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Does a decision to liberalize trade raise or lower national economic welfare?

1. Introduction
The global economy has grown rapidly in recent decades. The even quicker increase in global
trade has contributed to this expansion. Trade has increased as a result of both technology
advancements and deliberate initiatives to lower trade obstacles. Many emerging nations haven't
yet opened their economies to fully capitalize on the chances for economic growth through trade,
but some have. Trade restrictions that still exist in industrialized nations are mostly focused on
agricultural products and labor-intensive manufacturing; two industries where emerging nations
have a comparative advantage. Increased trade liberalization in these sectors would benefit both
industrialized and developing nations, helping the world's poorest people overcome the worst
forms of poverty (IMF).

The elimination of tariff and non-tariff trade restrictions is referred to as trade liberalization. This
has major distributional and macroeconomic repercussions. Duty and tax barriers are examples
of tariff barriers, much as licensing guidelines, quotas, and other regulations are examples of
non-tariff obstacles. Free trade is the ultimate goal of trade liberalization. In general, trade
liberalization has been seen as a socially desirable activity because it increases production
efficiency, which lowers costs and benefits consumers. Trade liberalizations and globalization
open up options for poor nations to export food goods in order to raise their foreign earned
income, which is vital but indirect (Acharya, 2015). Adoption and implementation of globally
harmonized standards would make it easier for these nations to gain access to more profitable
markets, which would in turn promote economic growth and enhance population welfare (Sedjo,
2004). In the case of developing countries, the process has been new, especially, started by most
countries from 1980s onwards. The liberalization and improved integration of the world has
provided a unique opportunity. The free trade advocates believe that trade openness can
positively impact the economy and trade of the developing countries. The debate of
interrelationship between trade and growth has remained at the front of every new step towards
integration.

The amount of goods and services that are "consumed" by households is the best indicator of
national welfare. The typical citizen's ability to live comfortably is ultimately what matters, and
this standard of living is influenced by a country's consumption levels rather than its production
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levels. The two primary ways that international trade may have an impact on a household's
welfare are through consumption and income. The first channel has an effect on household
spending because commerce has an impact on the prices of consumption items, which changes
the total cost of consumption for households. The second channel operates through the impact on
earnings, as global commerce may have an impact on workers' wage incomes depending on their
industry affiliation or degree of expertise. The gains via this route may be significant, and
households may experience overall welfare improvements even in the context of wage losses, if
consumer prices decrease in a way that favors consumers (Marchand). Those who support free
trade claim that it is a growth-inducing force. Additionally, free trade is thought to increase
economic efficiency, reduce consumer-beneficial market prices, and uncover sections of an
economy that have comparative advantages. For sustainable economic growth, policies that open
up an economy to trade and investment with the rest of the globe are required. Increasing
competition brought on by trade liberalization will probably cause domestic businesses to cut
their pricing.

A number of trade agreements have been made over the past few decades to streamline the
international trading system with the overarching goal of liberalizing trade, such as through
lowering tariffs and other limitations. Even though the goal of a trade agreement is to liberalize
trade, domestic and international political realities have a significant impact on the actual
provisions. The world has changed significantly since David Ricardo first proposed the law of
comparative advantage, and economists have recently updated their theories to take into account
trade in production factors like capital and labor, the expansion of supply chains that now
account for a large portion of global trade, and the success of neo mercantilist nations in
achieving rapid growth (Krist). The world trading system has profited from eight rounds of
multilateral trade liberalization since 1947, when the General Agreement on Tariffs and Trade
(GATT) was established, as well as from unilateral and regional liberalization. In fact, the World
Trade Organization was founded as a result of the final of these eight rounds the so-called
"Uruguay Round," which was finished in 1994 to help manage the expanding number of
multilateral trade agreements (IMF). Trade liberalization has been consistently promoted under
the GATT/WTO framework.
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2. Analysis

Although it is generally agreed among economists that trade liberalization increases the overall
welfare of an economy, it is also acknowledged that various agents may be affected differently.
For instance, free commerce may favor some agents more than others, or even more
dramatically, it may favor some individuals while harming others.

Assessing the affect of international trade on household welfare, Marchand studied how trade
policies impact domestic prices further impacting income wages and consumption which
ultimately impacts welfare. The author looked into the results of Thailand's removal of a rice
export tax. He took into account households that are both consumers and workers, both
producers and non-producers. In order to identify and quantify the many sources of welfare
impacts among homes, the author could analyze each of the components in the concept of
household welfare separately by dividing them into production and consumption. Overall, the
findings demonstrated that producers at all income levels gained welfare, although households in
the center of the income distribution benefited the most. Although producer households gained
more, the average effect at the high end was lower because fewer households at the top of the
income distribution were producers. Drnbush (1992) analyzed the impact of trade liberalization
on developing countries with emphasis on Turkey, Korea and Mexico. In order to set the setting
for a consideration of the potential benefits from liberalization, this study then analyses the
present protection position in developing nations. Then, after briefly describing three
liberalization experiences, the possibility of failure is discussed. The paper's conclusion discusses
two current trends in liberalization—the liberalization of trade in services and regional free trade
zones.

In his book, Ingco (1997) evaluated whether agricultural trade liberalization improved welfare in
least developing countries. The way trade is structured, and domestic economic distortions have
a big impact on welfare changes. Even if rising global prices damage many economies, trade
losses are negligible in comparison to overall GDP. The anticipated welfare changes accounts for
less than 1% of GDP in most countries. An applied general equilibrium model with nine
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agricultural sectors, one non-tradeable non-agricultural sector, one tradeable non-agricultural

sector, and five rural and five urban expenditure classes has been used to analyze the effects of
trade liberalization for India in a paper by Parikh (1997). The findings also indicate that, while
both initiatives aid in accelerating growth, nonagricultural trade liberalization is considerably
more crucial for agriculture than agricultural trade liberalization.

Kim (2014) used a dynamic general equilibrium model of a small open economy to examine the
welfare effects of fiscal and trade reform initiatives in emerging nations. His multi-sector model,
along with a wide range of tariffs and taxes, offers a testbed for analysing how trade
liberalization and fiscal reform initiatives interact to affect the key macroeconomic variables and
overall welfare. He also examines how the welfare implications of these programs depend on the
extent of access to global financial markets. The findings imply that reform and liberalization
initiatives can result in significant increases in welfare. These gains typically grow if higher
taxes on consumption rather than capital income are levied to make up for lost tariff revenue. A
significant implication of this conclusion is that, whereas financing through consumption taxes is
the best fiscal choice, financing through capital income taxes is the least favored fiscal tool to
replace lost tariff revenues. Programs for trade liberalization that remove tariffs on imported
inputs to production frequently result in greater welfare gains.

In his study, Behrens (2007) described the main benefit of international trade being that when
prices are high enough, lower intranational transport costs encourage regional dispersion,
whereas higher intranational transport costs promote regional convergence. This clearly
demonstrates that international and interregional integration play significant yet unique roles in
explaining the evolution of geography and wellbeing within each country when production
factors are mobile to varying degrees at various spatial scales of inquiry.
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3. Conclusion and Policy Recommendations

Governments can identify people and groups who could struggle with the adjustment process,
and they can also create regulations to lessen the load placed on those who are negatively
impacted. Slowly implementing trade changes could minimize political resistance to change, but
it's important to keep in mind that doing so runs the danger of undermining the reforms.
Expansion of a country's export industry is frequently necessary for good adjustment to trade
liberalization, and this may be a justification for pro-export policies. If trade policy reforms are
supported by international commitments, adjustment costs can be decreased. It has been widely
argued that developing countries cannot compete against foreign firms therefore infant industries
must be protected however in my opinion infant industry protection may fail as there may be a
lack of domestic demand, improper financial allocation, and ineffective research and
development.

Pakistan joined WTO, and the commitment to liberalize and integrate the trade increased and so
remained an important policy matter in the trade policies followed by the country in the next
decades. Pakistan granted MFN status to all countries except India, under which equal MFN
tariff applies on every country and had been reciprocated by other countries. The Federal
Government may easily implement macroeconomic policy reforms such trade liberalization,
financial sector reform, currency rate policy, and taxation reforms in Pakistan, a Federation of
four provinces where one province has an absolute majority of the population. But if state
institutions are involved in providing public goods and services, the second wave of reforms
cannot be successful unless the province and local governments work in concert with the federal
government. There are numerous occasions where the federal government has promoted
investment in social or infrastructural sectors in the nation's underdeveloped regions, but lack of
collaboration by local government officials has prevented such investment from taking place.
Law and order, security of goods and people, contract enforcement, labour law enforcement,
land allocation, etc. are all essential for an investor to run a profitable firm. However, the
Provincial and Local governments are responsible for carrying out all of these duties, and the
Federal Government is limited to issuing guidelines.
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