Is Trade Liberalization Important for Growth of Economy and Development - Essay Example

Is trade liberalization important for growth of economy and development? Student’s Name Course & Code Professor’s Name University City Date Introduction Integration among the countries across the world has proved to be more vital towards improvement of economic development and reduction of poverty for countries. Trade is a major boost towards economic growth and development. Countries find themselves in a situation where they are unable to produce certain commodities due to absolute or comparative disadvantages, this thus results to trade between countries leading to integration and foreign market trade. Trade between countries is one of the key factors that support the world’s economy especially the developing countries benefits much from these trade agreements. The general agreements on tariffs and trade (GATT) was formed in 1947, the formation has seen countries benefit from multilateral and regional trade liberalization agreements (Tupy 2016). Trade liberalization in general can thus be referred to reduction or removal of restrictions or barriers on trade between countries. International trade From economic perspective, imagine a country that stands alone by isolating itself from others. Such a country will to depend on everything being produced locally which in most cases becomes difficult to realize proper economic growth and development (Toye 2014). Through international trade, countries are able to trade with each other, through this, a country then become better off economically. According to Ricardo in his theory of comparative advantage, a country focuses on producing products that it can cheaply produce. Every country thus benefits from international trade whether developed or developing, international trade ensures there is production of goods which favours a country without much inputs, a country produces what it can manage and depends on another country on more expensive products. Everyone has comparative advantage over something and thus everyone stands to gain from trade. Ricardo through this theory managed to solve the problem of absolute advantage by Smith. The theory outlines why some countries may focus on importing products that they are weak at. It leads to the general view of what international trade is and how it came to occur, it is an automatic phenomenon as many countries may not be in a position to produce everything needed. The integration of the country’s economy has raised living standards across the world; most developing nations have enjoyed the prosperity of international trade (Yarbrough & Yarbrough 2014). Developing nations have become an important element in the world trade, they have increased their exports and trade between them has increased in general. Though international trade has increased, the progress of integration has been one sided and other countries have not well benefited. Developing countries from the Middle East and parts of Asia have had a positive progress in the integration compared to countries in Africa (Toye 2014). The success of these Asian countries has been credited to acceptance to participate in trade which has allowed them to benefit from foreign direct investments which they take to developing countries. A country like china has been successful and benefited a lot because of allowing trade liberalization with other countries. Countries from most parts of Africa have not benefited and their economy continues to decline due to structural problems and poor policies. Benefits of trade liberalization In international economics, the question that remains unanswered is whether every country can benefit from free trade. Looking back at comparative advantage theory, when a country produces more of one product, it creates less of another product; this is due to less resource to produce all products as people need maximum. It therefore leaves a gap in products which eventually leads to international trade (Hirst, Thompson &Bromley 2015). Trade liberalization is generally the openness of trade by countries by removing restrictions and barriers which slow trade. Countries benefit much from trade liberalization and it’s a concept that if well looked at, it definitely leads to economic growth and development. No country has managed to achieve increased living standards over the past years without being open to the rest of the world in terms of exchange of ideas and resources. For most developing nations, this has been one of its major boosts towards their tremendous growth and development in their economy. Developing countries have embraced the need to reduce tariffs between them which has boosted their trade. This has enabled many developing countries to achieve the competitive advantage in manufacture of certain important products which has in general increased raised their living standards. Countries that have consistently opened up to the rest of the world are considered to be relatively improving their economy compared to those which are inwardly slow in their operations. Countries like India have and Vietnam have presently increased their people’s living standards and reduced poverty by a great margin due to opening up of their economies (Dee, Hardin & Holmes 2014). They have allowed free movement of goods between their borders and as such increased foreign direct investment coming and going out thus improved economy and development. Free trade has been largely seen to benefit the poor more, the increased growth in developing countries that results from free trade are seen to have increased incomes of people in such countries raising their living standards consequently increasing economic growth and development in such countries. When trade is liberalized in the country, consumers tend benefit more. Trade liberalization is one of the tools of improving international trade and at the same time improving the living standards of the people. Through this act of trade liberalization, consumers are able to get cheap and quality products from both outside and locally produced in the country (Hirst, Thompson &Bromley 2015). Competition that occurs as a result of trade liberalization enable local companies to up their game in production process to able to produce the best products in the market. Consumers thus tend to benefits from this trade liberalization and it further creates employment in the country thus growth of the economy and development. Through trade liberalization, risks are seen to be diversified; this becomes a benefit to the local companies who in effect channel their resources to where they expect high income. It leads to growth of such companies and rise in employment which is one measure of improved economy and development. Trade liberalization should be accompanied by necessary domestic policies which are to competition and increased in general productivity. Arguments have it that trade liberalization have led to the decline of domestic companies. The arguments here can be overruled in a situation where many companies have improved their service provision policies due to high competition (Tupy 2016). Through trade liberalization, domestic companies have become even strong and improved their productivity. Examples are such countries are Brazil and India where companies have improved their production as a result of easy access to international markets across the world. Also reduction tariffs benefits domestic firms as they are able to get access to cheaper and more quality inputs from the international market thus expanding their growth and competitiveness. Lower tariffs thus not only benefits consumers but also firms as they are able to acquire cheap and quality inputs for their production. In India, back in the 90s, firms improved much of their productivity due to access of cheap and previously unavailable inputs. The firms in India also started producing more products dude to access to available inputs from other countries and also availability of markets. Link between trade liberalization and economic growth and development Back in the 90s, the main mission of trade liberalization was to break the inequality between the poor and the rich countries. The main expectations were to increase productivity due to increased inputs and availability of the market. Reduction of tariffs and restrictions in trade was a major boost towards growth in the economy (Winham 2014). The question that was not being taken into consideration was, whether the link between liberalization in trade and economic development and growth was real. Opening of trade for countries has been proven to expand the market for both manufacturing and consumer goods. The function of opening up trade was specifically to increase demand for goods produced by poor countries thus improving their income. This was expected to raise the GDP of developing nations which then is said to lower the rate of poverty for a nation. Through liberalization, the price agricultural products which are the main export products for developing nations should increase. This should result also to favourable foreign exchange for such countries thus boosting their economic performance. Trade liberalization is said to increase employment opportunities in among countries over time. Liberalization of trade has been proved to increase the country’s economy and raise living standards which lead to development through specialization and improvement in technology (Toye 2014). Though seen as a strong catalyst of growth, some economists have differed with trade liberalization as a way of improving growth. Such economists include Keynes who argues that trade liberalization will lead flooding of the local market with imported goods thus trade imbalance due to excess imports than exports. Trade liberalization according to Keynes may bring about unemployment and low economic growth as perceived. On the other hand, in endogenous growth model, trade liberalization plays an important part in increasing exports through introduction of technology which from other countries. This thus shows the greatest relationship between trade liberalization and economic growth. Opening the economy to the large world especially for developing nations has been seen to be the best factor towards development. Most developed countries have been linked to have achieved their status by integrating with other countries to achieve goods and services they require (Alessandria & Choi 2014). Especially labour mobility has been one factor that countries have shared in the past and even in the present. As the economy grows, most countries tend to import goods that they are not good at producing; this is the secret of success for many countries. This thus has in the recent past called for countries to embrace strong trade relationships for equality in terms of growth. Through liberalization, the international market becomes more accessible due to availability of products and inputs. Countries through different economic blocks like the European Union, COMESA have introduced the policy of reduction of tariffs among member countries following the WTO guidelines, trade in such countries is said to be great. Countries thus benefits much from such blocks as there is easy access to the international market for selling or purchase of products from other countries. As trade liberalization rises, productivity increases over a certain period of time. As seen earlier trade liberalization is sometimes a job creation opportunities, it occurs where companies compete thus forcing them to employ more people to increase productivity over time (Menyah et al., 2014). Increase in productivity also raises people’s salaries; this raises their living standards and the rise in the country’s GDP per capita. Growth and development of the economy is realized through productivity increase brought by trade liberalization. The benefits of trade liberalization can be more than the costs. It is therefore one important factor of growth and development and especially developing nations need to reduce tariffs and other form or trade restrictions for them to grow economically. Demerits of trade liberalization Though it seen as a major boost to economic growth and development, trade liberalization has failed some countries and thus many have not fully embraced the idea. According to the early economic reports, trade liberalization failed because of its dependency on free economy. It assumes that trade should take place without any government intervention, and there should perfect competition in the market for it to succeed; this has never worked for some countries as the policy is unrealistic when it comes to real economy. The government plays a vital role in the economy of country, thus living out the government regulation system means destroying the local economy which many countries avoid. Trade liberalization has also not been smoothly embraced as it has received other challenges such as, unbalanced development and dumping of goods (Yarbrough & Yarbrough 2014). It has been noted that, when tariffs are reduced competition rises in the international markets, this has led to sell of goods at lower prices compared to their market value to capture the attention of the market; this is one of the major concerns especially for developing countries (Flammer 2015). Most local companies end up winding up due to inability to cope with the market trends. The collapse of industries thus leads to low productivity which leads to unbalanced development where one country benefit at the expense of the other. Lack of trade restrictions has also been blamed to increased health related problems as some countries supply harmful products to others due to lack of regulations. For less developed countries, liberalization is unfair and unbalanced. Lack of restrictions in the market means there is rise in competition; less developed countries find it hard to compete with more established companies from developed countries (Flammer 2015). It also leads to poor economic growth and unfavourable terms of trade, there is imbalance of trade between countries which are more developed and the ones which are less developed. Trade liberalization may not be good for less developed countries. Conclusion From the study, liberalization has been discussed in length as the reduction of restrictions among countries in trade. Liberalization is essential; it has been seen to benefit many countries as the theory of comparative advantage suggests that every country has a comparative advantage over a certain product. it is one of the best method to realize trade expansion and most specifically very beneficial for developing countries to raise their growth and development over time. Trade liberalization on the other hand does not favour less developed countries due to factors such as high competition, dumping, and unbalanced development. In conclusion, trade liberalization should adopt under some policies to leave room for protection of the countries production. References Dee, P., Hardin, A. and Holmes, L., 2014. Issues in the application of CGE models to services trade liberalization. Services trade reform: making sense of it. Alessandria, G. and Choi, H., 2014. Establishment heterogeneity, exporter dynamics, and the effects of trade liberalization. Journal of International Economics, 94(2), pp.207-223. Winham, G.R., 2014. International trade and the Tokyo Round negotiation. Princeton University Press. Tupy, M.L., 2016. Trade liberalization and poverty reduction in sub-Saharan Africa. Policy Analysis, 557. Hirst, P., Thompson, G. and Bromley, S., 2015. Globalization in question. John Wiley & Sons. Toye, J., 2014. Is there a new political economy of development?.Occasional Paper, (2), pp.160-185. Menyah, K., Nazlioglu, S. and Wolde-Rufael, Y., 2014. Financial development, trade openness and economic growth in African countries: New insights from a panel causality approach. Economic Modelling, 37, pp.386-394. Flammer, C., 2015. Does product market competition foster corporate social responsibility? Evidence from trade liberalization. Strategic Management Journal, 36(10), pp.1469-1485. Yarbrough, B.V. and Yarbrough, R.M., 2014. Cooperation and governance in international trade: The strategic organizational approach. Princeton University Press. Read More