Sunday, October 12, 2014

Free Trade 39: Advantages of Unilateral Trade Liberalization

Free trade is part of human nature. People may oppose it philosophically but consciously or unconsciously, they are engaged in it. Even militant protectionism crusaders are still humans, they need to eat, and they want free choice where to eat.  Do not go to restaurants that are too expensive for their budget, never go back to a resto which may be cheap but the service is too annoying. They want to be served well given their budget, or they may endure bad service in exchange for really cheap food. That is the beauty of voluntary exchange, no one is forced and coerced to give his/her money to people who do not provide their specific needs. That is the beauty of free trade.

Thus, even the most authoritarian governments recognize the value of free trade. But because they are authoritarians, or semi-authoritarian protectionists, they want to limit and restrict trade because they are protecting certain sectors, like the business interests of their friends, families and campaign financiers, or a considerable block of voters.Thus, multilateral trade negotiations towards free trade has become too bureaucratic and time consuming. 

Some countries and economies have taken the unilateral trade liberalization route -- Hong Kong, Singapore, Dubai, Chile, among others. And have good results. Chart below shows that as of 2001, average tariff in S. America was around 12 percent vs around 4 percent in East Asia, zero already in Singapore. East Asians are more receptive to unilateral trade liberalization than their counterparts in S. America or Africa.

Applied Most Favoured Nation (MFN) Tariff Liberalization in Latin America and East Asia.

source: Richard Baldwin, 'Unilateral Trade Liberalization", Center for Trade and Economic Integration, CTEI 2011-04,

When it comes to agricultural products though, economies in general are more protectionist even if they may be relatively free traders in non-agri products. Stark cases are Korea, Turkey, Egypt and Thailand.

The exceptions to this agricultural protectionism are the unilateral Asian free traders HK and Singapore, and some countries in S. America, Argentina and Brazil. Data also from R. Baldwin.

In this working paper at the WB, Nogues argued that "Developing countries would gain far more from unilateral than multilateral trade liberalization negotiations over many years." 

(Julio Nogues, 1989. "The Choice Between Unilateral and Multilateral Trade Liberalization Strategies", 24 pages),

Chile experience is fantastic, from 220 percent tariff in 1973 to only 11 percent in 1991 (only 18 years after.) 

Source: Sebastian Edwards and Daniel Lederman, 1998. "The Political Economy of Unilateral Trade Liberalization: The Case of Chile", NBER working paper,

A Cato paper, A Cautionary Tale on Negotiated vs. Unilateral TradeLiberalization (November 21, 2012), author Sallie James wrote,

But since the theory has pretty-much consistently shown a hierarchy of mechanisms for increasing commerce across borders: unilateral trade liberalization is best, followed by multilateral trade liberalization (although the current WTO round of trade negotiations is dead), and then regional or bilateral agreements.
Two groups of people dislike unilateral trade liberalization. The first is the group of some local business (like cronies) and political  interests (trade unions, big farmer organizations). The second is the group of government trade negotiators and consultants (including academics), they do not want to lose their perks of frequent global junkets flying to many countries and flashing or exotic cities doing all sorts of trade bargaining that last for many decades. Consultants get huge amount of money justifying restrictions to trade, explicit or implicit; economic or social or environmental.

Ordinary consumers and independent researchers, them who are not corrupted by government and foreign aid money and consulting, should push the logic of unilateral trade liberalization. Ordinary consumers benefit from more choices, more options, where to buy and whom to sell.

See also:
Free Trade 35: EU-FNF Forum on 'FDI Engine for Job Growth', May 15, 2014

Free Trade 36: Taxation, Regulations, Trade and Rule of Law in ASEAN, August 05, 2014

Free Trade 37: Multiple Concerns and Regulations in the ASEAN, September 11, 2014

Free Trade 38: Liberalize Rice Imports and Demonopolize NFA, September 28, 2014

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