Trade Liberalization

Trade Liberalization

Traci Hegarty

MIM510 – International Trade

Colorado State University – Global Campus

Professor Maryann McCool

March 20, 2016

Trade Liberalization

Trade liberalization is focused on reducing or eliminating barriers to trade between countries.  To do this, countries must determine what barriers should be removed and how to do so without creating difficulties for the individual country’s economies.  Additionally, it is vital for the countries involved to determine at what level quotas should be set to help domestic producers compete with imported goods.

Trade barriers are restrictions placed on international trade by governmental institutions.  There are numerous forms these barriers take, including such forms as tariffs, embargos, and trade restrictions.  Trade barriers work on the principle that the cost on trade raises the value and price of the products which are traded.  Trade barriers are unfavorable to international commerce and the lowering of the barriers increases the overall economic efficiency.  

The theory of comparative advantage explains that free trade contains the removal of trade barriers, which helps to increase the efficiency of the economies for both countries (Siddiqui, 2015).  In practice, however, it is potentially problematic to implement, as countries utilizing free trade tend to support the regulation of industries which have a large impact on the overall financial baseline, including agriculture.

The theory of free trade is supported by many developed nations, and alliances to promote the countries’ best interest formed, typically based on a geographical region.  For instance, the North American Free Trade Agreement (NAFTA) is a treaty between Mexico, the United States of America and Canada.  The goal of the pact was to remove barriers to trade between the countries.

Lower trade barriers increase the amount of product that a given country can accept, however, it can create problems for local producers of products which compete with imports.  This is because the price for imports will be potentially detrimental for domestic producers whose livelihood depends on the sale of their goods.

To combat this issue, many countries who engage in free market trade set a limit of how many of a particular good a country can import at any given time, which helps combat the amount of competition domestic producers face when selling their goods against imported goods.  An example of how a quota is used to protect domestic producers is limiting the volume allowed of imported citrus fruits to help local growers sell their produce without an increase in prices.  Local growers receive benefits of quotas as they do not have to raise the cost of their product when selling it at markets and do not have to grow additional fruits to offset the expense needed to compete with imported fruit which may be at a lower cost to consumers.  

One of the most beneficial results of trade liberalization is the increase in economic growth and the overall reduction of poverty.  This in turn helps to stimulate the economy more, as individuals who are not in poverty typically have more financial freedom and the ability to purchase imported goods at a higher rate.  

Trade liberalization is seen as controversial though, as the concept is disadvantageous to certain groups who prefer the status quo as it stands now, and whose interests would be harmed in the process.  Trade liberalization involves removing some of the barriers for trade between countries and while the removal of the barriers is typically beneficial to most developing countries, it does force firms to become more efficient and develop better products or leave the market ("Research - Knowledge in Development Note: Trade for Development", 2016)