Trade Liberalization Term Paper

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Trade Liberalization

In basic terms, trade liberalization has got to do with bringing down the various trade limitations existing between countries. It is important to note that in an attempt to protect their domestic industries, many countries from across the world have in the past erected numerous protectionist measures including but not limited to tariffs and quotas. This has amongst other things had the effect of stifling international trade. This text concerns itself with the impact of trade liberalization on developing economies.

The Impact of Trade Liberalization on Developing Countries

Before commencing on the main discussion, it would be prudent to briefly define a number of key terms which I will be making use of in this text. These terms include trade liberalization, tariffs, subsidies, and quotas. To begin with, tariffs in the words of Lipsey and Harbury (1992, p.215) are "taxes levied by the government on imports of a particular good." As a protectionist measure, tariffs are in most cases used to increase the price of goods and services entering a given country thus making the said goods more expensive than those produced locally. It is however important to note that apart from being used as a protectionist measure, tariffs can also be used by governments as a source of revenue. As important tools especially when it comes to shaping trading policy, tariffs may in some instances have unintended consequences. It is for such a reason that formations like the World Trade Organization exist.

In the words of Stroup, Sobel, and Macpherson (2009 p.101), "a subsidy is a payment to either the buyer or seller of a good or service, usually on a per-unit basis." Subsidies as the authors further point out are meant to either enhance producers' profitability or ensure goods are affordable to buyers. Subsidies could come in various forms. Governmental subsidies according to Carbaugh (2011) could be in the form of cheap loans, tax concessions, or even outright cash disbursements. The author further points out that subsidies could be classified into two basic forms, i.e. export subsidies and domestic production subsidies. Export subsidies are meant to encourage or stimulate exports by providing exporters with a competitive advantage. They also assist a nation's balance of payments. Thus while tariffs seek to make imports much more expensive, export subsidies seek to ensure that a country's exports are cheaper. On the other hand, domestic production subsidies "are granted to producers of import-competing goods" (Carbaugh 2011, p.166).

Next, a quota is yet another tool used in an attempt to regulate trade volumes between nations. In basic terms, quotas can be termed government-backed restrictions to trade that attempt to limit the number of goods (or services) that can either be exported or imported within a specified time period. For this reason, we have import and export quotas. The former is in basic terms a restriction (physical) on the total quantity of goods business entities can import within a specified period of time (Carbaugh, 2011). Export quotas on the other hand restrict the quantity of goods allowed or permitted to leave a given country. Export quotas are put in place for a variety of reasons including but not limited to ensuring that a country does not face scarcity of some specific products.

Trade liberalization as I have already indicated in the introductory section concerns itself with the reduction of the various trade limitations existing between countries. In that regard, trade liberalization has got to do with the elimination of existing trade barriers between nations via the reduction or removal of existing tariffs, easing of quotas, etc. In the final analysis, trade liberalization plays a critical role in the enhancement of free trade.

Background

In the past, countries from across the world have sought to promote new trade agreements in the belief that developing countries benefit from such agreements. The question that should, and indeed must be answered, in this case is; do new trade agreements designed to reduce existing trade barriers have any impact on developing nations. If indeed, they have an impact, whet is the nature of the said impact?

Expected Effects of Trade Liberalization

According to a report issued by the World Bank (2002, p.xi), "a reduction in world barriers to trade could accelerate growth, provide stimulus to new forms of productivity-enhancing specialization, and lead to a more rapid pace of job creation and poverty reduction around the world." Although in the opinion of the World Bank there are benefits to be derived from trade liberalization, there is uncertainty as to the fate of trade talks - with a good number of developing nations harboring doubts about the said negotiations (World Bank, 2002).

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According to Saddiqui (2012, p.21), the World Bank has in the past pointed out that "faster integration lowering barriers to merchandise trade would increase growth and provide some $1.5 trillion of additional cumulative income to developing countries over the period of 2005-2015." One of the benefits that arise from trade liberalization according to Winters (2004) is economic growth. This according to the author is something that has been supported by cross-country studies conducted in the 1990s. In the words of Schneider and Kernohan (2006, p.2), "on average, those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those that did not." As Schneider and Kernohan (2006) point out, trade liberalization facilitates the entry of developing economies into global markets thus enhancing the concerned countries' growth and subsequently, poverty reduction. This is an assertion supported by the International Monetary Fund -- IMF which points out that global integration of economies ends up stimulating growth as well as development. As Schneider and Kernohan (2006) further point out, it is the said growth as well as poverty reduction that in the end stimulates or encourages local investment. If this is indeed the case, then it is likely that the overall demand for goods and services does increase (in the short to medium-term) as unemployment rates go down. It should however be noted that although there are indications that poverty does indeed decrease as a direct or indirect consequence of trade liberalization, significant variations do exist in this case (OECD 2005, p.39).

It is however important to note that the link between economic growth and liberalization has in the past been disputed by many economists and commentators. For instance, Rodriguez and Rodrik (2001 as cited in Winters, 2004 p.F7) point out that, inter alia, the measures of trade liberalization that have been utilized by those in support of a positive relationship between liberalization and economic growth are fundamentally flawed. Those opposed to such a link also claim that the econometrics used in arriving at such conclusions are also weak. It is also important to note that establishing causation between these the variables is inherently challenging. As Winters (2004, p.F8) seeks to find out, "does trade liberalization result in, or from, economic growth?" One could also argue that even in those instances where economic growth has been witnessed after liberalization, it would be difficult to attribute the said growth exclusively to liberalization. According to Baldwin (2002 as cited in Winters, 2004 p.F9), the implementation of trade liberalization has never been in isolation; that is, trade liberalization has always been embraced as part and parcel of other measures including but not limited to fiscal and macro policies. This is a point-of-view supported by Tussie and Aggio (2003) who are of the opinion that in addition to never happening as projected, trade liberalization is in most cases part and parcel of a myriad of other reforms. Attributing economic growth exclusively to trade liberalization in the opinion of those opposed to such a move would therefore be erroneous. In that regard, although evidence from case studies (as I will demonstrate later on in this text) demonstrates that there exists a strong positive link between trade liberalization and economic growth, the said association could be as a result of other economic factors. On another front, i.e. In relation to the effect of trade liberalization on growth in economic terms and productivity, Winters (2004) points out that a variety of cross-sectoral studies have indicated that the reduction or elimination of barriers to trade are often accompanied by productivity increases. This the author attributes to enhanced import competition.

Trade liberalization has also been linked to reduced inflation. This according to Romer (1993 as cited in Winters, 2004 p.F12) can be attributed to the move by economies that have already embraced trade liberalization to avoid inflation as real depreciation in such economies tends to be relatively costly. By avoiding inflation, such economies become "less likely to run the risk of excessive money creation and inflation" (Winters, 2004 p.F12).

Risks

As the World Bank (2008) admits in a report issued in 2008, as far as trade liberalization is concerned, there will be losers particularly when it comes to agricultural trade liberalization. This is despite Schneider and Kernohan (2006, p.12) assertion that "market barriers to agricultural imports and protectionism within large trading blocs have….....

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