CHAPTER 3 The Impact of Trade Liberalization


he effect of changes in trade policy on a given country can be divided into two components. First, the “terms-of-trade effect” refers to the gains or losses associated with changes in world prices as a result of the policy. Most countries are too small for their trade policy to have a noticeable effect on world prices, but global trade agreements can sig- nificantly influence world prices. To the extent that most interventions in agriculture contribute to higher world production and lower imports, they depress world prices of agricultural commodities relative to a world without distortions. Eliminating the distortions could have adverse terms-of-trade effects for net-food-importing countries, including most of the MENA coun- tries, while benefiting net exporters of agriculture. Second, the “efficiency effect” refers to gains or losses associated with removing distortions in the country’s own market. Unless there are significant externalities, a reduction in market distortions is generally expected to have positive efficiency effects. In other words, domestic market liberalization, to the extent that it reduces distortions in the economy, will generate more benefits than costs on bal- ance, regardless of what trade partners do (Bouët 2008). This view of trade liberalization differs considerably from the perspective of trade negotiators, for whom the goal is often to maximize trade liberal- ization in other countries while minimizing trade liberalization in their own countries. From this view, tariff reductions in one’s own country are un- fortunate concessions that must be made to achieve tariff reduction in export markets. Because it attempts to maximize exports and minimize imports, this approach is essentially mercantilist. This perspective is often attributed to the greater political influence of producers, who compete with imports, as opposed to consumers, who would gain from lower prices. It also reflects concerns by governments regarding the uncertainty of the benefits and costs associated with trade liberalization and how they are distributed among the various economic actors in the economy. In particular, there is concern that the poorest may bear the cost of adjustment or not benefit as much from the new opportunities.


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