Effect of Trade Liberalisation on Poverty in the US - Example

Discuss the impacts of trade liberalization on poverty in a country of your choice Introduction The practice of eliminating or reducing the limitations or the barriers to the transactions of goods and services between one nation and the other is known as liberalisation of trade. It involves removing or reducing both importation and exportation barriers that hinder the free flow of goods and services between nations (Harrison 2007). A similar limitation is the policy of licencing of the goods that enter or leave a country. It can also appear similar to the eradication of the trading practices that put a stop to the movement of products and services freely from one nation to another. Poverty is the state of people lacking or having inadequate resources to satisfy the daily requirements or the essential needs. Through the liberalisation of trade, a country can attain self-sufficiency in sustaining its needs as well as achieving the economic growth (Cook & Cylke & Larson 2010). Trade liberalisation may have both positive and negative impacts on an individual country. The positive effects are of advantages in poverty in that they aim at reducing the level of poverty. The adverse effects are of the disadvantages of the poverty status of the state in that they do not lessen the standard of poverty but may increase it even to great heights. Effect of trade liberalisation on poverty in the US Trade liberalisation has got significant impacts in the US on poverty eradication and attainment of economic growth of that country. Positive impacts Growth and industrial advancement It is evident in the argument by Justin and Chang that there are an improvement and expansion of industries due to buying and selling liberalisation. A person cannot think of growth alone without thinking of the continuous development of the industries and the technology that are the primary characteristics of continuous economic growth. Undeveloped countries should be at a point of taking advantage of their lagging behind and import the modern technology that has already developed elsewhere. Many countries have been able to do this successfully well and aided in the poverty reduction by adoption of the above technique (Bouet 2008). In this essence, the industrial policy of the developing countries should conform to the comparative advantage and not defying it as it plays a great role in the poverty eradication due to trade liberalisation Assisting the private sector to exploit comparative advantage Facilitating States plays the role of encouraging the emergence of the firms sectors and industries that upon their launching, makes efficient use of the current comparative advantage of the country. It means making a focus on the type of production acts such as labour and resource intensive and services. Making use of the work and resource intensive mode of production enables the poor country’s firms to stand a competitive advantage both in international and domestic markets. The facilitating states grant the required coordination and help to overcome the boundaries of the emergence of these firms and related industries which enables them to grow and advance due to the comparative advantage (Lin & Chang 2009). As these companies grow and expand, they claim a higher value of the shares in the market earning the highest achievable surplus to the economy in terms of profits and salaries. Reinvesting the surplus enables acquisition of the greatest possible returns to the economy of the country. It in turn aids in the eradication of the poverty that occur as a result of liberalisation of the trade (Salinas 2006). In the long run, the developing country industrial policy should conform to the comparative advantage. Creation of comparative and competitive advantage Although it may seem to be not well fashioned, placing the domestic firms at a point to exploit innovative benefit of the country sounds sensible. Comparative advantage promotes competitive edge in that there are four key sources of competitive advantage. It has lead to firms that make use of internally plentiful of possessions, large domestic markets and industrial clusters as well as high internal competition. If a country defines the comparative advantage, it may not be able to foster competition. If one follows the relative benefit of a state, there will be no need for large domestic markets because the firms and the industries stand a chance to compete globally (Stiglitz & Charlton 2005). Liberalisation of the trade enhances entrance to the global markets, which in turn attracts significant income to the country and allow for poverty reduction. The developing country’s industrial policy should thus be not defined. Opening up to world markets It provides tremendous advantages. It includes enhancing access to the technologies that promote growth. It facilitates the provision of exposure to the larger markets for the goods produced by the country more efficiently. In addition, there is creation of fewer prices for the consumable goods that are produced by the other country. Most of the exports from the trading countries are majorly the staple foods that the poor people depend on for their survival. Through the trade liberalisation, there erupts the international exchange of goods and services (Krajewski 2003). It promotes investment that aid in raising the production of the workers of that particular country, which plays the key role of earning higher incomes and promoting economic growth. A latest study carried out in the US has shown that a more free trade promotes economic growth that is the chief basis of decreasing the level of poverty. It is, therefore, acceptable that fair trade for all can promote the development to a large extent. Increase Exporting and importing promoting economic growth Trade barriers counter the production and backfire the consumers and the firms they are supposed to protect. Reduction or elimination of these trade barriers improves the exporting and the importing activities of an economy. The growth of exporting and importing activities has a relationship to economic growth. An economy that has opened up its trade experiences better performance and more economic growth than those that appear closed, Greenaway and Saps Ford (1994) And Greenaway et al. (1997). Exports earn an economy significant income for the economic development and the reduction of the poverty levels in that economy. Importing allows an economy to acquire the required materials for both development and internal consumption. An economy benefits most by trade liberalisation by having low levels of business taxes, higher levels of working capital and having the highest level of imports. Opening up an economy for the trading activities allows the county to enjoy multifaceted advantages. Imports and the human capital have a positive correlation with the gross domestic product per capital which is an essential tool for the development of an economy. In this sense, free trade for all promotes economic development of the country. Restoring balance to the trading relationships between the trading parties. Although a country like the US may seem to be self-sustaining, it usually needs the support of other countries even the poorest so as to attain economic sufficiency. Through opening up of the trade, the country can achieve some relief from the minor countries. In return, the fewer developed countries get some benefits in terms of financial and technological support. It enables balancing of the economic status of the interacting parties. Coming together of these trading partners may also aid in solving some of the trade issues that may affect the individual state. In this sense, free trade for all promotes the development of a country. Trade flows and balance of payments Another impact is on the facilitation of free flow of goods and services among the trading partners. It has useful implications of allowing the developing nations to expand rapidly without experiencing undesirable problems in the stability of payment. Fair trade for all enhances development. International acknowledgement to promote economic growth Liberalisation of trade helps the country to exploit their relative benefit in the production of regionally precise produce and take the advantage of larger markets for the products that have less local demand (Mcculloh, Cirera & Winters 2001). Liberalisation may also allow for the development of the economies of scale, increasing the effectiveness and lowering the cost incurred for the production. The capital of production is reduced due to natural acquisition of the materials for the production. Economies of scale result from the country producing a lot of products to generate profit. A country also remains competitive as it engages in both multiparty and mutual trade hence gaining a larger and the same access to more important trading partners like their competitors at the local level. Bilateral trade agreements also ensure the country has got unique contact to particular business partners in an exchange for bigger liberalisation of import tax and export tax trade barriers. It facilitates adherence to more strict rules than those found in the international trade structure that is fashioned by the organisations of the world trade. Being at a point to adhere to more strict regulations than those found in the world trade body leads to standing a far much better chance to engage in the trading affairs. Taking part in both multilateral and bilateral plays a greater role in the reduction of the poverty levels. More income is also generated which facilitates the economic growth and development. Creation of more jobs opportunities Trade liberalisation acts as a means of production more jobs. It is as a result of opening up of free trading which enables many people to be involved in the trading affairs. It is estimated that if the trade barriers are reduced by 50%, there is a general increase in the level of jobs of the lowly skilled workforce. The level may increase from 0.3% to 3.3% and from 0.9% to 3.9% for the highly skilled work personnel in an economy of the Britain. This level is, however, dependent on the country. Fair trade for all thus plays a critical role in the promotion of the development of an economy. Open trade in combination with a properly designed way of employment can help in the creation of more jobs. Reduced biasness for both the imports and exports Due to the high competition for the trading activities, the right quality and quantity of both the exports and imports is maintained. An example is the import of the quality personnel for offering the services to the importing country (Gurgel, Harrison, Rutherford & International Bank for Reconstruction and Development 2003). The skilled staffs play a great role in the economic development of the country. Quality imported goods for consumption also reduces the poverty level of the consumers. Increased exports Liberalisation of the trade reduces the level of trade barriers. It has been observed that it the trade barriers are cut in half, and the level of exports is boosted significantly. By reducing the trade barriers by half, there is an increase in the level of exports by 20% and more than 10% in the Eurozone. Increased real wages Apart from increasing the level of jobs, the wages paid to the workers is also increased depending on the skills of the workers. Variations in the rate of increase in the real wages from 1.8% to 8% in the lower skilled workers and from 0.8% to 8.1% of the highly skilled workforce is a major concern. Negative impacts The state is viewed as a midwife, not as permanent nursemaid. This argument is perceived as defying to the comparative advantage. It calls for high cost in both the quality of power and the financial status. This strategy requires the government to provide substantial subsidies and protection to the firms that may not be variable without the government protection and cannot compete globally quickly. Such companies do not contribute to the capital generation of the country. Without the continued flow of the surplus, the government finds it difficult to aid improvements in the factors of production. The economy also changed from competitive to non-competitive. The accumulation of both physical and human capital is slowed down. Many firms also divert their potential from carrying out entrepreneurial activities for production to seeking of rent. The issue makes many institutions be corrupt and lowers the accumulation of capital. In this essence, the country development policy needs to be defined. Represents a pro-poor growth policy Buying and selling reforms alone cannot play the task of decreasing poverty. The reason is that the country has to develop some corresponding ways so as to reinforce the role of the trade towards growth (Reimer 2002). It helps in enabling the people take complete benefit of the opportunities that the growth creates. Such complementary measures include helping the country improve the system of education and health, lessening of barriers to the establishment of new and improved jobs and investing in rural technology and the rural transport system. It makes trade liberalisation a poor strategy for poverty elimination. Opens up for competitions Through opening up of the liberalising nation, the countries become global, and the level of poverty increases as a result of globalisation. Elimination of trade barriers increases the level of commerce hence creating up the room for competition in the trading activities (Wu, Zeng & International Monetary Fund 2008). Continuous scarcity and development dissimilarity is the main characteristics of globalisation. As globalisation increases, the level of poverty is lifted up to a greater extent as the poor people will not be exposed to the global economy due to various limitations. Globalisation, poverty and growth inequality provides an argument that poverty is related to the above factors. The working of the global system condemns many to poverty. The movement of the investing activities and the increased numbers of skilled workers are decreasing the level of world wages posing a challenge to the policy makers in the firms of the country. Free trade is not the solution to the economic development There existed strong and long belief that there is a great association between economic growth and free trade. The recent work by some scholars has however questioned this view opening up the debate on the same, Rodriguez and Rodrik (1999). One of the aspects examined is about the effects to which the sincerity is conditional on the factors omitted from the central part of the relationship. The other aspect is on the meaning and how the openness can be measured (Deranyiagala & Fine 2006). The heterogeneity in the relationship between the economic growth and free trade among the liberalising countries is a major consideration. Its outcome shows that there is an active but subtle impact of trade liberalisation on economic growth. Creation of problems Although the export growth and economic growth have a positive correlation, there are some problems that arise from the same. Such problems include the measurement of the variables and the techniques to apply in the estimation of the economic growth of such an economy (Tardanico 2013). An example of such an element is the evaluation of the extent to which a country must trade before it can attain the benefit from the suggested mode of trading. Estimation, this degree in a country, can lead to some problems for the researchers as there can be the possibility that certain groups of countries are using the similar technology in the estimation. It is also argued that distance summa gives rise to the effect of the transfer of international technology through channels like the international trade. Variations in the sector development and growth Although some income may be earned as a result of the trade liberalisation, the wealth may not be equally distributed across all the sectors of an economy that leads to unequal development. Some of the areas will experience full development while other face underdevelopment or delayed development (Cline 2004). Rural areas, where the liberalisation will be more prominent, will experience slower decline in poverty reduction and little growth of consumption. The effect of deregulation is more pronounced in the least developed areas leading to the utilisation of the resources availability. The distribution of the income generated is done at the top level of the country and barely reaches the fewer developed areas. More propensities to import than export At times, a country may need to introduce more than exporting. An example is a developing state that tends to hire more technology from a developed country and skilled personnel. Such an act worsens the growth rate consistent with the sense of balance of payment (Kaplinsky 2005). More imports also lead to the draining of the capital of the importing country that is spent on the acquisition of the imported goods or the technology. Free trade is therefore not the solution for economic development and poverty reduction in such a case since it involves giving spending in order to acquire. Conclusion Liberalising trade has both positive impacts and negative impacts on the poverty of an economy. However, there are more benefits that are enjoyed upon the opening up of the trade by the country as compared to the disadvantaged. The best of all is aiding the economic development of such a country and the reduction in the level of the poverty of the state. In conjunction with the emerging issue of globalisation of the world, a country like the US needs to liberalise its trade as there are more merits of doing so as compared to the demerits. 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