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What is Trade Liberalization?

By Adam Hill
Updated May 16, 2024
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The history of trade between nations has been a long and colorful one, punctuated by wars and dramatic changes in beliefs about trade. Because of the economic impact that trade has always had on civilizations, governments often become involved in trade with the goal of producing a particular economic outcome for their countries. Trade liberalization refers to the removal of government incentives and restrictions from trade between nations. It is a subject of much scholarly and political debate, given the impact that trade has on the livelihood of so many people, especially in developed countries.

Economists in particular have debated the advantages and disadvantages of trade liberalization for centuries. Classical economists such as David Ricardo and Adam Smith were strongly in favor of free trade, believing that it led to the economic prosperity of civilizations. They pointed to examples of civilizations that had flourished as a result of increased trade liberalization, such as Egypt, Greece, and the Roman Empire, as well as the more modern example of the Netherlands.

The Netherlands had been under the imperial rule of Spain, but after they rejected the rule of the Spanish Empire and declared complete freedom of trade, they experienced unprecedented prosperity. This made the debate over trade liberalization into the most important question in economics for many years to come. Modern economists who favor trade liberalization cite evidence that it creates jobs, fosters economic growth, and improves the standard of living because of increased consumer choice in the marketplace.

Those who argue against rapid trade liberalization also cite statistical evidence that free trade can harm the ecology of the marketplace and have negative effects on poor countries. For example, the World Bank estimates that the number of people in the world living on less than $2 U.S. Dollars (USD) per day has risen by almost 50% since 1980. This correlates precisely with the period of the most worldwide trade liberalization in recent history. The implication of many of the arguments against trade liberalization is that trade negotiations should focus first on fairness to developing countries, rather than further opening up the markets of the poorest countries to competition.

All developed countries have had to deal with the question of free trade versus its opposite, protectionism. In most of the world’s developed nations, tariffs are in place on agricultural products, and in the developing world, there are high tariffs on many goods, especially manufactured goods. Trade barriers such as these are the subject of debates that will undoubtedly continue as long as economic disparities exist between nations.

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Discussion Comments
By widget2010 — On Nov 07, 2010

@watson42, the unfortunate fact is that trade liberalization and later regulation against it is a pattern that just repeats itself over and over in history. From the time of factories, and even before, you will always see the people who will do anything to make a profit, and then the people who will constantly want better and better treatment for workers. Neither end of the spectrum has everyone's best interests at heart. However, groups like the world trade organization and eu trade regulations seem to at least try for some sort of happy medium.

By watson42 — On Nov 07, 2010

The risk of free trade in any of its form is that removing concerns of countries does not remove the concerns of people. The impact of trade liberalization often seems good at first; less fuss, more income. Unfortunately, it can also lead to less fair treatment of workers and less money for people in all steps of the process, but only money for those people who run the whole show, essentially.

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