Issues in International Trade
The growth in world trade slowed in the first half of the 1980s compared with both the previous decade and relative to output. The slowdown in the early 1980s was particularly pronounced in developing countries, whose share of world trade has tended to decline. World trade growth picked up during 1986-87 and exceeded the growth of world output, but by a narrower margin than in the 1970s (Table 1).1
Trends in World Trade and Production 1
(Average annual growth rates)
Composites for country groups are averages of percentage changes for individual countries weighted by the average U.S. dollar value of their gross domestic product (GDP) (output) and trade (trade volume) over the preceding three years.
Compound annual growth rates of real GDP. Excludes China in 1970-79.
World averages include the U.S.S.R., the German Democratic Republic, Bulgaria, and Czechoslovakia, which are excluded from the industrial and developing country averages.
Average of export and import growth.
Trends in World Trade and Production 1
(Average annual growth rates)
| 1970-79 | 1980-85 | 1986 | 1987 | ||
|---|---|---|---|---|---|
| World output2,3 | 4.1 | 2.5 | 3.2 | 3.2 | |
| Industrial countries | 3.3 | 2.3 | 2.7 | 3.3 | |
| Developing countries | 5.7 | 2.7 | 4.2 | 3.4 | |
| World trade volume3,4 | 6.4 | 2.4 | 4.7 | 5.7 | |
| Industrial countries | 6.6 | 3.4 | 5.7 | 6.0 | |
| Developing countries | 6.6 | 0.5 | 2.5 | 6.5 | |
Composites for country groups are averages of percentage changes for individual countries weighted by the average U.S. dollar value of their gross domestic product (GDP) (output) and trade (trade volume) over the preceding three years.
Compound annual growth rates of real GDP. Excludes China in 1970-79.
World averages include the U.S.S.R., the German Democratic Republic, Bulgaria, and Czechoslovakia, which are excluded from the industrial and developing country averages.
Average of export and import growth.
Trends in World Trade and Production 1
(Average annual growth rates)
| 1970-79 | 1980-85 | 1986 | 1987 | ||
|---|---|---|---|---|---|
| World output2,3 | 4.1 | 2.5 | 3.2 | 3.2 | |
| Industrial countries | 3.3 | 2.3 | 2.7 | 3.3 | |
| Developing countries | 5.7 | 2.7 | 4.2 | 3.4 | |
| World trade volume3,4 | 6.4 | 2.4 | 4.7 | 5.7 | |
| Industrial countries | 6.6 | 3.4 | 5.7 | 6.0 | |
| Developing countries | 6.6 | 0.5 | 2.5 | 6.5 | |
Composites for country groups are averages of percentage changes for individual countries weighted by the average U.S. dollar value of their gross domestic product (GDP) (output) and trade (trade volume) over the preceding three years.
Compound annual growth rates of real GDP. Excludes China in 1970-79.
World averages include the U.S.S.R., the German Democratic Republic, Bulgaria, and Czechoslovakia, which are excluded from the industrial and developing country averages.
Average of export and import growth.
A number of factors underlie developments in the early 1980s. Large macroeconomic and structural imbalances, sluggish growth, and persistent unemployment intensified protectionist pressures in industrial countries. These pressures may have contributed to the slowdown of both world trade and production. The onset of the debt problem necessitated a reduction in imports relative to production in developing countries, including some of the newly industrializing economies. The decline in oil prices led to a particularly pronounced adjustment in imports in oil producing countries. With few exceptions, developing country policies have not been sufficiently outward-looking to achieve rapid export growth. Large exchange rate changes may also have contributed to the slowdown in world trade.2
The pickup in the growth of world trade in 1986-87 was not accompanied by an abatement of protectionist pressures. Trade policy developments continue to be a matter of concern. Instances of trade liberalization have been limited, while resort to restrictive trade measures has increased. Consequently, little evidence exists to suggest that the stance of trade policies is contributing to the correction of underlying disequilibria among industrial countries and to the resolution of the debt and balance of payments problems of developing countries. Indeed, trade policies (along with other policies) may well be hindering such a process. Given these developments, it needs to be considered whether unilateral liberalization can play a greater role in structural adjustment.
Industrial Countries
Protectionist pressures remain high in industrial countries and in some cases have resulted in an increase in trade-restricting measures (Section II). Nonfuel imports of industrial countries subject to nontariff measures (NTMs) rose from about 19 percent of their total non-fuel imports in 1981 to about 23 percent in 1987.3 Since then there has been a sharp increase in export restraint arrangements reported by the General Agreement on Tariffs and Trade (GATT): such arrangements rose from 135 in September 1987 to 261 in May 19884 (Table 2). The increase in such arrangements has intensified restrictions in sectors that are already subject to quantitative measures, such as textiles, clothing, and agriculture. In terms of protected markets, the increase is most prominent in the European Community (EC); and it affects exports of both developing and industrial countries. Although it is difficult to quantify the impact, the recent increase in voluntary export restraints (VERs) and similar arrangements has undoubtedly further widened the country and product coverage of trade restrictions.
Export Restraint Arrangements, 1987-881
Includes voluntary export restraints, orderly marketing arrangements, export forecasts, basic price systems, industry-to-industry arrangements, and discriminatory import systems. Excludes restrictions under the Multifiber Arrangement.
Of the reported increase, almost half were in existence prior to 1988 but were reported by GATT only in 1988.
Excludes restrictions under the Multifiber Arrangement.
Includes 20 arrangements involving individual EC member states.
Includes 51 arrangements involving individual EC member states.
Export Restraint Arrangements, 1987-881
| September 1987 | May 1988 | Reported Increase Between September 1987 and May 1988 | ||
|---|---|---|---|---|
| Total export restraint arrangements1 | 135 | 261 | 1262 | |
| By sectoral composition | ||||
| Steel | 38 | 52 | 14 | |
| Agricultural and food products | 20 | 55 | 35 | |
| Automobiles and transport equipment | 14 | 17 | 3 | |
| Textiles and clothing3 | 28 | 72 | 44 | |
| Electronic products | 11 | 19 | 8 | |
| Footwear | 8 | 14 | 6 | |
| Machine tools | 7 | 7 | — | |
| Other | 9 | 25 | 16 | |
| By protected markets | ||||
| European Community | 694 | 1385 | 69 | |
| United States | 48 | 62 | 14 | |
| Japan | 6 | 13 | 7 | |
| Other industrial countries | 12 | 47 | 35 | |
| Eastern Europe | — | 1 | 1 | |
| By restrained exporters | ||||
| Japan | 25 | 28 | 3 | |
| Eastern Europe | 20 | 45 | 25 | |
| Korea | 24 | 25 | 1 | |
| Other industrial countries | 23 | 59 | 36 | |
| Other developing countries | 43 | 98 | 55 | |
Includes voluntary export restraints, orderly marketing arrangements, export forecasts, basic price systems, industry-to-industry arrangements, and discriminatory import systems. Excludes restrictions under the Multifiber Arrangement.
Of the reported increase, almost half were in existence prior to 1988 but were reported by GATT only in 1988.
Excludes restrictions under the Multifiber Arrangement.
Includes 20 arrangements involving individual EC member states.
Includes 51 arrangements involving individual EC member states.
Export Restraint Arrangements, 1987-881
| September 1987 | May 1988 | Reported Increase Between September 1987 and May 1988 | ||
|---|---|---|---|---|
| Total export restraint arrangements1 | 135 | 261 | 1262 | |
| By sectoral composition | ||||
| Steel | 38 | 52 | 14 | |
| Agricultural and food products | 20 | 55 | 35 | |
| Automobiles and transport equipment | 14 | 17 | 3 | |
| Textiles and clothing3 | 28 | 72 | 44 | |
| Electronic products | 11 | 19 | 8 | |
| Footwear | 8 | 14 | 6 | |
| Machine tools | 7 | 7 | — | |
| Other | 9 | 25 | 16 | |
| By protected markets | ||||
| European Community | 694 | 1385 | 69 | |
| United States | 48 | 62 | 14 | |
| Japan | 6 | 13 | 7 | |
| Other industrial countries | 12 | 47 | 35 | |
| Eastern Europe | — | 1 | 1 | |
| By restrained exporters | ||||
| Japan | 25 | 28 | 3 | |
| Eastern Europe | 20 | 45 | 25 | |
| Korea | 24 | 25 | 1 | |
| Other industrial countries | 23 | 59 | 36 | |
| Other developing countries | 43 | 98 | 55 | |
Includes voluntary export restraints, orderly marketing arrangements, export forecasts, basic price systems, industry-to-industry arrangements, and discriminatory import systems. Excludes restrictions under the Multifiber Arrangement.
Of the reported increase, almost half were in existence prior to 1988 but were reported by GATT only in 1988.
Excludes restrictions under the Multifiber Arrangement.
Includes 20 arrangements involving individual EC member states.
Includes 51 arrangements involving individual EC member states.
Developments in agricultural trade policies give great cause for concern, particularly as they affect an already highly protected sector (see Section V). Between 1981 and 1986, support provided to the farm sector through domestic measures and export subsidies has risen further, as evidenced by the increase in producer subsidy equivalents (PSEs) in all major industrial countries (e.g., according to the Organization for Economic Cooperation and Development (OECD), PSEs rose from 24 percent to 39 percent of gross agricultural production value in Canada; from 37 percent to 40 percent in the EC; from 57 percent to 69 percent in Japan; and from 16 percent to 28 percent in the United States).5 The costs to consumers and taxpayers in terms of higher prices and budgetary expenditure have increased sharply; the OECD estimates such costs to have averaged $185 billion a year in 1984-86. Growth and employment are being adversely affected by the misallocation of resources implied by such policies, and access to the markets of major industrial countries has been curtailed. For example, one study estimates that in spite of their positive effects on agricultural employment, the Community’s agricultural policies have reduced overall employment in the economies of France, the Federal Republic of Germany, Italy, and the United Kingdom by a net 2-3 million jobs.6 Export subsidies have depressed world commodity prices with adverse consequences for the export earnings of efficient agricultural exporters, including some of the highly indebted countries. As a consequence, trade conflicts have increased markedly (U.S. disputes on beef and citrus products with Japan, and on wheat flour, pasta, oilseeds, and apples with the EC; also, the Community’s dispute on beef with Canada).
Although certain elements of the U.S. Farm Bill of 1985 reduced agricultural support, this bill led to an increase in overall budgetary spending and provided for agricultural export subsidies (under the Export Enhancement Program), and made import quotas for sugar more restrictive. In Japan, recent market-opening measures in response to bilateral negotiations and rulings of GATT dispute panels, although important, do not address access to Japan’s market for most basic farm products. Import controls that limit access to the Japanese market have reduced the effects of the appreciation of the yen on domestic prices.7 In the EC, measures agreed in February 1988 to reform the Common Agricultural Policy (CAP) included a ceiling on expenditures on agriculture in the EC budget; a widening of the coverage of guarantee thresholds;8 and the introduction of a land set-aside program. While these measures represent a change in direction of policy and will help contain EC budgetary expenditures on agriculture, they are not expected to contribute to increased access to the EC market or to reduce subsidized exports significantly, which, in the view of EC member countries, depend on negotiations in the Uruguay Round.
Against the background of severe imbalances in world agricultural production and trade, the lack of specific commitments in the communiques of the OECD ministers’ meeting in May 1988 and of the subsequent Toronto economic summit of the heads of state of the major industrial countries and the president of the European Commission is worrisome. The communiques endorsed a “framework” approach that would include both short-and long-term elements. No agreement was reached, however, on concrete steps to cut agricultural subsidies in the short term and to phase them out over the long term.
The traditional arguments used to defend continued protection of the agricultural sector were reiterated during the staffs discussions with major OECD countries. These arguments include the desire to maintain a fair standard of living for farmers, to preserve rural life, and to ensure food security (EC and Japan). Also in the EC, the greater importance of employment in the rural sector, compared with the United States, makes policymakers more sensitive to the social and political costs of adjustment. These views continue to be expounded, even though agricultural support measures often do not meet their social objectives (e.g., support tends to favor large farms over small farms; rural employment created by agricultural support tends to be more than offset by losses in other sectors of the economy), and food security does not necessarily require domestic production.
In addition to these arguments, the view that free trade (or freer trade) is politically feasible only if all major agricultural producers act together is widely accepted. This view is particularly widespread when multilateral trade negotiations are under way, since they are based on a mutual exchange of concessions.9 While the benefits from unilateral liberalization are recognized, many countries argue that it reduces pressure for others to act, and that the short-term costs of adjustment are reduced if liberalization is undertaken on a multilateral basis. In this context, recent studies have estimated that the direct welfare (income) gains of unilateral liberalization would range from $3 billion (in terms of 1985 dollars) in the United States to $9 billion in the EC and in Japan; although producers would lose more under unilateral liberalization, the economy as a whole would not be worse off than it would be under multilateral liberalization.10 For some major agricultural producers (e.g., Australia and New Zealand), where agriculture is taxed in relative terms, a reduction in support for agriculture (without measures to reduce support for their more highly protected manufacturing sectors) would probably result in a less efficient allocation of resources.11
In the industrial sectors, quantitative restrictions have increased. Trade disputes have risen—reflecting the difficult trading environment, the differences in interpretation or lack of multilateral rules, and the unresolved issues in new areas not covered by GATT (such as intellectual property rights). Resort to antidumping and countervailing duty petitions to combat unfair competition has become more widespread (Section II). Although sector-specific subsidies may have declined, they may have been offset by an increase in the use of border measures and in regional and research and development expenditures that sometimes provide less transparent support to specific sectors. Progress in reducing the competitive subsidization of exports through officially supported export credits has been made as a result of the OECD Consensus Arrangement. Although it is generally agreed that development assistance is more useful if it is untied, no move in this direction has been discerned.
The increased use of nontariff measures (NTMs) reflects, in part, the fact that most industrial countries have “bound”12 a considerable proportion of their tariffs, particularly on industrial products, at relatively low levels.13 NTMs are particularly damaging, however, because of their lack of transparency and their distortive effects and also because they heighten uncertainty about access on usual terms to industrial country markets. In addition, VERs are applied on a discriminatory basis outside GATT control and thus undermine the fundamental most-favored-nation (MFN) principle of GATT.
Restrictions are particularly widespread in industries suffering from excess capacity (such as steel) and where comparative advantage has generally shifted to developing countries (such as some textiles and clothing). The more advanced developing countries are particularly vulnerable to restrictions in these as well as those sectors in which they have begun to make an impact on industrial country markets (such as electronic products and automobiles). In the textile and clothing sectors, despite significant structural adjustment in some industrial countries in textiles, multilaterally agreed restrictions have been in force for 27 years: the latest extension of the Multifiber Arrangement (MFA) (MFA IV, August 1986-July 1991) involves a widening of the coverage of these restrictions (Section VI).
Quantitative restrictions frequently increase the price of items for which substitute products exist, which reduces demand for products subject to restrictions and makes it difficult for efficient producers to compete on world markets. Steel is such a case: despite substantial reductions in capacity in major industrial countries, excess capacity continues to be a problem, reflecting in part a decline in demand owing to increased competition from plastics and other substitutes. Sugar is another example in which quantitative restrictions, together with tariff escalation, have encouraged the production of nonsugar sweeteners that would not be profitable at the current free-market price of sugar. The U.S. Department of Agriculture has estimated that the reduction in the U.S. sugar quota has resulted in a loss of over $1 billion in foreign exchange for Caribbean Basin countries since 1984 (Section V).
The increased use of “unfair” trade legislation to restrict trade has resulted in a number of disputes (Sections IV and VI). While measures to combat unfair competition are permitted by GATT and have a valid basis in many cases, their extensive use has led to charges that industrial countries sometimes use them to harass foreign exporters and as substitutes for safeguard actions permitted under Article XIX of GATT.14 Evidence suggests that this may in fact have occurred. Investigations involve costs for exporters even if they result in negative findings and, in addition, often lead to VERs or price undertakings that restrict trade. Recent and prospective amendments to national legislation in this area are likely to increase the adverse effects (Section II).
Liberalization measures have been relatively limited. In the context of their structural adjustment programs, Australia and New Zealand have reduced protection on a unilateral basis (as have a number of developing countries). Pressure for liberalization by other industrial countries has focused mainly on Japan. In recent years, Japan has taken measures to stimulate domestic demand and increase access to its market. These measures have helped to reduce protectionist pressures directed against Japan although other industrial countries still believe that more could be done.
Multilateral Versus Unilateral Approaches to Trade Liberalization
Trade policy in industrial countries continues to be characterized by bilateral/sectoral approaches to liberalization and dispute settlement. Such approaches may be at the expense of solutions to larger problems on a multilateral basis and sometimes have adverse effects on third countries. For example, Australia has argued that the separate bilateral agreements on beef that Japan previously had with the United States and Australia in effect discriminated in favor of high-quality beef produced mainly by the United States and against grass-fed beef produced by Australia and other countries. Details of bilateral agreements are normally not publicized, which makes it easy to ignore the interests of third countries.
Bilateral/sectoral approaches are also used to respond to macroeconomic imbalances; such approaches may take the form, for example, of pressure on Japan and newly industrializing economies to provide access in specific sectors to industrial countries. These approaches are often divorced from comparative advantage and are unlikely to improve the current account.
Recent moves to liberalize trade in the context of free trade agreements and regional trading arrangements also raise questions about the prospects for strengthening the multilateral trading system. More than one third of world trade now occurs in regional trading arrangements providing some degree of preferential access. The U.S.-Canada Free Trade Agreement and plans to complete the EC internal market by 1992 give further impetus to regional and bilateral trading arrangements. In spite of the possible trade-creating effects of such arrangements, concern has been expressed in a number of industrial and developing countries about their possible trade-diverting effects. These countries are also concerned that Canada, the EC, and the United States might as a result reduce their commitment to liberalization on a MFN basis, including in the current Uruguay Round.
The lack of major liberalization in agriculture in the U.S.-Canada Free Trade Agreement15 has led some industrial countries to suggest that the U.S. interest in multilateral negotiations is now primarily in agriculture and in some selected new areas, such as telecommunications, banking, and patent protection. Although the United States notes that it has a much broader interest in multilateral negotiations, statements by the United States that it intends to pursue bilateral solutions to trade16 reduce the willingness of other countries to agree to long-term reform of agricultural policies independently of other aspects of the Uruguay Round negotiations. This situation contributes to the delay in urgently needed short-term reductions in support to agriculture in the major industrial countries.
In the case of the European Community, other countries fear that the complexity of internal market discussions might encourage the EC to become more inward looking precisely at the time that multilateral negotiations are in progress. Concern has been expressed about the possibility of nontariff measures imposed at the national level in sectors such as automobiles being replaced by EC-wide measures that would possibly be more restrictive. Important aspects of the EC’s external regime after 1992 have yet to be decided. The EC has indicated that it does not intend to raise barriers against the rest of the world upon completion of the internal market; it has nevertheless noted that its ability to contain possible protectionist pressures and to extend the benefits of the integrated market to third countries would depend, inter alia, on its obtaining improved market access in those countries. In the latter respect, it has noted that the Uruguay Round provides an opportunity for reciprocal market-opening actions. In addition, it has indicated that its dependence on export markets and the benefits to be gained from a liberal trade regime will also act to counter protectionist pressures.
Arguments for Protection
Industrial countries continue to defend protection using both traditional and not so traditional arguments (Section II). Among the latter, several are noteworthy because of the frequency with which they are mentioned and because of their implications for the global adjustment process. They include macroeconomic imbalances among the major industrial countries; associated exchange rate changes and exchange rate instability; and various versions of the “level playing field” argument. In addition, a number of countries cite the social costs of high unemployment (which often is regionally concentrated) as well as the high budgetary costs of unemployment benefits.
Arguments that justify protection as necessary to insulate particular sectors of the economy against exchange rate instability are of particular interest to the Fund. Those that defend protection on these grounds suggest that the lack of coherence of macroeconomic policies at the world level results in market-determined exchange rates that diverge widely from purchasing power parities. Therefore, it is argued, it is not “right” to ask world traders to adjust to such exchange rates. A number of industrial and developing countries have sought to insulate their economies or particular sectors from the effects of exchange rate (or other macroeconomic) changes in the rest of the world. In reality, however, it is difficult to insulate particular sectors from exchange rate instability without at the same time also insulating them from more permanent changes in exchange rate levels. This protection in turn slows down adjustment in the protected sectors and shifts it to other sectors; as a result, protectionist pressures are likely to emerge also in the latter. Moreover, such responses mean that to obtain a given current account outcome, a larger exchange rate change may be required. The appropriate response to exchange rate instability would be more vigorous efforts to adjust and coordinate macro-economic policies. Protection serves only to aggravate macroeconomic imbalances and exchange rate instability.
A large share of world trade is already partially or fully insulated from world market forces, including exchange rate changes. This reflects the use of a variety of protective instruments including VERs and quotas, variable levies, and subsidies that are sometimes designed to compensate for differences between domestic and world prices. The reluctance to adjust to exchange rate changes is shown in current discussions between the United States and the EC on civil aircraft and in discussions among major countries on modifications to the producer subsidy equivalent (PSE) for its possible use in multilateral negotiations.17
The “level playing field” argument originally applied mainly to differences in cost factors between industrial and developing countries owing to lower wages in the latter. With the obvious increase in spending power in some of the developing countries, the argument is now being used to demand reciprocity in market access. Thus, many industrial countries suggest that further liberalization of their own economies is contingent on reciprocal actions by developing countries, mainly the newly industrializing economies (NIEs). This argument is also directed at centrally planned economies, and at alleged “invisible” barriers to trade in Japan. The need for a “level playing field” is also cited by some industrial countries that contend that sectoral liberalization (e.g., in agriculture, textiles, and steel) is possible only if all countries liberalize these sectors simultaneously. The emphasis on joint action has held back significant unilateral liberalization, despite theoretical and empirical demonstration of the beneficial effects of unilateral liberalization in most cases, both for the country concerned and for its trading partners.
Increased demands for reciprocity from NIEs partly reflect dissatisfaction by some industrial countries with the trade and/or exchange rate policies of NIEs against the background of substantial current account surpluses experienced by some of these countries. Singapore and Hong Kong18 already have open trade regimes. Although Korea and Taiwan Province of China have undertaken market-opening measures in recent years, some industrial countries consider that more is needed, given their comfortable external positions. In addition, many industrial countries believe that undervalued exchange rates contribute to the substantive external surpluses in some of the NIEs. It needs to be recognized that correction of external disequilibria among industrial countries depends primarily on their own macroeconomic policy adjustments.
Developing Countries
In addition to the measures undertaken by some NIEs, many other developing countries have undertaken trade liberalization in the context of structural adjustment programs, often supported by the Fund and the World Bank. Progress in a number of countries is slow, however, and developing countries as a group maintain trade regimes that are more protective and complex than those of industrial countries. In particular, statutory tariffs are generally higher and more dispersed in developing countries and the use of NTMs is more extensive than in industrial countries. Exchange restrictions also often reinforce trade restrictions.
Developing countries continue to explore the use of countertrade as an export marketing tool, as a possible mechanism to overcome shortages in foreign exchange and protectionist barriers in industrial countries, to counter effects of overvalued exchange rates (countertrade can act as a nontransparent export subsidy), and in some cases to promote intraregional cooperation. It is still difficult to obtain estimates of such trade; there are indications, however, that countertrade has stagnated since 1984 and actually declined in 1987. These developments may reflect an increased recognition of the drawbacks of countertrade and the additional costs it imposes on exporters. Both the Fund and the GATT have been concerned with countertrade practices, not only because of their costs but also because they undermine multilateralism and inhibit efficient resource use.
Arguments for protection in developing countries rely heavily on balance of payments justifications. Over 85 percent of all quantitative restrictions notified to the GATT by developing countries have been justified for balance of payments reasons. Debt problems of developing countries have also sometimes been cited as reasons for maintaining or intensifying exchange and trade restrictions. Some developing countries are hesitant to adopt outward-oriented policies because of pessimism about the prospects of improved market access in industrial countries. A traditional argument for protection used by developing countries relates to the development of infant industries.19
The protectionist policies of developing countries hamper their own adjustment efforts. Also, industrial countries argue that they would find it easier to obtain domestic political support for more liberal trade regimes if developing countries also liberalized their import regimes. At the sectoral level, for example, restrictions by developing countries on certain higher-valued textiles and clothing products in which industrial countries are competitive weaken the commitment of industrial countries to eliminate the Multifiber Arrangement and return textiles and clothing to normal GATT disciplines. Similarly, industrial countries have increasingly alleged pursuit of “unfair” trade practices by developing countries. For these reasons, industrial countries are increasingly calling for “graduation” and greater “integration” of developing countries into the GATT through reduced reliance on the balance of payments provisions of GATT, increased tariff bindings, greater acceptance of GATT codes, and adoption of more market-opening measures. Such calls are aimed mainly at the more advanced developing countries, especially those in Asia and Latin America that have made substantial inroads into markets of industrial countries.
Prospects for Liberalization
Against the background of continuing protectionism, the launching of the Uruguay Round of Multilateral Trade Negotiations (MTN) at Punta del Este, Uruguay, in September 1986 was of major importance. The new Round is viewed by many as essential in keeping domestic protectionist demands at bay and in restoring the relevance and credibility of the multilateral trading system. The Round addresses the major issues that are a source of concern in the multilateral trading system, including areas that in the past were largely neglected (such as agriculture), new areas (such as services), and sectors that have been relegated to special regimes through multilateral action (textiles and clothing). It also aims to apply GATT disciplines to segments of international trade that are now subject to “gray-area” measures (steel, automobiles, electronics, etc.). In addition, it gives greater recognition to the linkages between trade and other economic policies and to systemic issues, such as the functioning of the GATT (including its relations with international organizations). Although not included specifically as a topic in the negotiations, the role of developing countries in the multilateral trading system is an issue in most negotiating groups. In launching the Round, industrial and developing countries committed themselves to observe a “standstill” and “rollback” of trade-restrictive measures, which were to be monitored by the Surveillance Body established for this purpose. A midterm ministerial review of progress in the negotiations is scheduled for December 1988.
A number of industrial and developing countries are of the view that the “standstill” commitment has not been observed by a number of major trading nations. Thus far, one conditional “rollback” offer has been made; the view expressed by some major industrial countries that VERs are not subject to the rollback gives little hope for significant reductions in these measures before the end of the negotiations. On agriculture, wide differences exist between proponents of a total elimination of subsidies and those who favor only their reduction. In other areas the reconciliation of divergent interests is proceeding slowly. The developing countries are participating actively in the discussions in the various negotiating groups. The discussions have indicated differing views between many industrial and developing countries on the greater acceptance by developing countries of GATT obligations.
The prospect of an early significant reduction in trade barriers prior to the end of the Uruguay Round appears remote. In this context, a number of countries have noted that previous multilateral trade negotiations proceeded slowly in the initial phases and that progress in the Uruguay Round, which involves more complex issues and trade-offs than in past Rounds, should be judged in that light. However, early action is necessary to contain protectionism and to alleviate external imbalances, including the debt problems of developing countries. The situation thus calls for renewed commitment at the political level and early action especially by major industrial countries in a position to play a leadership role, either jointly or unilaterally. Although difficult, issues such as the reduction in subsidies and containment of VERs require urgent action on the basis of enlightened self interest.
A number of developing countries, particularly highly indebted countries, have highlighted the interrelationships between trade and debt issues. While the Uruguay Round is not the forum within which to address the debt problem as such, clearly the questions of market access and the expansion of world trade are important to its resolution. For example, early substantial action by the industrial countries to reform their agricultural policies could facilitate structural adjustment in developing countries and thereby ease their debt burdens. Export diversification in developing countries depends partly on better access to markets for higher value-added products. To that end, elimination of quantitative restrictions that limit exports to industrial countries are needed, as are reductions of tariff peaks and escalation in the tariff schedules of industrial countries.
Surveillance
The need for effective multilateral surveillance over trade policies has been increasingly recognized. The GATT has primary competence in the trade field, and the Uruguay Round is discussing the establishment of an improved trade policy surveillance mechanism (see Section IV). Discussions within the Uruguay Round negotiating group on the functioning of the GATT system are proceeding fairly rapidly on the likely features of a mechanism to improve surveillance of trade policy at the international level. In this context a number of countries suggest that improved domestic surveillance of trade policies is also important. In their view, greater transparency at the national level is essential to reduce domestic pressures for protection and can also play an important role in mustering support for multilateral liberalization and in contributing to the success of improved multilateral surveillance. However, not all countries that favor the latter are taking steps to improve domestic trade policy surveillance.
One of the Fund’s underlying purposes is to facilitate the balanced expansion of international trade with a view to promoting economic growth. Accordingly, trade policy issues receive careful attention in the work of the Fund, both in its exercise of surveillance and in connection with the use of Fund resources. The Fund and the GATT collaborate closely in supporting mutual objectives. The Fund stands ready to provide technical help where possible to the various negotiating groups within the Uruguay Round.
Within its overall surveillance responsibilities, the Fund has been encouraging its members to implement appropriate measures to eliminate macroeconomic imbalances and reduce structural distortions. The continued pressures for protection, combined with an increase in trade-restricting measures, suggest the need for the Fund to continue to emphasize the importance of policies that can contribute to an improvement in the world trading environment. Likewise, encouragement by the Fund for countries to liberalize their trade regimes continues to be necessary.
While recognizing that macroeconomic imbalances cannot be corrected through protection, a reduction in these imbalances can play a positive role in reducing protectionist pressures. The Fund through its surveillance activities can contribute to an improvement in the international trade environment by assisting its members to adopt appropriate macroeconomic policies. This is particularly important for the major trading nations, in view of their weight in world trade and the correspondingly larger impact of their policies on the trading system. The timely adoption of structural measures by these countries is equally important.
Given the difficult international environment, it is important that countries not delay trade reforms, or increase restrictions, to improve their bargaining positions in the Uruguay Round. The recent increase in gray-area measures to protect industrial country markets is therefore of concern, as are views that liberalization is possible only if undertaken by all major trading countries. All countries should be encouraged to abide by the spirit of the standstill and rollback commitments of Punta del Este. In this context it is also important to note that joint or unilateral liberalization by major industrial countries could contribute significantly to resolving the debt problem.
Trade liberalization is a crucial aspect of structural and macroeconomic adjustment in both industrial and developing countries. Analysis of the role of trade reform in the adjustment process would be facilitated by an improved information base. In industrial countries, quantitative information on nonborder measures (particularly subsidies) is inadequate. In developing countries, information on both border and nonborder measures needs to be improved; this would also assist in the design of trade reforms in programs supported by the Fund. Improved information depends in part on greater efforts by member countries to collect relevant information on all forms of protection and to quantify its protective effect, and also on increased collaboration among the Fund, the Bank, the OECD, the GATT, and the UNCTAD to improve the information base.