Trade Liberalization Literature Review

2. Literature review

2.1 What is Trade Liberalization?

Participating in free trade is known to bring several benefits to participants involved. Some benefits include specialization, reduced prices, increased competition, and economies of scale. However, as the economic, social, political situation of nations differ, they set up artificial barriers on trade to protect their own interest. These measurements include tariff barriers, import quotas or non-tariff barriers such as TBT (Technical Barriers to Trade) and SPS (Sanitary Barriers and Phytosanitary Measures.

However, trade barriers are known to bring losses to consumer surplus as the trading market is artificially interrupted by government policies. Although keeping a high trade barrier

Hong et. al (2008) Added that by entering into trade liberalization agreements, exporting industries could increase their marketing expenditure to the exporting country as they had lower tax rates to pay. Fosu (1990) found that trade agreements enabled the home country to concentrate investment on the sectors that had a higher competitive advantage.

Trade liberalization has is known to bring benefits to the financial sector as well. By increasing exports, a nation is able to accumulate additional foreign exchange (Kemal et al 2002), promote additional saving and investment (Todaro, 2000) which may lead to an additional growth of exports thus creating a virtuous cycle. (Bhagwati (1988), Thirlwall (2003))

Several studies have been conducted to define the effects of the FTA to the competitiveness change of Korean industries. Hong et. al (2008) Found that FTA had positive effects to SME as more investments were made by foreign investors. (Lee (2007), Kim et. al (2011)) Observed that the FTA with South East Asian countries reduced the manufacturing costs Korean firms and increased productivity. (Kim, Sung 2011) Examined the effects of the FTA to exporting industries of Korea between the years 2001 to 2009 and found positive competitiveness increase in most of the exporting

Foster et al (2006) suggested the possibility of self-destruction for firms with less competitiveness in less developed countries as they may not be ready to compete with firms from developed countries. Dodaro (1993) added that focusing too much on export growth may be held under the cost domestic output growth and consumption.

Kim and Lee (2015) identified that increased inflow of trade and influence from foreign countries depressed the overall employment of Korea by reducing the average salary of low-skilled workers and increased the ratio of part-time contract workers.

Through a case study of Korea and India, Sarkar and Brototi (2005) concluded that there was no significant relationship between trade openness and the growth of real GDP and per capita GDP. Lastly, John Komlos (2015) stated that although free trade is supposed to bring benefits to both nations involved, it may not function properly when one side of the government intervene too much and alters the market conditions.

2.3