Developed vs. developing countries and international trade liberalization: a comparative analysis.

Tarzi, Shah M. ; Emami, Aristotle

I. Introduction

Since Adam Smith's defense of free markets and David Ricardo's formulation of free trade theory, the costs, benefits, and beneficiaries of free trade have been the subject of contentious debates by scholars, government policy makers, and organized interest groups. (1) Consequently, there exists a rich body of literature on winners and losers from international trade. In the classical free market tradition, free trade based on comparative advantage and specialization encourages competition, market efficiency, and growth in income. As a result, economic benefits of trade to consumers and the society far exceed the costs to those workers who lose jobs because of import competition or select domestic enterprises losing market share because of cheap imports. (2) The Heckscher-Ohlin theorem amplified the free trade thesis by emphasizing specialization based on factor endowments as the drivers of production and trade and key determinant of comparative advantage. (3)

The economic critique of free trade theory, in contrast, questions the assumption of a level playing field and conclusion regarding the distribution of gains and costs from trade liberalization. Critics warn of the effect of free trade on infant industries vital to long-term competitiveness. Others have criticized free trade and its consequences on moral and sociopolitical grounds. One line of criticism is that free trade aggravates income inequality and harms human rights, especially labor rights, because major countries play by different rules. Further, externalities in the form of harm to the environment, national security and other sociopolitical costs are not factored into economic gains from free trade. (4)

These charges notwithstanding, there is near consensus on the net benefits of free trade to society. The data from a 2006 survey of 83 notable American economists are most revealing. The survey found that "87.5% agree that the USA should eliminate remaining tariffs and other barriers to trade," and "90.1% disagree with the suggestion that the U.S. should restrict employers from outsourcing work to foreign countries." (5) Mankiw, the noted Harvard economist, and advisor to Mitt Romney's 2012 presidential campaign, best summarized the prevailing thinking, "Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards." (6)

There is an abundance of theoretical and empirical works regarding various facets of the economics of free trade. A sizeable body of literature has examined the effect of reforms, notably elimination of quotas, reduction of tariff levels, strengthening reciprocity measures, and the effect of trading bloc "trade diversion" to member states. (7) In contrast, there is inadequate commensurate quantitative work on the magnitude and pathway of the liberalization of the trading regime itself. To be sure, an abundance of research has focused on global systemic factors and their effect on the liberalization of the trading system. Scholars have examined the role and impact of the World Trade Organization (WTO) in reforming the trading system; reducing global systemic protectionism, in particular, the opening of China; and the increasingly significant role of other fast growing emerging market economies in East Asia and elsewhere. (8) Yet in spite of the expansive body of work, limited attention is paid to empirically documenting the magnitude of trade liberalization.

A quantitative profile of the degree of liberalization in trade and doing so on a comparative basis across the two broad aggregate grouping of countries, the developing countries versus the developed countries, has not received adequate attention. This study is a preliminary attempt to ameliorate this void. In particular, in order to shed light on trade liberalization, we identify and quantitatively highlight trade liberalization metrics, notably export share of GDP, correlation between exports and income, and document changes in the size of exports as a percentage of economic output. In the process, the study is intended to provide an empirical profile of trade liberalization and the magnitude of global integration via trade thus to offer a comparative analysis of two general blocs of countries, developed countries (DCs) and developing countries (LDCs). In addition, given the vital importance of tariffs as trade barriers, special attention is paid to documenting tariff reduction overtime for these two groupings of countries.

Differences among countries in the level of protectionism are fairly well established. Likewise, it is a given that periodic changes in the level of protectionism and degree of trade openness for individual states and groups of countries will invariably occur. Given this reality, offering preliminary insight on the rate and direction of change away from protectionism and on the level of integration with the world economy as a goal of this study is valuable endeavor in its own right. A widely held assumption is that on the whole, DCs tend to be more open to free trade, and, conversely, LDCs are perceived as having the more protectionist posture because of the legacy of import substitution, resistance to imports owing to an export-based mode of growth or because LDCs tend to shield their economies and infant industries through tariffs, quotas, subsidies, and other measures. How valid is this assumption? The empirical profile we hope to provide will explain this core assumption, which too often undergirds trade negotiations at the level of global blocs. As such, the study is likely to have implications for rules governing global trade.

The study will proceed as follows: First, a brief introductory statement regarding the methodology is in order. Next, the study will present a theoretical exposition situating tariffs as a measure of protectionism and documenting changes in tariff levels overtime in order to illuminate the significance of this pathway and the resultant improvement in trade openness. Then, we will highlight the magnitude of trade liberalization and the degree of integration into the world economy for the two groups, DCs and LDCs, with special reference to the economic metrics specified previously.

It is not the goal of this study to delve deeply into the economic and growth consequences of trade liberalization or to examine the national income effects of trade reforms. However, in the interest of highlighting the significance of the topic under investigation in section 4, a short comparative synopsis of the distributional consequences of the relative gains from the liberalization of global trade for the two groups of countries will be presented. Finally, the study will offer conclusions with special emphasis on select theoretical and policy implications.

II. Method

In this study, we measure trade liberalization by, among others, reduction in tariffs, changes in the composition of trade (exports), and changes in the size of exports as a percentage of economic output for both DCs and LDCs. The study makes liberal use of the large and comprehensive dataset, the International Monetary Fund's World Economic Outlook Database (henceforth IMF WOE dataset). (9) In the interest of analytic precision and the use of robust data, the study uses export figures instead of trade data.

In terms of data collection and interpretation, time-series data covering 1980-2008 are divided into five-year periods and one final three-year time slot. We use a combination of data analysis measures-indexation, the average of the annual changes in growth rates, and the average of the annual changes in trade as a percentage of changes in total output, all presented in percentages. In addition to the time-series frame, following the International Monetary Fund format, the data are presented and put through cross sectional analysis, and thus are demarcated along an axis of two economic blocks: DCs and LDCs. (10) The time frame adopted is useful for several reasons. First, it offers a wide window to address the objectives and key questions of the study. Second, it coincides with major global trade liberalization currents, the rise of China and its role as one of the largest global exporters, the reintegration of Eastern Europe into the world economy, and the discontinuation of the protectionist import substitution model and subsequent high growth rates in Latin America, among others.

Most importantly, it is a stable period of growth in world trade and thus is best suited for this study. We chose not to include the era of the global economic crisis caused by the "Great Recession," which hit full throttle in 2009, precisely because the resulting spectacular negative and gyrating global financial and trade consequences and its aftermath is an aberration and does not lend itself to stable pattern and regularity in data. Inclusion of the global financial crisis period, and the consequent gyrating and skewed data, would invariably contaminate data. Additionally, per the International Monetary Fund's "Direction of Trade Data' (DOT), the European Union's (EU) ongoing sovereign debt crisis of the last three years would distort data, given the size of EU as the single largest economic bloc in the world. (11)

In brief, a nearly three-decade period provides ample data to study the depth and breadth of trade liberalization and global integration via international trade. For ease of reference, we will refer to the 28-year period as the "period under study"; 1980-1994 as the "first period"; and 1995-2008 as the "second period."

Tariff reduction

To appreciate the propensity toward liberalization in world trade, a brief theoretical exposition of the negative consequences of tariffs is warranted. We then present data on tariff reduction as a measure of reform in the global trading system.

The chart below offers an approximate portrayal of the effect of imposing tariffs on trade. The goods in question, trade in widgets, for example, Pworld, the price of the goods in the world market (likewise in the domestic market) prior to imposing tariff measure. The designation Ptariff signifies increases in the domestic price, or a higher price for the said widget causing domestic production to increase from [Q.sup.S1] to [Q.sup.S2] and concomitantly domestic consumption to decline from [Q.sup.C1] to [Q.sup.C2]. (12)

Hence, as Stockman has noted, leading to several notable effects on societal welfare, Consumers are made worse off because the consumer surplus (green region) becomes smaller. Producers are better off because the producer surplus (yellow region) is made larger. The government also has additional tax revenue (blue region). However, the loss to consumers is greater than the gains by producers and the government. The magnitude of this societal loss is shown by the two pink triangles. Removing the tariff and having free trade would be a net gain for society. (13)

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Obviously, the distribution of costs and gains across sections of consumers and producers may differ so consumers come out better off, and producers worse off, a nearly opposite effect. The key conclusion, however, is that for the society, trade restrictions via tariffs represent net loss, because the aggregate losses outweigh relative gains. Put differently, when tariffs are reduced or eliminated, there are more winners than losers. Similarly, effects with different winners and losers can be observed in the net producing country where the tariff in this scenario would harm producers and benefit consumers. The same argument can be made regarding other forms of tariffs such as export tariffs and other trade restricting measures, notably import and export quotas. (14)

The effect of changes in tariffs on trade balances, exports and imports, and other measures of export performance is not a settled matter. Several studies have documented improvement in export performance in response to changes in tariff rates. Conversely, a study by Ostry and Rose (1992) found negative effect. (15) Overall, evidence suggests that tariff reduction is positively correlated with the liberalization of trade. Indeed, one influential IMF study covering 39 countries during the period of 1970-2004, documented the incidence and effect of tariff reduction as an effective trade liberalizing measures. According to this study, "trade liberalization episode is identified if there is a continuous and accumulated tariff reduction by at least 35 percent (e.g., a tariff reduction from 15% to 9.75%)". For purpose of precision, non-tariff barriers were incorporated, using the IMF rating of 'open, moderate and restrictive' and found the following: "First, the period of 1985-1995 seems to be the 'opening-up decade' for developing countries. Almost all the countries in our sample experienced one or more episodes of liberalization during this period. Secondly, many countries experienced multiple episodes of liberalization (this is the case for 20 of the 39 countries in the sample). Indeed, trade liberalization is still an ongoing process for many developing countries." (16)

The post-World War II period, especially the trend during the study period is marked by progressive reduction in the levels of tariffs. As early as 1947, the newly created General Agreement on Tariff and Trade (GATT) instituted several principles ostensibly designed to reduce trade barriers, encouraging "reciprocity" and the expansion of Most Favored Nation status. Most notably, member states were encouraged to reciprocate tariff reduction measures; a byproduct was competitive tariff reducing reciprocal measures and trade openness. The following Tokyo Round, signed in 1979, also resulted in an overall reduction in tariff levels, including a 35% reduction between the United States and the European Community. In the 1986 Uruguay Round, the single largest and longest round of multilateral trade liberalization and negotiations lasting seventeen years, nations agreed to reduce tariffs by about one third. The DCs were to reduce tariffs by 36%, and the LDCs group by 24%. These agreements, and six other rounds of multilateral trade negotiations, have had profound impact on trade openness. According to an influential World Bank study, the average tariff rate in the world dropped from nearly 40% in 1980 to 24% in 1990, and by 2008, the average tariff rate stood at less than 9%. (17)

Reduction in rate of tariffs in the developed world has been even more pronounced than the aggregate data would indicate. By 1990, the average tariff rate dropped below 10%, and by 2008, it was below 4%. In 1946 the United States as the leading world economy, producing nearly one quarter of the world's output: one of the top three exporters and importers in the world had an average tariff of 40%. By 2006 the average tariff rate in the United States dropped to about 1.4% from 10%, and in Switzerland and Singapore tariffs were eliminated altogether.18

Although the average rate of tariffs in LDCs was higher than in DCs, it followed the same trend line. Thus, in 1980, the average tariff rate in LDCs was over 50% in 1980, by 1990-it fell below 40% and by 2008, it had reached a low of 12%. India and China are two large economy examples notable for the pro-trade liberalization reform measures. Historically known for autarky (China) and trade protectionism associated with import substitution industrialization (India), by 2000, China's average tariff rate dropped from 18.7% to 12.8%, and India lowered its rate from a 30.2% to 21%.19

Regarding the positive impact of reduction in tariff rates on economic performance and growth, the emerging market economies of East Asia offer an obvious example. As an IMF study has noted, "... trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30 percent to 10 percent over the past 20 years." (20).

The above narrative indicates that there has been considerable across-the-board, albeit gradual, reduction of tariffs and a steady movement toward further reduction and eventual elimination. However, overall tariff levels by rich countries against the developing countries are still high. As Stiglitz has noted, advanced countries maintain tariffs levels against the developing countries that are four times higher than those against each other. "Indeed, the tariff structures are designed to make it more difficult for developing countries to move up the value-added chain-to transition, for instance, from process foods. As tariffs have come down, America has increasingly resorted to the use of nontariff barriers as the new forms of protectionism." (21) It is also worth noting that agreements to reduce tariffs or otherwise liberalize trade do not eliminate protectionist sentiments, often leveraged by powerful domestic rent-seeking constituencies to secure the benefits of free trade and socialize the costs. According to Stiglitz, there appears to be asymmetry in the global structure of tariffs whereby rich countries have lower levels of tariffs against each other yet maintain significantly higher rates against the LDC bloc. Ideally, to take a giant step toward the liberalization of trade would skew the tariff structure in the opposite direction so that asymmetry favors the DC bloc. Cognizant of these limitations, in the aggregate, the trend has been positive. The net positive effects of the reduction and elimination of tariffs in both developed and developing countries overtime is indicative of propensity toward an increasingly open trading system and the expansion of interstate trade flows.

III. "Export share of GDP," income, and trade liberalization

As indicated earlier, a combination of changes accelerated global economic integration and expanded international trade as measured by changes in the volume of global trade: notably, China's opening, India's economic reforms in the 1990s, and the collapse of communism and subsequent integration of Eastern Europe into the global economy. Further, in the aggregate, tariff levels declined. Empirically, one key metric to measure trade liberalization is "the share of exports to gross domestic products." (22) Accordingly, in the period 1980-1984, the average export share of the world was 19.65%.

In 1985-1989, it fell to 17.90% of GDP, thus showing a declining trend in the integration process for both DCs and LDCs. However, we observe that thereafter the share of exports climbed steadily from 17.90% to more than 27% in the 2000-2004 period, showing a reversal of the past trend. The export share increased from 18.72% to more than 25% in DCs, whereas, in LDCs, the export share, which was only 15.25% in the second half of the 1980s, rose to more than 34% by the second half of the 2000s. Thus, according to this metric, export share of GDP, signifying economic interdependence via trade, or, better yet, rate of integration of LDCs' economies with the rest of the world economy expanded nearly 125% compared to the 1980s and more than double the rate for DCs (See Table 1).

A related quantitative metric to measure trade liberalization is "export growth rate less the GDP growth rate." As Table 2 below shows, during the first period, world exports grew at a significantly lower rate than global output. However, in the second period, this trend reversed, with an ascending slope particularly during the latter part of the decade, rising from a meager 1.37% to 8.10%. Both blocs experienced a similar trend. In the DCs' case, during the second half of the 1980s, exports grew quickly and substantially, or 5.14% extra, relative to output. In the LDCs case, export growth lagged behind output growth. Only during the decades of 1990s and 2000s did exports expand faster relative to output in both economic blocks. It is notable that the magnitude of this trend is much greater in LDCs than DCs. Thus, the world economies integrated much more significantly during the second part of the last three decades. During the second half of the 1995-2008, the LDCs economies' integration with the rest of the world expanded by four times, compared to the 1990s, and almost twice the rate for DCs.

Throughout the post-World War II period, the developing countries had expressed concern, stated at the United Nations Conference on Trade and Development and various other forums, regarding DCs' sheer dominance and market power in global trade. The DC bloc dominated world trade and export markets, accounting for nearly 70% of the global export markets until late 1970s; more importantly, 80% of the global trade flows occurred among the DCs group. Not only was the LDCs' share of the world trade market limited, more importantly, during those early years, the latter primarily exported primary products and raw materials, two categories of products facing uncertain and shrinking global demand. Primary products had the added problem of price elasticity and wildly fluctuating demand. Trade liberalization, in particular, removal of barriers to developing countries' nonagricultural exports, was seen as a way to redress such imbalances.

Apparently, subsequent changes connote positive trends in trade openness for LDCs. Between 1980 and 1990, the DCs' share of the world export market increased from 72.31% to about 81.17%; thereafter, it steadily declined to 56% in 2008, or a 30% drop in DCs' share of world exports. In stark contrast, initially the LDCs' market share decreased from 27.7% in 1980 to 18.83%. However, thereafter, in 1990, it rose steadily and dramatically to 35% in 2008, an almost 75% hike. Compared to a 30% decline in DCs' market share, LDCs' whopping market-share boost of 75% changed the export composition in favor of the LDCs (See Table 3). More importantly, in addition to garnering a higher share of the world export market, LDCs gradually increased their share of the DCs' markets as well, thereby ameliorating the imbalance referenced earlier. Whereas, in 1990, 65% of LDCs' total export flowed to DCs, by 2008, that figure grew to 70%. These changes convey the significance of global trade in the economic life of the developing countries. Indeed, as the World Bank has indicated, "Export revenues constitute about a third of developing country GDP." (23) In short, as the data in Table 3 indicate, in terms of trade flows, the world economy exhibited significant integration during the 1990s and markedly so in the 2000s. Further, in the case of the LDCs the level of integration was considerably stronger and more pronounced, signifying a gradual structural change in world trade and favoring LDCs beginning in the 1980s and accelerating during the current decade.

The data in Table 4 further illustrate the structural shift noted earlier, including ever-expanding integration of the world economies via trade, changes in the composition of trade, and expanding LDCs share of markets in the developed countries. This shift is suggested by strong correlation between exports and income (output) in the world, which is up from 0.9478 during the first half of the last three decades, to 0.9710 during the second half of the twenty eight-year period. In that same period, the correlation coefficient remained high and almost unchanged for DCs, from 0.9624 to 0.9550. Major change occurred in the LDCs' economic block where the correlation coefficient strengthened significantly, rising from 0.7416 to 0.9802. By the second half of the 1980-2008 period, the correlation coefficient of LDCs exceeded the DCs group, thus indicating the very significant role that exports play in the economic life of the LDCs. (24)

International trade expansion--additional metrics

A useful and straightforward indicator of trade liberalization and expansion is the growth in aggregate volume of global trade measured in billions of dollars. Accordingly, the period under study is also marked by significant expansion in international trade. As data in Table 5 indicate, the exports of goods and services in the world rose from $2,472 billion in 1980 to more than $19,694 billion in 2008, nearly an eight-fold increase. (25) DCs' exports climbed from $1,787 billion in 1980 to $12,820 billion, or more than six fold rise, whereas LDCs exports grew from $684 billion to $6,874 billion during that same period or an astounding 900% rise. Thus, there was a worldwide expansion in the aggregate volume of global trade, with LDCs exports expanding faster than DCs. The acceleration in the late 1990s and in the last decade is dramatic. A comparison of post-1995 period, or the second half with the first half, reveals that most of the surge in exports occurred during the second half. The change in the status of the LDCs is particularly notable for this period. During the second half, the LDCs' share of global exports grew because apparently these countries were able to sell more goods and services to DCs. Further, most of the surge in LDCs exports occurred in the last decade, and, during that time, the LDCs' export index surpassed the DCs' export index; it jumped from 275 in 2000 to over 1000 in 2008, a fourfold increase in less than a decade.

An examination of the average annual rates of growth in exports for the study period buttresses the positive trends noted earlier. Indeed, both groupings of countries exhibited improvements overtime in the average annual rate of growth in exports. During 1980-2008 period, the respective numbers are 7.96% (World), 7.53% (DCs), and 9.14% (LDCs). (See Table 6.)

Overall, the upward trend in exports in the second half of the 1980s continued steadily in the 1990s and 2000s, and exports grew in both economic blocks. Whereas in the decade of the 1980s, DCs performed substantially better relative to LDCs in export markets; in the 1990s and 2000s, the opposite is the case, as the latter group steadily and significantly outperformed DCs. The average annual growth rate of exports in DCs rose from 7.64% in the first half of 1990 to 12.60% in the second half of 2000s. During the very same period, the average annual growth rate of exports in LDCs swelled from 7.72% to more than 21.25%. An intriguing data point is that the average annual rate of growth in exports of LDCs surpassed that of DCs by about 40% throughout the period after the mid 1990s. Thus, while exports played an insignificant part of LDCs' economies in the earlier period, during the second half, the 2000-2008 period in particular, international trade became increasingly a larger component of GDP.

In summary, this study finds that world trade exhibited significant liberalization. We note the positive effects of reduction in protectionist measures, notably, reduction in tariff rates across countries. More importantly, we note that structural changes overtime reflected in greater integration of the world economies via trade. This change is further amplified by the increasing share of exports relative to the size of the economies of the bloc countries, signifying the increasing importance of international trade in the economic life of countries. The dramatic changes have favored both economic blocks of countries. However, these have been more pronounced for the developing countries, especially during the mid 1990s through the 2008 period.

IV: Synopsis of the distributional consequences of trade liberalization

To document empirically the total and relative gains from trade liberalization and increasing integration into the world economy via trade, we can use several foundational statistical measures, notably, "changes in total income," "per capita income," and "net per capita income": the later adjusted for inflation, which impacts purchasing power. (26) Regarding the first metric, there exists strong correlation between exports growth and total income. Apparently, there was fivefold increase in total income due to exports. In particular, during the second half, the higher export growth rates resulted in higher rates of increase in total income, ranging from 160% to 300%. Importantly, while both blocs registered increases, LDCs experienced substantial increase in total income, reaching a high of 700% in the last decade, associated with dramatic increases in their export shares of global trade. (27)

Per capital income too increased significantly. This measure registered marginal performance during the first half and expanded thereafter, with DC scoring 4.2% performance, and LDCs initially registered at an annual rate of 2.9%. However, in the second half, income per capita more than doubled. Considering the higher rate of growth in LDCs' population, the growth in per capita income appears all the more impressive. (28)

Caveat emptor, measured in terms of "net per capita income," which considers inflation and thus adjusts for purchasing power, as opposed to the simple "per capita income" measure, a somewhat different picture of standard of living emerges. During the first half of the period, DCs experienced a marginal short-term diminution in their standard of living followed by steady and continuous improvement in standard of living; LDCs did not fare as well. Between 1980 and late 1990, LDCs' standards of living deteriorated. To be sure, the rate of deterioration slowed in the first half of the 2000s, it was only during the 2000-2008 period that LDCs began to experience positive net per capita income growth and thus improvement in their standards of living. (29) We can safely attribute this outcome to inflationary spikes during the study period, in turn partially caused by an important exogenous factor, the oil price shock of the late 1970s and the early 1980s as the average price of oil per barrel rose from $15 to $27.5, a whopping 150% price hike. Obviously, the West did a better job of taming inflation than did the developing countries. (30)

In brief, both economic blocs experienced a significant annual growth in their respective per capita, a positive development. Whereas, the income of DCs cumulatively rose by 270%, the income of LDCs increased even faster, a rise of 334% for the entire period. Importantly, for the world as a whole, and for the two blocs, total income rose dramatically, even more so for the LDCs. Thus, the proposition that trade liberalization inversely affected total income and per capita income in the LDCs does not seem tenable. We caution, however, that standard of living adjusted for inflation offers a negative picture. Still, it does not fully substantiate critics' views, because this change cannot be solely attributed to trade openness. Rather, high inflation, a function of exogenous factors such as oil shock, was a significant culprit. In addition, we suspect that indigenous macroeconomic and monetary policies surely play a role. To illustrate, in the United States, Chairman Paul Volker's tight monetary policy in the early 1980s played a vital role in wringing inflation out of the economy, demonstrating the vital impact of effective well-timed monetary policy.

V. Note on the cultural and societal costs of trade liberalization

Critics of trade liberalization, ranging from Pope John Paul II to the Nobel Laureate Joseph Stiglitz, have pointed out the immense negative economic, cultural and societal costs of unfettered trade liberalization and 'free trade' agreements. Stiglitz has shown that structural asymmetry in global tariffs persists, such that rich countries have lower levels of tariffs against each other; and yet this same group of countries maintains significantly higher rates against poor developing countries, thereby harming their prospects for growth and development. (31) Another line of criticism is that trade liberalization in its current form has been especially harmful to small farmers. For example, a study in Burkina Faso found that the economic prospects of small-scale cotton farmers were severely damaged by the elimination of subsidies and tariffs designed to support them in the face of persisting subsidies for American agribusiness. One study participant affected by Western commodity subsidies explained; "How can we cope with this problem? Cotton prices are too low to keep our children in school, or to buy food and pay for health." (32)

Writing in the grand tradition of Catholic social teaching and justice, John Sniegocki argues that trade liberalization potentially harms local business enterprises, especially small manufacturing firms, because they cannot compete with global corporations. Further, trade liberalization has created a 'race to the bottom', as it forces countries to reduce wages, cut taxes on the wealthy, and weaken environmental and workplace regulation as the price to be paid for attracting and retaining foreign direct investment. (33)

The present study acknowledges the potentially damaging costs of trade liberalization on national cultures and on democratic governance. For instance, it is estimated that the implementation of North America Free Trade Agreement (NAFTA) led to the loss of nearly two million rural livelihoods; "This loss of rural livelihoods is one of the major drivers of emigration from Mexico to the United States. In addition to its economic impacts, this loss of land also has profound cultural impacts, particularly on indigenous peoples whose cultural/spiritual identity is rooted in [their] relationship with the land." (34)

Regarding the cultural effects of trade liberalization, and the need for the preservation of national cultural identity and global cultural diversity within the world trading system: There is a palpable sense that proponents of trade liberalization often treat cultural differences and diversity as just another distraction or potential impediment to constructing a rationally organized world trading system. Conversely, critics maintain that preserving cultural identity and global diversity in value systems, traditions and cultural practices are worthy societal goals. (35) However, as Suranovic and Winthrop point out in their authoritative empirical study, the policies emanating from the WTO rarely take these profound societal and cultural values into account. The potential conflict between culture and trade liberalization, according to these authors, can take several forms. Among others, adherence to the principle of non-discrimination is vital to WTO's procedures, but yet can force countries to adopt common rules irrespective of potential conflicts with distinct local cultural, societal values and traditions. For example, rules governing labor mobility, market access, intellectual property rights and corporate governance are four areas with important implications for domestic cultural principles and preferences. Further, trade practices are increasingly contested on ethical grounds, often reflecting the clash of cultural principles. Examples include controversies over animal rights, child labor, and environmental protection such as logging practices in tropical forests. 36

Suranovic and Winthrop model the cultural effects of trade liberalization. They differentiate between what they call the 'cultural affinity' and 'cultural externality' models. In the former, they show that resistance to trade liberalization has the potential to diminish the cultural benefit of open trading systems. In contrast, in the 'cultural externality' model a loss of cultural benefits is 'more likely to occur', in part because, "... trade liberalization that encourages greater imports of a foreign good, and which competes with a domestic good that has cultural value, may result in a reduction in well-being for the country rather than an improvement. This argument can be used to argue for a cultural exception in trade policy." (37) There is also the obvious tension between the worldwide spread of Western consumption values and the push toward homogenization of cultural goods on the one hand; and , on the other, resistance to trade in cultural goods in order to preserve cultural and national identity.

The expansion of a relatively open trading system does not imply that trade liberalization ensures economic liberty and hence political democracy. On the contrary, challenges to democratic governance are apparent in the asymmetries of international trading regimes; the secretive ways in which such agreements are negotiated; World Trade Organization (WTO) favoritism of Western interests over those of developing nations; and the power of rulings by the unelected WTO to counter and transcend national environmental, labor and consumer regulations adopted by democratically elected local and national authorities. Even within the United States Congress, the corporate-sponsored push to 'fast-track' authority in trade agreements imposes limits on debate and blocks amendments from reaching the floor of the Congress.

Finally, trade policy both shapes and reflects domestic politics. Accordingly, there are three sets of theoretical explanations regarding the politics of trade liberalization. First, policies in support of trade liberalization reflect the policy preferences of economic elites, political leaders and influential societal groups with a stake in trade liberalization. The second set of explanations focus on the character of political institutions. In the United States, the fragmentation of political authority and the process of political coalition-building create a fertile environment for societal actors strategically placed via the political process to shape trade policy outcomes. Third, global systemic analysis highlights large-scale changes in political institutions at the international level. The collapse of communism and the subsequent shift toward pro-market democratic institutions in Eastern Europe exemplify this line of reasoning. Although in the United States various labor, environmental and small business groups are increasingly skeptical of trade liberalization due to perceived 'unfair' trade practices, the ability and willingness of the United States as a global hegemon to support free trade has been the critical impetus for post-WWII trade liberalization. (38)

VI. Precis of findings: theoretical and policy implications

In this study, we offered an empirical profile of the magnitude of trade liberalization, the rate of change in trade openness, and the degree of integration into the world economy on a comparative basis with reference to two general blocs of countries, DCs and LDCs. To illuminate trade liberalization and to analyze and present quantitative data, we utilized several key metrics, notably export share of GDP, correlation between exports and income, and documented changes in the size of exports as a percentage of economic output.

Per the metrics deployed in this study, we found that in the study period, during the second half in particular, significant liberalization of trade occurred, leading to expansion in international trade. A pattern of tariff reduction in both blocs contributed to the broader trend. Further, we observe that trade liberalization played a positive role in increasing developing countries' access to the DCs markets. We speculate, however, that the access to the markets of rich countries was in part a function of the ability of LDCs to become resilient exporters, exporting in categories other than the traditional staple of exports, notably, primary products and raw materials.

Consistent with the views proffered by Nobel laureates Stiglitz and Krugman, a key policy implication of this study is that to improve the global export share of LDCs and to support economic growth, DCs should reduce or eliminate their own tariffs and subsidies, nontariff barriers, and other impediments to developing countries' exports. In practical terms, reforms in the global governance of the international trading system, WTO decision making in particular, are needed in order to insure greater LDCs representation. Definitely, to empower LDCs' rule making authority regarding international trading regime would require reforms in the governance of the international trading system, especially in the WTO decision making. More importantly, structural asymmetry in global tariffs persists so that rich countries have lower levels of tariffs against each other, and yet this same group of countries maintains significantly higher rates against the LDC bloc, a fact also noted by Stiglitz and others. (39) If there is to be asymmetric liberalization, we propose that it be skewed in favor of the LDCs, given the positive impact on total income and per capita income documented in this study. We recognize, however, that agreements to reduce tariffs or otherwise liberalize trade do not eliminate protectionist sentiments in both blocs, often leveraged by powerful domestic rent-seeking constituencies to secure the concentrated benefits of trade protectionism and to socialize its costs to consumers. The study highlights this issue and to amplify balance, other potentially negative consequences and societal costs of trade liberalization.

In terms of theoretical implications, the findings of the study confirms Lester Thurow's thesis that freer trade and greater trade volume cause total income of participant countries to grow. (40) Conversely, our findings shed doubt on critics who maintain that trade liberalization lowers total income for one group of countries or the other. Indeed, by various foundational measures--per capita income, total income, and the rate of export growth--there has been significant improvement in the position of LDCs, especially during 1995-2008. In terms of "net per capita income," however, LDCs lag behind.

In this study, we introduced and examined aggregate data. Future research may focus on specific countries. Within the LDCs group and globally, the role of China is especially worthy of examination, as recently China has become the world's leading exporter and apparently has surpassed the United States as the world's leading trading nation in 2012. (41) Thus, a China-focused case study would enrich future research on global trade liberalization.

Shah M. Tarzi *

Aristotle Emami

Bradley University, Peoria, Illinois

* Lee L. Morgan Professor, Institute of International Studies, 1501 West Bradley Avenue, Peoria, Illinois 61625-0278. Phone: (309) 677-3653; Fax: (309) 677-3256; E-mail: tarzi@fsmail.bradley.edu

(1) Adam Smith published his magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations in 1776. In this seminal work, he put forth his ideas regarding free market economics and free trade. David Ricardo offered most original and compelling defense of free trade theory in his path-breaking classic, Principles of Political Economy and Taxation (1817). Another major strand of theory, the Heckscher-Ohlin theorem centers on comparative advantages primarily determined by factor endowments. Heckscher and Ohlin argue that countries will gain by specializing in the production of goods which use their most abundant factor of production. See Bertil Ohlin, Interregional and International Trade. (Cambridge, MA: Harvard University Press, 1967).

(2) Amongst influential contemporary theorists the works of Milton Freedman is notable. See Freedman, 'The Case for Free Trade," Hoover Digest, Vol. 4 (1997). John Maynard Keynes too on several occasion supported free trade. See among others, his influential work, The General Theory of Employment, Interest and Money (1936). Two recent scholarly works in defense of free trade are Jagdish Bhagwati's, Free Trade Today (Princeton University Press, 2002) and N. Gregory Mankiw, Macroeconomics, fifth edition (2007), chapter 7 and his Principles of Macroeconomics (2011). See also, Thomas Pugel, International Economics (McGraw Hill, 2003).

(3) According to the Heckscher-Ohlin thorem, (H-O Model), capital abundant and labor abundant countries and regions will opt for export and import based on factor endowments. Essentially, the H-O Model holds that regions and countries will specialize in the export of goods and services that utilize their ample and cheap factors of production, conversely these same countries will import products that use factors that are scarce. For an excellent exposition of the Heckscher-Ohlin theorem see Edward E. Leamer, "The Heckscher-Ohlin Model in Theory and Practice," Princeton Studies in International Finance 77 (Princeton, NJ: Princeton University Press, 1995). For a critique of the theory, its weak predictive power in particular, see Chris Ewards, "The Fall of The Hecksher-Ohlin Theory," The fragmented world: competing perspectives on trade, money, and crisis (London and New York: Methuen, 1985), pp. 29-40.

(4) Arguably one of the most influential critics of traditional free trade theory is the Nobel laureate Joseph Stiglitz whose critique of trade theory is based on powerful tools of economic analysis: imperfect competition, the problem of asymmetric information and inequalities amongst market participants to insure risks. To date no scholar has been able to rebut Stiglitz's thesis regarding the existence of asymmetric information in global markets and trade and the undesirable consequences for market participants, including those engaged in international trade where such gaps are most glaring. In addition to superior scholarly critics referenced above, most anti-globalization writers too are critical of free trade. An excellent synopsis of their concerns can be found in another influential work by Jagdish Bhaghwati, In Defense of Globalization (Oxford University Press, 2007).

(5) Robert Whaples, "Do Economists Agree on Anything? Yes!". Economists Vol. 3, No. 9, (2006), cited in Wikipedia, http://en.wikipedia.org/wiki/Free_trade section titled, "Opinion of Economists".

(6) Ibid. N. Gregory Mankiw, "Outsourcing Redux".

(7) See Charles C. Kindleberger's influential work," Group Behavior and International Trade," Journal of Political Economy, Vol. 59, NO.1 (1951), pp. 30 46. See also Michael Hiscox, "The magic bullet? The RTAA, institutional reform and trade liberalization," International Organizations, Vol. 53 (1999), pp. 669-698.

(8) Regarding the effect of domestic politics and institutional reform on trade, two authoritative works are: Judith Goldstien and Lisa Martin, "Legalization, Trade Liberalization and domestic politics," International Organizations, Vol. 54, No. 3 (2000), pp. 603-32; Peter Gourevitch, "International trade, domestic coalitions and liberty, Journal of Interdisciplinary History, Vol. 8 (1977), pp. 669-698.

(9) The International Monetary Fund's World Economic Outlook Database, April and October, 2009 is the principal and arguably the most comprehensive datasets of its kind. Prepared twice each year, it forms the main instrument of the IMF's global surveillance regarding international trade, monetary and other economic activities. It can be accessed at: http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm and http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx; IMF 'eLibrary' too offer access to these and other statistical reports and datasets. Permission to use IMF WEO dataset and free non-commercial usage can be found at: http://www.imf.org/external/terms.htm.

(10) The WEO dataset permits preparation of custom reports, ideal for a study of this kind. Data can be accessed by 'Countries' (country-level data), by 'Country Groups (aggregated data) and commodity prices ', and the 'Entire Dataset. For the purpose of this study, data retrieval, organization and presentation entailed the following: (1) To conduct comparative analysis we aggregated the raw IMF data along the DC (developed countries) and LDC (developing countries) axis by combining individual countries and country grouping typically part of one or the other bloc of countries; (2) Unless otherwise specified, we prepared the data tables appearing in this study, using the IMF raw data; (3) We used the IMF WEO dataset to organize and calculate data in 'five years' period' intervals, thereby making it possible to calculate changes in and across these time periods. The IMF World Economic Database too use time series but of different duration interval and strictly for basic description, rather than analysis.

(11) To appreciate the magnitude of distortion the inclusion of the European Union would cause to an otherwise lengthy period of stable data, consider that in 2010 Europe's exports to its partner countries was $ 568.80 Billion, in 2011 just before the crisis hit it reached as high as $ 709 Billion and precipitously declined thereafter. Thus inclusion of data from the largest economic area in the world surely would have skewed results for both the DC group and the statistics on world trade. For this and other data sets on changes in world trade see the International Monetary Fund figures and data appearing under the rubric, "Terms of Trade" (or DOT). This and all other "DOT" data can be extracted from the IMF "Data Warehouse' at the IMF eLibrary website or can be accessed at: http://elibrary-data.imf.org/FindDataReports.aspx?d = 33061&e = 170921 and at: http://www.esds.ac.uk/international/support/user_guides/imf/dots.asp

(12) See Alan C. Stockman, Introduction to Economics, second edition, chapter 9, (1999); N. Gregory Mankiw, Macroeconomics, fifth edition, chapter 7 (2008), both cited in Wiki, "Free Trade", http://en.wikipedia.org/wiki/Free_trade. As noted, in this study we have adopted the cross sectional format used by IMF and the World Bank. The chart in this study is drawn from the same source.

(13) Ibid, "Free Trade", section titled, "Disadvantages of Tariffs". Wiki references Stockman's Introduction to Economics is the original source for this citation. The diagram in the original source is in color, thus reference 'Green Region' and 'Yellow Region'. Also, in the original version, net losses to the society due to the imposition of tariff as specified by the pink color. However, for consistency the original diagram was converted into black and white.

(14) For a critical discussion of the impact of trade restrictions see also, N. Gregory Mankiw, Macroeconomics, op. cit., chapter 7; Steven E. Landsburg, Price Theory and Applications, sixth edition (2004), chapter 8; Thom Hartmann, Unequal Protection: The Rise of Corporate Dominance and the Theft of Human Rights (2011), second edition chapter 20.

(15) For an overview of these debates, including a summary of Ostry and Rose (1992) study see, Yi Wu and Li Zeng, 'The Impact of Trade Liberalization on the Trade Balance in Developing Countries," IMF Working Paper (January 1, 2008), especially pp. 3-5. Free full text can be accessed at: http://www.imf.org/external/pubs/cat/longres.aspx?sk=21596.0.

(16) Ibid. p. 6. This study extended an earlier sample size of 45 countries to 39 developing nations. Further, it deployed a rigorous data set: UNCTAD'S TRAINS database supplemented by IMF's TPID database.

(17) World Development Indicators is the World Bank's foremost annual collection of data and information about various aspects of development. See the World Bank "2009 World Development Indicators," (April 2009), especially parts one, four and seven. See also Global Links. The World Bank study can be accessed at: :http://publications.worldbank.org/index.php?main_page = product_info&products _id=23087.

(18) Ibid. For the United States the Economic Report of the President compiled each year by the Chair of the Council of Economic Advisors is a key source. It provides data, analysis and information regarding economic policies, trade, state of the US economy and offers economic forecasts. The 2006 report containing the data on trade and tariff levels is titled, "The 2006 Economic Report of the President and can be accessed at: http://georgewbushwhitehouse.archives.gov/cea/jec-testimony-2006erp.html; it is also cited in the World Bank study, see footnote 17.

(19) Roger A. Arnold, Economics, 9 edition (South-Western, 2008), p. 742. See also the 10th edition, chapter 36 on globalization, especially pp. 772-774. Several prominent works under the auspices of World Bank have addressed trade liberalization and reform in these two countries. See, for example, Timothy King, Jipin Zhang, Case Studies of Chinese Economic Reform (World Bank, 1992); Robert M. Stern, Aaditya Mattoo, India and WTO (Oxford University Press, 2003); World Bank Country Studies Series, India: Five Years of Stabilization and Reform and the Challenges Ahead (World Bank, 1997).

(20) IMF Issue Brief 1/08, "Global Trade Liberalization and the Developing Countries," (November 2008). This IMF Staff paper can be accessed at: http://www.imf.org/external/np/exr/ib/2001/110801.htm

(21) Joseph Stiglitz, "Social Justice and Global Trade," Far Eastern Economic Review, Vol. 169, No. 2 (March 2006).

(22) We selected statistical metrics foundational to examining the magnitude and dimensions of trade liberalization and its consequences for the afore-stated DCs vs. LDC. The heading for each table in the study bears the name of the respective statistical metric containing data germane to it. See footnote 10 above for details.

(23) "World Development Indicators," 2009 World Bank Report, Global Link, p 319.

(24) As previously noted, the raw data in the IMF WEO dataset was used to undertake the desired calculations. Thus, for Table 3 we used export and income figures from IMF dataset and simply calculated their correlation coefficients to examine how effective higher exports have been in generating higher income in the respective two groups of countries.

(25) Clarification regarding the interval, "1980 = 100" is in order: In this particular table the first row denotes exports in billions of dollars as it appears in the IMF dataset, the second row is our calculated indexation of the first row so as to illuminate the magnitude of the changes overtime. Reference to 1980 = 100 shows that the base year used for indexation is 1980. Consequently we can track and observe changes in percentile and make tangible and readily visible comparisons. In the following two rows this procedure is repeated for DCs and LDCs.

(26) Income data is presented in terms of widely established key measurements or metrics such as total income, per capita income and net per capita income, the latter intended to adjust for purchasing power changes due to inflation, etc.

(27) Regarding this indicator the IMF data sets provide ample aggregate information. In the interest of brevity, selective most relevant data is presented. See IMF, the "World Economic Outlook Database," 2009.

(28) Ibid. The data is presented in terms of purchasing power parity. Whereas during the study period the DC group registered a highly respectable growth in per capital income, rising from nearly 7.7 trillion dollars to 31 trillion. LDCs growth in per capita income was even higher, rising from 1.3 trillion to 5.5 trillion or by 334%.

(29) Ibid. 'Average annual consumer prices' is used to adjust for inflation and therefore arrive at market-based measure of changes in living standards.

(30) According to free trade theory, presumably free trade helps tame inflation and therefore may have mitigated the impact of inflation on all countries, including the developing countries. That said, purchasing power, a real measure of living standard declined in LDCs, partly due to significant inflation shocks. Also, surely non-trade related indigenous factors played a significant role. The literature on the Third World debt crisis has amply documented macro economic and monetary mismanagement and bad governance in many large highly indebted developing countries in Latin America and elsewhere. See for example the Brooking Institution study, World Inflation and the Developing Countries (1981). For changes in the oil prices over time see the website, Oil-Price.Net at http://www.oil-price.net/; see also Salvatore Carollo, Understanding Oil Prices (John Wiley and Sons, 2012).

(31) Joseph Stiglitz, "Social Justice and Global Trade".

(32) Brahima Outtara cited in the Oxfam study: http://www.oxfam.org/en/campaigns/trade/real_lives/burkina_faso).

(33) John Sniegocki, "Neoliberal Globalization: Critiques and Alternatives,", Theological Studies, No. 9 (2008), pp. 321-339. Pope John Paul II has also opined extensively on global capitalism and trade. For his teachings see John Sniegocki, "The Social Ethics of Pope John Paul II: A Critique of Neoconservative Interpretation," Horizons, No. 33 (2006), pp. 7-32. For another critical treatment of the negative consequences of international trade agreements on the poor and on the '"race to the bottom" see David Korten, When Corporations Rule the World, 2nd ed. (San Francisco: Berrett-Koehler, 2001); see also Alvaro Ramazzini, "CAFTA Likely to Hurt Poor Central Americans," National Catholic Reporter, November 11, 2005. Link: http://ncronline.org/NCR_Online/ archives2/2005d/111105/111105w.php

(34) John Sniegocki, "Neoliberal Globalization", p. 325. The November 2003 study by Public Citizen and cited in Sniegocki is titled, "Unfair Trade: Mexico's Agricultural Crisis"; Link: http://www.globalpolicy.org/globaliz/econ/2003/11unfairtrade.pdf

(35) This segment on the cultural effects of trade liberalization draws heavily on Steve Suranovic and Robert Winthrop study, "Cultural Effects of Trade Liberalization," April 2005. Link: http://home.gwu.edu/~smsuran/Suranovic Winthrop.PDF

(36) Ibid

(37) Ibid, p. 37.

(38) Helen Milner, a prominent scholar of politics has carefully examined these three sets of explanations in her study, "The Political Economy of International Trade," Annual Review of Political Science, Vol. 2 (1999), pp. 91-114; Link: http://www.annualreviews.org/doi/abs/10.1146/annurev.polisci.2.1.91

(39) Joseph Stiglitz, "Social Justice and Global Trade".

(40) Lester Thurow, The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World (1999).

(41) Heriberto Araujo and Juan Pablo Cardena, "China's Economic Empire," editorial, New York Times, Sunday, June 2. A more elaborate treatment of this theme appears in the authors' work, China's Silent Army: The Pioneers, Traders, Fixers and Workers Who Are Remaking the World in Beijing's Image (2013).

Table 1: Integration with the World Economy: Export Share of GDP
(Average Shares of Export of Goods and Service as a Percent of GDP)

        1980-84   1985-89   1990-94   1995-99   2000-04   2005-08

World   19.65     17.90     19.30     20.43     25.03     27.04
DCs     20.37     18.72     19.38     20.00     23.51     25.02
LDCs    17.92     15.25     19.31     22.37     30.88     34.04

Calculation based on IMF WOE dataset.

Table 2: Integration with the World
Economy: Exports less GDP (Average Export
Growth less Average GDP Growth (percentages)

        1980-84   1985-89   1990-94   1995-99

World   -9.33     3.71      2.48      1.37
DCs     -8.92     5.14      2.05      0.88
LDCs    -11.69    -2.47     2.81      2.80

        2000-04   2005-08   1980-08

World   4.57      8.10      1.99
DCs     3.73      6.62      1.78
LDCs    7.82      11.86     1.98

Calculation based on IMF WEO dataset.

Table 3: Export Shares Goods and Services (Percent)

        1980    1985    1990    1995    2000    2005    2008

World   100     100     100     100     100     100     100
DCs     72.31   75.60   81.17   79.89   76.13   69.96   56.05
LDCs    27.69   24.40   18.83   20.11   23.87   30.04   34.91

Calculation based on IMF WEO dataset.

Table 4: Correlation Between Exports and Income
(Correlation Coefficients)

        1980-1994   1995-2008   1980-2008

World   0.9478      0.9710      0.9723
DCs     0.9624      0.9550      0.9711
LDCs    0.7416      0.9802      0.9589

Calculation based on IMF WEO dataset.

Table 5: Exports: Goods and Services (In Billions of U.S. Dollars)

             1980    1985    1990    1995    2000    2005     2008

World        2,472   2,352   4,339   6,308   7,881   12,840   19,694
(1980=100)   100     95      176     255     319     519      797
DCs          1,787   1,778   3,523   5,040   6,000   8,982    12,820
(1980=100)   100     99      197     282     336     503      717
LDCs         684     574     817     1,269   1,882   3,857    6,874
(1980=100)   100     84      119     185     275     564      1004

Source: IMF WEO dataset.

Table 6: Exports: Average Annual Rates of Growth (Percent)

        80-84   85-89   90-94   95-99   00-04   05-08   1980-08

World   -0.92   13.09   7.98    4.64    10.61   15.33   7.96
DCs     -0.03   14.72   7.64    3.58     8.71   12.60   7.53
LDCs    -3.36    7.72   9.44    8.64    16.02   21.25   9.14

Calculation based on IMF WEO dataset.