Introduction

Trade liberalization refers to reduction or entire removal of any barriers that may hinder the free movement of goods across territories. This integration into the economy through international trade has not only strengthened the global economy but has also substantially reduced poverty and enhanced development at the domestic level.   It has been observed that over the last two decades, there has been an increase of six percent in the global trade which is invariably twice as much as the global output. The General Agreement on Tariffs and Trade, GATT, was created in 1947 and resulted in subsequent eight rounds of multilateral, regional and unilateral trade liberalization following which the World Trade Organization was established (Heerat, 2010). The progress of integration throughout the globe has not been consistent, for example, within Asia; the progression through trade liberalization has been immense since they participated in the strategies for attracting foreign direct investment but the same has been comparatively lower in Latin America.

The progress experienced through trade liberalization has been particularly slower in Middle East and African regions. This is particularly because these regions did not lower their trade barriers in an era of world economic integration and thereby suffered at the hands of international trade, thereby putting them at the risk of marginalization (Mkubwa, 2014). These regions along with other developing and under developed countries are disproportionately dependent upon the export and production of traditional commodities. Protection of the home land, weak policy frameworks, weak institutions and structural problems all lead to marginalization by the countries with regard to international trade and global development (Pachecko, 2011).

Rationale behind imposing trade restrictions.

Governments usually involved in protectionism may revert back on various trades related negotiations where they face unforeseeable circumstances that enable the previous statements to be inefficient (Mayer et al, 2014). Where the market is observed to fail, the governments can agree to increase the barriers to trade which will be deemed to be the second best policy for economic development of the particular country (Salinaz and Aksoy, 2011). The following figure illustrates the various reasons that countries may impose from the economic theory perspective.

Figure 1 Reasons for increase in Trade barriers.

• Product Specific.

There are some unexpected circumstances related to trade and those could be technological interventions, change in customer behavior or change in market procedures.

• Change in customer preferences

Change in customer preferences occurs when the customer demand increases or decreases for a certain product. In this case one can be benefited while the other industry or the partner has to suffer, but the temporary loses can be recovered.

• Technological innovation.

This could be the case for instance if one party advances its technological procedures replacing the labour force, then the other partner with outdated technology comes in danger of suffering from a loss. There are some tactics that can help prevent the great extent of loss (Ikenson, 2007). Tariffs, trade barriers and increase in the price of the product are some of the ways to tackle this kind of situation. The suffering ones should respond to the loses in case that they are temporary in such a way that they should carry on with their production because the losses would recover if they are temporary (Feenstra et al, 2014). Moreover if they totally abandon themselves and stay out of the loop then there is a danger of them getting outside the business loop. So, there must be constant urge to struggle by the suffering party in order to boost up their image in the trading sector.

• Infant Industry.

An infant industry is a newly formed local industry that is in its initial phases of practice. Such industries find it very difficult to compete with other overseas industries on the international platform of markets. Over the years these industries will learn how to attract business by controlling their costs but in the beginning the industry might not be able to experience success due to the trade barriers. If there is little or no risk involved in financing a business endeavor then the financial markets will be willing to do so but if there is risk involved then it important that government increases trade barriers so that local industries can finance themselves on their own.  When talking about infant industry policy it is important to understand that subsidy and externalities play a crucial role in it. Money is invested in job training of new employee and if these employees share their knowledge or shift to other firms then this is counted among the externalities. There is always uncertainty involved in selling local goods abroad and therefore export subsidy might prove beneficial in this case. Once these policies are formed it is the responsibility of the government to implement them.

• Declining Industry.

Declining industry is when that industry’s production begins to decline leading towards shutting down of the business. The sudden decrease in the production can be attributed to decline in demand, lack of resources or to the advancements in technology. Whenever this happens it is recommended to use trade restrictions to provide enough time to the employees to find other jobs. Large scale declining industry can have a negative impact in the surrounding area therefore it is important that government gets involved in slowing down the decline. 

• Dumping

When a foreign firms lowers its price of a certain good in the international market it means that it wants to dominate the market and eliminate the competitors therefore in this case government should play its role to guard domestic industries by introducing trade restrictions.

• Global or country specific economic fluctuations

Country specific fluctuations impact all the sectors at the same time and changes in outlay can impact the demand and supply.

• Economic Recession

Decline in local and foreign demand is observed when the recession is on global scale. In this case the government might have to introduce new trade barriers to reserve local markets for the local firms. The introduction of such a protective measure might result in reprisal and unrest in the neighbouring countries and eventually these trade barriers will be applied by all the countries on globe (Panangariya, 2000). The culmination of this situation would be depression resulting from decrease in global wellbeing and bad economic conditions.

• Changes in world prices.

When the price of domestic goods increase compared to the foreign goods then the demand also shifts towards the imported goods side and when the domestic goods are cheaper than preference shifts on their side. The overall increase in world prices would harms both as imported goods would cost more and domestic supply will reduce.  Government can impose export restriction to insulate and safeguard their domestic markets.

• An unsuitable balance of payments situation

Balance of payments includes the payments made inside or outside the country. There are two impacts of lower currency, the first is that the price of local goods would decrease and their demand in foreign world would increase and at the same time it will increase the price of foreign goods and their demand within a specific country would decrease (Bhagwati, 2010). Secondly if the local currency is not appreciated then the rate of return on foreign assets also declines.  To avoid such unbalanced conditions it is essential to fix the rate of exchange.

• Changes in policy

Changes in government policies can have both negative and positive impact on the economy. This are discussed below:

Trade opening

On international platform, those firms that lack comparative advantage have to endure a lot of stress and burden coming from the severe competition. This can even result in loss of jobs and shutting down of business. The governments in this case should provide more time for the firms to make certain adjustments (Hussain, 2007). The government can do this by two possible methods. First is by reallocating the resources and second is by helping industries recover from the damages sustained by the severe competition.

Sometimes it happens so that the foreign country provides subsidy over its export of certain goods to check the potential of its selling in the international market. In such case the importing country can enforce duties on these imports to give signal to the exporting country to change its policy. However this is only possible in case of large countries because only they are allowed to impose such tariff on their imports. The subsidy mentioned here is transferred to the consumers and therefore the tariff applied in this case is inform of tax or duty paid by the consumer to limit its use of foreign goods and to encourage the use of domestically manufactured goods (Panangariya, 2000).

• Non-economic circumstances.

There may be noneconomic objectives that the government wants to achieve by application of trade restrictions and they are given below:

• Environment, health emergency and national security

Sometimes it happens that an outbreak of certain disease is the only reason for imposing trade restrictions. This was done in case of mad cow disease to prevent it from spreading across the world. The import of disease causing products is either banned or highly discouraged by applying restrictions (Manni et al, 2012). Same is the case when you are dealing with environmental issues, air pollution of one country might harm the neighbouring country and in this case the affected country imposes higher trade barriers to force the exporting and polluting country to cut down on air pollution by taking preventive measures.

• Political changes

Political changes in a country also play a crucial role in deciding the trading policies. With the collapsing of one government and emergence of another, preference also changes. However in this case on economics ground, government’s intervention is not discussed but in political economy matters the role played by the government can be debated (Neely, 2011).         

Benefits of trade liberalization.

Two terms that are vastly used in the world of trading and those are commitments and flexibility. Though various costs are already prescribed in trading policies and the trading parties are bound to follow the decided criteria, but at the same time due to unpredictable future of the developmental sector the “economic theory” also suggests the incorporation of flexibility in trade policies and commitments. There are five main pillars or approaches of flexibility.

Flexibility as a tool for safety

Flexibility in trading policies can provide government with a little relief because in that way the pressure of remaining true to the policies to the fullest no matter what happens does not apply. Instead this flexibility would allow readjusting the stern policies in a way that will act according to the present or required scenario (Panangaria, 2000). So, if things go unplanned or haphazard this flexibility incorporation tool would serve as a safety tool.

Incorporation of “contingency measures”

There are many external and internal factors responsible for a sudden change in trading that can have positive as well as negative impacts on the economy of the country (Khan, 2012). Here the role of “contingency measures” can play a vital role in restoring the economy back to a certain extent which would otherwise be totally a loss. These measures make the traders ready for the unpredictable circumstances that can either be natural or anthropogenic.

Adjustment in policies

As mentioned above that there are certain unseen events that can affect the trading system, especially there are chances that external factors can impact the domestic economy. If, at that time the country has the right to use the adjustment tool in trading policies than it can recover or can be saved from some huge loss but if it’s bound to follow the policies in any case than that will make the economy narrow down to loss and even a failure because in that case the adjustments could no longer play their part (Wright, 2014).

“Contingency measures” as a tool for compensation

These measures can make the trading countries or the trading partners comfortable because then they can make minor amendments according to the time and need. These measures will serve as a compensation tool between the trading parties when both or any of them feels the need to adjust the policies in a way that will benefit the economy.

“Contingency measures” as a tool for discipline and integrity

At times there may come a point in a trading relationship that can affect the whole agreement between the trading partners in a negative way and they may lose self-discipline which in return can damage the trading relationship and the rest of the agreement as well. But this situation can be avoided by the incorporation of the “contingency measures” from the very beginning. This will allow adjustments to the trading partners and will maintain the sound basis of the agreement between the two.

Flexibility and addition of safety value

Flexibility in trade policies can give a sense of secure feeling to various types of commitments that are vital and very crucial for a country’s economy. It can save the entire agreement between the trading partners from ending on a bad note that would ultimately lead to a huge loss. Usually trade barriers are imposed to gain befits on short term basis but that only gives benefits in case where the fluctuations arising are temporary (Wright, 2014). On contrast when there are huge importing volumes, than the importing country may play a role to exploit the agreement in the absence of flexibility. So if from the beginning there is flexibility in trading policies between the partners then the agreement can be saved from being manipulated by any of the two or both the trading partners because in that case adjustments could be made. This can also help to maintain the trend of fluctuations in the trading, economic and political spheres.

Insurance

Free trade involves some sort of risks associated with it and for the sake of protection tariffs and trade barriers are imposed which in a time frame here political or any other conditions are not stable can play their role. But there is a phenomenon that can replace the concept of insurance and that is the application of “contingency measures”. In this way governments could be more willing to accept the agreements as to gain the deeper benefits related to them. Contingency measures can play there role in case the policy has certain hurdles in its way to trigger. These measures can then save the entire ship of trade from drowning.

Adjustment

Flexibilities serve as an adjustment tool because it can offer to cater for the loss before it happens. This concept can be applied to the imperfections in the labor market.  At times for example the order is not per demand and the costs need to be adjusted. Meanwhile the other competing partner could be given a chance to show its strengths and save the whole agreement.

Deeper commitments and potential compensations

 The incorporation of the contingency measures also imposes one question and that questions the transparency of this concept. It may be asked that how come these measures will impact, either positively or in a negative way. For instance a country exports some product to a third party which falls behind the renaming and is not in a condition to face a lot of barriers (Panangariya, 2000). In that case the exporter can give compensation thinking of the benefits he would be having by exporting the product. But to make sure that all the parties would be benefited there is a term of discriminatory contingency measures that ensures that all the involved parties would be somehow benefited and this in return attracts the traders.

Deterrence and the rule of law

To make sure that trading countries or partners don’t misuse the concept of contingency measures and start making innovations in agreements on their own, the flexibility in agreements can play its part (Ju et al, 2007). There must be some limit that will define the extent of adjustments.

WTO and Trade Negotiations.

• • Scepticism of developing countries towards WTO and Trade Negotiations.

It has been observed that developing countries show disagreement on trade and environment issues. This is because the developing countries believe that market access restrictions will be imposed on them under the label of environmental protection. They fear that they might lose the trade privileges granted to them by WTO system. Instead these countries argue that trading provision makes up only ten percent of the MEAs and so there is no legitimate test in WTO to MEAs (Bernard et al, 2013).  Also these countries support the normal trading command approach. Lastly strong opposition to precautionary principle is also observed as this can impose strict protective measures and limit the trading opportunities.

Requirement of constructive engagement in trade and environment plan.

There are four main reasons to involve the developing nations in trade and environment discussions and they are:

• The social benefits will increase if trade and environment objectives are achieved.
• Adoption of an approach which incorporates environment along with trade can assist in sustaining trade with lesser restrictions thus restoring the trust in WTO.
• If developing countries avoid this discussion then they might lose some of the very attractive and beneficial opportunities that might work for both the parties.
• It is always recommended to convince others by winning the debate instead of solving problems by dispute settlement.

The idea of trade liberalization opens up new avenues for economic development and growth and by protecting the environment the health of the people is safeguarded (Zakariya, 2014). Thus both the things contribute towards one common goal and that is social well-being. However in case of developing countries they will benefit from less trading restrictions but would suffer by the losses from environmental degradation.

Conclusion

Trade liberalization can be argued upon in two perspectives one is in terms of developing countries and the other in terms of developed countries. It is mostly believed that the developing countries because of the fact that they are weaker than the developed nations need more rules in a multilateral trading system. Due to this fact there could be a prominent decline in support for World Trade Organization from these less developed countries that in return could be harm to the South. Addressing environmental issues in trading system is one of the key concerns of trade liberalization commitments according to WTO (Zakariya, 2014).

Protection and conservation of the environment is one of the fundamental goals of WTO which the developing countries should not object to because environmental issues and constraints are a threat to the commitments of trade liberalization and WTO itself.  The concept of free trade and the system supporting it is quite exposed to perceptions against it in developed countries where it is argued that if this concept of trade liberalization gains more acceptance than this would lead to an outcome with more harm and less benefits. Till than there are a number of protests by various NGOs that WTO should stop linking trade so much to environmental considerations. In the South the populations are even more vulnerable to the threats of environmental degradation and consider such type of trade that completely misses out on the environmental considerations. But this type of agenda in the long run is unlikely to survive on political grounds.

• The potential for win-win opportunities

Sometimes environmental concerns and trading concerns overlap and only one triggers, mostly being the developing countries that oppose the environmental concerns to some extent but there could be a win in situation as well. For instance, the promotion of eco labelling on the products (Hussain, 2007). In this way the environmental concerns of the developed nations would also be fulfilled and the developing countries could also avail trade opportunities.

• Pressure on the dispute settlement mechanism

Another reason the developing countries should look up into the trade and environment debate is to influence this debate rather than letting the issues being solved by dispute settlement approach. It is also argued that the dispute settlement system is playing its role to resolve the problems rather than the trading partners.

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