Trade Liberalization Case Study

i) Trade liberalization promotes free trade between countries by removing tariffs and non-tariff barrier on the exchange of goods. The reduction of tariff and non-tariff barriers includes tax charged on imported goods, licensing rules, quotas and other requirements (1). Trade liberalization benefits a nation by lowering price for the scarce resources which enables domestic firms to create more products and foster economic growth. The other advantage is that countries involved in free trade can specialize in production based on comparative advantage for goods. From academic research of rapid development in Asia around the 1990s; the reduction of trade barrier and growth showed positive relationship. In most of the countries that were involved

The farmers were the first to experience trade in open market; the successful trade of agricultural product and increasing trading volume led to privatization of other enterprises. In order to adapt to the market Chinese government has used overall approach for the transformation which includes: gradual changes, parallel pricing, and decentralization of administration. As a result, the number for exporting companies increased from 12 to 5075 from 1978 to 1988 promoting economic growth within the country. After decades of opening up to international trade in 1990s, Chinese government has decided to take part in trade liberalization and to compete against the world market (4). In 1994 China officially made agreement to lower tariff over 4,000 Item as part of commitment towards APEC trade liberalization, moreover in 1992 China and US has agreed to remove 90% of its non- trade barriers over time. These changes stimulated growth in export and import but were also involved in country’s economic development. The annual growth rate of China in 1985 to 1995, increased from 8.5% to 9.7% (5). The trade barriers remained very high until 1992 with nominal tariff rate of 43.2% but Chinese government had taken steps to decrease tariff rate to 16.5%, a decrease of 26.7% within the span of 7

(Koves and Marer, 1991). The introduction of incentives for exports brought China a step closer to trade liberalization as they reduced the biasness for exports. Chinese government effectively managed trade liberalization using 3 mechanisms in order to improve economic performances. Firstly shock effect; pushes most domestic firms to produce at highest potential efficiency under high competitive market. The increasing number of foreign investors in China will have negative impact on the economy without government’s intervention. Without government intervention infant industries will not benefit from low taxes and incentive for exports and will fail to compete in the free trade causing unemployment in the country. Secondly with resource allocation, Chinese government controls the resources based on comparative advantage helping domestic firms to specialize based on cheapest resource available. The availability of the resources increases the output of domestic firms; this will improves the balance of payment of a country because of the increase in value of export compared to the import. Lastly the dynamic mechanism states that growth can be sustained by introduction of new technologies, foreign investments and from imports. The increasing number of foreign direct investment has benefited China in