Liberalization of Foreign Trade

Foreign trade liberalization simply means the relaxation provided by the government in foreign trade laws and policies. These relaxations mainly include a reduction in taxes on foreign exchange, framing policies promoting foreign trade, etc. It motivates an individual to expand his/her business and take it to a global market. It has been observed that the GDP of nations with liberal policies on foreign trade is likely to grow faster than others.

Foreign trade liberalization simplifies the complex process of foreign trade, reduces import duties on the goods, and modifies foreign trade law for hassle-free trading overseas. Taxes play a crucial role in foreign trade as the trader needs to pay both local and international taxes, which results in increased prices of the goods. A country with minimum or fewer taxes on foreign trade is likely to grow at a higher pace than the others. For example, Dubai is the only tax-free country in the world and its GDP has increased by over 9.88% in the last 10 years.

With the amendment of GATT (Global agreement on tariffs and trade) global trade observed growth of 6 per cent per year. With the joint efforts of many countries, today foreign trade has achieved new heights and many nations have profited from it. But also there is a downside of foreign trade liberalization i.e. the small business owners become helpless to compete with the major players in the market.

Due to foreign trade liberalization and reform and in economic policies India observed a significant growth in its GDP in the mid-’90s. During this period i.e. 1993-1996 the annual growth of India was around 7 percent.

What is Foreign Trade Liberalization?

The ease of doing business overseas without much government restrictions is referred to as foreign trade liberalization. Many economists believe that a seller gets a good price for his/her product only when there are more buyers in the market. Foreign trade liberalization expands the market for a seller and helps him get a fair price. In addition to this, it generates plenty of employment opportunities, as you need a team of skilled people to handle foreign trade. Liberalization in foreign trade policies mutually benefits both traders as well as the customer as it provides a decent profit to traders and a better rate to customers. 

You need to pay multiple taxes in foreign trading like import duty, export duty, local taxes, and additional taxes for some specific goods. All these taxes are included in the MRP of the product when it’s been sold in the market, thus resulting in inflation. 

By 2014, with the help of Foreign trade liberalization, China spread its feet in the smartphone market all over the world and became the largest manufacturer and exporter of smartphones in the world.

Major Obstacles in Foreign Trade Liberalization

There are many obstacles in foreign trade liberalization and some of them are mentioned below.

• Laws and policies

The laws and economic policies of a country play a major role in foreign trade and its liberalization. For a consistent growth of a nation, it is necessary to frame foreign trade policies in such a way that it brings in more FDI (Foreign Direct Investment) but should not exploit local traders of the country. 

• Resources

Taking a business overseas is not an easy task as it requires plenty of resources like the internet, land, and financial support. Thus the foreign trade policies of a country should provide these basic resources to its citizen. Many developed countries are now investing a decent amount of money in local start-ups, and artificial intelligence, so that people can take their businesses online and attract customers from different regions of the world.

• Internal relations of different countries

It is often seen that many countries stop the exchange of goods due to some internal disputes between the two nations. This kind of closure of trade between two nations usually results in price hikes, and may sometimes also leads to war. Thus liberalization of trade is quite necessary for the smooth functioning of nations.

Advantages and Disadvantages of Foreign Trade Liberalization:

Advantages

1. Relaxation in foreign trade taxes results in a significant price drop of consumer goods. Foreign trade liberalization is quite helpful for the nations that import food items from other countries.
2. The liberalization of foreign trade increases the competition in the market and provides consumers with the best quality goods as every seller tries to provide the best quality to compete with other sellers in the market.
3. If a country wants to attract more FDI (Foreign Direct Investment) then foreign trade liberalization is the primary step in this process.
4. Foreign trade liberalization helps a nation to escalate its economy by focusing on the major goods that play an important role in the global market.

Disadvantages

1. Foreign trade liberalization sometimes results in the exploitation of local products of the country by foreign brands.
2. Liberalization in foreign trade policies sometimes results in creating an imbalance in a country’s economy as some sectors begin to grow and some start falling.
3. Foreign trade liberalization may result harmful for the environment as industries start dumping chemicals into the natural resources and thus polluting environments.
4. In many cases, it has been observed that child labour is employed to meet the demand in industry and thus it’s a major drawback on foreign trade liberalization.

It can be concluded from the above points that foreign trade liberalization can help a nation grow its economy at a rapid pace. But also government should take care that these liberalization policies don’t harm citizens’ rights. Often it is observed that foreign trade becomes a medium of entry of illegal substances in the country. Thus it’s important to make some strong norms in foreign policies to keep track of these illegal activities and take necessary action against the culprits.