The benefits of removing trade protection

Trade liberalisation can increase exports, strengthen economies and bring in new technologies that will allow entrepreneurs to compete with the world's most efficient suppliers, says Foreign Policy's Arvind Panagariya.

The development paths chosen by South Korea and India are good examples of the effects of trade liberalisation, he says.

South Korea decided to switch to an export-oriented strategy and proceeded to dismantle trade restrictions across the board; the results were quick:

Between 1961 and 1980, Seoul produced impressive annual growth rates of 23.7 per cent in exports, 18 per cent in imports and 6.3 per cent in per capita income.

The country's exports as a proportion of gross domestic product (GDP) jumped from 5.3 to 33.1 per cent during the same period.

However, India toyed with liberalisation in the 1960s but never got serious about encouraging its exporters or eliminating restrictions on imports:

The government kept an array of domestic industries on life support, without regard to their inefficiency or comparative advantage and the repressive trade regime caused the GDP to fall from 7 per cent (1958) to 3 per cent (1976).

Despite stable politics and a highly capable bureaucracy, per capita GDP grew slowly between 1961 and 1980, at only 1.1 per cent.

Protectionists still contend that certain industries should be protected, specifically agriculture. But even though rich countries subsidise their agriculture, poor countries will still suffer from trade barriers, says Panagariya.

Poor countries face a choice: either wait in vain for rich countries to unilaterally drop their trade barriers, take the time to negotiate mutual concessions or liberalise their own markets, says Panagariya.

Source: Arvind Panagariya, The Protection Racket, Foreign Policy, September/October 2005.

For more on Trade: http://www.ncpa.org/pd/trade/trade.html

FMF Policy Bulletin/ 04 October 2005