What is trade liberalization?
Trade liberalization is the removal or reduction of restrictions or barriers to the free exchange of goods between nations. These barriers include pricessuch as duties and surcharges, and non-tariff barriers, such as licensing rules and quota. Economists often view the relaxation or elimination of these restrictions as measures to promote free trade.
Key points to remember
- Trade liberalization removes or reduces barriers to trade between countries, such as tariffs and quotas.
- Having fewer trade barriers reduces the cost of goods sold in importing countries.
- Trade liberalization may benefit stronger economies but further disadvantage weaker ones.
Understanding Trade Liberalization
Trade liberalization is a controversial subject. Critics of trade liberalization say the policy can cost jobs as cheaper products will flood the country’s domestic market. Critics also suggest the goods may be of lower quality and less safe than competing domestic products which may have undergone more stringent safety and quality checks.
However, proponents of trade liberalization claim that it ultimately reduces consumer costs, increases efficiency and promotes economic growth. Protectionism, in contrast to trade liberalisation, is characterized by strict barriers and market regulation. The result of trade liberalization and the resulting integration between countries is known as globalization.
Advantages and disadvantages of trade liberalization
Trade liberalization promotes free exchange, which allows countries to trade goods without regulatory barriers or associated costs. This reduced regulation lowers costs for countries trading with other nations and may ultimately lead to lower consumer prices as imports are subject to lower fees and competition is likely to increase. .
Increased competition from abroad as a result of trade liberalization creates an incentive for greater efficiency and cheaper production by domestic firms. This competition can also induce a country to redirect its resources towards sectors in which it can have a competitive advantage. For example, trade liberalization has encouraged the UK to focus on its service sector rather than manufacturing.
However, trade liberalization can negatively affect some companies in a country due to increased competition from foreign producers and can lead to less local support for these industries. There can also be a financial and social risk if the products or raw materials come from countries with lower environmental standards.
Trade liberalization can pose a threat to developing countries or economies, as they are forced to compete in the same market as stronger economies or countries. This challenge can stifle established local industries or cause newly developed industries to fail.
Countries with advanced education systems tend to adapt quickly to a free trade economy because they have a labor market that can adapt to changing demand and production facilities that can focus on more in-demand goods. Countries with lower education standards may struggle to adapt to a changing economic environment.
Critics believe trade liberalization costs jobs and lowers wages. Proponents believe it stimulates competition and growth.
Example of trade liberalization
The North American Free Trade Agreement (NAFTA) was signed on December 17, 1992 by Canada, Mexico and the United States. It entered into force on January 1, 1994. The agreement eliminated tariffs on products traded between the three countries. One of NAFTA’s goals was to integrate Mexico into the highly developed economies of the United States and Canada, in part because Mexico was seen as a lucrative new market for Canada and the United States. The three governments also hoped the trade deal would improve the Mexican economy.
Over time, regional trade has tripled and cross-border investment has increased between countries. However, former President Donald J. Trump said the deal was harmful to jobs and manufacturing in the United States. On September 30, 2018, the Trump administration concluded negotiations on an updated pact, the United States-Mexico-Canada Agreement (USMCA), effective July 1, 2020.
Most economists agree that NAFTA has been good for the Canadian and American economies. According to a report by the Council on Foreign Relations, regional trade has grown from $290 billion in 1993 to over $1.1 trillion in 2016and U.S foreign direct investment (FDI) in Mexico has grown from $15 billion to over $100 billion. However, economists also say that other factors may also have contributed to these results, such as technological change and the expansion of trade with China.
NAFTA critics argue the deal led to job losses and stagnant wages in the United States because companies moved production to Mexico to take advantage of lower labor costs .It remains to be seen how the USMCA will affect these factors.