Term Paper: Trade Liberalization in Basic Terms

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[. . .] " It is important to note that in most cases, benefits to be realized from trade liberalization are largely overstated. My assertion is in this case founded on the existing literature on the impact of trade liberalization on developing nations.

In some instances, trade liberalization in developing countries does indeed come at a cost. For instance, from an economic perspective, trade liberalization could end up hurting some critical sectors of such countries' economies. Sectors which could end up being hurt in this case include but they are not limited to agriculture. This is more so the case when the said countries access subsidized products from developed nations. For this reason, one could argue that enhanced access to the markets of developed nations could indeed pose some significant risks to some critical industries of developing nations.

It is also important to note that some risks also do exist when developing countries elect to open up their own markers. To begin with, reduction of trade barriers could effectively lower the income/revenue developing nations rake in from tariffs. When the said tariff revenue is significant (i.e. when it accounts for a significant portion of the national revenue), a decrease in the same as a result of elimination of tariffs could force a country to consider alternative sources of revenue. To minimize adverse effects to their budgets, affected countries may be forced to increase taxes in other sectors of the economy. Such a move could have unintended consequences. There is also the risk that countries which are disproportionately dependent on the agricultural sector could experience increased levels of unemployment should trade barriers be eliminated. In the words of Telfer and Sharpley (2007, p.9) "most developing countries' economies are dependent on agricultural production…." Removal of agricultural import barriers could thus result in rural population displacement. In addition to triggering serious unemployment levels, such an occurrence could also lead to both economic and social instability. This is a point-of-view Thirlwall and Loipez (2008) agree with. In their opinion, some welfare losses may be experienced if "domestic firms cannot compete as trade barriers fall and those thrown out of work cannot find alternative employment" (Thirlwall and Loipez, 2008 p.145).

Trade liberalization could also make developing countries more susceptible to regional and global financial market instabilities. For instance, as Fanelli and Medhora (2002) point out, although Argentina's move to deepen trade liberalization led to significant growth of the country's economy, the Asian crisis and the Tequila effect later on ended up affecting the said economy severely.

Empirical Evidence

For the same reasons that I have given elsewhere in this text, Edwards (1998) points out that empirical findings and presentations on both trade and openness have often appeared doubtful. To begin with, it is important to note that although some growth could be experienced from trade liberalization, the said growth may not be that significant. As I have pointed out elsewhere in this text, the World Bank has in the past pointed out that "faster integration lowering barriers to merchandise trade would increase growth and provide some $1.5 trillion of additional cumulative income to developing countries over the period of 2005-2015" (Saddiqui 2012, p.21). According to Winters (2004, p.F9), there is "evidence from detailed case studies of particular countries and/or growth events" to the effect that trade liberalization does indeed stimulate economic growth and productivity. In the 1980s and 1990s, Mexico according to Winters (2004) benefited significantly from trade liberalization. Some of the gains in this case as the author further points out included but they were not limited to elimination of firms that were not efficient, stimulation of productivity as a result of cheaper intermediaries, and enhancement of technical efficiency as a result of competition from imports (Winters, 2004). However, growth in this case may not be instantaneous (Greenaway, Morgan, and Wright, 2002). Indeed, according to Fanelli and Medhora (2002), available evidence clearly demonstrates that growth in a significant number of nations that embraced trade liberalization was not as rapid as it had widely been expected. To reinforce their assertion, the authors in this case give examples of countries such as "Turkey, Mexico, the Philippines and Brazil" (Fanelli and Medhora, 2002).

In seeking to briefly explore the relationship existing between trade liberalization and wage distribution, it would be prudent to focus on Brazil. According to Arbache, Dickerson and Green (2004), there were various protectionist measures in place in Brazil prior to 1990. Sustained liberalization efforts according to the authors begun in 1990. In the end, "wages in the traded sector were lowered substantially by increasing the degree of openness following liberalization…" (Arbache, Dickerson and Green, 2004 p.F93). It should however be noted that as Dollar and Kraay (2004) point out, although this has also been observed in some liberalizing economies like China, it would be inaccurate to conclude that this trend has been observed across all liberalizing economies.

Conclusion

Based on the discussion above, although there is evidence that trade liberalization could have an impact on a developing country's overall well-being, it would be difficult to divorce the effects of liberalization from those of other economic policies. This is more so the case given that as I have already pointed out in the text above, the former is rarely isolated from other reforms. Further, it is also important to note that any positive impact of trade liberalization on productivity and growth is in most cases overstated. Based on my conclusions, there exists a need for additional cross-country studies on the impact trade liberalization has on developing countries.

References

Arbache, J.S., Dickerson, A. And Green, F. 2004. Trade Liberalization and Wages in Developing Countries. The Economic Journal, 114(February), pp.F73-F96.

Carbaugh, R.J. 2011. International Economics. 13th ed. Mason, OH: Cengage Learning.

Dollar, D. And Kraay, A. 2004. Trade, Growth, and Poverty. The Economic Journal, 114(February), pp.F4-F20.

Edwards, S. (1998). Openness, Productivity and Growth: What Do We Really Know? The Economic Journal, 108 (March), pp.383-398.

Fanelli, J.M. And Medhora, R. eds., 2002. Finance and Competitiveness in Developing Countries. Ottawa: IDRC.

Greenaway, D., Morgan, W. And Wright P. 2001. Trade Liberalization and Growth in Developing Countries. Journal of Development Economics, 67(2002), pp.229-244.

International Monetary Fund -- IMF, 2001. Global Trade Liberalization and the Developing Countries. [online] Available at: < http://www.imf.org/external/np/exr/ib/2001/110801.htm> [Accessed 25 April 2013].

Lipsey, R.G. And Harbury, C.D. 1992. First Principles of Economics. 2nd ed. New York: Oxford University Press.

OECD. 2005. Agriculture and Development: The Case for Policy Coherence. Paris: OECD Publishing.

Saddiqui, K. 2012. Developing Countries' Experience with Neoliberalism and Globalization. Research in Applied Economics, 4(4), pp.12-37.

Schneider, A. And Kernohan, D. 2006. The Effects of Trade Liberalization on Agriculture in Smaller Developing Countries: Implications for the Doha Round. Brussels, Belgium: CEPS.

Stroup, R.L., Sobel, R.S. And Macpherson, D.A. 2009. Economics: Private and Public Choice. 12th ed. Mason, OH: Cengage Learning.

Telfer, D.J. And Sharpley, R. 2007. Tourism and Development. New York, NY: Routledge.

Thirlwall, A.P. And Loipez, P.P. 2008. Trade Liberalization and the Poverty of Nations. Cheltenham: Edward Edgar Publishing.

Tussie, D. And Aggio, C. 2003. Economic and Social Impacts of Trade Liberalisation. IMF Working Paper, Policy development and Review and Africa Department. Washington DC: International Monetary Fund.

Winters, L.A. 2004. Trade Liberalization and Economic Performance: An Overview. The Economic Journal, 114(February), pp.F4-F20.

World Bank. 2008. World Development Report 2008: Agriculture… [END OF PREVIEW]

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