The implementation of trade policy reforms is a key part of macroeconomic stabilization, and governments must not place too much faith in these efforts, because wobbly reforms are worse than no reform at all. Trade reforms can have unorthodox roles in the macroeconomic stabilization process, including helping to balance entrepreneurial expectations and fiscal retrenchment. A government that understands how to effectively implement trade policy reforms will reap the greatest benefits, while one that tries to blindly rely on trade reform will most likely fail.
Among the many benefits of trade reforms are reduction of tariff rates. In the United States, for example, the tariff rate has decreased from 71 percent in 1993 to an average of 35 percent today. However, the tariff structure remains complex, and escalation continues to be a problem in several industries. Additionally, tariffs are still high in some industries, particularly in the manufacturing sector. And, while tariff reforms have helped reduce tariffs overall, the structure of tariffs is far from perfect.
One of the main reasons trade reforms fail is because governments often do not have the credibility to sustain them. Without credible reforms, macro-economic balances may be stressed and governments may simply give up. If the reform is implemented too slowly, the government may find itself unable to keep its commitments to the new regulations, and its political opponents may riot in the capital city. In the end, the government will either have to face mounting political opposition or compromise.
There are several important trade policy reforms currently underway in Africa. Most African countries have reduced the complexity of their tariff schedules, but the high protection of some sectors has remained, in part because they have not eliminated all their protective measures. Moreover, even a reduction in formal tariffs will fail unless it is coupled with removal of non-tariff barriers. Further, the impact of reforms is not confined to Africa; it should have an influence on other parts of the world.
Several trade reforms have been implemented since 1993. The Foreign Investment Promotion Board has allowed foreign equity participation up to 50 per cent in 13 minerals, although any participation higher than this requires approval from the Foreign Investment Promotion Board. There has also been liberalization of exploration licenses. In the past year, the government has taken major steps toward reforming these sectors. This has included lower tariffs, de-linking equity investment from technology transfer, and simplifying procedures.
One common remedy for a trade policy reform is to devalue the currency. This offsets the negative impact of trade policy reforms on the balance of payments. However, this solution can have negative consequences if inflation is not kept in check. For example, the government should watch the exchange rate closely in a high-inflation environment, since upward movement translates into domestic prices. Further, a fixed nominal exchange rate can act as an anchor during the stabilization of inflation, coordinating expectations around a low-inflation path.