Trade Liberalization: A Critical Analysis Essay

Introduction

Trade liberalization can be defined as the reduction or removal of barriers or restrictions to the free exchange of goods between countries. Such barriers may include tariffs like surcharges and duties, and non-tariffs like quotas and licensing rules. Trade liberalization is considered a core component for realizing development as the eradication or easing of these restrictions is viewed as an effort to promote free trade. This paper presents a critical analysis of the assumption that trade liberalization is a core components for development. It will take a stance that trade-liberalization is bad and does not enhance the livelihood of people living in developing countries. The paper will draw on examples from the World Trade Organization (WTO).

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Opponents of trade liberalization argue that it can cost employment opportunities since the domestic market becomes flooded with cheaper goods. They also point out that such goods are likely to be of poor quality less safe when compared to domestic products that may have been subjected to quality and safety checks. The exact opposite of trade liberalization is called protectionism, and is characterized by market regulation and strict standards. The result of trade liberalization and the subsequent integration among nations is referred to as globalization (Bhagwati 2017).

Trade liberalization can have a negative effect on certain businesses within a country as imported goods increase the competition from foreign manufacturers. According to Dix-Carneiro and Kovak (2017), such a situation may lead to less local support for those industries. Also, a greater social and financial risk may be present if products or raw materials are imported from nations with lower safety and environmental standards. Trade liberalization can present a threat to developing nations or economies as they would face stiff competition from developed countries or established economies in the same market. Such competition can cause newly developed industries to fail or stifle the diversity of local industries.

The World Bank and other western developmental organizations claim that trade liberalization is a crucial condition for development. They are of the opinion that reducing barriers to world trade can induce stimulus for new kinds of productivity-boosting specialization, accelerate growth, and result in a quicker pace of employment opportunity creation and reduction of poverty across the world. However, such thinking is based on a number of assumptions. For one, it is assumed that developing nations would experience huge income gains if they significantly reduced their trade barriers to very low levels. Another assumption is that these nations, as a bloc, would together experience huge income gains if wealthy nations removed barriers to their exports (Zahonogo 2016).

It is unfortunate that there is no persuasive evidence to back up those assumptions. If all rich nations did away with barriers to exports from developing nations, very small gains would be generated for the latter. If and when the barriers are fully removed, the developing countries as a block might enjoy a GDP (Gross Domestic Product) of less than one percent. Also, just a few developing nations would enjoy almost all the gains, with many of those countries actually losing in key sector of interest to their exports. For instance, the expiry of the The Multi Fibre Arrangement (MFA) in January 2005 hurt textile exports across the third world as much more efficient producers from China gobbled up the market. Also, if export or producer subsidies in the West are done away with, it would hurt nations that consume huge quantities of the subsidized exports. For instance, if agricultural exports are eliminated in Japan the European Union and the US, it would increase the costs of importing food products such as wheat. These costs are supposed to be weighed against the handicap to industrial and agricultural development posed by the business of importing subsidized goods from the West. However, this is not always the case.

If a developing country removes its own barriers, the action may indeed help its exports. However, there are estimates from certain trade models that imply such an action would lead to large income gains. Such estimates tend to exaggerate the net gains while omitting some significant costs. Loss of revenue is one such cost, and it often amounts to between 10 and 20 percent of the government revenue. This revenue has to be recovered through alternative taxes such as income or sales tax, which have their own adverse effects. Another cost is the disruption caused to agriculture and rural population's social-economics due to a sharp increase in competing imports. In the West, the move from an agricultural-based economy to an industrial one took several decades. Even at such a slow pace, it was accompanied by an intense social disruption and a subsequent political backlash. Third-world nations that are pressurized to do away with agricultural protection are likely to experience an even worse social disruption. The trade models also tend to omit the handicap imposed on an infant industry sector by a complete absence of protection (Gnangnon 2018).

Assuming that the theory of comparative advantage works perfectly, the people removed from existing businesses would be transferred to other seemingly more efficient activities. However, the theory assumes that there will be full employment, meaning no significant costs would be incurred during the transition. Simply put, it assumes the underlying problem away. There is ample proof suggesting that, if an industrial sector is inefficient, the alternative will often not be an efficient one. Rather, the alternative is no sector at all, which is much worse. All in all, an inefficient industrial sector can provide an opportunity to learn how to be innovative and efficient, which is key to development. If the authorities in charge of the sector can learn this, then they can induce development.

The gains that developing countries can get from trade liberalization are likely to be smaller than assumed by consensus. In addition, there are other changes to international trade agreements that can present much more gains to third world countries. However, such changes are obscured from view when focus is directed at trade liberalization. A notable one would involve a moderation of the TRIPS (trade-related intellectual property) agreement by the WHO with respect to how it applies to developing nations. The agreement stipulates that third world members of the WTO should adopt copyright and patent laws similar to those of the US. While it is made to look like liberal economics, it is a huge protection strategy for western business organizations. Businesses and consumers in developing countries are forced to pay far more for products like software, drugs, and scientific journals than would be the case without the agreement.

The cost of trade liberalization to developing countries probably outweighs the gains from it. Another recommendation would be to re-examine Article XXIV of the General Agreement on Tariffs and Trade (GATT). It allows developed nations to do away with the principle of multilateralism and instead embrace preferential trade agreements. Such agreements tend to create unfair spheres of influence that discriminate against developing nations that are outside the agreement. At the same time, it subjects developing nations within the agreement to the elbow power of the richer economies.

A third recommendation would involve the international monetary system. This system is characterized by instability that forces the governments of developing nations to hold foreign exchange reserves relative to GDP that are far more than in the decades just after the Second World War. Holding huge reserves costs nations the alternative investments that such resources can induce. It is worth looking at what the US government gets considering that it is the issuer of a national currency that also acts as the main international currency. Governments of developing countries hold most of their foreign exchange reserves in US Treasury bills. Such a situation makes it possible for the US government to fund deficits of about five percent of a developing country's GDP at rates of interest that are much lower than otherwise. While this is favorable to the US, it is not as beneficial to developing countries. Those advocating for trade liberalization should focus on convincing rich countries to do away with their protection against barriers to imports from developing nations. In return, the third world countries will open up to trade. It is unfortunate that such moves would not solve much of the problem. Also, it is not right to leave the trade protection that currently exists in the West unchanged. Clearly, trade policy issues are too complex to be wrapped up in the notion of trade liberalization.

WTO was established with the aim of facilitating international trade as well as economic growth and development. It is a quite a powerful organization as it has an institutional and legal foundation together with a dispute settlement mechanism. This means that countries that violate trade rules can be taken to court and eventually subjected to retaliation. Over the years, the corporate interests of developing nations have gradually expanded. These countries have also advocated for the incorporation of more areas into the WTO. Today, its agenda includes financial, IT, telecommunications and other services, agriculture, e-commerce, intellectual property right, among others (Baldwin 2016).

One of the yardsticks most commonly used to measure WTO's success is the volume of international trade. In recent years, international trade has experienced considerable growth, with exports of goods and services exceeding $ 9 trillion per year. Despite this, developing countries have been obtaining mixed results at best, while in many cases they have been damaging. The WTO may present itself as a democratic institution. However, it is dominated by the top industrialized nations and their corporations. According to Williams and Ford (1999), it is apparent that the organization is driven by the logic of commercial trade. The developmental goals put in place during the formation of the General Agreement on Tariffs and Trade (GATT) seems to have been put aside, or are erroneously taken to be natural effects of increased trade. In its present form, the WTO is really all about fast tracking trade liberalization in products and sectors benefiting those holding powerful positions in the organization.

Developing nations may make up about two-thirds of WTO membership and can theoretically use their vote to influence the agenda and outcomes of any negotiations. However, in reality these countries have never capitalized on this advantage. Most third world economies are in one way or another in one way or another dependent on developed western nations in terms of aid, imports, exports, security, and so on. Their representatives often feel that obstructing consensus at the WTO poses too much of a threat to their security and overall well-being. Thus, while many developing countries may be opposed to a certain agreement, they may eventually decline to obstruct its conclusion (Flento and Ponte 2017).

Trade negotiations are usually based on trade-offs, or the principle of reciprocity. This is whereby one country offers a concession in one area, such as reducing tariffs for a certain product. In return, another country agrees to sign on to a certain agreement. Such kind of bartering tends to benefit the big and diversified economies as they can get more by offering more. A disparity thus occurs between the countries that can give and thos...