Liberalization processes play a sufficient role in the nowadays world. The liberalization of trade relations significantly facilitated the international trade, that effected integrated elements as well as separate countries. Europe, European Union in particular, and Latin America are the parts of the world trade system with distinctive differences, however both taking advantage of liberalization processes. Latin American countries, same as the European Union, form regional integrated units. Both Latin America and EU have a single market within their borders. The single market has several advantages: the liberty of transportation of outcomesof production and increasing competition, and mutual acceptance of qualifications. Increasing competition is a factor stimulating the economy, thus, bringing it to the growth. In the globalization processes involving every country nowadays, the liberalization and facilitation of trade becomes a key factor. Practically, the globalization result in a single worldwide market. However, the liberalization brings disadvantages to the economies, namely: inequality, the reduction of technological development, the emerge of vulnerable areas.
Integration processes, aiming to liberalize trade relations in Latin America, started in 1826. However, the first step was taken in 1959 only as the Latin American free trade zone was planned to be established. It included: Venezuela, Uruguay, Paraguay, Bolivia, Brazil, Argentina, Peru, Mexico, Colombia, Chile, and Ecuador. Due to political reasons, the plan wasn`t implemented, though, mutual preferential trade zones agreements were signed and are being used up till now. The Enterprise for the American Initiative was proposed by the USA in 1989. It was supposed to liberalize investment and trade, increase economic growth and integrate politics in the Western part of the world. The agreement was cancelled as the initiator, the USA, signed the NAFTA agreement. The Free Trade Area for Americas plan came instead of the Enterprise for the American Initiative in 1994. Among the liberalization methods the reduction of customs duties, introduction of the common policy, liberalization of the services trade, the creation of the regional state procurements sector, transparency, non-discrimination, free competition were proposed. Moreover, Mexican economy was set as an example of the one benefiting from integration as it was showing the increase in the growth rates. In 2004 the South American Community of Nations was established with its target of transforming to the political cooperation instead of economic one.
As for the European Union, the liberalization start point is considered the signing of the Rome Agreement, which had the facilitation of trade by exterminating trade barriers as its main goal. The common external tariff became one of the instruments to achieve it. It was set as the average of the tariffs of all EU countries and was reduced several times during The General Agreement on Tariffs and Trade (GATT) negotiations. The European Union is also fighting the non-tariff trade restrictions, namely: quotas, voluntary export restrictions and technical regulations. The Rome Agreement offered to keep quotas, but the EU considers them useless. However, with the help of quotas, the EU protects vulnerable sectors of their economy, labor-intensive ones. The voluntary export restrictions were exterminated as well, under GATT agreement. With the removal of the restrictions, the companies started to seek for the new trade markets. They set the prices less than they spent manufacturing the product (the so-called damping price), which led to unfair competition. Those cases now are also regulated by GATT agreement. Therefore, the anti-damping customs duties were allowed (The impact of Globalization and increased trade liberalization on European region).
Generally, the country`s degree of liberalization is defined as the ease to invest in the country. There are some key factors defining this ease:
- Removing barriers to enter and conduct business in the selected country;
- Free flow of capital
- Political stability
The impact of liberalization has been thoroughly studied by Heckscher - Ohlin. He proposed a theory, according to which with the liberalization the income and specialization of the member - countries would increase. Though, it is essential to allocate the production according to the competitive advantages. For the countries with labor surplus the production is expected to switch to labor - intensive export instead of capital-intensive import with the liberalization. Moreover, Stolper - Samuelson discovered that in the labor surplus countries the inequality would decline and it would rise in the countries rich in capital (P. Ashok, S. Corneliu).
Private capital flows consist of two parts: foreign direct investment and portfolio investment. They show the amount of shares in a business owned by foreigners. In the European Union private capital flows boomed when the integration processes were still in progress. After 2007 when the last two countries integrated (Romania and Bulgaria), there was the peak of foreign direct investment for the EU countries. After that the decline is observed. Big amounts of capital inflows may reduce the employment in the export sector and cause the exchange rate appreciation. Usually, foreign investments are made into the agriculture or labor - consuming manufacturing. Moreover, the excess in capital inflows would increase inequality and cause inflation due to the increasing amount of money in a turnover (A. Cornia Geovanni). The data on European stock market is presented in the chart below (Trading Economics).
It is essential to note that liberalization has different effects on macro regions and regions dealing with vulnerable production. In the vulnerable production the unemployment rates are usually low, the labor liquidity there is also lower, and the labor market is based on flexible conditions. Moreover, the workers with high qualifications lose their jobs more frequently than the unskilled ones.
The excess in the liberalization, capital inflows increase in particular, cause negative effect on the stability. The first victims of the instability are the middle - income countries. The income of the country is measured by its GDP and the growth is shown through the GDP growth rate in percents to the previous year (P. Ashok, S. Corneliu). It is important to indicate that both Latin American Countries and the members of the European Union are considered middle - income countries. The charts for the GDP growth for both EU and Latin America are given below (Trading Economics).
However, the Euro zone is an already formed organization that started the integration process after the World War II. It is already an “adult” organization with relatively strong economy. On the contrary, Latin America didn`t attract the investors that much before. According to the charts below, it doesn`t attract foreign direct investment in the present days either, however, it is being financed with the international markets` money. For instance, the Volvo Company is building a manufacturing works in Brazil after they revised their external policy and facilitated the procedure of obtaining a license.
Latin America nowadays is becoming more attractive for investors. During the last 20 years this continent showed the tendency to democratization and making the assets and commodities exchange and distribution fairer. The governments in Latin American countries took the responsibility for liberalization lately. Argentina and Brazil, and other countries either restructured or paid their external debt, which made them look more reliable and stable on the international market. Central America is still suffering from the low compensation for the workforce, which is attractive for the investors willing to pay less though. The income inequality in Latin America now is higher due to the increase in the enrollment rate. Therefore, the qualified labor force amount increases (P. E. Caldentey)
Latin America had an import – substitute policy during the 80s – 90s. That meant that the economy was developing under the protectionism conditions with a big share in it of the governmental sector and therefore became dependent upon export. After 90s Latin America started to show interest in the GATT regulations that aimed to facilitate international trade. At that time, the free trade policy replaced the industrialization concept due to the modernization of the economy. However, most of the countries got disappointed in GATT and decided to enter other international organizations with more preferable conditions for the developing countries. The United Nations Commission on Trade and Development (UNCTAD) became one of them. Since this moment, GATT decided to allow preferences for the developing countries as the “rich” ones still needed new markets to sell their goods at.
The liberalization of trade has both positive and negative effects on the economy. Among the positive ones are: the attracting of foreign money to the economy, therefore the GDP and salaries grow, the increase of employment in export oriented spheres and the reduction of imported goods` prices due to the facilitation of customs regulations. However, the surplus in the money supply causes the inflation, the vulnerable sectors remain weak and, additionally, suffer from the competition, the country becomes dependent on the presence of foreign capital, the inequality increases. Europe is already facing the results of severe, extra liberalization, though Latin America, as an example of developing economy that feels the need in it, benefits from it.