We will write a custom Essay on Trade Liberalization in International Trade specifically for you
301 certified writers online
International trade is the exercise of exchanging products, either tangible or intangible, between different countries across the globe. This involves both import and export trade, both of which have their significant positive and negative impacts in the trading countries. Due to the controversies surrounding international trade, the venture is not fully acceptable in almost every country in the world.
A significant factor that hinders international trade leading to its unacceptability is imposition of tariffs. Although there are several other non-tariff factors that cause hindrance to international trade, tariffs have played a significant role in many countries for such a long time, making them the greatest factors hindering free trading activities between countries (Aguiar, 2002, p 1).
Tariffs are imposed by governments of respective countries in the form of taxes, quotas and duties. This is done as a way of promoting domestic products since the imported products end up with hiked up prices as a result of the imposed duties and taxes. Such imported products have increased prices throughout the whole chain of consumption and as a result, people are left with no choice but to use the domestic products even if the goods are not their preferred choice.
This paper evaluates ways in which tariffs act as barriers to international trade and the impacts of trade liberalization based on empirical studies.
Impacts of trade liberalization
Trade liberalization has various effects in various aspects in the countries imposing them. For instance, there are impacts on income distribution, environmental stability, economic growth and development, among others. Some of these effects may have positive impacts on such countries, while others affect the countries negatively.
Based on a broader development impact, trade liberalization has resulted in increased welfare of local citizens due to the improved allocation of local resources. Restriction of importing products creates an anti-export state which promotes local production and thus the improved allocation of local resources. The removal of this restriction leads to liberalization of export-based products and leads to a shift from the production of products meant to substitute imports to the extensive production of export goods (James, 2012, p 1).
This creates both short and long term generation of growth as such countries adjust to new ways of resource allocation to its advantage. However, this process may have limitations due to adjustments of costs, which are more likely to result in potentially unproductive results for the countries as well as to individual entrepreneurs. The most significant effect is the loss of stability of such countries, which result from the difficulties arising from balance of payments and/or decreased revenue from the government.
Others are unemployment effects, which result in low output and the reduction of human capital due to loss of industries and specific firms. However, these impacts depend on the rate with which transitions are made from one sector to another.
Despite these relations between trade liberalization and economic growth, the two have not been completely correlated with each other in a universal manner. There are still controversies surrounding trade liberalization on economic growth of the trade-liberalized countries. Although a lot of literature has linked the two, some studies have failed to deduce a conclusive connection between them.
For instance, a study by Rodriguez and Rodrik (1999) indicates no correlation between the two with the argument that the theoretical analysis is less informative and is nothing close to the real facts on the ground hence regarding to the conclusion of trade liberalization affecting economic growth as being biased (Basu, and Abegaz, 2010, p 1).
Some of these researchers argue that the gap between the theoretical aspect of the matter and the real facts could be a result of other internal factors of the involved countries such a poor performance concerning the economy. However, this does not mean that trade liberalization does not necessarily affect economic growth in any way.
In any case, factors like improved technology, availability of information and the openness of paving way for reduced prices do play a significant role in contributing to economic growth in any country with or without trade liberalization. However, for better economic results in regard to trade liberalization, there needs to be complementary policies specific to each country, which includes availability of infrastructure, level and value of education and policies of financial and other macroeconomic sectors of the particular countries.
The overall impact of trade liberalization is better determined by the complete economic pathway of specific countries. Trade liberalization affects the poor in a similar way that it does to other consumers as it leads to increased prices of imported products as well as ensuring that the prices for substitutes of foreign goods are kept as low as necessary.
This increases the actual income for all consumers, including the poor. One of the most important factors to consider in trade liberalization is price transmission, which affects the way that prices of border products are effectively translated into the actual price changes of the locally produced products. This, however, depends on the competition within the distribution sector of the country importing the products.
Get your first paper with 15% OFF
The nature of the imported product also affects price transition as well as the operation of marketing institutions, especially those that are run by the government in those countries. Another significant factor affecting trade liberalization is enterprise, which affects the movement of resources between local industries and this, in turn, creates an impact on employment and, consequently, on wages. This is where trade liberalization affects households through its impacts on employment and wages, thus, affecting profitability of consumers.
There are two different ways through which trade liberalization can affect enterprise. One is when there is full employment and flexible wages during which the changes in price resulting from trade liberalization are reflected in changes on wages but with employment remaining constant.
The other way is when there is no constant employment with pools of employees moving in and out of jobs probably due to circumstances of the jobs. In this case, trade liberalization results to changes in employment rather than in wages.
In the actual sense, the two situations tend to occur simultaneously with a balance between them depending on the flexibility of relative wages and employment as well as the capacity of the respective sectors to absorb the unemployment situation and other declining sectors (McCorney, 2006, p 1).
Trade liberalization also affects taxes and expenditure of countries due to the reduction or the complete elimination of trade taxes, which lowers government revenue. This causes governments to put on efforts to stabilize macroeconomy by cutting off some social expenditure or alternatively, imposing new taxes which, in turn, affect the poor in an inappropriate manner.
Empirical studies on the effects of trade liberation
The empirical evidence on trade liberalization has been only directed towards reforms in the general markets due to the relationship between trade reforms and poverty in many countries. Evidence has been presented on eight countries and it has indicated that the countries have had a gradual rate of liberating trade for a period of over 20 years.
These countries are India, Bangladesh, Zambia, Jamaica, Philippines, Malawi, Brazil and Bulgaria. Trade liberalization in these countries was pursued through multilateral, bilateral and regional levels of trade policies through the Uruguay Round of trade negotiations. Broader economic policy strategies were also considered, including the structural adjustment program.
After several years of trade regime interventions, all the eight countries began implementing tariff reforms, which resulted in gradual decrease on average tariffs although in a considerable rate. Several quantitative restriction measures were either completely eliminated or transitioned into their respective tariff equivalents (Aguiar, 2002, p 1).
Manifestation of trade liberalization was also demonstrated in the removal of restrictions on imports and the overall simplification of the export-import activities; the most significant being the elimination of import-export licenses. Generally, the trade reforms created easy accessibility to international trade for the eight countries.
Additionally, all the eight countries have joined partnerships with neighboring trade partners to boost general trade. Each of the eight countries has at least one partnership with a free trade agreement through which they benefit by receiving easy preferential market access. For instance, the two African countries among the eight, Zambia and Malawi, have easy market access to most of the developed countries, a preference that other African countries may not have.
All the other countries out of the eight have trade agreements that have been established between countries within the same locality. With trade liberalization providing essential incentives for trade, the bilateral and regional trade agreements kept particular partners to trade. These agreements have and are still influential in the products to be traded as well as the trade partners.
Another important feature common with the eight countries is that the trade reforms have been greatly promoted by international financial economic institutions such as the World Bank and the IMF (Tussie and Aggio, 2006, p 1). However, some changes have occurred in all the eight countries with some of them getting trade reform promotions from local policies such as the stabilization plan in Brazil, the centrally planned system in Bulgaria and the economic liberation framework in India.
Trade liberalization has been linked to economic growth, not only in the eight countries mentioned, but in any other country with liberty to trade. This is because of the economic policies associated with it, which have impacts evidenced in social and economic indicators. These countries experienced various impacts resulting from the trade policies associated with the liberalization process.
For instance, Zambia and Malawi have had proliferation in the value of their non-traditional export goods representing a significant increase in the total earnings from exported products. However, negative impacts were also reported, especially in Zambia, as quoted by the World Bank, 2008: “The country saw significant progress in the area of structural reforms during the 1990s, but full macroeconomic stability and sustainable growth proved elusive. All the social and education indicators deteriorated. Infant mortality rates, adult illiteracy, malnutrition and poverty remained very high” (McCorney, 2006, p 1).
Bulgaria and Bangladesh have, on the other hand, had institutional reformations. Bangladesh transformed from the previous centrally planned system to a market economy. The impacts of trade liberalization in these two countries were fairly positive compared to those in the two African countries, Zambia and Malawi. They gained economic growth by increasing external flows.
However, in both countries, absolute alleviation of poverty has not been made possible with large populations living beyond poverty line. Philippine and Jamaica have also had gradual economic growth with indicators in the living standards of their population. Brazil and India, on the other hand, have exhibited great economic growth facilitated by the economic policy agreements, which added value to trade liberalization, hence, greater economic growth in those countries.
International trade is the process of buying and selling of products between various countries around the globe. Its main operations involve importing and exporting products between various countries. However, there have been controversies regarding international trade as its significant impacts have been divided between the positive and the negative.
As a result, many countries do not allow free international trade and they do this by imposing restrictions widely classified as tariff restrictions and non-tariff restrictions. The tariff restrictions mainly involve taxes, duties and quotas. The most significant effect of international trade causing these restrictions is the deterioration of local markets due to the high competition presented by foreign goods.
However, with the proper implementation of trade reforms, developing countries can actually grow economically and socially from international trade through trade liberalization. This is significant because with trade liberalization and consequent removal of trade licenses, both local and imported goods get to have reasonable prices to the benefit of the poor. In conclusion, considerations and proper implementations of trade reforms and related agreements should be done prior to making the decision of liberalizing trade.
Aguiar, C. 2002, “Trade and financial liberalization and its effects on growth, employment and income distribution in Latin American countries”, provisional draft: IDEAS conference. Web.
Basu, A. and Abegaz, B. 2010, “The elusive productivity effect of trade liberalization in manufacturing industries of emerging economies”, center for development research, universitat Bonn. Web.
James, B. 2012, “Trade liberalization, profitability and financial leverage”, Highbeam business: journal of international studies. Web.
McCorney, G. 2006, “The effects of trade liberalization on the environment: an empirical study”, department of rural economy, university of Alberta. Web.
Tussie, D. and Aggio C. 2006, “economic and social effects of trade liberalization”, coping with trade reforms: a developing country perspective on the WTO industry tariff negotiation. Web.