27/12/2019 Trade Liberalization Definition

ECONOMY GOVERNMENT & POLICY

Trade Liberalization
By CAROLINE BANTON AND WILL KENTON | Updated Sep 10, 2019

What Is Trade Liberalization?

Trade liberalization is the removal or reduction of restrictions or barriers on the free
exchange of goods between nations. These barriers include tariffs, such as duties and
surcharges, and nontariff barriers, such as licensing rules and quotas. Economists often
view the easing or eradication of these restrictions as steps to promote free trade.

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Understanding Trade Liberalization

Trade liberalization is a controversial topic. Critics of trade liberalization claim that the policy
can cost jobs because cheaper goods will flood the nation's domestic market. Critics also
suggest that the goods can be of inferior quality and less safe than competing domestic
products that may have undergone more rigorous safety and quality checks.

Proponents of trade liberalization, however, claim that it ultimately lowers consumer costs,
increases efficiency, and fosters economic growth. Protectionism, the opposite of trade
liberalization, is characterized by strict barriers and market regulation. The outcome of trade
liberalization and the resulting integration among countries is known as globalization.

KEY TAKEAWAYS
Trade liberalization removes or reduces barriers to trade among countries, such as
tariffs and quotas.
Having fewer barriers to trade reduces the cost of goods sold in importing countries.
Trade liberalization can benefit stronger economies but put weaker ones at a
greater disadvantage.

Advantages and Disadvantages of Trade Liberalization

Trade liberalization promotes free trade, which allows countries to trade goods without
regulatory barriers or their associated costs. This reduced regulation decreases costs for
countries that trade with other nations and may, ultimately, result in lower consumer prices
because imports are subject to lower fees and competition is likely to increase. 
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Increased competition from abroad as a result of trade liberalization creates an incentive for
greater efficiency and cheaper production by domestic firms. This competition might also
spur a country to shift resources to industries in which it may have a competitive
advantage. For example, recent trade liberalization has encouraged the United Kingdom to
concentrate on its service sector rather than manufacturing.

However, trade liberalization can negatively affect certain businesses within a nation
because of greater competition from foreign producers and may result in less local support
for those industries. There may also be a financial and social risk if products or raw materials
come from countries with lower environmental standards.

Trade liberalization can pose a threat to developing nations or economies because they are
forced to compete in the same market as stronger economies or nations. This challenge can
stifle established local industries or result in the failure of newly developed industries there.

Countries with advanced education systems tend to adapt rapidly to a free-trade economy

because they have a labor market that can adjust to changing demands and production
facilities that can shift their focus to more in-demand goods. Countries with lower
educational standards may struggle to adapt to a changing economic environment.

Important: Critics believe that trade liberalization costs jobs and depresses
wages. Proponents believe it spurs competition and growth.

Trade Liberalization Example

The North American Free Trade Agreement (NAFTA) was signed in January 1994 by Canada,
Mexico, and the United States. The agreement eliminated the tariffs on products that were
traded among the three countries. One of NAFTA's goals was to integrate Mexico with the
highly developed economies of the United States and Canada, in part because Mexico was
considered a lucrative new market for Canada and the United States. The three governments
also hoped that the trade deal would improve Mexico's economy.
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Over time, regional trade tripled, and cross-border investment increased among the
countries. However, President Donald J. Trump considered the agreement detrimental to
U.S. jobs and manufacturing. In October 2018, the Trump administration negotiated an
updated pact, the U.S.-Mexico-Canada Agreement (USMCA). 

Most economists agree that NAFTA was beneficial to the Canadian and U.S. economies.
According to a Council on Foreign Relations report, regional trade increased from $290
billion in 1993 to over $1.1 trillion in 2016, and U.S. foreign direct investment (FDI) stock in
Mexico increased from $15 billion to more than $100 billion. However, economists also say
that other factors may also have contributed to these outcomes, such as technological
change and extended trade with China.

Critics of NAFTA argue that the agreement caused job losses and wage stagnation in the
United States because companies moved their production to Mexico to take advantage of
lower labor costs. It remains to be seen how the USMCA will affect these factors.

Related Terms
Free Trade Area Definition
Free trade areas are groups of countries which sign free trade agreements to facilitate trade and
reduce trade barriers. more

How a Free Trade Agreement (FTA) Works

A free trade agreement reduces barriers to imports and exports between countries by eliminating all
or most tariffs, quotas, subsidies, and prohibitions. more

USMCA
The United States-Mexico-Canada Agreement more

Bilateral Trade Definition

Bilateral trade is the exchange of goods between two nations promoting trade and investment by
reducing and eliminating trade barriers. more

What is a Trade War?

A trade war—a side effect of protectionism—happens when country A raises tariffs on country B's
imports in retaliation for them raising tariffs on country A's imports. This continuing cycle of increased
tariffs may lead to injuring the businesses and consumers of the involved nations, as the prices of
goods increase due to increased import costs. more

North American Free Trade Agreement (NAFTA)

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The North American Free Trade Agreement was implemented in 1994 to encourage trade between the
United States, Mexico, and Canada. more

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