Trade liberalisation

[batra555]

Who else is doing trade lib as their micro economic policy?

How do you think it improves external stabilty and economic growth?

Thanks

[morantz]

Sorry for the late reply.

My impression of trade liberalisation is that it often causes a negative effect upon economic growth, especially external stability. In some cases it can be a good thing, and my theory is this.

Trade liberalisation is the case where tax on imports(tariffs) and laws(quotas) are removed, promoting the case where overseas producers want to export more goods and services to, say, Australia. If Australia got more products(goods) from, for example, China at a lower prices dues to the reduction of taxes, the Australian traders can use that to their advantage and resell them for a much higher profit towards local consumers. Once high profits are gained, the local traders would want to employ more workers in order to expand their business, and by that they're increasing production, full employment and equity in income distribution. The increase in production leads to an increase in GDP (economic growth).

In relation to external stability, trade liberalisation wouldn't have much of an effect upon CAD, but rather with the exchange rate and NFD. More cheap imports to Australia means that local producers can use those imports to their advantage by making a new product out of them. An example could be using a cheap Chinese made tyre to assemble the rest of an Australian made car (not a real case with Ford, Holden and Toyota), where the producer is cutting costs per tyre compared to the case of using locally made tyres. The finished product would then be sold out to local consumers, and exported to overseas for a cheaper price due to cheaper resources used, hence promoting international competitiveness. An increase in exports should be likely, hence increasing the current account surplus and possibly terms of trade. As a result, more income is brought in Australia, thus reducing the budget expenses due to decreased welfare payments, therefore promoting a budget surplus, and ultimately, less foreign debt due to less relying on foreign loans.

[dantan]

I think when it comes to trade liberalization, it's very important to make a distinction between short term and long term effects of trade liberalization. In terms of the the two goals you just mentioned look at it in the following way:

ST: In the short term trade liberalization is going to expose local firms to cheaper international imports. Being rational consumers, we are going to substitute our local g+s for cheaper imports, hence imports are going to be able to penetrate the local market. This means that M is going to rise relative to X because we will now buy more imports. As such AD will fall and the goal of S&S economic growth will be hindered. Furthermore, this means that goods debits are going to rise relative to goods credits leading to a rise in the CAD and hence a larger NFD (more money needed to finance the CAD). Also, there is not greater capital outflow of the $A as we're buying more imports and hence supply will increase and the $A will depreciate.

LT: In the long term, trade liberalization forces an improvement in efficiency because firms will either sink or swim. As such we become more internationally price competitive and the reverse now becomes true. An increase in international price competitiveness means we can now compete better on a local and international level, so we will buy less imports and sell more exports improving AD. Hence we're going to better achieve economic growth. Similarly, as X is nor rising relative to M, so too are goods credits to debits, improving our CAD and hence the NFD and $A for the opposite reasons explained in the ST section.

Again, as I said, especially for things like trade liberalization, distinguishing between long term and short term really helps to demonstrate knowledge.