David Ricardo developed the basis for international trade as part of their efforts to
make a case for .... Pugel, T.A. & Lindert, P.H. (2000) International economics.
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Free Trade or Trade Liberalisation
Free trade or trade liberalisation is often defined as a situation without tariff barriers or with a reduction of tariff and non-tariff barriers imposed on the inflow and outflow of goods and services. The rationale of free trade stems from the 18th and 19th centuries when Adam Smith and then David Ricardo developed the basis for international trade as part of their efforts to make a case for free trade (Pugel and Lindert 2000: 32). Adam Smith argued that, “all commerce that is carried on betwixt any two countries must necessarily be advantageous to both”, and consequently, “all duties, customs, and excise [on imports] should be abolished, and free commerce and liberty of exchange should be allowed with all nations” (Smith 1978, as cited in Irwin 2005: 25). Although it sounds simple, employing such a definition for research remains challenging. Here the key question is how to operationalize trade liberalisation, and how such operationalization is feasible if research is to be conducted across countries or along time series. Many scholars have attempted to measure trade liberalisation. Some focused on efforts to liberalise trade, by looking at reduction or removal of tariffs (Green et al. 2001; Manasse and Turini 2001), or by investigating deregulation measures in general (Cragg and Epelbaum 1996). These measures have some limitations. First, focusing on tariff barriers will exclude non-tariff barriers. Hence, this approach may overlook protectionist attempts through non-tariff barriers. Second, “consistent data on tariffs are not available for many countries and for a sufficient number of years” (Spilimbergo et al.1999: 96). Third, the reduction or removal of tariffs is not necessarily followed by an increase in trade flow (exports and/or imports). Lee (2005: 2) argued that policy announcing reduction or removal of tariffs should be checked against actual performance and the possibility of instrument substitution. Hence, other authors emphasized the effects of trade liberalisation, such as changes in relative product price (Baldwin and Cain 1997; Beyer et al. 1999; Desjonqueres 1999; Hanson and Harrison 1999; Haskel and Slaughter 2001; Munshi 2008), the ratio of exports and imports to Gross Domestic Product (GDP), or the so-called trade-to-GDP ratio (Robbins and Gindlings 1999; Calderón and Chong 2001; Morone 2003; Mosley and Uno 2007). Studies that attempt to test the Heckscher-Ohlin and Stolper-Samuelson theorems 1 often focus on changes in relative product price as the measure of trade liberalisation because these theorems argue that trade liberalisation impacts factor prices by changing relative product price. Meanwhile, the advantage of the trade-to-GDP ratio is that it allows capturing a country’s participation in subcontracting components of global production networks (Mosley and Uno 2007: 929). However, it is argued that the increase in trade-to-GDP ratio cannot be automatically attributed to trade liberalisation because an increasing trade-to-GDP ratio can also be the result of higher growth
1
Advancing the comparative advantage theory introduced by David Ricardo, the Heckscher-Ohlin theorem proposes that different factor endowment is the reason for countries to trade. In this case, according to the theorem, a country shall trade goods that intensively use its abundant factor of production. Based on the Heckscher-Ohlin theorem, the Stolper-Samuelson theorem focuses on the effect of free trade on factors of production (Arbache 2004: F75). The theorem argues that an increase in the price of a certain good will also lead to an increase in the real payment of the factor most intensely used in the production of the good. For the North-South trade, the Heckscher-Ohlin and Stolper-Samuelson theorems predict that free trade will lead to decreasing wage inequality in the South, since the South specializes in labour-intensive industries, whereas the North concentrates on capital-intensive industries.
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achieved through successful development strategy or favourable external market conditions (Lee 2005: 3). Given the limitations of these measures for trade liberalisation, some studies strive to measure trade liberalisation by using certain indicators, ensuring that all relevant factors are taken into account. To exemplify, Sachs and Warner (1995, as cited in Lee 2005: 4) considered a country as open or closed based on the level of average tariff barriers, the coverage of non-tariff barriers, the presence or absence of a social economic system, the presence or absence of a state monopoly on major exports, and the level of black market premium. Spilimbergo et al. (1999) looked at indices of trade flows, price distortion, black market exchange rate, and measures of structureadjusted trade, as well as Lee’s (2005) safeguard measures that include geographic characteristics of a country.
References Arbache, J.S., Dickerson, A. & Green, F. (2004) Trade Liberalisation and wages in developing countries. The Economic Journal 114, F73-F96. Baldwin, R.E. & Cain, G.E. (1997) Shifts in US Relative Wages: the Role of Trade, Technology and Factor Endowments. NBER Working Paper No. 5934. Beyer, H., Rojas, P. & Vergara, R. (1999) Trade Liberalization and Wage Inequality. Journal of Development Economics 59, 103-123. Calderó́n, C. & Chong, A. (2001) External sector and income inequality in interdependent economies using a dynamic panel data approach. Economic Letters 71, 225-231. Cragg, M.I. & Epelbaum, M. (1996) Why has wage dispersion grown in Mexico? Is it the incidence of reforms or the growing demand for skills? Journal of Development Economics 51, 99-116. Desjonqueres, T., Machin, S. & Van Reenen, J. (1999) Another nail in the coffin? Or can the trade based explanation of changing skill structures be resurrected? Scandinavian Journal of Economics 101, 533-554. Green, F., Dickerson, A. & Arbache, J.S. (2001) A picture of wage inequality and the allocation of labor through a period of trade liberalization: the case of Brazil. World Development 29, 1923-1939. Hanson, G.H. & Harrison, A. (1999) Trade liberalization and wage inequality in Mexico. Industrial and Labor Relations Review 52, 271-288. Haskel, J. & Slaughter, M.J (2001) Trade, technology and U.K. wage inequality. The Economic Journal 111, 163-187. Irwin, D.A. (2005) Free trade under fire. New Jersey: Princeton University Press. Lee, E. (2005) Trade liberalization and employment. DESA Working Paper No. 5. Manasse, P. & Turrini, A. (2001) Trade, wages, and ‘superstars’. Journal of International Economics 54, 97-117.
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Morone, P. (2003) Globalisation and inequality: the effects of trade liberalisation on developing countries. Science and Technology Policy Research, Electronic Working Paper Series No. 42. Mosley, L. & Uno, S. (2007) Racing to the bottom or climbing to the top? Economic globalization and collective labor rights. Comparative Political Studies 40, 923-948. Munshi, F. (2008) Does openness reduce wage inequality in developing countries? A panel data analysis. http://gupea.ub.gu.se/bitstream/2077/2665/3/gunwpe0241corr.pdf (retrieved on June 16, 2011). Pugel, T.A. & Lindert, P.H. (2000) International economics. 11th Edition, London: McGraw-Hill. Robbins, D. & Gindling, T.H. (1999) Trade liberalization and the relative wages for more-skilled workers in Costa Rica. Review of Development Economics 3, 140-154. Spilimbergo, A., Londono, J.L, & Szé́kely, M. (1999) Income distribution, factor endowments and trade openness. Journal of Development Economics 59, 77-101.
