Abstract
The international trade enhances the economic growth through efficient allocation of resources, spurs competition, increase flow of knowledge and investment, and enhances the rate of capital accumulation in an economy; while empirical evidences suggest that barriers to trade restrain export potential are below optimal level [Santos- Paulino and Thirwall (2004)]. The trade liberalization reduce barriers to the movement of goods and services among the nations and appears to be a powerful system for promotion of economic growth and development. Over the last few decades the world trade has grown on an average of over 6 per cent per year, which is twice the world output. According to Bhagwati [(1978), (1988)] and Krueger (1997), "any policy which reduces the anti-export bias will move towards liberalization of trade" and reduction the import license premium is necessary step towards trade liberalization regime [Edwards (1993)]. He also demonstrated that trade liberalization eliminates trade distortions, such as import tariffs and export subsidies.The new growth theory propagates that trade liberalization expands global market, promote research and development, increase movements of knowledge and skills among nations and reallocate human capital in more innovative manners [Thomas and Nash (1991), Weiss (1992), Arsalan and Wijnbergen (1993)]. However, trade liberalization entails cost; the most significant setback due to reducing tariff which is the loss of government revenue in developing countries. If tariffs are reduced or eliminated, the developing countries impose other taxes to their citizens in order to keep its budget in line, which causes economic imbalances in an economy. To develop more outward-oriented or liberalized trade policy regime, there is a need to control the internal and external factors. The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO) have been the key forces for free trade which substantially reduced and dismantled barriers to trade, i.e., quotas, licenses and technical specifications, among other restrictions [Santos and Amelia (2005)]. Accordingly, trade liberalization is beneficial for all economies regardless of their size and level of growth and the aggregate gains from free trade outweigh possible losses of free trade, irrespective sectors and size of the country. Though, free trade enlarges pie but distributes unequally among various countries in accordance with their size [Shafaeddin (1994), Jenkins (1996), Krueger (1997)]. Consequently the trade liberalization has enhanced the living standards around the world; while in many developing countries' prosperity has raised, few gain considerably. The share of developing countries in the world trade has significantly increased, during the last four decades and their export of manufactures and services relative to primary commodity exports have substantially increased. The developing countries manufactures export accounted eighty per cent of their total exports. Moreover, international trade between developing economies grew very fast in the recent years - over forty per cent of their export goes to other developing countries. Export growth is very important for achieving economic growth, stability and sustainability [Khan (1998), Greenaway and Sapsford (1994), Weiss (1992)]. The efficacy of any country's trade policy in relation to its export performance is highly dependent on demand of its exports, productive potential of the exportable goods, composition of commodity exports, and diversification of variety of exportable commodities, and on the free preferential trade agreements with regional and non-regional economies. The rate of economic growth and distribution of income, wealth and resources in a country are closely related to export growth. On one hand, if export increases at a faster rate as compared to its imports, nothing can stop an economy from being a developed nation. On the other hand, the instability in exports growth can adversely affect the process of economic development, because fluctuation in export earnings generate uncertainties in an economy. These uncertainties influence the economic behaviour by adversely affecting the level and competency of investment and in turn have a negative effect on growth. The contrary view of the picture is that immense amount of uncertainty on export proceeds also brings risk aversion. The risk averse investors invest relatively more domestically and this may constrain the economic growth; but however, currently it is not a much observable fact. Trade liberalization could be beneficial when magnitude of international trade of a country grows at a faster rate. Exports of a country are vital for its economic performance relatively due to the high profitability and foreign exchange earning potential.