Trade Liberalization

Updated on February 1, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Trade Liberalization Definition

Trade liberalization refers to eliminating or easing trade barriers between countries to promote free trade of goods and services. Examples of trade barriers are tariffs, import quotas, embargoes, and non-tariff barriers.

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.

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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.

Trade liberalization advantages and disadvantages

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Advantages/Benefits

Disadvantages

Frequently Asked Questions (FAQs)

What is trade liberalization meaning?

It is the easing or elimination of trade barriers to facilitate the exchange of goods and services between countries. It focuses on reducing the complexity involved in international trade.   Developing and underdeveloped countries can secure FDIs and contribute to economic growth by presenting a trade-friendly environment.

Explain trade liberalization advantages?

Advantages include introducing new products and services, sharing technological ideas, innovations, and culture, thereby developing a healthy community, healthy competition resulting in affordable prices, and businesses developing globally scalable business models.

Is the Philippines a trade liberalization?

Before the twentieth century, the Philippines followed a complex set of protective laws, investment incentives, and regulatory controls. High tariffs, quotas, and regulatory policies effectively regulated pricing, domestic supply, and market access in the manufacturing sector. However, by the early 1980s, the government had begun to remove tariff and non-tariff obstacles, preparing trade liberalization paths.

This article has been a Guide to Trade Liberalization & its Meaning. We explain its definition using examples, advantages (benefits), and disadvantages. You can learn more from the following articles –

Reader Interactions

Comments

  1. Namlee says

    Good details

  2. Levina says

    Good am understand well

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