in South-East Asia, the growth of exports has exceeded 10% perannum. Exports have tended to increase fastest in countries with more liberal trade regimes, and these countries have experienced the fastest growth of Gross Domestic (GDP).