trade

CHAPTER TWO
2.1 INTRODUCTION
Trade liberalization has been one of topics that many economist has argued on, by showing their own side of it, while economist argued in favor of it, also some other researchers said it is a negative influence on the economy as a whole .But before the advent of trade liberalization policy , import substitution was embarked by countries all over the world in the 20 century. It was adopted by countries to improve locally made goods by raising high tariffs, increase taxation and highly protectionist trade policies also this strategy also start to prevail as form of industrialization in most developing countries in the post war period. But was later abandoned in 1980s and 1990s due to the insistence of IMF and world bank to adopt the structural adjustment program which brought about liberalization of the trade market, which can also be called the out ward oriented policy which is also know to have lead to the development of the national economies of the Asian tigers which are Hong Kong, south Korea, Taiwan and Singapore.
Asian developing economies have grow much more rapidly over the past 15 years then their counterpart Latin America or Africa. Observing the period of 1976 to 1985, per capita income during this period grew at an average annual rate of 3.4% for 16 Asian countries but declined at rates of 0.3% in the Latin America (24 countries) and 0.4% in Africa (43 countries). This is to show that out-ward oriented policies reflected on in the level of the real exchange rate encourage exports, fostered the development of the tradable sector in the Asia whereas in-ward orientation and an overvalued real exchange rate encourage growth of the non- tradable sector in Latin America and Africa as well.(Dollar 1992)
In the world economy since 1950 there has been a massive liberalization of world trade, first
Under the auspices of the General Agreement on Tariffs and Trade (GATT), established in 1947,
and now under the auspices of the World Trade Organization (WTO) which replaced the GATT in 1993. Tariff levels in high-income developed countries have come down dramatically, and now average approximately 4 percent. Tariff levels in developing countries have also been reduced, although they still remain relatively high, averaging 20 percent in the low-and middle-income countries. Non-tariff barriers to trade, such as quotas, licenses and technical specifications, are also being gradually dismantled, but rather more slowly than tariffs.
Regional Trade Agreements (RTAs) have also become very fashionable in the form of Free
Trade Areas and Customs Unions. The WTO lists 76 that have been established or modified
Since 1948. . The major ones are the European Union (EU); the North American Free Trade Area (NAFTA); Mercosur covering Argentina, Brazil, Paraguay, Uruguay and Chile; APEC, covering countries in the Asia and Pacific region; ASEAN covering South-East Asian countries, and SACU, covering countries in southern Africa.
The liberalization of trade has led to a massive expansion in the growth of world trade relative
to world output. While world output (or GDP) has expanded fivefold, the volume of world trade
Has grown 16 times at an average compound rate of just over 7 percent per annum. In some
Individual countries, notably in South-East Asia, the growth of exports has exceeded ten percent
Per annum. Exports have tended to grow fastest in countries with more liberal trade regimes, and
These countries have experienced the fastest growth of GDP. (Thirlwall 2000)
The World Bank found that in 1990s the increase of trade-to-GDP ratios made an increase of 5 percent of income per capita for about 3 billion people. It concludes that countries, which do open up, increase their growth rates. The IMF considers that low level of trade makes countries more volatile to debt crises. It recognizes that the debt services of the least developed countries are in large due to the low export revenues.
Trade liberalization over the years has been seen as an engine of growth in the national economies of Asian tigers for example Singapore, South Korea and the other countries. And it is believed that without trade an economy can barely survive and it is left to the country to devise a way or policies that can lead to trade gain thereby leading to growth. After several trade policies trade liberalization policy has been proven looking at the developed countries and the way it was implemented, it still stand out as a policy that would to growth and development when implemented effectively in the developing countries.


2.2 REVIEW OF DEFINITIONAL ISSUES
TRADE
Trade can be define as the A basic economic concept that involves multiple parties participating in the voluntary negotiation and then the exchange of one's goods and services for desired goods and services that someone else possesses. The advent of money as a medium of exchange has allowed trade to be conducted in a manner that is much simpler and effective compared to earlier forms of trade, such as bartering. In financial markets, trading also can mean performing a transaction that involves the selling and purchasing of a security. (Investopedia)






TRADE LIBERALIZATION
The removal or reduction of restrictions or barriers on the free exchange of goods between nations. This includes the removal or reduction of both tariff (duties and surcharges) and non-tariff obstacles (like licensing rules, quotas and other requirements). The easing or eradication of these restrictions is often referred to as promoting "free trade."(Investopedia)

ECONOMIC GROWTH
An increase in the capacity of an economy to produce goods and services, compared from one period of time to another. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries.(Investopedia)
EXPORT
Export can be define as the amount of goods and services sold to other countries and it is expected that higher export would lead to growth of the economy also the more we produce in the economy the more income we gain from trade
IMPORT
Import is the amount of goods and services sold or purchase by the country, and also the more we import into the economy will lead to risk of low growth of the economy. Also import serve as a leakage to the economy.
2.3 REVIEW OF CONCEPTUAL ISSUES
2.3.1 WHAT IS TRADE LIBERALIZATION?
Trade liberalization is an essential component of international trade and finance. It entails the removal of the various barriers to trade that countries around the world have erected and has been recognized by many studies as an important factor accounting for the economic growth and development of many Nations.( Echekoba F.N. Okonkwo V.I. Adigwe P.K 2015)

2.3.2 The Benefits of Trade Liberalization
Policies that make an economy open to trade and investment with the rest of the world are needed for sustained economic growth. The evidence on this is clear. No country in recent decades has achieved economic success, in terms of substantial increases in living standards for its people, without being open to the rest of the world. In contrast, trade opening (along with opening to foreign direct investment) has been an important element in the economic success of East Asia, where the average import tariff has fallen from 30 percent to 10 percent over the past 20 years.
Opening up their economies to the global economy has been essential in enabling many developing countries to develop competitive advantages in the manufacture of certain products. In these countries, defined by the World Bank as the "new globalizers," the number of people in absolute poverty declined by over 120 million (14 percent) between 1993 and 1998.1
There is considerable evidence that more outward-oriented countries tend consistently to grow faster than ones that are inward-looking.2 Indeed, one finding is that the benefits of trade liberalization can exceed the costs by more than a factor of 10. Countries that have opened their economies in recent years, including India, Vietnam, and Uganda, have experienced faster growth and more poverty reduction. On average, those developing countries that lowered tariffs sharply in the 1980s grew more quickly in the 1990s than those that did not.
Freeing trade frequently benefits the poor especially. Developing countries can ill-afford the large implicit subsidies, often channeled to narrow privileged interests, that trade protection provides. Moreover, the increased growth that results from freer trade itself tends to increase the incomes of the poor in roughly the same proportion as those of the population as a whole.New jobs are created for unskilled workers, raising them into the middle class. Overall, inequality among countries has been on the decline since 1990, reflecting more rapid economic growth in developing countries, in part the result of trade liberalization.
The potential gains from eliminating remaining trade barriers are considerable. Estimates of the gains from eliminating all barriers to merchandise trade range from US$250 billion to US$680 billion per year. About two-thirds of these gains would accrue to industrial countries. But the amount accruing to developing countries would still be more than twice the level of aid they currently receive. Moreover, developing countries would gain more from global trade liberalization as a percentage of their GDP than industrial countries, because their economies are more highly protected and because they face higher barriers.
Although there are benefits from improved access to other countries' markets, countries benefit most from liberalizing their own markets. The main benefits for industrial countries would come from the liberalization of their agricultural markets. Developing countries would gain about equally from liberalization of manufacturing and agriculture. The group of low-income countries, however, would gain most from agricultural liberalization in industrial countries because of the greater relative importance of agriculture in their economies.
2.3.3 TRADE LIBERALIZATION AND ECONOMIC GROWTH IN NIGERIA


2.3.4 REVIEW OF NIGERIA'S TRADE POLICIES
Nigeria trade policy has been categorized into two which is the period before the introduction of the structural adjustment programme and the period after the adoption of the structural adjustment programme even as at the late 1970s and the early 1980s when Nigeria was experiencing a downturn in the economy which led to the introduction of the policies which also carry along stringent conditionality from the IMF and world bank this would be explained in details in the post structural adjustment programme era. The trade policies implemented under the two regimes are as follows,
2.3.4.1 PRE-STRUCTURAL ADJUSTMENT PERIOD
Nigeria economy was backward and rural at independence and are also based on the agrarian with very low industrial base , which lead to the adoption of development planning strategy by the political leaders as an instrument for securing a steady and rapid growth of the economy. Also it was emphasized that the economy should widen its industrial base which means that the country should be able to at least produce consumable good locally and reduce the dependence on external forces to supply goods also to be able to finance imports necessary for the pursuance of the industrialization programme, export of the cash crops which were then the major source of foreign exchange had to be intensified. Then the farmers were encouraged to expand their production of cash crops with guaranteed external markets by marketing boards. So they began to export cocoa, palm produce, groundnut, rubber, ginger and solid minerals, coal and tin. Also the goal of development gave rise to stronger demand for import which in turn affects the balance of payment, exchange control measure were then introduced to adjust the demand for foreign exchange to the available supply so as to maximize the use of reserve by ensuring that essential imports were accorded priority over others in the use of foreign exchange resources. Also in order to give effect to the import substitution industrialization policy trade barriers in the form of import licensing was put in place to complement import tariffs in the control of import as well as protect domestic industries that were established to produce import substitutes so the tariff structure was one –sided in benefit of capital goods and raw materials while luxury goods either on the prohibition list or comes with a very high import tariffs placed on them.
The first development policy(1962-68) was formulated with the objectives of development opportunities in health, education and employment and improving access to these opportunities. E.t.c. This plan failed because 50% of resources needed to finance the plan was to come from external sources. And only 14% of the external finance was received. Collapse of the first republic and the commencement of civil war also disrupted the plan. After the civil war in 1970, The second national development plan (1970-74) was launched ,the plan priorities were in agriculture industry, transport, manpower, defense, electricity, communication, water supply and provision of social services.
The third development plan (1975-80) was considered more ambitious than the second plan emphasis was placed on rural development and efforts to transform agricultural sector.
The forth development plan (1981-85) recognized the role of social sciences, health service. The plan was aimed at bringing about improving in the living conditions of the people. The specific objectives were to increase the real income of the average citizen ,and more even distribution of income among individual and socio-economic groups. Increased dependence on the country's material and human resources.

2.3.4.2 STRUCTURAL ADJSUTMENT PERIOD (1986-1993)
The enormity of distortions in the economy influenced by the culture made it necessary for government to take quick and abrupt actions to amend the situation.
In July 1986, the structural adjustment programme (SAP) was introduced to take the problem of imbalance in the economy and thereby pave way for the stable growth qnd development. The main element of the program include:
Restructure and diversify the productive base of the economy in order to lessen the dependence on the oil sector and on imports
Achieve fiscal and balance of payment viability overtime
Lay the basis for sustainable, non- inflationary growth
Lessen the dominance of unproductive investment in the public sector, improve the sector's efficiency and intensify the growth potential of the private sector
A Number of strategies were pronounce to achieve the broad objectives of the SAP. Specific to international trade, the primary focus was on liberalization of trade and the pricing system. With the emphasis on the use of " appropriate price mechanism for the allocation of foreign exchange". The second tier foreign exchange market (SFEM) was introduced under which the exchange rate of the naira was to be determined by the market forces of demand and supply .The price determination mechanism provided the means for ultimate allocation of foreign exchange to end users as against the erst while use of administrative discretion. The application of import and export licensing became irrelevant in the new dispensation and were consequently abolished.
To encourage export activities, the policy which required exporters to surrender their export proceeds to the central bank of Nigeria was abolished. Consequently, exporters were allowed to retain 100% of their export earnings in their domiciliary accounts from which they could freely draw to meet all their eligible foreign exchange transactions.
Furthermore ,under the revised duty draw back or suspension scheme, exporters or producers could import raw materials and intermediate product free from import duty and other direct tax and charges. The export incentives and miscellaneous provisions decree of 1986 was promulgated to encourage exports through it the CBN could provide re- financing and discounting facilities to banks to encourage them to provide export financing to their customers. Also the Nigerian export credit guarantee and insurance corporation came on stream in 1988 , and was subsequently renamed Nigerian export- import Bank (NEXIM) to provide credit and risk bearing facilities to bank ,so as to encourage them to support exports
In the area of imports, the devalued exchange rate of naira at the different shades of the foreign exchange market either SFEM, AFEM,OR IFEM was meant to make imports dearer and thus discourage excessive importation and thereby reduce the pressure on the balance on the use of custom tariff for the control of imports. The list of items on the imports prohibition list was also drastically reduced.
2. 3. 4. 3 POST STRUCTURAL ADJUSTMENT PERIOD (1994- TILL DATE)



2.4 REVIEW OF THEORETICAL LITERATURE
2.4.1 Early Trade Theory: The Mercantilist View
The importance of trade in economic growth and development has been recognized as early as the mercantilist era of economic thought. This doctrine emphasizes the importance of international trade and pioneered the accounting notion of the balance of payment between a nation and the rest of the world. This period was one of nation building and consolidation of powers by newly formed nations. Because gold and silver circulated as money, the quantity of these precious metals held by a country symbolized that nation's wealth and power. The leaders therefore, wanted to accumulate as much gold and silver as possible while keeping imports to
a barest minimum. Any country that would export more than it imported would enjoy an inflow of gold and silver. The policy prescription based on this mercantilist view was to encourage exports and restrict imports. Mercantilists viewed trade primarily as a way to accumulate gold (wealth). Further, mercantilist assumed trade was a zero-sum game; i.e. that trade could not be mutually beneficial to all parties. The basic idea here is that a country might have absolute advantage over the other's product. So this country would export its more competitive products and take advantage of markets of its trading
partners, Hecksher (1949).

2.4.2 The Classical Trade Theory: Smithian and Ricardian View
Adam Smith, in his book "An Inquiry into the Nature and Causes of the Wealth of Nations" published in 1776, questioned the mercantilist assumption that trade was a zero-sum game. By assuming that each county essence trade here improved allocation of resources, ensuring that goods production requires fewest resources.
The result would be a large total quantity of goods produced in the world. In a nut shell, according to the theory of absolute advantage, it would benefit each country to specialize in producing the goods in which it has an absolute advantage and to import the goods in which it has an absolute disadvantage, Smith (1937). However, smith's trade theory was later fine tuned by David Ricardo. Ricardo in his "Principle of Comparative Advantage" further argued that even when one country has an absolute advantage in the production of two goods against another country; it might still be more beneficial to both countries if each of them specializes in the production of only one of the goods. Ricardo opined that a country can produce and export a
particular commodity in which it has comparative advantage, while importing a commodity in which it has comparative disadvantage and thereby maximize its welfare. Such specialization and trade makes both countries potentially better off by expanding their consumption opportunity sets. Residents can choose to consume combination of goods that would be impossible to produce domestically, Yarbrough and Yarbrough (1994).

Hecksher-Ohlin Model or Factor Endowment Trade Theory: The Neoclassical Model
The classical comparative advantage theory of free trade is a static model based strictly on a onevariable-factor (labour cost), complete specialization approach to demonstrating the gains from trade. This nineteenth century free trade model, primarily associated with David Ricardo and John Stuart Mill, was modified and refined in the 20th century by two Swedish economists, Eli Hecksher and Bertil Ohlin to take into account differences in factor supplies mainly; Land, Labour, capital on international specialization. Hecksher-Ohlin neoclassical (variable proportions) factors endowment trade theories also enables us to describe analytically the
impact of economic growth on trade patterns and the impact of trade on the structure of national economies and on the differential returns or payments to various factors of production.
Unlike the classical labour cost model, however, where trade arises because of fixed but differing labour productiveness for different commodities for different countries, the neoclassical factor endowment model, assumes away inherent difference in relative labor productivities by postulating that all countries have access to the same technological possibilities for all commodities. If domestic factor prices were the same, all countries will use identical methods of production and will therefore have the same domestic product price ratios and factor productivities. The basis for trade arises not because of the inherent technological differences in labour productivity for different commodities between different countries but because countries are endowed with different factor supplies. Given relative factor endowments, relative factor prices will differ (e.g. labour will be relatively cheap in labour abundant countries), and so will domestic commodity price ratios and factor combinations. Countries with cheap labour will have a relative cost and price advantage over countries with relatively expensive labour in commodities that make intensive use of labour (e.g primary products). They should therefore focus on the production of these labour intensive products and export the surplus in return for
import of capital intensive goods. Conversely, countries well endowed with capital, will have a relative cost and price advantage in the production of manufactured goods, which tend to require relatively large inputs of capital compared with labour. They can thus benefit from specialization in export of capital intensive manufactures in return for labour intensive products from labor abundant countries. Trade therefore serves as a vehicle for the nation to capitalize on its abundant resources through more intensive production and export of commodities that require large input of those resources while relieving its factor shortage through the importation of commodities that use large amount of its relatively scarce resources.
To summarize, the factor endowment theory is based on two crucial propositions.
1. Different products require productive factor in different relative proportions. For example,
agricultural products generally require relatively greater proportions of greater per unit of
capital than manufactured goods that require more machine time (capital) per worker than
most primary products. Proportions in which factors are actually used to produce different
goods will depend on their relative prices. But no matter what factor prices may be, the factor
endowment model assumes that certain products will always be relatively more capital
intensive while others will be relatively more labour intensive. These relative factor intensities
will be no different in India than in the United States: primary products will be the relatively
esignated capital abundant countries. Others, like India, Egypt or Colombia, have little capital
and much labour and are thus designated labour abundant countries. In general, developed
countries are relatively capital abundant (one could also add that they are well endowed with
skilled labour), while most developing countries are labour abundant.
2. The main conclusions of the neoclassical model of free trade are that all countries gain from
trade and the world output is increased. However, there are several others in addition to these
two basic conclusions. First, due to increasing opportunity costs associated with resources
shifting among commodities with different factor intensities of production, complete
specialization will not occur in the classical comparative advantage model. Countries will tend
to specialize in products that use their abundant resources intensively. They will compensate
for scarce resources most intensively. But rising domestic costs and therefore prices in excess
of world prices will prevent complete specialization from occurring.
Second, given identical technologies of production throughout the world, the equalization of domestic product price ratios with international free-trade price ratio will tend to equalize factor prices across trading countries.Wage rates, for example, will rise in labour-abundant developing world as a result of the more intensive use of human resources in the production of additional agricultural output. But the price of scarce capital will decline due to the diminished production of manufactured goods, which are heavy users of capital will rise relative to its scarce labour as more emphasis is placed on the production of capital- intensive manufactured goods and less
on labour intensive agriculture. The neo-classical factor endowment theory makes the important prediction that international real wage rates and capital costs will gradually tend toward equalization. In recent years, many highly paid manufacturing workers in the more developed countries were worried that freer trade and greater international competition would drive
their wages down to the LDC. Therefore as a corollary to these theories, we would examine the export-led growth hypothesis which is adopted for this present research.
Export Led Growth Hypothesis
The Export led Growth hypothesis postulates a relationship between the growth of exports and the economy such that export expansion becomes one of the main determinants of economic growth. This hypothesis holds that overall growth of different economies could be generated not by increasing the amounts of
labor and capital, but also by expanding exports. The theoretical rationale for this hypothesis hinges on a number of arguments which include the following: first, that the export sector may generate positive externalities on nonexport sectors through more efficient management styles and improved production techniques, Feder (1983). Second, export expansion will increase productivity by offering potential for scale economies, Helpman and Krugman (1985); Krugman (1994). Thirdly, exports are likely to alleviate foreign exchange constraints and can thereby provide greater access to international markets, Esfahani (1991). These arguments have recently been extended by the literature on endogenous growth theory which emphasizes the role of exports on long-run growth via a high rate of technological innovation and dynamic learning from abroad, Lucas (1998); Romer (1986, 1989); Grossman and Helpman (1991, 1995); Edwards (1992); Alisna and Rodrick (1999).