ABSTRACT This paper examines the impact of trade liberalization on the merchandise trade balance for a sample of developing countries that have adopted trade liberalization policies. The impact is differentiated according to the destinations and origins of the exports and imports, whether they are developing or industrial countries. This is important as one of the arguments for protection is based on the assumption of asymmetry in the elasticities of products traded between developing and industrial countries, and this asymmetry leads to disparity in economic growth. The paper shows that the impact on the merchandise trade balance differs between the two groups of trading partners; there is weak evidence that the trade balance worsens (increase in deficit) for trade with developing countries, but the trade balance improves (increase in surplus) for trade with industrial countries. Keywords: Trade Liberalization, Trade Balance I. INTRODUCTION The objective of the paper is to empirically examine the impact of trade liberalization on developing countries’ trade balance with industrial and developing countries. Many developing countries have liberalized their trading regime with the hope of gaining static and dynamic gains from trade, and that the liberalization will increase both the growth of exports and imports, and, consequently, improve welfare. However, trade barriers are still relatively high in many developing countries. This is because a more liberal trade regime may invite the possibility of worsening trade balance, as the impact of liberalization depends on the relative increase in the growth of imports and exports and the prices of the product traded (Santos-Paulino and Thirlwall, 2004). International Journal of Business and Society, Vol. 10 No. 2, 2009, 53 - 64 THE IMPACT OF TRADE LIBERALIZATION ON DEVELOPING COUNTRIES’ TRADE BALANCES WITH INDUSTRIAL AND DEVELOPING COUNTRIES: AN ECONOMETRIC STUDY Gairuzazmi M. Ghani ♣ Department of Economics, KENMS, International Islamic University Malaysia ♣ Corresponding Author: Gairuzazmi M. Ghani, Dept. of Economics, KENMS, International Islamic University Malaysia, P.O. Box 10, 50728 Kuala Lumpur, Malaysia. Email: gairuzazm@iiu.edu.my