What is the difference between trade liberalization and free trade?

Alfonso Llanes, Master Degree in International Development

Written 23h ago

The basic difference between trade liberalization and free trade is on the barriers placed to the open flow of merchandise across borders. Trade liberalization means less regulation while Free Trade means no tariffs or restrictions conducted such as trade in the United States among its constituent states.

The European Union is trying has forged a similar pattern among EU member states with unified rules for all exchanges including flow of merchandise, capital, finance and people among a common borders with a single currency and central bank and with equal rule making and enforcing body for all member states.

The theory behind trade liberalization was put forth by British economist, David Ricardo arguing that a country specializing in the goods where it had advantage of capital and labor, production- costs would have a comparative advantage over other trade areas that were disadvantage in those resources. Trade specialization became the move in the direction of comparative advantage. Today, trade as described by American economist, Paul Krugman is at the level economies of scale where producers of a given industrial item pool resources to take advantage of either capital or labor existing for large scale production of specialized cubicles of capital and an educated labor force.

Car manufacturing is a good example of such trade system where engines might be made across borders and miles away from the final assembly plant and ultimate market of the vehicle. This method of trade is favored by the OECD which was originally formed by the G-20 industrialized countries to its current count of 35 member countries. Trade between these blocs of countries takes place with regional free trade agreements such as NAFTA between the US, Mexico and Canada and other major trading blocs like that formed by the EU. Trade liberalization takes place more often than not in the raw materials markets such as crude oil, metals and minerals.

Today multilateral trade is governed by the World Trade Organization (WTO) where initiatives have been made towards multilaterally-driven liberalization and harmonious rule-making. This international organization has yielded highly effective synergies between approaches at the regional and multilateral levels.