40 years ago, China, the second largest economy in the world today, used to be undeveloped and poor. The country had remained closed to the world and, as a result, its economy was paying the price. A big chunk of its population lived in poverty. No one thought the country could turn around and become what it is today. But things changed when Deng Xiaoping took over.
In the late 1970s, Deng Xiaoping helped the nation by opening up in terms of trade and new technologies that saw the economy start adopting western ideas, which led to an increase in its GDP. This caused the nation to grow. By the year 2010, it was the second largest economy in the world with the prospect of surpassing the United States to become the largest economy by 2025. Since 1978, the nation has lifted over 500 million of its people out of poverty, creating one of the largest economic miracles in the world.
Noticing the success of China, other developing countries saw the need for trade liberalisation, hence its widespread adoption. Over time, the liberalisation of trade has assisted developing economies in their goals of achieving sustainable development, and increasing their overall economic performance.
However, in some cases trade liberalisation has not had the same effect it had in China. For instance, in most African economies, it has negatively affected local businesses. With reduced or zero tariffs, foreign producers – who usually get subsidies from their home governments – have been able to reduce commodity prices to attract more customers.
This, in turn, has forced local producers to compete with those lowered prices, which cause them losses; in extreme cases, they have lost markets altogether because consumers prefer cheaper imported goods to local commodities. An example would be the liberalization of the textile industry in Kenya, which led to flooding of the market with imports, leaving limited market for locally produced goods.
Trade liberalisation has also led to excessive dumping especially in Africa, where foreign companies send commodities from their home markets to foreign markets for sale at very low costs, sometimes even lower than their production cost. This has led to the proliferation of inferior and harmful commodities. An example is the dumping of counterfeit electronic goods, like mobile phones, in Kenya.
Liberalisation has the potential to ensure that the gains from trade going to African countries are twice the amount that they would receive as aid. Therefore, even though it might have several challenges in the short run, there is need to encourage liberalisation, to encourage positive outcomes, such as increased productivity, job creation and poverty reduction
Because of the increase in cheap imported goods, many local producers have had to lower wages or to close down their companies on account of unmanageable loses, the net result of which is a rise in unemployment. In a market with an excess of cheap labour, workers are left with the choice of either agreeing to minimum wage, or losing their jobs.
In addition, trade liberalization tends to encourage unfair distribution of gains of trade. This is because distribution depends on the development of the parties involved. In most cases, the developed countries end up with a bigger portion of the gains when compared to developing countries.
On the other side, liberalisation has also been a boost in some areas of the economy. The reason is that as trade increases – as a result of more commodities in the market – competition from abroad increases as well. This leads to low costs and an increased efficiency. In turn, it protects citizens from domestic monopolies that sell their products at high prices.
Liberalisation also ensures that countries, whether developed or developing, can benefit as a result of comparative advantage. This means that every individual country is able to create a specific product more efficiently than the other. Therefore, with no country able to produce all the goods and services cheaply than the others, every country has something the other wants. This allows countries to specialise in production, and gives them the ability to take advantage of the efficiencies gotten from economies of scale and increased output. This has helped several firms to increase their market to the international level thus resulting to lower average cost and increased productivity. For instance, comparative advantage helped Zimbabwe to specialise in tobacco and cotton production that saw it rise to global fame due to its quality products.
Even though in some areas it causes unemployment, it also creates employment in other areas, especially in the export industry. For example, it creates new jobs for unskilled workers. In doing so, it gives low-income earners the opportunity to rise to the middle class, which translates into raised living.
Liberalisation has also caused intra-regional trade to increase henceforth, causing member countries to benefit more than they would when undertaking specialisation. Intra-regional trade has enabled countries to benefit from larger markets, making them regionally competitive and preparing them for global competition. In Africa there used to be less focus on intra trading, as among all the other continents they traded least with each other. However, over the years this has changed; for example, the Common Market for Eastern and Southern Africa alone was able to increase its intra-African trade five times since 2000 while the East African Community trade has grown threefold.
Trade still has a lot of opportunities to offer Africa in terms of development and growth, and with countries liberating their markets, there is need to exploit every opportunity. Liberalisation has the potential to ensure that the gains from trade going to developing African countries are twice the amount that they would receive as aid. Therefore, even though it might have several challenges in the short run, there is need to encourage liberalisation in order to encourage positive outcomes, such as increased productivity, job creation and poverty reduction.