Trade Liberalization Definition Examples Benefits

Trade Liberalization Definition

The removal or reduction of trade barriers is an important element in a free trade agreement and increases the competition in the world market for goods and services. Moreover, integration into the global economy is vital for nations to promote economic growthEconomic GrowthEconomic growth refers to an increase in the aggregated production and market value of economic commodities and services in an economy over a specific period.read more, industrialization, urbanization, and prosperity.

Key Takeaways

Trade liberalization refers to facilitating trade between countries by removing or reducing trade barriers.It is an important element in establishing free trade, and the process always includes the reversal of protectionism measures.It benefits countries in different ways. Its positive effects include introducing various products, services, ideas, technologies, etc.It also gives disadvantages like unhealthy competition for domestic entities, overdependence on foreign nations, overexploitation of human capital, environmental damages, etc.

Trade Liberalization Explained

Trade liberalization is significant to the global economyEconomyAn economy comprises individuals, commercial entities, and the government involved in the production, distribution, exchange, and consumption of products and services in a society.read more; it promotes free trade and contributes to globalizationGlobalizationGlobalization is defined as the extension of trade, commerce and culture of an economy across different nations.read more. It started gaining popularity in the early 1980s, specifically in developing countries. However, the output obtained by different countries varies. Some countries experienced a rapid expansion of exports of manufactured goods, fast expansion of industrial supply capacity, and upgrading, mostly East Asian countries.

For example, China benefitted from the reforms implemented between 1995 and 2001. But, at the same time, countries like Africa and Latin America experienced non-prolific impacts like the non-acceleration of the industrial base. Hence there are opponents and proponents of the ideology.

The idea’s proponents advocate that liberalization fosters economic growth supported by increased investment and physical capital accumulation. In the long run, it reduces the poverty level in the nation. Opponents of the concept focus on its side effects like poor employment conditions, labor standards, income inequalityIncome InequalityIncome inequality refers to the crucial imbalance of income dispersal across the population.read more, etc., contributing to a “race to the bottom” phenomenon. So, they always hold onto the implementation of protectionism measures.

Examples

In the late 20th century, the Philippines launched its trade liberalization program. The diminution in industrial protection enforced by strong tariff barriers and import controls was one of the starting points. It leads to the liberalization of imports significantly. These reforms looked to have delivered significant damage to the import substitution development strategy that had characterized the nation’s trade and industrial policy. However, the initiative was halted in 1983, as the country had its greatest BOP crisis and economic recessionEconomic RecessionEconomic recession is defined as the phase in which economic activities of a country become stagnant, leading to a disturbance in the business cycle and affecting the overall demand-supply balance. read more. Again, the reforms were reintroduced in 1986 when the economy gradually recovered and foreign exchange limits eased.

Another example is trade liberalization in the United States. The free trade agreements in the United States have created a minor but favorable impact. Since 1984, the economy has grown by $88.8 billion and gained 485,000 full-time employment; however, the benefits have not been spread uniformly, with college-educated males benefiting the most. Another discernable issue is the exploitation of American employees. The agreements frequently benefit multinational firms at the expense of American employees. For example, while promoting trade liberalization and investor protections, governments fail to defend worker and environmental rights effectively. Hence, as the country recovers from the epidemic, the Biden administration’s trade policy prioritizes workers and middle-class people.

Advantages & Disadvantages

There is a handful of trade liberalization benefits and, at the same time, produce negative impacts also. Let’s look through some of the advantages and disadvantages.

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Advantages/Benefits

Trade barrier relaxations increase imports and exports.It introduces various goods and services at reasonable prices.When countries collaborate, they introduce their cultures which is an important element in developing a healthy community.It can foster FDI, industrial growth and subsequently create more employment opportunities.An increase in the brain drain phenomenon and domestic supply of skilled workers is an incentive to improve education.Promotes shift to a globally scalable business model.Promoting free trade leads to the reallocation of government funds initially spent on factors like subsidiesSubsidiesA subsidy in economics refers to direct or indirect financial assistance from the government to an individual, household, business, or institution to promote social and economic policies.read more.It eases technology transfer from developed countries to developing and underdeveloped nations.

Disadvantages

Imports make it challenging for domestic companies to establish because of increased competition and lack of support.Gradually, it may lead to overdependence on foreign products and services.Favoring FDI-friendly policies and SEZ sometimes leads to exploitation of the workforce. They may face long work hours, low wages, and unhealthy working conditions.It makes less-developed countries struggle to replace revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more lost through import tariffs and other fees.Loosened regulations and lack of concern for environmental protection can cause depletion and degradation of natural resources.Brain drain associated with liberalization policies can reduce the availability of human capital in developing countries.It can affect indigenous people. For example, relaxed regulations can encourage and ease the acquisition of indigenous people’s land for corporate use.