Trade Liberalization

Trade liberalization refers to the opening up of markets to foreign imports and entails the abolishment or reduction by governments of tariff and nontariff barriers (quotas, standards, etc.) that limit trade in goods or services across countries. Governments can liberalize trade unilaterally or on a reciprocal basis in negotiations with other countries and can apply any cuts in a preferential or a nonpreferential manner. Preferential liberalization removes barriers to imports only from selected countries and can lead to the establishment of free trade areas and customs unions, whereas nonpreferential liberalization applies to all countries that are covered by a most favored nation clause. The modern international trading system built around the World Trade Organization is based on the nonpreferential liberalization of trade and thus limits member countries' discretion to liberalize trade preferentially. A country that abolishes all its trade barriers engages in free trade. This entry first presents a brief history of major moves toward international free trade and then discusses the possible causes and consequences of trade liberalization.

Most major European countries engaged in trade liberalization from the mid-19th century until the start of World War I, producing the rapid growth in international trade that was a key feature of the first phase of globalization. By contrast, nearly all countries increased barriers to trade in the interwar years, leading to a collapse of international trade. The process of trade liberalization was restarted by the United States in 1934, when Congress passed the Reciprocal Trade Agreements Act that conferred authority on the president to agree on reciprocal tariff cuts with other countries, which entered into force without requiring further congressional approval. After the end of World [Page 2637]War II, other developed countries joined the process of trade liberalization and agreed to repeated negotiations in the framework of the General Agreement on Tariffs and Trade (1947–1994).

While initially these trade rounds yielded only minor tariff cuts, the Kennedy Round (1964–1967), which was launched as a response to the creation of the European Economic Community (1958), led to a reduction of average tariffs by about one third. Overall, the multilateral negotiations caused a drop in the average tariffs on industrial goods applied by developed countries from more than 40% at the end of World War II to less than 4% after the implementation of the cuts agreed on in the Uruguay Round (1986–1994). For some time, these tariff reductions were partly offset by the imposition of nontariff barriers to trade and the use of administrative trade instruments, such as antidumping duties. Since the 1960s, however, a series of international agreements have also imposed limits on the use of these instruments for protectionist purposes.

Throughout most of the postwar period, developing countries hardly participated in the process of trade liberalization, not least because they received one-sided preferences from developed countries, which gave them little incentive to reduce their own barriers. In the 1980s and 1990s, however, many of them undertook partly substantial unilateral tariff cuts when moving away from import-substituting industrialization policies. Developing countries have also become eager participants in the proliferation of preferential trade agreements that characterize the current international trading system. There has been little progress in multilateral trade liberalization since the mid-1990s, and therefore, it seems safe to conclude that international trade is currently as free as it has ever been, which also explains the rapid growth in international trade over the last few decades. Variation in trade barriers across countries and sectors obviously still persists: on average, developed countries have lower trade barriers than developing countries, and industrial goods and services face lower trade barriers than agricultural goods.

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