What are the pros and cons of worldwide trade liberalization?

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

The major pro of worldwide trade liberalization, at least according to economists, is that there will be more total output for the world as a whole.  This will mean that people around the world will, on average, come to enjoy a higher standard of living.  This will happen because liberalization will allow countries to specialize in producing things for which they have a competitive advantage.  This will allow more total products to be produced.

The most likely con of worldwide trade liberalization is that some sectors of the economy in some countries will be badly harmed by competition.  This has already happened in rich countries like the US.  We can see that the US manufacturing sector has been hollowed out because of competition from countries where goods can be manufactured more cheaply.  The same sort of thing can happen to farmers in developing countries who cannnot compete with the mechanized farming that is done in rich countries.

kipling2448's profile pic

kipling2448 | (Level 3) Educator Emeritus

Posted on

Trade liberalization, which seeks to eliminate or at least reduce barriers to the free flow of goods and services across international borders, can, as with the free enterprise capitalist systems of many advanced economies, entail considerable advantages, but can also create losers.

Market economics can be zero-sum games, or they can, ideally, be non-zero-sum games, depending upon the circumstances. All sides can benefit relatively equally, or one side might profit at the expense of the other side, and therein lies the answer to the question. Trade liberalization is an enormously complicated and politically-sensitive topic. Actual trade agreements between two or more countries can take many years to negotiate and many more years for the full effects of the agreements to be realized. They are invariably voluminous documents and are often classified as "secret" by the respective governments involved in the negotiations. They are not classified because of concerns about national security but because of the difficulty of negotiating complex trade agreements with the interested parties in the private sector, in Congress or parliaments, and in the media scrutinizing details for advantages or for warnings of impending difficulties should a specific provision appear in the final document. A student studying international trade would be quite surprised to discover the intricacies involved in merely negotiation trade provisions involving steel. There are numerous categories of "steel," and numerous vested interests in how a final trade agreement treats the various categories of "steel." 

All of this said, the advantages of trade liberalization lie in the incentive it provides for individual economies to maximize efficiencies while minimizing efforts in those areas that do not play to a particular country's strength. Some countries, or some economies, are better suited to produce certain types of goods than others. In a free trade regime, the advantages will accrue to the country that can more efficiently produce that particular good. In addition, and more importantly, trade liberalization benefits all parties in that it results in better quality goods and services at lower prices because of the competition inherent in free trade or free market systems.

There are, as suggested above, disadvantages or cons to trade liberalization. Different countries, even contiguous trade partners like Mexico and the United States, can be so different culturally and economically that the successes or failures of trade liberalization can be difficult to gauge. That is why the North American Free Trade Agreement was and remains so controversial. Mexico has a large economy, but it remains a fraction of the size of that of the United States. Trade liberalization between these two nations (NAFTA also, of course, includes Canada) facilitated a tremendous amount of economic activity between the two countries, but the Mexican economy is so much smaller than that of the United States, with the latter's per capita income rate dwarfing that of the former, that trade liberalization created much hardship across certain industries in the United States. The cost of business in Mexico is so much lower than in the United States (e.g., labor costs are lower and costs associated with regulatory structures are much lower in Mexico) that major American industries reacted to the ratification of NAFTA by relocating manufacturing facilities to Mexico. The result has been job losses in the United States. American consumers may be getting more for their money under this arrangement, as imports from Mexico are much cheaper than goods produced in the U.S., but the losses in American jobs mean those consumer gains came at serious costs within the United States.

Trade liberalization can be most beneficial when the trade partners are economically similar. In other words, those countries entering into a free trade agreement all enjoy similar standards of living and roughly equal levels of development. When great disparities exist between trade partners, as with NAFTA, the gains can be outweighed by the losses. 

On balance, the gains from trade liberalization outweigh the losses. Protectionism, history has shown, is self-defeating. The most vibrant economies are those that trade freely with partners. There are, though, so many variables that absolute conclusions are difficult to come by. Mercosur, the multinational trade agreement involving Argentina, Brazil, Paraguay, Uruguay and Venezuela, held promise until problems of corruption in Brazil and massive economic mismanagement by the socialist regime in Venezuela impeded regional economic performance. On the other hand, trade between the United States and Canada is among the more successful partnerships in the world despite the far greater size economy in the United States. The two countries are culturally similar despite recent political tensions, and, share a long border, which facilitates the more efficient movement of goods. Singapore, a tiny city-state, has an enormously productive economy because of its emphasis on trade liberalization. The two largest economies in the world, the U.S. and China, have a robust trade relationship but are continuously protesting each other's trade policies, and China enjoys a tremendous trade surplus with the United States, which constitutes a potentially catastrophic weakness for America. In short, political and cultural affinities create closer economic relationships than those between nations with antithetical political systems and cultures.