Trade Liberalization's Impact in Poor vs. Rich Countries

Developed and developing countries have substantially reduced trade barriers in recent decades. However, the effects of trade liberalization may not have been the same for both groups, according to a recent Economic Synopses essay.

“Understanding the differential responses to trade liberalization across income groups is important for designing effective policies that allow low-income countries to fully benefit from openness to international trade,” wrote Economist Fernando Leibovici and Senior Research Associate Jonas Crews.

Identifying Trade Liberalizations

In their analysis, the authors examined the response of exports to changes in trade barriers in rich and poor countries. To do so, they first measured the average foreign import tariffs charged on a country’s exports by each destination market over the period 1980-2006. The authors gave foreign import tariffs on U.S. exports as an example. They measured the average import tariffs charged by each country importing U.S. goods and then weighted those tariffs by the share of aggregate U.S. exports imported by each country.

Then, they identified episodes of trade liberalization. In a given year, they said that a country experienced liberalized trade if the average foreign import tariffs on its exports declined by at least 0.75 percentage points over the following three years.If a country experienced more than one of these episodes, the authors used the first one.

Finally, the authors grouped the countries based on their level of economic development in the trade liberalization year. Their sample consisted of:

• Nine low-income countries—those with real GDP per capita below $5,000 (in 2011 U.S. dollars)
• 19 middle/upper-income countries—those with real GDP per capita above that threshold

Impact on Export-to-GDP Ratio

Leibovici and Crews examined how the export-to-GDP ratio for these two income groups changed through the first 10 years after trade liberalization. They found that over this period:

• The export-to-GDP ratio increased by 13 percentage points for the middle/upper-income countries.
• The export-to-GDP ratio increased by 2.5 percentage points for the low-income countries.

This occurred even though average foreign import tariffs declined by about 1 percentage point more in low-income countries than in middle/upper-income countries over the first 10 years after trade liberalization, the authors noted.

Role of the Level of Economic Development

“This evidence suggests that the impact and potential gains from trade liberalization may differ based on a country’s level of economic development,” Leibovici and Crews wrote.

They speculated that some characteristics—such as financial underdevelopment, limited infrastructure or limited human capital—might prevent low-income countries from increasing production to sell internationally and taking more rapid advantage of trade liberalization.

Notes and References

¹ The authors gave foreign import tariffs on U.S. exports as an example. They measured the average import tariffs charged by each country importing U.S. goods and then weighted those tariffs by the share of aggregate U.S. exports imported by each country.

² If a country experienced more than one of these episodes, the authors used the first one.

Additional Resources

Economic Synopses: Trade Liberalization and Economic Development

On the Economy: How Could Higher Tariffs Affect American Manufacturers?

On the Economy: What Drives Productivity Differences across Countries?