Trade Liberalization and Economic Growth

A number of studies have pointed to the importance of trade liberalization to economic growth and therefore the presence of restrictive trade policies could account for the poor growth recorded in many developing countries (Bhagwati, Protectionism, MIT Press, 1988; Onafowora & Owoye, World Development, 26(3), 497–506, 1998; Rose, Do WTO members have more liberal trade policy?. Journal of International Economics, 63(2), 209–235, 2004). The tenets of these findings are that import restrictions of any kind create an anti-export bias thereby increasing the price of importable goods relative to exportable goods. Nonetheless, the findings from both the theoretical and empirical literature on trade liberalization’s impact on economic growth are predominantly mixed and inconclusive (Bhattacharyya, Trade liberalization and institutional development. Journal of Policy Modeling. 34 (2), 253–269., 2012; Rodríguez & Rodrik, 2000). While trade liberalization contributes to greater economic productivity, market failures, differing technological absorption, and capacities may cause trade liberalization to have an adverse impact on individual countries (Winters, 2004; Lall, 2020). In this chapter we will analyze the linkage between different trade liberalization indicators—(i) tariffs, (ii) adjusted trade ratios, and (iii) real effective exchange rates (REERs)—on economic growth in the six World Bank regions. The chapter further discusses how trade barriers have reduced substantially across most countries and regional blocks, contributing to economic resilience and growth. In addition to providing recent evidence, this chapter illuminates how different liberalization instruments work better or otherwise in different regions.