4.9 Trade Liberalization



Trade liberalization or free trade means the international trade of goods with few restrictions by government. Countries have not always practiced free trade. Although the role of national governments is to create prosperity for their people, in the past most nations used protectionism to keep jobs within their own countries so they did not have to rely on other countries for the products they needed. The United States, for example, used protectionism as it developed its wealth in the late 1800s and during the Great Depression.

Most economists today, however, believe that free trade leads to prosperity for all. They believe in something called comparative advantage, which is the concept that every nation is better at some things than others and, if it concentrates on those industries and then sells those products to other nations, everyone will benefit. Today, fewer restrictions occur between nations and economic growth since World War II. However, trade is not completely "free", because most trade between nations is regulated to some degree.

Protectionism is the opposite of free trade. It occurs when a government puts restrictions or rules on the goods and services traded between its country and other countries. By protecting its own industries, it hopes to be self-reliant and to produce goods and employment for its own people. Protectionism has several components:

  • Tariffs are duties that must be paid on imported goods. By making imported products more expensive, tariffs reduce the amount sold and reduce the income of the producer. Tariffs benefit domestic producers and the government that receives the tariff.

  • Quotas are limits on goods that can be imported from another country. This encourages domestic production and consumption.

  • Subsidies are government-assistance programs in specific industries. Agricultural production is highly subsidized around the world, including in Europe, the United States, and Canada. Subsidies allow countries to produce much of the food they need.

  • Government Intervention occurs when a government wants to enhance a certain industry. It might provide infrastructure for the transportation of a natural resource, or it might fund research and development or education programs so a particular industry can develop.


Trade liberalization involves some or all of the following:

  • international trade of goods and services without trade barriers

  • the free movement of labor and capital between countries

  • no policies, including all of those listed under protectionism, that give domestic companies advantage over foreign companies

  • the right to own and control private property by international investors


Free trade enables people to sell their products to people all around the world. It allows people who live in areas where labour is cheap to sell the products of their labour to people who are willing to pay the highest price for them. It allows nations to specialize in the production of certain items.


The International Financial Institutions strongly believe that the liberalization of trade leads to more trade, more profits, and more economic growth.

"Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world. In contrast, trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30 percent to 10 percent over the past 20 years.  ..........

......Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often channeled to narrow privileged interests, that trade protection provides. Moreover, the increased growth that results from freer trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole. New jobs are created for unskilled workers, raising them into the middle class. Overall, inequality among countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, in part the result of trade liberalization."

Source: Global Trade Liberalization and the Developing Countries, International Monetary Fund


However, there is also evidence to show that free trade does not benefit everyone equally. We know that about 10% of the world still lives in extreme poverty. We know that a great deal of inequality occurs in wages all around the world. Is free trade really leading to increased prosperity?

History shows that the world's richest nations did not get that way through "free trade". In fact, the United States and Great Britain were highly protectionist and used many tariffs while their economies were developing. Not until they became wealthy did they start to advocate for free trade.

China and India are two of the chief examples used to support the idea that free trade leads to economic success. However, both of these nations, while reducing tariffs, have had high degrees of government control and regulation, including subsidies, quotas, and tariffs. They have not practiced free trade.

One of the chief problems with the concept of free trade is that nations, just like people, do not begin in the same situations. Can a nation rich in natural resources, with an educated workforce and a sound government, compete fairly with a poverty-stricken nation of malnourished, sick, and illiterate workers with few resources? If nations do not begin with the same advantages, can they all improve?

Free trade agreements are not really free because the more powerful nations in the agreement set the terms to benefit themselves. For example, the Washington Consensus was a set of 10 policies introduced by the American government and the international financial institutions based in the United States. They believed that all nations need to adopt the new liberal view of globalization to increase economic growth. World Trade Organization talks have broken down on more than one occasion primarily because powerful trading blocs such as the European Union refuse to remove subsidies from their agricultural products.