Liberalization of trade: why so much controversy?

Drawing on the experience and academic research of the 1990s, this chapter identifies five lessons: • Openness to trade has been a central element of successful growth strategies. In all countries that have sustained growth the share of trade in gross domestic product (GDP) has increased, and trade barriers have been reduced. • Trade is an opportunity, not a guarantee.While trade reforms can help accelerate integration in the world economy and strengthen an effective growth strategy, they cannot ensure its success. Other elements that address binding constraints to growth are needed, possibly including sound macroeconomic management, trade-related infrastructure and institutions, and economywide investments in human capital and infrastructure. • There are many possible ways to open an economy. The challenge for policy makers is to identify which best suits their country’s political economy, institutional constraints, and initial conditions.As these vary from country to country, it is not surprising that there is a striking heterogeneity in country experiences regarding the timing and pace of reforms. Different countries have opened up different sectors at different speeds (for example Bangladesh and India); others have achieved partial liberalization through the establishment of export processing zones (for example China and Mauritius); and yet others have combined unilateral trade reforms with participation in regional trade agreements (for example Estonia). • The distributive effects of trade liberalization are diverse, and not always pro-poor.Trade reforms were expected to increase the incomes of the unskilled in countries with a comparative advantage in producing unskilled-intensive goods.Yet evidence from the 1990s suggests that even in instances where trade policy has reduced poverty, there are still distributive issues. One important policy lesson is that countries need to help workers affected move out of contracting (import-competing) sectors into expanding (exporting) sectors. This is an issue relevant to both developing and industrialized countries. • The preservation and expansion of the world trade system hinges on its ability to strike a better balance between the interests of industrialized and developing countries. Global markets are the most hostile to the products produced by the world’s poor—such as agricultural products and textiles and apparel.The problems of escalating tariffs, tariff peaks, and quota arrangements systematically deny the poor market access and skew the incentives against adding value in poor countries. These problems can be addressed through collective action, best pursued through the Doha Round and the World Trade Organization.