Trade liberalization refers to the expansion of trade through the removal of all forms of trade barriers such as tariffs and quotas. Trade liberalization has in turn been facilitated by the formation of trading blocks.
Advantages of Trade Liberalization
Specialization - trade liberalisation allows countries to specialise in producing the goods and services where they have a comparative advantage.
Lower prices - the removal of tariff barriers can lead to lower prices for consumers; this would particularly be a benefit for countries which are importers of food.
Increased competition - trade liberalization means firms will face greater competition from abroad. This should act as a motivation to increase efficiency and cut costs.
Economies of scale - through specialization, trade liberalization can lead to economies of scale.
Disadvantages of Trade Liberalization
Imbalance of industries and economies - trade liberalisation often leads to a shift in the balance of an economy. Some industries grow while some may decline which can lead to structural unemployment from certain industries closing.
Exploitation of the environment - trade liberalisation could lead to greater exploitation of the environment, for example, more industrialization can lead to all forms of pollution.
Lack of competitiveness of developing countries - trade liberalisation may be damaging for developing economies which cannot compete in free trade. The infant industry argument suggests that trade protection is justified for helping developing economies to diversify and develop new industries. Most developed economies had a period of trade protectionism.
The term globalization refers to the process of global integration of the economies of nations by allowing the unrestricted flow of goods, services, investments and currencies between countries. Advances in communication and transportation technology, combined with free-market ideology, have given goods, services, and capital unprecedented mobility.
Advantages of globalization
The advantages of globalization can be seen by many as the following:
- goods and people are transported with more ease and speed;
- free trade between countries increases;
- global mass media connects all the people in the world
Criticism of globalization
Even though there have been some advantages of globalization, critics point to some disadvantages which are as follows:
Disadvantage of poorer countries - poorer countries can be at a disadvantage. The main export of poorer countries is usually agricultural goods. Because the farmers in the poorer countries cannot compete, they are forced to sell their crops at much lower prices than what exist in the market;
Exploitation of foreign impoverished workers - the reduction in protection for poorer countries by stronger industrialized powers can result in the exploitation of the people in those poorer nations. Due to the lack of protections, companies from the industrialized nations are increasingly using cheap labour from developing countries thereby exploiting these workers.
Weakening of labour unions and labour movements - the surplus in cheap labour coupled with an ever growing number of companies in transition has caused a weakening of labour unions in some countries; membership in trade unions have been on the decline.
General Agreement on Tariffs and Trade (GATT)/WTO
The General Agreement on Tariffs and Trade (GATT), which was signed in 1947, was a multilateral agreement regulating trade among about 150 countries. The purpose of the GATT was the substantial reduction of tariffs and other trade barriers and the elimination of preferences, on a reciprocal and mutually advantageous basis. The GATT was followed by the World Trade Organization (WTO) in 1995 which was the successor to the GATT. The WTO’s main function is to ensure that trade flows as smoothly, predictably and freely as possible.
Advantages of WTO to Small Nations
There are some advantages of the WTO to small nations which are:
- Market access - the purpose of the WTO is a mechanism for bargaining the elimination or reduction of trade barriers. Without the WTO, small countries cannot bring much to the table to bargain with and they tend to get left out. The WTO solves this problem by allowing small countries to join together to bargain in trade.
- Transition of economies - the small countries are successfully moving away from reliance on agriculture to tertiary activities, notably tourism. Nevertheless, they remain vulnerable to external shocks. They need to bargain at a multilateral level hence the importance of the WTO.
Criticism of the WTO for Small Nations
While some advantages of WTO have been cited, some critics argue that there are some disadvantages which are:
Bias - critics contend that small countries in the WTO produce little influence, and despite the WTO aim of helping the developing countries, the influential nations in the WTO focus on their own commercial interests. Critics argue that the WTO does not manage the global economy impartially and has a systematic bias toward rich countries.
Undermining of local level decision-making and national sovereignty - the WTO's most favored nation provision requires all WTO member countries to treat each other equally and to treat all corporations from these countries equally. Local policies aimed at rewarding companies who hire local residents or use domestic materials may be illegal under the WTO.
Preferential trade agreements – preferential trade agreements that give developing countries access to markets of some developed countries are not allowed under the WTO. This results in harm to developing countries which need these preferential agreements for their economic growth and development.