Reducing Poverty through Trade Liberalization

     Trade liberalization increases economic activity between countries. This liberalization is important in Export Promotion especially to developing countries with regards to increasing output. In order to facilitate liberalization it is vital that countries enter into trade agreements examples of which are EC, NAFTA, AFTA, and ACFTA. These regional trade block agreements facilitate a smoother trade between countries within the region. Philippines has been long part of trade agreements such as ASEAN Free Trade Area (AFTA), the ASEAN-China Free Trade Area (ACFTA), and the Japan-Philippines Economic Partnership Agreement (JPEPA), also the country is one of the original member countries of the World Trade Organization (WTO). Trade agreements involve reduction on tariff rates, elimination of quotas, elimination of non-tariff barriers and subsidies. In effect there is better bargaining leverage and improved investment among countries which then leads to higher outputs.  But the question is, do standards of living really increase when a country enters into a trade agreement?

    A potential benefit of a trade agreement is trade creation. Due to policies imposed, as mentioned earlier, cost of trade will definitely decrease. Each businessman would like to maximize his profit while minimizing cost, and thus a decrease in tariff rate will surely decrease the cost of trade. Because of this more and more businessman will engage into exchanging goods across borders. Consumer goods would then become cheaper making it more affordable and available to many.  Though there are economic costs related to trade agreements, it is outweighed by the benefits received by member countries which will be discussed later on.

       Trade creation which resulted from trade agreements provides employment and income to member countries. Through this many are able to provide for their families, also there is a decrease in inequality. Trade liberalization has the potential to lower imports and domestic prices which in turn raises domestic output and local consumption. It also improves national output along with the increase in wage rate. In this case though, industrial sector benefits more than the agricultural sector. Moreover, with the imposition of appropriate fiscal policy, majority of the household groups will benefit in the reduction of the cost of consumption. While on the other hand, the relatively poor and unskilled workers will be better off than before.

Reference: 

Todaro, M. & Smith, S. (2003) Economic development, 8th edition. Singapore: Pearson Education, Asia Pte Ltd.