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Trade liberalisation has affected the flow of trade (goods and
services) between developed and developing countries. The
Heckscher-Ohlin trade theory reveals that under free trade, developing
countries would specialise in the production of those goods that are
produced by relatively abundant factors of production such as labour and
natural resources. Developed countries would specialise in the
production of those goods that are produced by human capital and
manufactured in capital-intensive activities. Trade openness entails
movement of goods produced in one country for either consumption or
further processing to other country. Production of those goods is not
possible without the effective use of energy. Trade openness affects
energy demand via scale effect, technique effect and composite effect.
Other things being same, trade openness increases economic activities,
thus stimulates domestic production and hence economic growth. A surge
in domestic production increases energy demand , which is commonly
referred as scale effect. Such scale effect is caused by trade openness.
Economic condition of the country and extent of relationship between
economic growth and trade openness determine the impact of trade
openness on energy consumption [Shahbaz, et al. (2013); Cole (2006)].
Trade openness enables developing economies to import advanced
technologies from developed economies. The adoption of advanced
technology lowers energy intensity. The use of advanced technologies
result in less energy consumption and more output that is usually
referred to as technique effect [Arrow (1962)]. Composite effect reveals
the shift of production structure from agriculture to industry with the
use of energy intensive production techniques. In initial stages of
economic development economy is based largely on agriculture sector,
thus the use of energy is relatively less. As economy starts shifting
from agriculture to industry, the energy consumption
increases.