Opening the floodgates of growth
View(s):“As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.”
What Smith meant is straightforward: a country’s economic growth depends on the size of its market. If the market is kept small with boundary walls around it, producers cannot sell their surplus, so specialisation and productivity improvements stall.
Sri Lanka can enter global niche markets via gem exports.
But when the market expands with demolished boundaries, producers can specialise more deeply, innovate, and become more efficient – and this drives growth. This is true for not only the goods that we produce, but any service we render or any profession we perform.
Local vs. global markets
Although 250 years has passed by since Smith made his prediction, some nations continued to ignore or still struggle to understand what Smith said. They make their people sacrifice with higher prices to nurture and maintain a few local businesses and wealthy owners.
They also sacrificed by preventing their children to benefit from income growth and job creation from higher growth so that they remain poor from generation to generation.
And the countries continued to remain isolated from the rest of the world without global integration, and people continued to remain poor without better jobs and higher incomes. But there would be a few businesses flourishing with the government support and the sacrifice of the people.
By contrast, nations that embrace Smith’s principle achieve stronger growth. Their firms compete in global markets, generating income and creating jobs. Even for large economies like China and India, the global market is far bigger than their own domestic one with over a billion people—and tapping into it has been the key to their rise.
Open economies
There are a few key reasons why the global market can outpace smaller local markets and drive stronger growth momentum.
First, businesses can expand by serving millions—or even billions—of global customers, rather than being confined to a few hundred thousand locally. Closed economies fail because their industries cannot grow beyond the narrow boundaries of domestic demand.
Second, larger markets unlock both economies of scale and economies of scope. Economies of scale mean that producing more of the same product lowers the average cost per unit, as fixed costs are spread over greater output and efficiency improves with size. Economies of scope, on the other hand, arise when producing different products together is cheaper than producing them separately, thanks to shared resources like marketing, distribution, or technology.
In short, scale is about doing more of one thing more efficiently, while scope is about doing more different things with the same setup. Both are powerful engines of competitiveness and growth—and both depend on the size of the market.
Competition
Third, global markets foster competition in a way smaller local markets cannot. Larger markets become powerful engines of efficiency and innovation. When producers face wider customer bases and stronger rivals, they are pushed to specialise more deeply, invest in advanced tools, and streamline processes—driving productivity upward.
The sheer size of global markets also makes experimentation worthwhile. Potential returns from new techniques or technologies are magnified when spread across millions of buyers, so firms are more willing to take risks and innovate. In this way, exposure to larger markets fuels creativity, turning market size into a catalyst for progress.
Yet competition is both an opportunity and a challenge. Firms that have grown comfortable in protected local markets often fear open economies and trade agreements. Protection makes good entrepreneurs “wealthy dependents” of government protection and people’s sacrifice.
Their lobbying would often block integration with the global market—holding back growth, income generation, and job creation for the wider population.
Global integration
Over the past three decades since the WTO (World Trade Organisation) era began, many countries have expanded their markets through two main paths: traditional route, which is unilateral policy reforms and a new route of free trade agreements (FTAs).
Unilateral trade liberalisation means a country reforms on its own to open its economy and reduce barriers to trade. Typical measures include cutting down tariffs, removing non-tariff barriers, liberalising investment, reforming exchange rates and financial systems, improving trade facilitation, and adjusting domestic policies.
This path is quicker because it does not depend on reciprocal action from trading partners. Sri Lanka took this route in 1977, and India followed in 1991.
FTAs, by contrast, are formal and strategic agreements between two or more countries to eliminate trade barriers and foster closer integration. They aim to eliminate or lower tariffs, make exports and imports more competitive, and address non-tariff barriers such as quotas, licencing rules, and restrictive standards.
By entering into FTAs, member countries integrate with each other while keeping non-members outside the pact. Naturally, nations that combine FTAs with unilateral policy reforms gain more than those that rely on FTAs alone within protective walls.
Modern FTAs
Modern FTAs go far beyond goods. They now cover services, investment protections, intellectual property rights, digital trade, and technical cooperation—creating a comprehensive framework for cross-border commerce.
By locking in preferential access to partner markets, FTAs give businesses greater certainty, encourage specialisation, and stimulate innovation. For governments, they serve both economic and strategic purposes: strengthening alliances, diversifying trade partners, and positioning the country more effectively within global value chains.
In essence, FTAs complement unilateral liberalisation by embedding openness into binding agreements, ensuring that the benefits of trade are sustained and expanded over time.
Sri Lanka and India began entering into FTAs together by signing the Indo-Lanka FTA in 1999. Since then, Sri Lanka has done little to expand its FTA network, while India has pursued them aggressively. The result is clear: India has steadily deepened its free trade access to global markets, while Sri Lanka has remained more hesitant—keeping its protective walls tight and limiting its ability to capture the full benefits of trade liberalisation.
“Mother of all deals”
India’s most recent trade milestone is the conclusion of its FTA with the European Union (EU), which brings together 27 European countries. With its network of bilateral and regional agreements, India now enjoys free market access to more than 50 countries worldwide.
Dubbed the “mother of all deals,” the EU–India FTA has been described by commentators and negotiators as transformative—surpassing all of India’s previous FTAs in scale, scope, and strategic importance. Its sheer weight lies not only in the size of the EU market, but also in the depth of integration it promises across goods, services, investment, and technology.
By expanding its reach to Europe, ASEAN, and many other regions, India has positioned itself within an “unlimited global market.” With access to vast populations and rising middle classes, India is set to keep its growth momentum—driven by trade, innovation, and integration into global value chains.
Surprise deal
Just days after signing the EU–India FTA, on February 2, US President Donald Trump announced via Twitter a surprise trade deal between the US and India. Under the agreement, the US would lower tariffs on Indian goods from 50 per cent to 18 per cent. In return, India would reduce tariffs on US goods to zero and commit to purchasing American oil instead of Russian oil.
Prime Minister Narendra Modi pledged to significantly increase imports of American products—including energy, technology, and agriculture—amounting to over US$ 500 billion, far above current levels of less than one-tenth of that.
A few days later, Prime Minister Modi responded on Twitter, describing the deal as a framework for an interim trade agreement. He emphasised that it would strengthen bilateral ties, boost investment, support farmers and businesses, create jobs, enhance supply chains, promote innovation, and advance India’s ambition of becoming a developed nation.
Bottom line
Although the US–India trade deal appears asymmetrical and shaped more by geopolitics than economics, its ultimate impact remains debated among analysts.
Yet the bottom line in evaluating international trade arrangements is not the balance of any single bilateral deal, but the overall trade performance of a country. On that front, India is now doing far better than many of its Asian neighbors.
The reason is simple: India has not been constrained by the boundaries of its domestic market. By opening itself to the global economy more with FTAs than with unilateral policy reforms, India has tapped into larger markets, unlocked economies of scale and scope, and embraced competition—driving growth, jobs, and rising incomes.
(The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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