Global Trade Liberalization And Its Importance

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The following report is the understanding of the Global Trade Liberalization and its importance. Here the meaning of Global trade liberalization is studied and the effect on developed and developing nations is discussed. The main purpose is the benefits of GTL on developing nations.  Due to global free trade, many countries have become economically sustainable and stable. There are lots of factors which are responsible for the implementation. The countries are divided based on their polices towards free trade and based on political, social and economic conditions.


Large part of world has eliminated all the trade barriers. Single internal market is prevalent in Europe, Australia and New Zealand have free trade zones, USA, Canada, and Mexico formed North American free trade agreement, Mercosur comprises of Argentina, Brazil, Paraguay, Uruguay and similarly many small countries and numerous countries have free trade areas between them.

Many countries liberalized their trade policies which resulted in the expansion of global trade. Globalization is one of the major phenomenons that started taking place during early 1970's. The barriers and boundary lines related to trade are diminished and all the countries contributed to world trade.This integration of world countries led to many advantages in terms of reduction in poverty, development in economy, and economic growth. There is a six percent growth on an average every year in terms of world trade.

The creation of GATT ( general agreement on trade and tariffs) in 1947 led countries to sit in several discussions and at last in Uruguay in 1994, formation of world trade organization (WTO) has resulted. Since then WTO has been the governing body for world trade. Free trade concept has been recognized by International Monetary Fund in 1992.

Most of the third world and developing countries looked towards free trade in order to improve the living conditions and standards in their respective countries. Countries, especially many developing and third world countries like Poland, Ireland, Bangladesh, Mexico, Brazil to name a few completely changed the world trade by participating. Standard of living along with income has risen tremendously. Most of changes have taken place in developing countries as there is a need for them to change. In most of the countries the internal policies from trade unions did not hinder the growth. The unions changed and supported the integration of word economies. This enabled most of the developing countries to participate at a faster phase. Progress has been very huge from the Asian front, countries like India, korea, Japan, China which resulted in their respective economies to grow. However there isn't much participation from the latin American countries. Countries like India, china, Brazil, Singapore have been blessed with

Foreign direct investments as they have opened doors for liberalization of trade.

Many of the researchers claim that this trade liberalization was the result of pressure from world trade organization, International Monetary Fund and other developed countries like USA, France, and UK etc. Some researchers opined that the economic crisis in many countries led to the liberalization of world trade. there is a strong need to further liberalize the trade in terms of benefits to the countries of the south. There is a long gap between the countries of north and south. We will study in the following report the effect of global trade liberalization, benefits and demerits to developing nations.

Literature Review

Many researchers did an extensive research on Liberalization. According to Rodrik (1992) any change either big or small in political regimes, have a great impact on reforms of the trade in that particular country. I agree to the views of Rodrik, as there is a significant participation of many democratic countries rather than autocratic countries. Political system is not only the single factor that is responsible for trade reforms but evidence shows that a political change in many countries has been a major reason in the changing patterns of trade. Some researchers contradicted the statement that only democratic countries are more likely accepted to world trade. For example, Chile liberalized its trade policies in 1970's. Geddes (1995) pointed out that only reforms in the economy and democratic set up of countries can result in trade liberalization. Differences in political regimes among democracies and autocracies are more influenced by political regime itself. (Haggard, 1990)

According to the above literature and other available resources, we can say that politics is one of the key decision making factor in trade and other economic development matters. Many less developed countries mostly from the African continent started to liberalize the trade policies and became part of global trade liberalization.

Determinants of Trade Policies:

The main determinants of trade policies are the economic and political structure of the countries. Dutt and Mishra (2002) opined that there are inequalities which are taking place in countries of the whereas countries of south prefer not to protect. Due to the rapid development most of the developed countries are trying to and adopting protectionist form of policies in the trade. However quite opposite is taking place in the developing countries. Harrigan (1993) argued that the more substantial barriers to trade in manufactures is tariff in developed countries rather than non-tariff barriers.

Difference between developed and developing economies in terms of Trade:

There are many theories related to the acceptance global trade liberalization. Some opine that politics made difference in developing countries and rest opined that emergence of trade liberalization is due to economic crisis. Political leaders of decomocratics are more towards the removal of economic barriers. In democratic countries, the leaders are elected by people and policies are made for the benefit of the people. Free trade would make the country economically strong and reduce poverty which in turn will be a gain to the politicians. Countries giving high preference to education, benefited most. Due to the emergence of research heads and talented academics, it has been very easy for the politician to follow the policies which were framed by economists. Some interest groups always oppose free trade policies and warn them of potential risks. More and more shift towards removal of trade barriers is seen in developing countries than in developed world.

There is a strong belief in democratization process in democratic countries leading to establishment of free trade policies. Also people in the government and think tank behind the government are also responsible for the policies. For example, Indian government way back in 1991 opened the door to Foreign Direct Investments (FDI) which led to the development of the economy. Now India is the one of the fastest growing economies in the world. In the similar fashion many countries developed economically. If we take the Korea's for example, north due to the military regime has become hub for poverty whereas South Korea entered and became an active part of globalization.

According to Stopler- Samuelson theorem, Change in policies or strict trade policies might stop countries to encourage free trade. The above notion is supported by Yang and Mayer (1984) differentiated politics and studied how trade policies influence the decision making of politicians. Due to protectionism, developing countries are more dependent on developed countries. There is an increase in income for the poor and the working sector due to trade liberalization. Also due to free trade, people pay less for the imported goods.

Many countries in Latin America for example Chile, Venezuela failed to capitalize the benefits of globalization in terms of employment. Many companies in the above countries are created with strict protectionist trade laws. As more labor is prevalent in developing countries, it is very important for them to vote for political regimes which will favor free trade.

Protectionist Economies

Countries are differentiated on the basis of protectionism on trade policies. Mostly democratic countries are less protective towards free trade whereas in autocratic countries there is a evidence of strict protectionism. Still some Latin American countries succeed in trade. The reason for success is understood as autocratic rulers freeze the incomes of working class people and rural people, resulting in revenues. This type of freeze on earnings is not possible in democratic countries. Coming to ground level, the autocratic rulers are voted by only few people like affluent people; hence the regimes can do anything to the people. Whereas in democratic countries, government is elected by vast majority of people and every policy will be for the benefit of the people. As we observe from the literature, less protective laws on trade results in high employment.

Example 1: Most of the industries are controlled by well affluent capitalists and industrialists in Philippines. Only this small majority used to vote for the regime and all the benefits of the industrialism in this country used to be in the hands of the political regime and industrialists. Due to strict trade laws the unemployment is always high in this island country.

Example2: India is the largest democratic country in the world. Here people vote for the government and politicians make new policies which are advantageous to large groups of populations. To gain trust and acceptance, they formulate new strategies and implement in due time. In India, most of the trade policies are focused towards exports so as to support the large base of rural population. There is very less opportunity to be a protectionist economy. Now India after opening doors to global trade, could able to obtain 8 percent annual growth every year from last 5 years and is one of the fastest growing economies (Emerging Markets).

Form the above discussion we see that most of the developing nations are gainers as they have less protectionist trade laws. Most of the countries tasted success when they promoted free global trade laws. Examples include Zambia, Bangladesh, Philippines, and Bolivia to name a few.

Benefits of Global Trade Liberalization:

Opening up of economies to the global world has many advantages. Some of the following are described below:

  • Increases the standard of living
  • Decrease the average import tariff which results in economic success
  • Faster growth and reduction of Poverty. For Example, India, Vietnam, and Uganda have experienced faster growth
  • New jobs are created, resulting in the transformation of unskilled to middleclass
  • Decreases the inequality among the countries

Apart from the above, there are many advantages. Especially developing countries gain as a percentage to GDP than industrial countries. Since developed economies are highly protected with more prominent trade barriers.

The other important advantage is that the countries benefit from internal markets too. The main for developing countries comes from liberalization of agriculture and manufacturing units. Other LDC countries mostly gain from agriculture liberalization policies as their agriculture is their main occupancy.

Analysis of the Situation:

As per early literature and the scenarios in the early section, trade liberalization is recommended for developing countries. Many theories have shown the clear link between policies which are made due to social, political and economic conditions. But no one was clear about the emergence of liberalization policies due to political policies. Due to the phenomenon of trade liberalization, the world has been divided into small, big, poor and rich nations. The developed countries are stronger with resources and investments and their work force is intact with strict protectionist thinking. Strong and intact workforce, rich resources, and stable financial system is required to implement trade liberalization regimes.

Most of the third world countries are struggling to liberalize and trade free because of financial instability, unstable governments, and lack of technical resources and expertise. In the matter of developing countries, some of the barriers are government support to companies and political parties. Companies can not compete or trade globally without required support. In order for companies to enter the global markets, policies formulated by the government bodies should help the companies.

Politiical situation

Autocratic ruling has provided military regimes and other dictator regimes to maintain high level of protectionism in some developing countries. This is often known as

“Old business model” used to be prevalent in most of the countries. But later on due to the emergence of world democracies, and people becoming more and more knowledgeable about the benefits of globalization made the old business model to fade slowly. Political leaders in democratic countries need to satisfy huge groups of population called electorate. So in order to make them satisfied, the political leaders have no way other than have policies which will useful for social and economic development. Lesser trade barriers both internal and global will give rise to employment, which in turn raises the standard of living. All these effects will be good for the political leaders as well as to the country. There are groups in developing countries that are against trade liberalization policies; however they are not significant as olden days. All the trade policies are governed and supported by the government, who are elected by the people. So by the above discussion it is quite clear that political situation or political leaders of a country are responsible and prove to be very significant in moving forward towards global trade liberalization.

The Need for Further Liberalization:

There is a need for further liberalization. Due to the protectionist nature of many industrialized nations, many under developing countries and few developing countries finding it hard to make a mark on the international front. Industrialized countries maintain very high protection in agriculture by maintaining very high tariff rates. (tariff escalation, tariff peaks) Agricultural tariff protection in developed countries is nine times higher than the manufacturing sector. Most of them are shutting off low cost produce from African countries. Generally protection is low in manufacturing sectors but tariffs are high on labor intensive produce from developing countries.  For example according to International monetary fund organization, United States has tariff peaks on more than 300 products from developing countries.

Many developing countries are also going in the same direction. They themselves have very high tariffs.  Like for example, agriculture tariffs are approximately 18 percent. Most of the products they export themselves are approximately four times higher than the developed countries. The above findings show that there is a need to be liberalizing trade further.

Both industrialized and developing countries should take the concept of free trade as the driver of economic growth and stability. Over the years the international community has met many times in several trade meetings in order to lessen the trade barriers. Most of the third world and poor countries are facing lot of disadvantages due to these kind barriers by industrialized and some developing countries. Outward growth can be sustained by developing world if the rich markets do not turn in ward.  There is an immediate need to bridge down the gap between North and south and the proposed “Grand Bargain” would help strongly. Already the gap in the south is closing with some regional meetings such as EU, NAFTA, APEC, and FTAA.

Conclusion and Recommendations:

In order to gain maximum advantage out of global free trade liberalization, first developing countries should make sure their internal structures, polices are safe in place and viable. Intact policies supporting companies to enter global markets are one of the first phases in the process. The manufacturing units involved in import business should be complex and should have a strategy for production in order to be competitive. The manufacturing units involved in import business should be complex and should have a strategy for production in order to be competitive. Governments of developing nations should make sure that there won't be any export-import imbalances. Any unchecked imbalance in the import business will lead to unemployment and will be hard to control. As we learned from the earlier sections, developing nations should concentrate on developing technical expertise which will result in proper adoption of Free trade regimes. Nations lacking technical expertise, other resources and financial capabilities would find hard to adopt global trade regimes. So in order for achieving the objectives with the help of free trade, developing countries should have required human resource and financial capabilities. For example in Uruguay case, the country failed in meeting the results as the regime could not support financially. But there are few cases where countries succeed without the need of financial stability.

It is very vital for organizations like WTO to stop differentiating on the basis of north and south. International organizations should help and assist developing nations regarding any disputes. Technical assistance should be given to developing nations in order to get maximum benefit out of trade blocks and globalizations.

There is an immediate need for developing countries to maintain decent tariffs for business in-between them.