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What Is Trade Liberalization?

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Trade Liberalization

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.

● 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.

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.

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.

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, 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.

Trade Liberalization Example


The North American Free Trade Agreement (NAFTA) was signed on Dec. 17, 1992, by
Canada, Mexico, and the United States. It entered into force on Jan. 1, 1994. 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.

Over time, regional trade tripled, and cross-border investment increased among the countries.
However, Former President Donald J. Trump considered the agreement detrimental to U.S.
jobs and manufacturing. On Sept. 30, 2018, the Trump administration concluded negotiations
on an updated pact, the U.S.-Mexico-Canada Agreement (USMCA), which entered into force
on July 1, 2020.

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.

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