Independence – Interdependence – Dependence Theory of International Trade tries to read trade patterns and policies of countries based on their degree of independence or dependence or interdependence on rest of the world. See this is a continuum: Independence – Interdependence – Dependence. The polar extremes are Independence at one pole and Dependence at the other. Independence stops trade, while dependence boosts trade.
Independence is being self-reliant. Well one cannot be self-reliant. Yet one country may choose to be independent and the cost of such obstinacy is self-denial of life’s luxuries, comforts and necessities that can be afforded without difficulty. It may be a government policy to remain independent. This austerity could cost the country heavily. Hence governments plan independence sans difficulty for citizens. Few countries in the world maintain a vast reserve of essential minerals and even don’t touch own oil fields, so that in future if foreign supplies are cut for whatever reason these built/unexplored stocks could be used. Thus a policy of independence hurts global trade patterns for the present and the future.
Interdependence is the middle of the continuum. France and Germany are mutually dependent on each other almost to same extent. This level of interdependence leads to more intra-industry trade or more aptly captive trades amongst group concerns (MNCs and Affiliates) in different countries. Too much mutual dependence is also not good when something happens disrupting your supply line.
Dependence is being in a state of forced relationship. Here, trade relationship. With skewed resource endowments, countries depend on few products for exports, few countries to trade with and so on. Third world countries because of their technological backwardness are either primary goods exporters or just exporters of ores. Sultanate of Oman depends too much on one product, Oil and Gas, as its prime export revenue source. Of course emerging economies depend on few products and few markets for their exports and imports as well. Among the developed nations, one nation that makes major portion of its export revenue (>25%) from a primary product, fish, is Iceland. Again one developed country, Canada, depends so much on one country, the USA, for over 50% of its exports. Similarly, Mexico depends on the USA for over 60% of its foreign trade. But the USA’s dependence on Mexico for trade is just 10%. So, USA’s policy on trade will affect Mexico, but Mexico’s policy will not affect the USA. That is the disadvantage of too much dependence.
Credit: Managerial Economics Notes-PU