Trade Liberalization

Trade Liberalization


Trade liberalization is the reduction or complete removal of trade barriers or restrictions and thus allowing for a free exchange of goods and services between different trading nations. The trade barriers include quotas, trade licenses, and tariffs. Trade liberalization aims to reduce the costs of products sold and to strengthen the economic ties between the trading nations. One of the major real-world examples of trade liberalization was witnessed in the year 1994 when three countries including Canada, the United States, and Mexico signed a North American Free Trade (NAFTA). In the agreement, trade tariffs on various products that were traded among the three countries were eliminated.

Effects of Lower Trade Barriers on the Prices of Domestic Goods

The main aim of trade liberalization is to lower the prices of goods and services within a country through enhancing competition within the county’s economy. Lower barriers to trade have led to increased import competition and thus leading to an increase in the supply of products and services in the domestic market. The increased supply of goods has consequently led to a decrease in the prices of domestic products in the economy. In addition, lower trade barriers are characterized by lower taxes that are imposed on domestic products. The low taxes hence reduce the prices of such products within the economy. However, the increased supply of goods within the market might lead to over-supply of goods and services as the consumers might demand less of the already supplied products. Thus, this might lead to inflation in the economy with the resultant effect being the decrease prices of domestic goods and services. In some instances, lowering barriers to entry might lead to the import of high-quality goods that are relatively cheaper than the already existing domestic products. Therefore, for domestic goods to remain competitive in the local market, the prices must be decreased.

Effect of Lower Trade Barriers on Producers of Products Competing With Imports

Trade barriers such as tariffs are always imposed on imported goods to increase the prices of imported products by adding additional costs. Moreover, the trade barriers are always aimed at protecting the domestic producers from the impact of increased importation of competitive goods and services within the economy. Therefore, lowering or removing such barriers might have significant implications for domestic producers within the domestic market. Firstly, reducing the barriers to trade might lead to the reduction of taxes imposed on the production of local goods. This action will, therefore, reduce the costs of production and thus reducing the prices of domestic products. In such an instance, the domestic producer’s products will, therefore, be able to compete with the imported products in both the global and the local market. Besides, the domestic producers will enjoy substantial economies of scale such as increased market since they can trade their products both locally and in the global market.

On the other hand, lower trade barriers in an economy might have adverse effects on the producers of domestic products. Lower trade barriers lead to increased importation of products and thus poses unhealthy competition within the market. For the local producers to cope with the increased competition, they need to lower the prices of the domestic products which might, in turn, lead to losses. Besides, the local producers might lose some of its market bases to the new entrants in the economy. However, trade liberalization might not only reduce the cost of goods sold and increase competition within the economy, but it also encourages innovation. The domestic producers need to adopt the various innovation within the economy to increases their market share but also to remain competitive in the market. Besides, the lower trade barriers reduce the government protection that was enjoyed by the domestic producers before through quotas imposed by the government. Removal of such quotas will mean that the local consumers will not be obligated only to consume the locally produced goods and services. The market share of the domestic producers will, therefore, reduce significantly. Besides, trade liberalization has led to the collapse of infant firms that lacked the resources to survive due to the high competition in the economy brought by an increased importation of cheap and quality products in the domestic market.

Additional Benefits of Trade Liberalization in a Developing Country

Countries in most instances trade with each other to better off their economies and increase the availability of products and services to the individual economies. Developing countries have scarce resources that are required to produce some products that are needed within their marketplace. Therefore, to acquire such products cheaply and adequately developing countries needs to lower the trade barriers imposed on such products and services. Hence, trade liberalization leads to specialization in the developing countries as they only specialize in the production of certain products and acquire other through importation. Thus, specialization in such countries leads to increased productivity, high income in the labor market and hence better living standards.

Besides, trade liberalization leads to increased access to economic resources by the developing countries. Therefore, the removal of barriers to trades has enabled developing countries to acquire economic resources that are limited in their economies. Such resources include labor, land, and capital. The domestic producers within such countries have been able to obtain cheap labor and expertise from the global market to aid in their production processes. Besides, trade liberalization has led to increased foreign relations as most of the developing countries are always a subject to international threats. Therefore, developing a trading relationship with the powerful countries with no trade barriers ensures that developing countries access protection from such foreign threats. Through such trading relations, the developing countries can improve politically, gain technological advancements and also gain equipment meant for boosting their military strength.

Also, trade liberalization, through high competition within the economy, increases efficiency and also leads to cheap production processes by the domestic producers. Therefore, the domestically produced products in such countries are of high quality to enable the products to compete favorably both in the global and local markets. Also, the developing countries have acquired and adopted advance education systems to allow its labor market to adjust to the ever-changing demands. This has, in turn, led to increased knowledge within the developing countries.  Trade liberalization has opened the global market for locally produced goods in developing countries. The developing countries are therefore able to market and sell its products in the worldwide market with ease and at no additional costs. Furthermore, trade liberalization has led to the creation of employment opportunities in the developing countries labor market. Hence has led to reduced unemployment rates and rates of poverty.

For the developing countries to benefit fully from trade liberalization, the states must adopt two main ways of trade liberalization. That is mutual trade liberalization and unilateral trade liberalization. Mutual liberalization will involve the removal of trade barriers among different countries with mutual expectations, i.e., the states need to gain mutual support such as technical expertise and military training. On the other hand, unilateral trade liberalization is a trading relationship where the participating countries do not acquire any mutual benefit but enjoy the free flow of goods and services within their economies. Therefore, adopting both the two forms of trade liberalization will be hugely beneficial to developing countries.

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