The Impact of Trade Liberalization on International Trading Activity : an evaluation of legal and regulatory measures regulating international trade

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The Impact of Trade Liberalization on International Trading
Activity : an evaluation of legal and regulatory measures
regulating international trade
K.M. Hasitha Kalhari
LLB (Hons) (London), ICCS (SL), Attorney-at-Law
ABSTRACT :
The continued process of globalization which has arisen due to integration of
the world’s economies and societies has resulted in widespread movement of
goods, services, money, labour including ideas across political frontiers which
has brought about the concept of intentional trade. Although it makes a
tremendous impact on the world’s economies, international trade that lacks
liberalization due to different forms of barriers imposed by the governments is
virtually futile. Therefore, the nations are very much keen on possible
elimination of such trade barriers. As the international trade expands over time,
the nature of the trade agreements between the nations and their implementation
become complicated which necessitates proper regulation of international trade.
Multiple measures that have been employed over the years to regulate
international trade were seen since 1940s. This article analyses the reasons for
trade liberalization and evaluates multiple legal and regulatory measures that
have evolved over the years to regulate international trade.
KEY WORDS :
Globalization, trade liberalization, international trade, trade barriers, trade
protectionism

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1. Introduction
The phenomenon of globalization has led the world to a state where it is no
longer possible for the nations to survive in isolation. As such, being self-
sufficient for any nation in a modern era is nearly unattainable.
Globalization typically refers to the process by which different economies and
societies become more closely integrated.1
In such a process, economies remain
more and more interdependent leaving the nations with no other choice but to
depend by and large on the products and services supplied by another to satisfy
its own needs. In other words, owing to the fact that no country possesses all
the material or labour that it requires to fulfil its needs in entirety, the exchange
of its surplus with another country to satisfy its scarcity is commonplace.
An essential attribute that could be encountered within the phenomenon of
globalization is mobility. This crucial feature facilitates widespread movement
of goods, services, money, labour including ideas across political frontiers. This
whole process brings about the concept of international trade which, at present,
has made a tremendous impact on the world’s economies.
Even though it had not been addressed as ‘International Trade’ per se, this
concept has been in existence for centuries as it had been seen in our ancient
civilizations engaging in trade with other parts of the world, starting off with a
barter system. It is a system in which people exchanged goods and services for
other goods and services, which is a simpler transaction. With the evolution of
the societies, this system further developed progressively in line with growing
human needs in various economies.
1
For a comprehensive discussion on Globalization, see Andreas Bergh and Therese Nilsson,
‘Good for Living? On the Relationship between Globalization and Life Expectancy’ (2010) 38
‘World Development’ 1191.

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For many years, international trade has been a popular interest among many
intellectual traditions. As a result, we come across several theories that have
emerged from critical thinking of such schools of thought in the sphere of
international trade namely mercantilism, absolute advantage, comparative
advantage and the theory of production factors proportions.
In addition to the reason of interdependence, the nations may choose to engage
in international trade due to other reasons as well. For instance, a nation will
specialize in the goods for which they have a relatively lower opportunity cost
as suggested by the Theory of Comparative Advantage. Economies of scale
permits cost advantage to the nations when they increase their level of output.
2. Trade Liberalization
The preceding section attempted to shed light on the concept of international
trade and its significance. However, international trade, lacking liberalization is
to little purpose or virtually futile. In general, trade liberalization refers to the
removal or reduction of barriers to trade between the nations and to encourage
free movement of goods and services. These barriers imposed by the
governments have been designed to levy additional costs or to restrict the
amounts of imports or exports, with the intention of safeguarding domestic
markets. Due to such additional costs and shortage of certain products which
are restricted to be exported or imported, increased price of imported products
is inevitable together with domestic goods and services being much more
competitive.
3. Trade Barriers
The aforementioned trade barriers could be identified in different forms such as
tariffs, non-tariffs and quotas. A tariff is a tax imposed on imported goods and
services. This makes importation of goods and services less desirable as the
consumer may not be willing to pay a higher price to obtain a product or a
service, if a similar product/service is available in the domestic market at a

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lower price. This exercise therefore contributes to protecting domestic markets
that could otherwise not compete with foreign products. For example, in
Country ‘X’, an oral care product is available in the market at € 5, and in
Country ‘Y’, a similar product is sold at € 4. The consumers in Country ‘X’,
therefore, will be more inclined to purchase the Country ‘Y’ product sold at €
4, and this will create competition for the manufacturers of Country ‘X’. In such
a situation, Country ‘X’ will attempt to restrict imports from Country ‘Y’ in
order to promote the local product. In doing this, Country ‘X’ will impose a
tariff of € 3 on each oral care product imported from Country ‘Y’. The
introduction of this tariff will result in an increase of the price of the Country
‘Y’ product upto € 7 while the Country ‘X’ product remains at the same price
of € 5. This makes the local product more attractive to the consumers and they
will now be inclined to purchase the local oral care product over the Country
‘Y’ product.
Non-tariffs are another type of trade barrier. In implementing non-tariffs, the
governments may attempt to introduce measures demanding certain quality and
requirements on the products imported into a country. Because of these
measures, import of goods into a country is hindered since every foreign product
will not be able to comply with these requirements introduced by the local
government. Additionally, with the purpose of making the local markets more
competitive, governments also grant subsidies to local producers. Subsidies are
financial assistance given to trade by the governments.
In the above example, Country ‘X’ in addition to the tariffs imposed on the oral
care products from Country ‘Y’, could further restrict importation by
introducing a regulation that every oral care product imported into Country ‘X’
should contain 20% of natural herbs. This measure will discourage many oral
care producers exporting their products into Country ‘X’, and also for those who
are willing to comply with this requirement will have to alter their production
by incurring an additional cost. This will result in price of the products from

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other countries increasing and the products in the local market being more
competitive. Further, the government of Country ‘X’ could grant a subsidy to
its producers of oral care products so that they can match the prices of other
imported products in the local market.
Quotas can be identified as restrictions on the quantity of a specific good
imported into a country. This facilitates an increased demand for local products
in the market. The governments issue license to companies permitting them to
import only a limited quantity of a certain product or a service, thereby imposing
quotas. If the same example above is taken into consideration, the government
of Country ‘X’ may decide that they are going to limit the quantity of oral care
products they import from Country ‘Y’ upto 1000 units during a period of one
year. Once these products have been sold out in the market of Country ‘X’, what
is available is what Country ‘X’ produces itself. These may be more expensive
than the Country ‘Y’ product. Country ‘X’ could also decide to restrict
importation of all oral care products completely, thus abolishing foreign
competition. This exercise is identified as an embargo, a total elimination of
trade with another country with respect of some product.
4. Why Trade Liberalization?
Having discussed different forms of trade barriers, it is important to analyze
why countries are interested in eliminating such barriers in facilitating trade
liberalization. A country with an open economy is likely to develop faster when
compared with a country with a closed economy. Once the borders have been
open, exports and imports of a country tend to rise. It allows a country to exploit
any untapped markets by allowing foreign companies into the county through
the open borders. These foreign parties also will benefit by the low cost of
labour that they must incur in the process of production in the host country. This
will also create many opportunities for the consumers, firms and workers in the
host country while also contributing to alleviation of poverty.

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Trade liberalization allows producers to enter into much larger markets. This
will encourage the producers to increase their production which results in more
innovation and competition. Another advantage of trade liberalization is
Foreign Direct Investment (FDI). Individuals or firms in one country can make
investments in another country with some controlling power. This is known as
FDI. FDI serves as an effective means of gaining access to a foreign market.
Also, if the labour costs are lower in the foreign country where the investment
is made, it will help reduce the cost of production as well. FDI increases revenue
and offers external capital for a developing country which supports its economic
growth.
5. Regulation of International Trade
As the international trade expands over time, the nature of the trade agreements
between the nations and their implementation become complicated. In order to
circumvent these complexities, regulation of international trade is paramount.
A mechanism to regulate international trade was firstly focused on at the Bretton
Woods Conference of 1944. Even though an agreement relating to trade did not
materialize at that time, later the efforts of United States together with some
other powerful nations led to the establishment of the International Trade
Organization (ITO). The Charter which established the ITO provided the
fundamental rules of international trade. However, this Charter could not come
into force since it did not receive the approval of the United States itself.
Inauguration of the General Agreement on Tariff and Trade (GATT) in 1947
could be identified as the next milestone in the history of international trade. It
was a free trade agreement which sought to eliminate tariffs and other non-
pecuniary trade restrictions and contributed to bringing back the economic
stability lost during the years of the Great Depression and the World War II.

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The objective of GATT being promoting and fostering trade liberalization, it
consisted of a set of obligations that one signatory nation has towards another
with respect of reducing its own trade barriers. A significant feature that could
be encountered within the GATT is indiscriminate trade among the member
nations. Identified as Most Favoured Nation Principle, every member of GATT
is treated equally. This means when a reduction of tariff is implemented as a
result of negotiations between two member countries, this reduction would
apply to all other GATT members as well.
A series of meetings that GATT had held with the participation of its members
since 1947 has significantly contributed to reducing trade barriers thus
promoting global trade liberalization. It is reported that the average tariff rate
has reduced from around 22%, when the GATT was first signed in Geneva in
1947, to around 5% by the end of the Uruguay Round, concluded in 1993.2
During the evolution of the regulation of international trade, the establishment
of the World Trade Organization (WTO) under the Marrakesh Agreement can
be identified as a significant occurrence. WTO emerged through GATT as its
successor in 1995, today being the principal regime for overlooking
international trade. WTO is currently made up of 164 member states.
When compared with its predecessor GATT, WTO stands out due to certain
features that GATT lacked such as the Secretariat which has assisted
formalizing the structure of WTO and an institutionalized dispute resolution
mechanism to perform the judicial function which is reported to be very
effective.
Article III of the Marrakesh Agreement provides the functions of the WTO.
These functions include facilitation of implementation, administration,
2
For more information see ‘General Agreement on Tariffs and Trade (GATT)’ (Investopedia)
<https://www.investopedia.com/terms/g/gatt.asp> accessed 10 May 2021.

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operation and furtherance of the objectives of the agreement and multilateral
trade agreements, providing the forum for negotiations among its members
concerning their multilateral trade agreements, administering the understanding
on rules and procedures governing the settlement of disputes, administering the
trade policy review mechanism, and cooperating with the International
Monetary Fund and the International Bank for Reconstruction and Development
with a view to achieving greater coherence in global economic policy-making.3
The Most Favoured Nation Principle which was discussed under the GATT
agreement is applicable to WTO as well. Therefore, a tariff cut or any other
privilege negotiated and granted to one member state does apply to other
member states as well, treating imports into every member state in an equal
manner, promoting non-discrimination. In order to uphold trade liberalization,
WTO also ensures its involvement in mitigating trade barriers such as tariffs
and other non-pecuniary restrictions by various agreements. Some of such non-
pecuniary natured arrangements are introduction of the Agreement on Import
Licensing Procedures for fair use of import licenses, rules provided for
valuation of goods at customs to prevent arbitrary valuation, regulations on pre-
shipment inspection to guarantee transparency and non-discrimination etc.4
WTO is further involved in eliminating as much unfair trade practices as
possible. Subsidized goods and the act of ‘dumping’ could be mainly identified
as unfair trading as regarded by WTO. It has introduced the Agreement on
Subsidies and Countervailing Measures with the purpose of regulating
subsidies. Dumping is an act by a country which exports a product to a foreign
market at a lower price than the price in the exporter’s domestic market. WTO,
3
For more information see ‘Marrakesh Agreement Establishing the World Trade Organization’
(World Trade Organization) <https://www.wto.org/english/docs_e/legal_e/04-wto_e.htm>
accessed 10 May 2021.
4
For more information see ‘Import licensing’ (World Trade
Organization) <https://www.wto.org/english/tratop_e/implic_e/implic_e.htm> accessed 10
May 2021.

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in regulating this act of dumping, has introduced Anti-Dumping Agreement
setting out the remedies obtainable in the event of dumping.5
WTO also provides for the regulation of services and protection of intellectual
property through agreements. The GATS is an agreement aimed at facilitating
trade in services.6
The significance of this agreement is that for the first time,
services were considered in the arena of international trade to be included in an
agreement. The objectives of creating GATS were similar to that of GATT.
These objectives include, creating a credible and reliable system of international
trade rules, ensuring fair and equitable treatment of all participants (principle of
non-discrimination), stimulating economic activity through guaranteed policy
bindings, and promoting trade and development through progressive
liberalization.
The TRIPS is an agreement aimed at protecting intellectual property rights
between all the member states of the WTO7
. Administered by the WTO, TRIPS
emerged at the Uruguay Round of the GATT. The preamble to the TRIPS
provides that the WTO recognizes that the new rules and disciplines are required
in eliminating distortions and hindrances to international trade and the need for
adequate protection of intellectual property rights. In an age in which having to
deal with counterfeit goods has become a growing concern in international
trade, introducing proper rules and regulations as necessary is mandatory. As
such, the TRIPS addresses the applicability of basic GATT principles and those
5
For more information see ‘Agreement on Subsidies and Countervailing Measures’ (World
Trade Organization) <https://www.wto.org/english/docs_e/legal_e/24-scm_01_e.htm>
accessed 11 May 2021.
6
For more information see ‘The General Agreement on Trade in Services (GATS): objectives,
coverage and disciplines’ (World Trade Organization)
<https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm> accessed 11 May 2021.
7
For further information see ‘Trade-Related Aspects of Intellectual Property Rights’ (World
Trade Organization) <https://www.wto.org/english/tratop_e/trips_e/trips_e.htm> accessed 11
May 2021.

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of relevant international intellectual property agreements, the provision of
adequate intellectual property rights, the provision of effective enforcement
measures for those rights, multilateral dispute settlement and transitional
arrangements.
The provision of a mechanism to address trade disputes is one of the main
functions of the WTO. Although prior to the WTO, such a mechanism had been
provided under the GATT, it had not been effective due to many reasons such
as there had not been fixed timetables, the ability to block rulings with ease,
cases pending for a long period of time without a judgment etc. However, the
Uruguay Round agreement managed to introduce an effective process to address
dispute resolutions with clearly defined stages recognizing the need for prompt
settlement of trade disputes for an effective and efficient function of the WTO.
Today, through this function, the WTO plays a pivotal role contributing to the
stability of the global economy.
In a world consisting of fast growing economies which are interdependent on
each other for their continued existence, the significance of a developed legal
framework for facilitation of international trade is also exemplified by the
establishment of the United Nations Commission on International Trade Law
(UNCITRAL), by the United Nations General Assembly. Among
UNCITRAL’s functions towards provision of an advanced legal framework, its
role in harmonization and modernization of the law of international trade by
preparing and promoting the use of legislative and non-legislative instruments
in many areas of trade law stands out.8
These areas include electronic
transactions, international contract practices, international payments, sale of
goods, dispute resolutions and many more.
8
For more information see ‘Texts and Status’ (United Nations Commission on International
Trade Law) <https://uncitral.un.org/en/texts> accessed 11 May 2021.

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6. Territorial Efforts
Efforts made by the nations for the purpose of promoting trade liberalization
and its due regulation could also be witnessed on a territorial basis. North
American Free Trade Agreement (NAFTA) is such an effort between the United
States, Canada and Mexico came into effect in 1994. The preamble to NAFTA
sets out the obligations of the three nations. Some of these obligations include
contributing to the harmonious development and expansion of world trade and
providing a catalyst to broader international cooperation, creation of an
expanded and secure market for the goods and services produced in their
territories, reducing distortions to trade, establishing clear and mutually
advantageous rules governing their trade etc.9
Moreover, NAFTA also provides
a dispute resolution mechanism.
Another territorial exercise could be identified with the establishment of the
Association of Southeast Asian Nations (ASEAN) in 1967. The Association
made up of 10 member countries, has formed its Free Trade Area (AFTA) where
the member states significantly benefit from reduced import tariffs.
Furthermore, moving towards trade liberalization, ASEAN has also entered into
free trade agreements with non-regional partners. In regulating such activities,
ASEAN complies with a set of trade and customs laws and procedures. Some
of these laws and procedures are related to importation, exportation, transit,
transshipment, and storage of goods, rates of duty, taxes or other charges,
requirements, restrictions or prohibitions on imports or exports, transit goods or
transshipment etc. among the member states.10
9
For more information see ‘North American Free Agreement’ (NAFTA Secretariat)
<https://www.nafta-sec-alena.org/Home/Texts-of-the-Agreement/North-American-Free-
Trade-Agreement?mvid=1&secid=b5b817ee-c48a-4dda-b8d9-c4564e34ac4b> accessed 11
May 2021.
10
For more information see ‘ASEAN Trade Repository’ (Association of Southeast Asian
Nations) <https://atr.asean.org/read/national-trade-and-customs-laws-and-rules/45> accessed
11 May 2021.

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7. Conclusion
Although much emphasis has been placed on liberalization of trade and its
regulation in this literature, such liberalization does not always seem to be
favourable to the nations individually, considering its drawbacks. When tariffs
are reduced, it allows companies to expand to other countries and to easily
compete with the domestic products of those countries at a lower cost, making
it difficult for the domestic industries to prosper. As a result, these industries
tend to reduce their workforce which unfavorably affects jobs in those countries.
With the great possibility of outsourcing jobs to growing markets due to
liberalization of trade, multi-national companies may not pay attention to
provision of adequate labour protection, creating an unhealthy work life for the
workers. There may be further negative impacts on the areas of protection of
intellectual property, environmental protection, preservation of natural
resources etc. created by liberalization of trade. Moreover, when tariffs are
reduced, the countries may struggle having lost a means of revenue generation
as well.
In conclusion, it appears that liberalization provides the nations with more
opportunities in the global trade, however it is not without drawbacks. Having
said that, closed economies or trade protectionism cannot be considered as a
solution to overcome possible destruction caused by liberalization. As such, the
countries will be in a better position if trade agreements could be negotiated in
such a way that the domestic markets, resources and people are not affected
negatively in the efforts in promoting trade liberalization.
Bibliography :
Books
Kamardeen N, Global Trade and Sri Lanka: Which Way Forward? (Stamford
Lake 2016)

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Journal Articles
Bergh A and Nilsson T, “Good for Living? On the Relationship between
Globalization and Life Expectancy” (2010) 38 World Development 1191
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Organization) <https://www.wto.org/english/docs_e/legal_e/24-
scm_01_e.htm>
accessed 11 May 2021
‘ASEAN Trade Repository’ (Association of Southeast Asian Nations)
<https://atr.asean.org/read/national-trade-and-customs-laws-and-rules/45>
accessed 11 May 2021
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<https://www.investopedia.com/terms/g/gatt.asp> accessed 10 May 2021
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accessed 10 May 2021
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Trade Organization) <https://www.wto.org/english/docs_e/legal_e/04-
wto_e.htm> accessed 10 May 2021
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accessed 22 October 2019
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<https://uncitral.un.org/en/texts> accessed 11 May 2021
‘Texts and Status’ (United Nations Commission on International Trade Law)
<https://uncitral.un.org/en/texts> accessed 11 May 2021

14. 14
‘The General Agreement on Trade in Services (GATS): objectives,
coverage and disciplines’ (World Trade Organization)
<https://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm> accessed 11 May
2021
‘Trade-Related Aspects of Intellectual Property Rights’ (World Trade
Organization) <https://www.wto.org/english/tratop_e/trips_e/trips_e.htm>
accessed 11 May 2021