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Economics

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Trade Liberalisation – Analysis and Evaluation

Level:
A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Trade liberalisation involves one or more countries agreeing to lower import tariffs and relaxing import quotas and other forms of protectionism.

One of the aims of liberalisation is to make an economy more open to trade and investment so that it can engage more directly in the regional and global economy.

Trade Liberalisation – Analysis and Evaluation

Are there good recent examples of trade liberalisation?

The UK has signed free trade deals with Australia, New Zealand and Singapore among others having left the European Union single market

The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement among the Asia-Pacific nations of Australia, Brunei, Cambodia, China, Indonesia, Japan, South Korea, Laos, Malaysia, Myanmar, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. RCEP eliminates import tariffs on about 90 percent of traded goods and standardizes many customs, investment, IP and e-commerce regulations.

The African Continental Free Trade Agreement, creates a single market of 1.3bn people and liberalizes over 90 per cent of intra-Africa tariffs

A lot of trade liberalisation happens at a regional rather than a global level. For example, the Regional Comprehensive Economic Partnership (RCEP) which includes 15 East Asian and Pacific nations of different economic sizes and stages of development.

How can we show the impact of trade liberalisation using an analysis diagram?

Evaluate the impact of trade liberalisation on economic welfare

Possible gains in welfare:

  • Lower prices for consumers:
    • This increases their real incomes / real purchasing power
    • Higher consumer surplus (can be shown in an analysis diagram)
    • Might help to reduce inequalities in consumption
  • Liberalisation makes domestic markets more competitive / contestable
    • Lower prices increase allocative efficiency
    • Increased competition can drive higherproductivity, lower unit costs
    • Allows businesses & countries to benefit from specialisation and economies of scale – leading to improved productive efficiency

Potential drawbacks from trade liberalisation

  • Loss of import tariff revenue for the government
  • Risk of higher structural unemployment if domestic demand shifts away from home suppliers to imports – made worse if labour is geographically and occupationally immobile
  • Linked risk of a rise in relative poverty (inequality) especially if certain industries & regions suffer a decline as trade is liberalised
  • Short-term rise in the size of a country’s trade deficit due to an increase in the volume of imports
  • Trade liberalisation could lead to greater exploitation of the environment, such as trading toxic waste to countries with weaker environmental laws.

Trade liberalisation can have micro and macroeconomic effects. The impact depends on the scale of tariff reductions and the flexibility of domestic businesses to respond to changing relative prices including lower prices for imports.

The impact of trade liberalisation can be different for advanced (developed) high income countries contrasted with low-income nations. Build this into your evaluation.

How can the concepts of trade creation and trade diversion be applied to this topic?

  • Trade creation: lower import tariffs stimulate trade between members, of a trade agreement
  • Trade diversion: lower tariffs redirect trade away from non-members of the trade agreement to participating members

Trade liberalisation is an important growth and development strategy for many countries. For trade agreements to occur they should result in mutual gains for the countries involved – in other words, there should be net economic welfare gains and a stronger macroeconomic performance.

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