Trade liberalization refers to the removal or reduction of restrictions or barriers to the free exchange of goods between nations. Tariff barriers, such as duties and surcharges, and nontariff barriers, such as licensing rules and quotas, are examples of these barriers. Economists frequently regard these restrictions’ relaxation or abolition as steps toward promoting free trade.
Trade liberalization is a contentious issue. Trade liberalization opponents argue that the policy will cost jobs because cheaper goods will flood the domestic market. Critics also claim that the goods may be of lower quality and less safe than competing domestic products that have gone through more stringent safety and quality checks.
However, proponents of trade liberalization argue that it ultimately lowers consumer costs, increases efficiency, and stimulates economic growth. Protectionism, the polar opposite of trade liberalization, is defined by high tariffs and market regulation. Globalization is the result of trade liberalization and the resulting integration of countries.
The goal of liberalisation was to eliminate the rigidities and restrictions that were impeding the country’s development. Furthermore, the government was expected to be flexible with its regulation in the country under this approach. The goals of this policy were to boost domestic industry competition and encourage international trade through planned imports and exports. It also aimed to increase international technology and capital. This policy was also expected to broaden the nation’s international market frontier and reduce the country’s debt burden.
Trade Liberalization Example
On December 17, 1992, Canada, Mexico, and the United States signed the North American Free Trade Agreement (NAFTA). It became effective on January 1, 1994.. Tariffs on products traded among the three countries were eliminated by the agreement. One of NAFTA’s goals was to integrate Mexico into the advanced economies of the United States and Canada, in part because Mexico was viewed as a lucrative new market for Canada and the United States.. The three governments also hoped that the trade agreement would boost the Mexican economy.
Over time, regional trade tripled, and cross-border investment increased among the countries. Former President Donald J. Trump, on the other hand, viewed the agreement as harmful to American jobs and manufacturing. On September 30, 2018, the Trump administration completed negotiations on an updated pact, the United States-Mexico-Canada Agreement (USMCA), which will go into effect on July 1, 2020.
The majority of economists agree that NAFTA benefited both the Canadian and American economies. According to a Council on Foreign Relations report, regional trade increased from $290 billion in 1993 to more than $1.1 trillion in 2016, and US FDI in Mexico increased from $15 billion to more than $100 billion. However, economists believe that other factors, such as technological change and expanded trade with China, may have also contributed to these outcomes.
NAFTA detractors claim that the agreement resulted in job losses and wage stagnation in the United States as companies relocated production to Mexico to take advantage of lower labor costs. It remains to be seen how the USMCA affects these variables.
Indian Context
Economic liberalization in India refers to the process of opening the country’s economy to the rest of the world in order to make it more market and service-oriented, as well as to increase the role of private and foreign investment. In the late twentieth century, Indian economic liberalization was part of a global pattern of economic liberalization. Although some attempts at liberalization were made in the 1960s and early 1980s, a more comprehensive liberalization was launched in 1991. The reform was prompted by a balance-of-payments crisis that had resulted in a severe recession, as well as structural adjustment programs for obtaining IMF and World Bank loans. India overcame its worst economic crisis in a remarkable two years through reform.
Import tariffs were reduced, markets were deregulated, and taxes were reduced, resulting in increased foreign investment and high economic growth in the 1990s and 2000s. From 1992 to 2005, foreign investment grew 316.9%, while India’s gross domestic product (GDP) grew from $266 bn in 1991 to USD 2.3tr in 2018. According to one study, overall wages rose, as did wages as a labor-to-capital relative share. Poverty fell from 36 percent in 1993-94 to 24.1 percent in 1999-00 as a result of the 1991 liberalization. India’s economy is also becoming more integrated with the global economy. The ratio of total goods and services exports to GDP in India nearly doubled from 7.3 percent in 1990 to 14 percent in 2000. The increase in imports was less dramatic, but still significant, rising from 9.9 percent in 1990 to 16.6 percent in 2000. Within ten years, the total goods and services trade-to-GDP ratio increased from 17.2 percent to 30.6 percent. The Indian government’s liberalization policies have been criticized for increasing inequality and wealth concentration. The reforms have also been chastised for worsening rural living standards, increasing farmer suicides, and worsening rural unemployment.