The Costs of Trade Liberalization on Developing Countries

Introduction

Trade liberalization, as a facet of globalization, is generally seen as a normatively attractive strategy for poverty reduction. From the late 1980s to the early 1990s, many states moved towards policies of trade liberalization (Edwards, 1997). However, in the case of many lesser developed countries, trade liberalization has not had a measurably positive impact on the reduction of inequality and poverty. With expansion of the market in developing countries with smaller economies, trade liberalization can systemically exclude domestic producers from the economy. This moves money out of the domestic and into the foreign market, creating a detrimental effect on the economy, which is usually felt the hardest in the agrarian sector, disadvantaging rural poor. Through the lens of dependency theory, it becomes clear why countries with the most unstable economies would be the most harshly subjugated in global competition when they open their markets to liberalized trade. In this way, a persuasive case can be made for protection in developing economies, at least until they reach a point in which their industrial sector can compete in the international market (Dornbusch, 1992).

The Appeal of Trade Liberalization

Ideally, “the reduction of restrictions or barriers on the free exchange of goods between nations[1]” could help a developing economy through the transfer of technology, increasing productivity and growth and offering it a place in the global market (Omlo, 2012). It should also help domestic producers to expand through foreign investments and capital, towards the ultimate goal of factor-price-equalization (Reinert, 2003). Theoretically, trade liberalization should help increase a country’s GDP per capita, reducing poverty, and therefore inequality (following the Kuznets curve). In fact, since many nations adopted policies of trade liberalization, their GDPs per capita have seen an increase (IMF Staff, 2001). Countries such as India, China, South Korea, and Taiwan have seen the full positive impact of liberalization, with an increase in GDP and exports (Weisbrot and Baker, 2002). Another compelling argument for removing barriers to trade is that it allows for outsourcing work such as administrative activity (as in India) as well as providing a landscape in which exports may have traction in the competitive global market, ultimately a boon to the economy through the globalized involvement. However, the positive effects of trade liberalization can only occur under specific conditions. In practice, the effects of trade liberalization are shaped by multiple factors, which allow certain economies to thrive under free trade, while others suffer.

Factors That Shape its Effects

Goldberg and Pavcnik, in their analysis of trade, inequality and poverty, argue that tariff reduction as part of the globalization process, and specifically nontariff barriers (NTBs) to trade, are difficult to measure (Goldberg and Pavcnic, 2004). According to Weisbrot and Baker, in many states where economic growth has been observed since the economy removed barriers to trade, it may not even be the case that the growth is specifically caused by trade liberalization. Other explanations of economic change include the diverse results of different aspects of modernization, and the fruition of mercantilist economies (Weisbrot and Baker, 2002).

Though it may be difficult to measure the exact impact of liberalization on different nations, it is clear that liberalization does not have the same effects on all countries. One factor that highly shapes the effect is the country’s stage of development. According to Ian Fletcher, “free trade tends to mean that the industrial sectors of developing nations either…become globally competitive, or else they get killed off entirely by imports, leaving nothing but agriculture and raw materials extraction, dead-end sectors which tend not to grow very fast (Fletcher, 2011).” The opportunity to grow from trade is only available for countries who have developed technologically, with a workforce in both agricultural and industrial sectors (IMF Staff, 2001). Conditions such as regime type and exchange rate flexibility determine the processes toward liberation. Tariff rates (whether they be uniform or removed altogether), and other terms of liberalization policies determine the precise effects of importation on a country’s economy. Removing tariffs altogether can decrease the country’s revenue, destabilize the economy, and threaten debt. Shujaat Abbas argues that sustainable growth can only be achieved through “export promotion policies” and by “developing [the] production side” of the economy, emphasizing that liberalization can have positive effects under these self-sustaining conditions (Abbas, 2014).

Still, other factors implicate trade liberalization’s bias against the agrarian sector (Clarete, 1980). In considering countries whose economies are widely reliant on agricultural production, trade liberalization often focuses on the industrial sector, which comprises labor-intensive manufacturers, and industrial producers. Without stabilizing measures in its policy, free trade can have adverse effects on the self-sufficiency of the agrarian sector. Consequently, the foundation of a country’s economy is another factor that affects the result of liberalization. In Japan, tariff reduction has damaged the industries of rice, sweetener, beef and dairy (Kobayashi, 1999), as they are more cheaply imported from abroad. In the Philippines, “aggregate agricultural output declines [with free trade] except in the case when agricultural tariffs are raised (Clarete, 1980).” Tariff rates, terms and processes of liberalization, means of production, and a country’s stage of development shape the effects of trade liberalization. Ultimately, while certain economies have shown improvement in poverty reduction from liberalization, many countries with lesser developed economies suffer more from its implementation, enduring a range of consequences.

Consequences

Within countries with smaller economies, the process of trade liberalization can be detrimental to industry. The Vanek-Reinart Effect demonstrates exactly this phenomenon: “in effect, historical experience shows that opening up for free trade between nations of very different levels of development tends first to destroy the most efficient industries in the least efficient countries (The Vanek-Reinert Effect) (Reinert, 2005).” A study of the effects of trade liberalization in Ghana determined that “trade reform tends to generate both winners and losers (Nyanteh, 2014).” The consequences of trade liberalization can be measured in an increase inequality, a decrease in domestic competition, and an increase in chronic disease.

Rising Inequality

Weisbrot and Baker suggest that advocacy groups promote liberalization out of self-interest and capitalist ideation, and that “many developing countries will actually lose from trade liberalization in important sectors, such as agriculture and textiles (Weisbrot and Baker, 2002).” The explanation of this process lies in the “terms-of-trade” effect, where the relative prices of goods change as a result of liberalization, which could mean that export prices decrease (in relation to the price of imports). Liberalization is furthermore shown to increase income inequality in developing countries[2]. Another consequence of liberalization is that governments may now invest less in building infrastructure or in human capital, and instead increase holdings of foreign reserves.

Gender inequality is another effect of trade. In Senegal, trade liberalization creates an economy that is more invested in the export-competing sector of the economy, with a focus on cash crops and mining. These trades are usually reserved for men, whereas women typically work producing food crops, which is an import-competing sector (Cockburn et al., 2010). Since the exports hold more ground in a system of liberalized trade, the markets become gendered in favor of men, and women see a loss in labor as a direct result of trade liberalization. While different forms of oppression exist systemically against women, the wage gap is further ingrained as a result of trade liberalization.

Decrease in Domestic Competition

With the increased availability of imports, free trade leads to a decrease in domestic competition of certain sectors. In Tanzania, the impact of trade liberalization has been negative, especially on import competing industries and manufacturing (AGOA, 2007). Besides decreasing competition domestically, liberalization leads to a loss of jobs and therefore livelihood for many people in developing nations. In the case of Senegal, which liberalized in the late 1980s: “by the early 1990s, employment cuts had eliminated one-third of all manufacturing jobs (Cavanaugh et al., 2004).” For lesser developed countries including Nigeria, Sierra Leone, Zambia, Zaire, Uganda, Sudan, and Ghana, liberalization has “devastating effects on industrial output and employment (Cavanagh et al., 2004).” Furthermore, certain countries also risk a “debt spiral” on account of the lack of tax revenue from tariffs as a result of free trade (Fletcher, 2011).

Chronic Disease

One nuanced consequence of global trade liberalization is its effect on health systems that are pursuing universal health coverage. Eduardo Missoni provides tangible evidence of the effects of trade on health. Missoni argues that through trade, globalizing countries begin to take on certain aspects of “Western lifestyles,” those that often lead to chronic diseases, inevitably more difficult to treat in poorer countries. Often, the goods imported affect health and lifestyle, such as new types of food (considering the obesity pandemic) (Missoni, 2013). In countries that cannot provide care for those with chronic illness, the aspect of trade that provokes consumption is overall extremely detrimental to health. Also, bearing in mind that “hazardous wastes are globally traded and disposed in low-income countries (Missoni, 2013),” some of the lowest income countries have begun to see an increase in “environmental degradation” which results in an increase in chronic disease, as well as “irreversible transgenerational epigenetic change,” a result of exposure to hazardous materials. Furthermore, water is a contested issue in its security, financially and through waterborne diseases. This instability also affects the rate of chronic disease and the possibility of treatment.

He further argues that trade has an effect on the building blocks of the health system, including service delivery, the health workforce, information, medical products, financing, and governance. In terms of service delivery, health care has become more commercialized, where workers have incentive to move from the public to the private sphere. There has been an increase in inequitable access, since certain countries have more available resources and personnel. This also leads to “health tourism,” where a country has an established healthcare system, that visitors will enter the country to seek healthcare where they cannot get access in their own. Although it can be beneficial to the economy of the destination country, the tourism also promotes movement from the rural into the urban sector, privileging those in urban areas[3]. Within the workforce, Missoni reveals that trade can open the door to remittances, special recruitment, and again, migration, considering new information and communication technologies, which offer drug advertisements, and can often pathologize regular human activity through disease mongering. There is a higher demand for drugs, he argues, as well as for service. Under open trade policy, investors can help provide insurance, but depending on the leadership of the health care systems, often there are neopatrimonial ties that link certain businesses to policymakers, influencing the global trade agenda. Therefore, trade has an overall negative impact on health care systems, which risk various forms of corruption.

Conclusion

The benefits of trade liberalization on developing countries are small or even negligible. Factors that determine the effects of liberalization include a country’s stage of development, its economic dependency on the agrarian versus the industrial sector, regimes and the flexibility of the exchange rate, and the policies of trade liberalization, such as uniform tariff rates and emphasis on industry or agriculture. The appeal of trade liberalization holds that through modernization, technological developments will spread to help industry, and improve the lives of many. Ultimately, free trade is not suitable for developing countries when they are not economically stable enough for the transition in policy. Liberalization has the effect of decreasing competition, generating winners and losers, increasing gendered inequality, and hindering the establishment of universal health care systems, hindering, rather than promoting growth.

References

AGOA (2007). Tanzania: Trade Liberalization and its Effects on Local Textile Industries. Retrieved from https://agoa.info/news/article/3916-tanzania-trade-liberalization-and-its-effects-on-local-textile-industries.html

Abbas, S. (2014). Trade liberalization and its economic impact on developing and least developed countries. Journal of International Trade Law and Policy,13(3), 215-221.

Bookman, M. Z., & Bookman, K. R. (2015). Medical tourism in developing countries. Place of publication not identified: Palgrave Macmillan.

Busse, M., Gröning, S., & Groening, S. (2012). Assessing the Impact of Trade Liberalization: The Case of Jordan. Journal of Economic Integration, 27(3), 466-486. Retrieved from http://www.jstor.org/stable/23317243

Cabalu, H., & Rodriguez, U. (2007). Trade-offs in Trade Liberalization: Evidence from the Philippine 2005 Tariff Changes. Journal of Economic Integration, 22(3), 637-663. Retrieved from http://www.jstor.org/stable/23000899

Cavanagh, J., & Mander, J. (2004). Alternatives to economic globalization: a better world is possible. San Francisco, CA: Berrett-Koehler.

Cockburn, J., Corong, E. L., Decaluwe, B., Fofana, I., & Robichaud, V. (2010). The Gender and Poverty Impacts of Trade Liberalization in Senegal. SSRN Electronic Journal.

Clarete, R. L. (1980). The Economic Effects of Trade Liberalization on Philippine Agriculture. Philippine Review of Economics and Business,XXVI(2), 208-235.

Dornbusch, R. (1992). The Case for Trade Liberalization in Developing Countries. The Journal of Economic Perspectives, 6(1), 69-85. Retrieved from http://www.jstor.org/stable/2138374

Edwards, S. (1997). Trade Liberalization Reforms and the World Bank. The American Economic Review, 87(2), 43-48. Retrieved from http://www.jstor.org/stable/2950881

Fall, C. S., & Isra‐Bame. (2012). The impact of trade liberalization on Senegal: An assessment of the potential impacts of an Economic Partnership Agreement (EPA) on Senegalese Households using a Single country CGE analysis. Gtap.agecon.purdue.edu.

Fletcher, I. (2011). Free Trade Isn’t Helping World Poverty. Retrieved from http://www.huffingtonpost.com/ian-fletcher/free-trade-isnt-helping-w_b_837893.html

Goldberg, P. K., & Pavcnic, N. (2004). Trade, Inequality, and Poverty: What Do We Know? Evidence From Recent Trade Liberalization Episodes in Developing Countries. Brookings Trade Forum, 223-269.

IMF Staff. (2001). Global Trade Liberalization and the Developing Countries. Retrieved from http://www.imf.org: https://www.imf.org/external/np/exr/ib/2001/110801.htm

Kobayashi, H. (1999). Effects of trade liberalization on agriculture in Japan: commodity aspects. Bogor, Indonesia: CGPRT Centre.

Missoni, E. (2013). Understanding the Impact of Global Trade Liberalization on Health Systems Pursuing Universal Health Coverage. Value in Health,16(1).

Nyanteh, K. (2014). Is Ghana’s trade liberalization policy leading us towards an economic cliff? Retrieved from http://www.ghanaweb.com/GhanaHomePage/business/Is-Ghana-s-tradeliberalization-policy-leading-us-towards-an-economic-cliff-298516

Perry, G., & Olarreaga, M. (2006). Trade Liberalization, Inequality and Poverty Reduction in Latin America. ABCDE, San Petersburg.

Quartey, P., Aidam, P., & Obeng, K. K. (2014). The Impact of Trade Liberalization on Poverty in Ghana. Gtap.agecon.purdue.edu.

Reinert, Erik (2005). Development and Social Goals: Balancing Aid and Development to prevent “Welfare Colonialism”. Paper prepared for the High-Level United Nations Development Conference on Millennium Development Goals.

__________ (2003). ‘Increasing Poverty in a Globalised World: Marshall Plans and Morgenthau Plans as Mechanisms of Polarisation of World Incomes’, in Chang, Ha-Joon (editor), Rethinking Economic Development.

Serra, N., & Stiglitz, J. E. (2008). The Washington Consensus reconsidered: towards a new global governance. Oxford: Oxford University Press.

Weisbrot, M., & Baker, D. (2002). The Relative Impact of Trade Liberalization on Developing Countries. Retrieved from legacy.earlham.edu: http://legacy.earlham.edu/~jond/2003%20Stuff/relative_impact_of_trade_liberal.htm

[1] Staff, I. (2015, August 30). Trade Liberalization. Retrieved from http://www.investopedia.com/terms/t/trade-liberalization.asp

[2] Perry and Olarreaga graph income and wage inequality before and after trade liberalization, demonstrating a decrease in wage ginis in Korea, Singapore, and Malaysia, and an increase in household income ginis in Singapore, Korea, and Taiwan (Perry and Olarreaga, 2006).

[3] Most common destinations for healthcare tourism include Argentina, Chile, Costa Rica, India, and the Philippines, whose regime types are either federal republic or republics, each with electoral democracies (Bookman and Bookman, 2015).

Annie Rubin

Annie proudly knows all the lyrics to Joni Mitchell's album Blue. When she's not writing, you can find her reading about intersectionality, drinking Lorelai-Gilmore-levels of coffee, and exploring the world.

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