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, such as licensing rules and quotas. Economists often view the easing or eradication of these restrictions as efforts to promote free trade.


Trade Liberalization

The Implications of Trade Liberalization

Critics of trade liberalization claim that the policy can cost jobs because cheaper goods flood the domestic market. Critics also suggest that the goods may be of inferior quality and less safe than the domestic products that may have undergone different safety and quality checks. Proponents of trade liberalization, however, claim that it ultimately lowers consumer costs, increases efficiency, and fosters economic growthProtectionism, the opposite of trade liberalization, is characterized by strict standards and market regulation. The outcome of trade liberalization and the resulting integration among countries is known as globalization.

Key Takeaways

  • Trade liberalization removes barriers to trade among countries such as tariffs and quotas.
  • Removing barriers to trade reduces the cost of goods sold in importing countries.
  • Trade liberalization can benefit stronger economies because weaker economies may lack competitive advantages.

The Pros of Trade Liberalization

Trade liberalization promotes free trade. Free trade 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 costs because imports are subject to lower fees and competition increases. 

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 they may have a competitive advantage. For example, recent trade liberalization has encouraged the United Kingdom to concentrate on the service sector rather than manufacturing.

The Cons of Trade Liberalization

Trade liberalization can negatively affect certain businesses within a nation because imported products increase the competition from foreign producers and may result in less local support for those industries. There may also be a greater financial and social risk if items 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 established economies or nations. This challenge can stifle local industry diversity or result in the failure of newly developed industries.

Education and Trade Liberalization

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.

Real World 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 as Mexico was considered a lucrative new market for Canada and the United States. The governments concerned also hoped that the trade deal would improve Mexico's economy.

Regional trade tripled, and cross-border investment increased between the three countries. However, President Trump considers the agreement detrimental to U.S. jobs and manufacturing and, in October 2018, the Trump administration negotiated an updated agreement, the U.S.-Mexico-Canada Agreement (USMCA). 

Most economists agree that NAFTA was beneficial to the Canadian and U.S. economies. According to The Council of Foreign Relations (CFR), 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 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.