Article

Effects of Increased Market Access on Exports of Developing Countries

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1984
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An important aspect of recent concern about the rising trend toward protectionism in industrial countries relates to developing countries’ access to the markets of these countries. Many developing countries facing balance of payments and debt difficulties are undertaking adjustment programs supported by financial assistance from the Fund. These programs often include, among other provisions, the pursuit of more outward-oriented development strategies and the promotion of exports with a view to establishing a viable balance of payments and external debt position and sustainable growth in the medium term. The external environment facing developing countries is important for the success of their own adjustment efforts. Although this environment is determined by a host of factors (including economic growth in industrial countries, developments in world commodity prices, and the evolution of exchange and interest rates abroad), the stance of trade policies in partner countries can be a critical constraint on possible export expansion in developing countries.

Against this backdrop, the present paper analyzes the impact on the exports of developing countries if market access for a number of their products were to be enlarged in industrial countries. The analysis bears the character of an illustrative exercise; because it is based on partial analysis with certain simplifying assumptions, its results must be qualified accordingly. There is considerable scope for fruitful experimentation with alternative methodologies, with a view to developing more refined measurements of the effects of trade liberalization, particularly on the adjustment efforts of developing countries. Although this paper focuses rather narrowly on the effects of liberalization on exports, the positive, longer-term effects of an open trading environment on structural adjustment and efficient resource allocation are also important for economic growth.

On the basis of information on recent tariff and nontariff barriers to trade in four Organization for Economic Cooperation and Development (OECD) markets for seven selected sectors during 1979-81, estimates are made of the potential impact of eliminating these barriers on the exports of ten developing countries.1 These developing countries represent a geographically distributed sample of Fund members that are currently undertaking adjustment programs with Fund financial assistance or have done so in the recent past. In terms of World Economic Outlook classifications (International Monetary Fund (1984)), the sample consists of non-oil developing countries: four are among the major exporters of manufactures within the group of net oil importing developing countries, and three are classified as low-income countries. Except for Kenya, the other countries in the sample belong to the group of “major borrowers,” defined as the 25 developing countries with the largest outstanding external debt in 1982. Together, the ten sample countries accounted for just under one third of exports of non-oil developing countries in 1979-81. The seven selected sectors include both agricultural and manufactured products of interest to developing countries. In these sectors trade barriers, particularly nontariff restrictions, are relatively high or have tended to grow since the mid-1970s in many industrial countries, and the threat of future protectionism persists.2 The selected sectors accounted for 26 percent of the total exports of the sample countries, and 25 percent of their exports to the four markets on average in 1979-81.3

Following a brief review of selected studies from the literature, in Section I, the analytical framework and the data base of the exercise undertaken in this paper are outlined in Sections II and III, respectively. Section IV presents the results, and a sensitivity analysis is reported in Section V. The final section provides comments on the interpretation of the results.

I. Review of Selected Studies

Several studies have investigated the consequences for growth and trade in developing countries of protectionist practices in industrial countries. Using internationally linked, econometric country models (Project LINK), Klein and Su (1979) studied the worldwide effects of a (5, 10, and 20 percent) tariff increase for manufactured imports of 13 OECD countries. They concluded that such an increase in protectionism would reduce trade and growth in both industrial and developing countries. Brown and Whalley (1980) evaluated the effects of alternative tariff-cutting formulas proposed by participants in the Tokyo Round of Multilateral Trade Negotiations (1973-79) and of more substantial trade liberalization, by means of a computable general equilibrium model of the world economy. From their analysis, one can conclude that tariff reductions alone would slightly increase world welfare but would redistribute income, through changes in the terms of trade, from developing to developed countries. Abolition of all tariff and nontariff barriers in all countries, however, would increase the welfare of both groups. These results were broadly confirmed by studies by Deardorff and Stern (1981, 1983), who used the same type of analysis to study the effects of the Tokyo Round.

In a more recent study, Whalley (1984) has investigated the effects of trade liberalization from the standpoint of an extended version of the general equilibrium model of world trade used in the earlier study by Brown and Whalley (1980). He arrives at the result that complete trade liberalization, although increasing world welfare, would redistribute welfare from the “South” (developing and newly industrialized countries) to the “North” (OECD countries and members of the Organization of Petroleum Exporting Countries). The major reason for this result is a deterioration of the terms of trade of the South after trade liberalization. This decline is explained by higher average rates of protection in the South compared with those of the North, and by the smaller size of trade involving Southern regions compared with trade among the countries of the North.4

Baldwin and Murray (1977), and Sapir and Baldwin (1983) chose partial analysis to evaluate the effects of tariff reductions on developing countries in light of their existing tariff advantages under the Generalized System of Preferences of the United Nations Conference on Trade and Development. Cline and others (1978) used a similar approach to study the effects of the Tokyo Round and of further trade liberalization (including a reduction of nontariff trade barriers in agricultural trade) on trade in industrial and developing countries, as well as on welfare and employment in the industrial countries. These studies lead one to conclude that gains for developing countries from tariff reductions on a most-favored-nation (MFN) basis would be significant and would far outweigh potential losses from an erosion of their tariff preferences. Valdés and Zietz (1980) estimated the effects of trade liberalization in 17 OECD countries on selected agricultural exports from 56 developing countries and found that a 50 percent reduction in trade barriers would have yielded an annual increment of 11 percent in developing countries’ exports of agricultural products during 1975-77.

A synopsis of the above studies is provided in Table 1. Most of the studies have attributed positive overall welfare and trade effects to trade liberalization. Further, they have emphasized the importance of lowering nontariff barriers to trade for developing countries’ growth and trade performance.5

Table 1.Selected Measurements of the Costs of Protection
Results Obtained for:
StudyTrade Policy StudiedMethod UsedIndustrial countries’ welfareDeveloping countries’ welfareDeveloping countries’ exports
Baldwin and Murray (1977)50 percent cut in all tariffs in United States, European Community (EC), and JapanPartial analysis; simple trade-flow model+US$369 million (1971 prices)
Cline and others (1978)60 percent cut in all tariffs; similar cuts in non-tariff barriers in agriculture in industrial countriesPartial analysis; simple trade-flow model+US$3.4 billion (1974 prices)+US$5.3 billion (1974 prices)
Valdés and Zietz (1980)50 percent cut in trade barriers affecting 99 agricultural commodities in 17 industrial countriesPartial analysis; sectoral trade-flow model+US$473 million (1977 prices)+US$3 billion (11 percent increase in agricultural exports at 1977 prices)
Klein and Su (1979)20 percent increase in trade barriers affecting manufacturers in 13 Organization for Economic Cooperation and Development (OECD) countriesEconometric model of world economy-US$22 billion in 1978 and 1979 (accumulated)-US$6 billion in 1978 and 1979 (accumulated)-US$7.8 billion in 1978 and 1979 (accumulated)
Brown and Whalley (1980)Complete trade liberalization in all countriesGeneral equilibrium model of world economy+US$11 billion (1973 prices)+US$9 billion (1973 prices)
Deardorff and Stern (1983)Effects of Tokyo Round of Multilateral Trade NegotiationsGeneral equilibrium model of world economy+US$4.8 billion (1976 prices)+US$0.3 billion (1976 prices)-US$173 million (1976 prices)
Whalley (1984)Complete trade liberalization in all countriesGeneral equilibrium model of world economy+US$64.3 billion (1977 prices)-US$31.4 billion (1977 prices)

In relation to the studies reviewed, the scope of the present exercise is more limited. The country coverage is narrower, and the analysis investigates the effects of trade liberalization on exports, making no attempt to measure welfare effects. The focus is on developing countries that are undertaking adjustment efforts to overcome balance of payments and debt difficulties and for which expansion of exports is crucial to resolving these difficulties. The exercise takes into account key sectors in both the manufacturing and agricultural areas, and assumes complete trade liberalization in these sectors.

II. Analytical Framework

The exercise is based on partial analysis. It utilizes a simple framework describing demand and supply for the seven sectors by standard two-country market models.6 In these, percentage changes in import demand, export prices, and export earnings may be written as functions of the price elasticities of import demand and export supply, as well as of the percentage change in the one-plus-ad-valorem tariff equivalent of trade (tariff plus non-tariff) barriers.

Export supply and import demand for item i in a two-country model with exporting country k and importing country j can be described by the following equations:

where M is import demand (in volume); X is export supply (in volume); PD is the importing country’s domestic price; Pw is the export price before duty; t is the one-plus-ad-valorem tariff rate (the tariff equivalent of tariff and nontariff barriers); R is the exporter’s revenue (importer’s expenditure at preduty prices); and the subscripts i, j, and k denote the ith item and the jth (importing) and the fcth (exporting) country.

Differentiating equations (1) through (5) totally and solving for the percentage changes of imports, export (preduty) prices, and exporter’s revenues yields the following equations:

where n is the price elasticity of import demand, and e is the price elasticity of export supply.

In this model trade flows and exporter’s revenues (or importer’s expenditures in preduty prices) are a function of the percentage change of the one-plus-ad-valorem tariff rate and of the elasticities of supply and demand. For exporter’s revenues, this relation can be illustrated by tabulating the change in this revenue (dRik/Rik) for a given cut in the tariff level (or in the tariff equivalent of trade barriers) and for a range of values of eik and nij (Table 2).

Table 2.Change in Exporter’s Revenues
Price Elasticity of Import DemandPrice Elasticity of Export Supply.
0½12
-dt/tdt/t-⅔dt/t-⅗dt/tdt/t
-1-dt/t-dt/t-dt/t-dt/t-dt/t
-2-dt/t65dt/t43dt/t32dt/t-2dt/t
Note: Change in exporter’s revenues is given by equation (8) of the text:dRik/Rik=nij[(1+eik)/(eiknij)]dtij/tij,where
d =differential operator
R =exporter’s revenue
i, j, k =the ith item and jth (importing) and kth (exporting) countries
t =1 + T, with T = ad-valorem tariff (tariff equivalent of trade barriers) and dt/t = dT/(1 + T)
nij =price elasticity of import demand
eik =price elasticity of export supply.
Note: Change in exporter’s revenues is given by equation (8) of the text:dRik/Rik=nij[(1+eik)/(eiknij)]dtij/tij,where
d =differential operator
R =exporter’s revenue
i, j, k =the ith item and jth (importing) and kth (exporting) countries
t =1 + T, with T = ad-valorem tariff (tariff equivalent of trade barriers) and dt/t = dT/(1 + T)
nij =price elasticity of import demand
eik =price elasticity of export supply.

With unitary elastic demand, exporter’s revenues are not affected by the export supply response. Hence, the second row of the matrix in Table 2 shows the same percentage change of exporter’s revenues for all export supply elasticities considered. If import demand is elastic, however, price reductions are over-compensated by increases in sales, so that exporter’s revenues grow more than proportionately. Hence, the higher the supply elasticity, the larger is the change in exporter’s revenues. Yet, with inelastic import demand, price reductions owing to tariff cuts are not compensated by respective quantity increases. Consequently, the higher the export supply elasticity, the smaller is the increase in exporter’s revenues. If import demand elasticities lie in the range between -½ and −2, one can expect exporter’s revenues to grow between ½ and 2 times the percentage cut in one-plus-ad-valorem tariff rates.

Figure 1 illustrates the partial analysis cases in a two-country model in accord with different assumptions about the price elasticities of supply of the imported commodity. The panels are drawn from the exporter’s viewpoint and represent the importing country, or market: the demand schedule for imports of the given commodity is DD. Pw is the preduty price, and PD is the postduty (domestic) price.

Figure 1.Exporter’s Revenues Under Various Assumptions of Export-Supply Elasticity

In panel A, with an infinitely elastic supply of the imported commodity (e = ∞), the importing economy faces a supply curve 5, which is the horizontal (price) line at the Pw level. Before trade liberalization, domestic equilibrium is indicated by E. Total domestic expenditure is 0Qd x 0PD. Exporters, however, only receive 0Qd x 0PW, the difference accruing to the government of the importing country as tariff revenue (or, possibly, revenue split between the government and private importers of the importing country if nontariff barriers are present). After trade liberalization, domestic equilibrium is at E’, and domestic expenditure on the imported item is 0Qd′ x 0PW, all of which now goes to the exporter.7 The extent of the gain to the exporter depends on the elasticity of demand for imports.

The case of a zero elasticity of supply (e = 0) of the imported commodity is illustrated in panel B. The importing country faces a supply curve 5, which is now the vertical line at the Qd level because supply is fixed. The point of equilibrium before trade liberalization is at E and does not change after liberalization. The exporter now is able to extract from the importing market the full domestic price PD. The elasticity of import demand plays no role in determining the gain to the exporter from liberalization.

In panel C, the case of a finite but positive elasticity of supply (0 < e < ∞) is illustrated. The importing country faces an upward-sloping supply curve SS. In this case, trade liberalization will determine a gain to the exporter that will be a function of both import-demand and export-supply elasticities.

The exercise does not explicitly take account of the different degrees of substitution or differentiation between the imported products and similar domestically produced commodities. However, in the application of the two-market model to rather broad product groups in a multicountry framework, it is implicitly assumed that domestic and imported products, and imported products from different sources, are imperfect substitutes.8

III. Assumptions and Data Base

Import and export data for countries and products were taken from OECD (various issues) and United Nations (various issues) statistics, and averages for the period 1979-81 were used. For estimates of the three parameters (the price elasticities of import demand and of export supply and the height of trade barriers), the general approach was to rely on existing studies to the extent feasible and to use judgmental estimates and simplifying assumptions in other cases.

For price elasticities of import demand, estimates from Cline and others (1978) were used (Table 3). These estimates represent the middle values of a range of low and high values that are based on an extensive literature survey, and they correspond closely to those published by other researchers (for example, Stern, Francis, and Schumacher (1976)). Because information on the value of export supply elasticities for the countries and commodities under investigation is incomplete or unreliable, for the present exercise it was assumed that these elasticities were uniform, both among the countries under investigation and between these countries and the rest of the world. This assumption implies that, after trade liberalization, exporting countries would hold their original market share in international trade. The two limiting values (zero and infinity) of the elasticities were used to establish lower and upper bounds for exporters’ revenue gains from trade liberalization. Intermediate values for the elasticities were used in performing a sensitivity analysis (Section V).

Table 3.Sectoral Price Elasticities of Import Demand in Four OECD Markets
SectorUnited StatesEC1JapanCanada
Meat and meat preparations
(SITC 01)-0.53-1.09-1.13-0.84
Cereals and cereal preparations
(SITC 04)2-0.82-1.06-0.56-0.81
Sugar and sugar preparations
(SITC 06)2-0.82-1.06-0.56-0.81
Textiles, yarn, fabrics, etc.
(SITC 65)-2.43-2.61-1.56-2.09
Iron and steel
(SITC 67)-1.99-3.25-2.36-2.07
Apparel and clothing
(SITC 84)-2.43-2.61-1.56-2.09
Footwear
(SITC 85)-1.23-3.17-1.42-2.07
Note: In this and subsequent tables, SITC refers to Standard International Trade Classification.Source: Cline and others (1978).

Estimates for the EC are weighted averages of individual country estimates corrected for trade diversion effects toward imports from non-EC countries following trade liberalization (see Cline and others (1978, p. 57) for a detailed explanation).

For the United States, EC, and Japan, the average of estimates for BTN (Brussels Tariff Nomenclature) 02 (vegetable products, fats, oils), 03 (food, beverages), and 04 (tobacco).

Note: In this and subsequent tables, SITC refers to Standard International Trade Classification.Source: Cline and others (1978).

Estimates for the EC are weighted averages of individual country estimates corrected for trade diversion effects toward imports from non-EC countries following trade liberalization (see Cline and others (1978, p. 57) for a detailed explanation).

For the United States, EC, and Japan, the average of estimates for BTN (Brussels Tariff Nomenclature) 02 (vegetable products, fats, oils), 03 (food, beverages), and 04 (tobacco).

Estimating tariff equivalents of nontariff barriers presents many difficulties, particularly when these barriers are applied discriminatorily, as in the textile and clothing sectors. Existing quantitative estimates of the height of trade barriers vary widely. Reasons for the large differences include, among others, differences in concepts of “world market” reference prices, in product definitions, and in time periods for estimation. In the framework of the current exercise, selection of representative estimates from the available information was based on judgment informed by qualitative information on trade measures and policies. For agricultural products, the general approach was to rely on published coefficients of nominal protection.9 The starting point for estimates for manufactures was the comprehensive work on trade barriers existing in 1973 done by Yeats (1979). Because Yeats’s estimates may not always reflect more recent developments, nor always match the level of commodity disaggregation chosen in this exercise, they were adjusted to provide as uniform and current a basis for this exercise as possible.

For meat, estimates of trade barriers in 1977-79 in the four OECD markets for beef were used, based on United Nations Food and Agriculture Organization (1980). More recently, the restrictiveness of trade measures appears to have increased in this sector, but no allowance was made for this factor. For cereals, for the European Community (EC) the exercise used the average coefficient of nominal protection (the percentage difference between the EC threshold price and the c.i.f. Rotterdam price) for wheat, barley, and maize in 1979-80 as estimated by Koester (1982). For Japan, the average of coefficients of nominal protection for rice, wheat, barley, and soybeans in 1979 was taken from Anjaria and others (1982). For the United States, the estimate was based on Yeats (1979). In the absence of sufficiently specific information for Canada, and against the background of similar agricultural trade policies followed in the past, protection in Canada in the cereal and sugar sectors was assumed to be the same as in the United States (although, admittedly, this assumption could lead to overestimation).

In the sugar sector, for the United States the exercise used the average 1979-80 ratio of New York postduty prices and Caribbean world market prices, adjusted for a transport cost component of 6 percent, based on statistics from the U.S. Department of Agriculture (1981). (In 1982 the United States imposed import quotas and raised tariffs in this sector.) For the EC and Japan, coefficients of nominal protection for 1979-80 (percentage differences between domestic and c.i.f. prices) were taken, for the EC, from the study by the Commonwealth Secretariat (1982) and, for Japan, from the study by Anjaria and others (1982).

For the commodities of the manufacturing sector, post-Kennedy-Round levels were used for tariffs, and estimation of the tariff equivalent of nontariff barriers was based on various studies (Yeats (1979), Morici and Megna (1983), Jenkins (1980)). For textiles and clothing, for the EC and the United States estimates by Yeats (1979)10 were adjusted upward on the basis of a study by Morici and Megna (1983).11 For Japan, in the absence of evidence of significant nontariff barriers, only post-Kennedy-Round tariffs were used for both textiles and clothing. Estimates for the Canadian textile and clothing industries were obtained from Jenkins (1980).

Because no estimates of nontariff trade barriers specifically for steel were available, these were first approximated from estimates (Yeats (1979)) of average nontariff barriers for manufacturing in 1973 in the EC and the United States. These figures were then updated, using estimates cited by Morici and Megna (1983) that refer to the effect of nontariff barriers in the U.S. steel industry in the period 1976-77. (Nontariff restrictions in the steel sector have increased significantly in the United States and in the EC since 1980.) For Japan and Canada, the steel industry is fairly competitive internationally, and only tariffs were included in estimating the height of trade barriers in these two countries.

Finally, in the footwear sector, in the absence of evidence of significant nontariff barriers in the United States and Japan, only tariffs were used. For the EC, qualitative information led to the assumption that nontariff barriers in the EC footwear industry are one third of what they are in the clothing and textile sectors. For Canada, global quotas on footwear are applicable, but, in the absence of available quantitative estimates, nontariff barriers in the footwear industry were assumed to be about three fourths of what they are in textiles and clothing.

The estimates of tariff equivalents of trade barriers are given in Table 4. They should be taken only as a rough indication, of the order of magnitude and relative size, of protection around 1980.

Table 4.Sectoral Tariff Equivalents of Tariff and Nontariff Barriers in Four OECD Markets(In percent)
SectorUnited StatesECJapanCanada
Meat (SITC 01)4611832852
Cereals (SITC 04)208117520
Sugar (SITC 06)27314427
Textiles (SITC 65)68591339
Iron and steel (SITC 67)354388
Clothing (SITC 84)79591839
Footwear (SITC 85)9271630
Source: Own estimates based on sources listed in Section III.
Source: Own estimates based on sources listed in Section III.

IV. Results

In this section the effects of hypothetical trade liberalization are reported for both importers and exporters of the product groups studied.

importing countries

Table 5 gives the results for the percentage change of imports induced by a complete, nondiscriminatory removal of trade barriers in the selected sectors of the selected OECD countries under the assumption of an infinite elasticity of export supply.12 The figures reflect increases in physical trade because export prices are expected to remain unchanged under the assumption of infinite export-supply elasticity. Altogether, the results indicate that a complete removal of barriers to trade in the selected OECD markets would increase imports of agricultural products in the liberalized sectors by about 20 to 50 percent and would increase imports of manufacturing products in the liberalized sectors by about 30 to 90 percent. As expected, given the generally higher import-demand elasticities for manufactured products than for agricultural products, trade liberalization for manufactured products would induce more imports than would liberalization for agricultural products. For Japan, however, some differences are noteworthy. On the one hand, the extraordinarily high import elasticity for meat, together with the relatively high protection of the domestic meat industry, give significantly larger estimates of import increases for Japan than for other importing countries. On the other hand, because of the assumed relatively low import elasticity for clothing and the rather moderate estimate of protection of the Japanese clothing industry, Japan’s imports of clothing increase less than in the other countries.

Table 5.Increases of Sectoral Imports in Four OECD Markets After Complete Trade Liberalization(In percent)
SectorUnited StatesECJapanCanadaTotal
Meat (SITC 01)16.759.086.628.749.5
Cereals (SITC 04)13.747.435.613.539.2
Sugar (SITC 06)17.425.017.117.219.3
Textiles (SITC 65)98.496.817.958.681.8
Iron and steel (SITC 67)51.697.717.515.362.4
Clothing (SITC 84)107.296.823.858.692.6
Footwear (SITC 85)10.167.419.647.830.4
Source: Own calculations based on sources listed in Section III.
Source: Own calculations based on sources listed in Section III.

Although this exercise was not specifically formulated to assess the impact of trade liberalization on import penetration ratios, some broadly indicative computations were made. The results (Table 6) show that a complete removal of trade barriers would raise the overall import penetration ratio in the importing countries by 2 percentage points at most. There would, however, be large changes in the EC, U.S., and Canadian textile, clothing, and footwear industries, ranging between 10 and 14 percentage points. Given the assumptions of no change in consumption and of crowding out of domestic producers by importers, these figures represent indicative upper limits to increases in import penetration ratios.

Table 6.Sectoral Import Penetration Ratios Before and After Complete Trade Liberalization in Four OECD Markets(In percent)
United StatesEC1JapanCanada
SectorIP0IPxIP0IPxIP0IPxIP0IPx
Food
(ISIC 31)6.36.620.421.76.59.410.811.6
Textiles, clothing, and footwear
(ISIC 32)12.122.341.655.99.811.623.836.9
Base metals
(ISIC 37)12.215.934.238.96.97.131.334.0
Manufacturing
(ISIC 3)9.210.230.732.55.76.233.134.3
Note: ISIC refers to the International Standard Industrial Classification. IP0 is the average import penetration ratio in 1979-80; values are taken from World Bank data compiled by the Bank’s Economic Analysis and Projections Department. IPX is the postliberalization import penetration ratio calculated on the basis of the exercise undertaken in this paper. The computations assumed that total consumption would not change after trade liberalization and that increased imports would replace domestic production. Thus, the figures represent indicative upper limits to the immediate effects of trade liberalization on import penetration. Because the aggregation level is not the same, there is no exact correspondence between the changes in imports presented in Table 5 and the changes in import penetration ratios presented here.

Includes intra-EC trade. IP0 values refer to Belgium and Luxembourg, France, Federal Republic of Germany, Italy, the Netherlands, and the United Kingdom only.

Note: ISIC refers to the International Standard Industrial Classification. IP0 is the average import penetration ratio in 1979-80; values are taken from World Bank data compiled by the Bank’s Economic Analysis and Projections Department. IPX is the postliberalization import penetration ratio calculated on the basis of the exercise undertaken in this paper. The computations assumed that total consumption would not change after trade liberalization and that increased imports would replace domestic production. Thus, the figures represent indicative upper limits to the immediate effects of trade liberalization on import penetration. Because the aggregation level is not the same, there is no exact correspondence between the changes in imports presented in Table 5 and the changes in import penetration ratios presented here.

Includes intra-EC trade. IP0 values refer to Belgium and Luxembourg, France, Federal Republic of Germany, Italy, the Netherlands, and the United Kingdom only.

exporting countries

Table 7 gives the effects of hypothetical trade liberalization in major OECD markets on the exports of the sample of developing countries. With infinite export supply, the most striking increases occur in the clothing sector, but export growth in the meat, textile, steel, and footwear sectors also seems substantial. Export growth rates for sugar and cereals are smaller. When combined, increased exports of the seven sectors would raise total exports of the ten developing countries by about 9 percent (US$8.0 billion in average 1979-81 prices).13Table 8 gives the results separately for agricultural and manufactured exports. Thus, the increases in exports of the three agricultural sectors would raise total agricultural exports by some 4 percent; similarly, total manufactured exports would rise by about 16 percent.

Table 7.Change in Sectoral Exports of Sample Countries After Complete Trade Liberalization(In percent)
MeatCerealsSugarTextilesIron and SteelClothingFootwearTotal
(SITC 01)(SITC 04)(SITC 06)(SITC 65)(SITC 67)(SITC 84)(SITC 85)Total
Countrye = 0e = ∞e = 0e = ∞e = 0e = ∞e = 0e = ∞e = 0e = ∞e = 0e = ∞e = 0e = ∞e = 0e = ∞
Argentina26.026.48.16.810.38.631.278.93.99.18.721.810.824.36.97.2
Brazil22.022.013.110.99.58.219.849.912.229.519.549.610.421.22.74.8
India12.311.75.65.95.65.924.965.33.47.638.095.711.632.46.115.1
Kenya27.329.725.614.47.98.48.020.129.075.60.41.20.50.6
Rep. of Korea11.613.140.324.20.20.28.117.99.019.629.069.811.022.97.617.6
Mexico70.577.29.77.922.621.622.655.415.831.643.7106.210.117.21.32.9
Pakistan0.50.523.725.014.536.313.744.423.459.216.351.86.515.9
Philippines0.50.413.89.121.351.86.116.457.0140.610.320.44.79.2
Turkey4.75.11.61.77.37.724.263.019.761.520.352.82.57.94.511.7
Yugoslavia17.216.02.12.20.50.56.516.98.624.224.563.73.39.12.45.5
Weighted average23.423.56.15.210.08.215.037.09.622.430.474.69.019.34.39.0
Note: e is the price elasticity of export supply.Source: Own calculations based on sources listed in Section III.
Note: e is the price elasticity of export supply.Source: Own calculations based on sources listed in Section III.
Table 8.Change in Agricultural and Manufactured Exports of Sample Countries After Complete Trade Liberalization(In percent; e = ∞)
AgriculturalManufacturedTotal
CountryExportsExportsExports
Argentina11.84.47.2
Brazil2.79.84.8
India1.025.215.1
Kenya0.81.10.6
Rep. of Korea0.519.617.6
Mexico1.412.82.9
Pakistan1.629.615.9
Philippines3.935.69.2
Turkey0.337.411.7
Yugoslavia4.16.55.5
Weighted average3.716.39.0
Note: e is the price elasticity of export supply.Source: Own calculations based on sources listed in Section III.
Note: e is the price elasticity of export supply.Source: Own calculations based on sources listed in Section III.

With zero elasticity of export supply, the overall export increase for the sample of developing countries amounts to over 4 percent. Because volumes traded now remain constant, the increase in export earnings is attributable to the rise of export prices to the level of domestic prices in the OECD markets. In the case of agricultural sectors, where the import elasticities in most OECD countries are less than unity, the increase in export earnings tends to be larger than would be the case if export supply were infinitely price elastic; the opposite holds true for nonagricultural products.

The increases in exports resulting from the hypothetical trade liberalization are unequally distributed among the sample countries because the composition and geographical distribution of the exports of the sample countries vary. The increases range from 0.6 percent for Kenya to nearly 18 percent for the Republic of Korea. Several factors influence this distribution: (1) the countries face different average rates of protection in the seven sectors according to the product and geographic composition of their exports; (2) the countries face different average elasticities of export demand according to their trade patterns; (3) most important, the seven sectors’ shares in total exports to the world and to the four OECD markets differ widely among the ten developing countries of the sample. Table 9 shows these features for the sample countries.

Table 9.Structure and Demand Elasticity of, and Protection Against, Sectoral Exports of Sample Countries
CountryExports of

Selected

Sectors

in Total

Exports

(In percent)
Exports of

Selected

Sectors

in Total

Exports

to Four

OECD

Markets

(In percent)
Average

Elasticity

of Export

Demand1

(As implied by Table 3)
Average

Protection

Against Exports

of Selected

Sectors1

(As implied by Table 4;

in percent)
Argentina49.115.1-1.197
Brazil18.89.9-1.746
India25.616.9-2.459
Kenya4.31.4-1.273
Rep. of Korea44.827.6-2.143
Mexico4.63.9-2.064
Pakistan60.719.2-2.354
Philippines18.814.5-1.852
Turkey24.612.3-2.659
Yugoslavia21.77.1-2.355
Source: Own calculations based on Tables 3 and 4 and on OECD and United Nations statistics.

Weighted averages according to product and geographic trade patterns.

Source: Own calculations based on Tables 3 and 4 and on OECD and United Nations statistics.

Weighted averages according to product and geographic trade patterns.

V. Sensitivity Analysis

As noted in Section II, three important sets of parameters determine the results of this exercise: the export-supply elasticities, the import-demand elasticities, and the tariff equivalents of tariff and nontariff barriers in the seven sectors of the four OECD markets. Given that previous studies, taken together, do not always provide sufficient assurance of the accuracy of their estimates, several tests were performed to determine the sensitivity of the results of the illustrative exercise to variations in these three sets of parameters.

First, elasticities of export supply were varied over a broad range. In addition to the two limiting cases of zero and infinity, intermediate values assumed were ½ and 2 for all sectors, and one case used combined values of ½ for agricultural and 2 for manufactured sectors (Table 10). For countries facing elasticities of export demand near 1, export increases from trade liberalization were nearly the same for all assumed elasticities of export supply. For countries with elasticities of export demand of 2 and above (India, Korea, Mexico, Pakistan, Turkey, and Yugoslavia), export increases more than doubled when elasticities of export supply tended to infinity. Export increases were smaller, however, for countries with elasticities of export demand lower than 2 (Brazil and the Philippines). There was no significant change when the elasticity of export supply of all sectors was assumed to be 2 and those of the agricultural and manufactured sectors were assumed to be ½ and 2, respectively.

Table 10.Sensitivity Analysis of Export Supply(Percentage change in total exports)
CountryElasticity of Export Supply (e)
0½2
Argentina6.96.96.97.2
Brazil2.73.03.64.8
India6.17.610.115.1
Kenya0.50.50.50.6
Rep. of Korea7.69.312.117.6
Mexico1.31.62.02.9
Pakistan6.58.110.615.9
Philippines4.75.46.69.2
Turkey4.55.77.611.7
Yugoslavia2.42.93.75.5
Weighted average4.35.16.49.0
Source: Own calculations based on sources listed in Section III.
Source: Own calculations based on sources listed in Section III.

Second, elasticities of import demand were varied: they were lowered by 25 percent in one test and raised by 25 percent in another. Under the assumption of infinite export supply, the calculations indicated a lower limit of 6.8 percent and an upper limit of 11.3 percent for increases in total exports of the sample countries. Finally, the estimated rates of protection were varied up and down by 25 percent. With export supply again assumed to be infinite, lower and upper limits of 7.5 percent and 10.3 percent could be established for increases in total exports of the sample countries.14 On the whole, the sensitivity analysis indicated that the increases in total exports of the sample countries would be in the order of 5 to 10 percent after trade liberalization.

VI. Interpretation of Results

The illustrative exercise presented above is subject to several limitations. First, the exercise is based on partial analysis and thus can indicate only the static, first-round effects of trade liberalization on developing countries. Because important second-round effects, such as income and terms of trade effects, are not considered, it is not possible to infer the trade positions of the developing countries in the sample once all changes have worked their way through the economies of both industrial and developing countries. Moreover, the exercise does not take account of the dynamic effects of trade liberalization, such as exploitation of economies of scale or intra-industrial trade. Such effects could help a country achieve higher export growth rates, over longer periods, than it would have achieved in the absence of trade liberalization.

Second, the exercise is based on certain simplifying assumptions. In particular, the assumption of uniform elasticities of export supply in all exporting countries may overstate the sample countries’ ability to meet increased export demand and to hold their former market shares. In addition to trade-creation effects, there could also be trade diversion against the exports from the sample developing countries as more efficient producers undercut existing suppliers in the expanded market. Further, those developing countries which have benefited from the Generalized System of Preferences or other preferential arrangements may suffer some losses after trade liberalization. At the same time, trade diversion toward exports of the sample countries may occur when nontariff trade barriers that especially discriminate against these countries are removed.

Third, further research is needed to improve estimates of the parameters used in the exercise. In particular, the estimates of the tariff equivalents of trade barriers in the OECD markets for the seven sectors reflect only rough orders of magnitude, partly based on qualitative information, that can be the subject of debate. In practice, nontariff barriers to trade take many forms and are frequently applied on a bilateral rather than multilateral basis; thus, liberalization of bilateral restrictions will have more differential effects than those considered here.

Notwithstanding these limitations, the exercise illustrates that the benefits of trade liberalization for developing countries can be significant, although the benefits would differ among countries and might be spread over a number of years. Under the illustrative exercise, a 5 to 10 percent real growth of exports is attributed to trade liberalization. By way of comparison, in the course of the 1970s the volume of exports from the sample countries grew on average at an annual rate of 8 percent. Although the exercise was not meant to measure effects of trade liberalization on the balance of payments of the sample countries, it indicates that an improvement in market access within the industrial countries could make a significant contribution to the export prospects and adjustment efforts of developing countries.

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Ms. Kirmani, Assistant Chief in the Trade and Payments Division of the Exchange and Trade Relations Department, is a graduate of the University of Maryland.

Mr. Molajoni, economist in the Trade and Payments Division of the Exchange and Trade Relations Department, is a graduate of the University of California, Berkeley.

Mr. Mayer, economist in the Eastern European Division of the European Department, was in the Exchange and Trade Relations Department when this paper was prepared. He is a graduate of the University of Konstanz and of the University of Kiel in the Federal Republic of Germany.

The importing countries are the United States, the European Community (EC), Japan, and Canada. The seven sectors considered are meat, cereals, sugar, textiles, clothing, footwear, and iron and steel. The developing countries considered are Argentina, Brazil, India, Kenya, the Republic of Korea, Mexico, Pakistan, the Philippines, Turkey, and Yugoslavia.

For a survey of recent trade policies in the seven sectors, see Anjaria and others (1982).

Calculated from OECD and United Nations statistics. These ratios have important implications for the overall results, as discussed in a later section, but the main criterion in selecting the developing countries of the sample was representation of the various geographical regions (three are in the Western Hemisphere, three in Asia, two in Europe, one in the Middle East, and one in Africa), rather than the structure of the countries’ exports.

The studies cited above assume constant returns to scale and competitive market structures and, hence, disregard the effects of trade liberalization on economic efficiency. Furthermore, it can be argued that the foreign demand elasticities for the exports of developing countries are unrealistically low. Accordingly, the results of these studies have to be qualified.

The studies mentioned above use static frameworks for their analyses. Easton and Grubel (1982) have pointed out that, in a dynamic framework, the costs of protection are likely to grow at the rate at which international trade expands because protection impedes exploitation of the opportunity for gains from trade, such as economies of scale and intra-industry trade, which grow at that rate. They concluded that the welfare costs of protection, as measured in the economic literature, have tended to be substantially underestimated.

Ideally, global demand and supply models for the selected sectors would be needed that would take into account all the producing and consuming countries, as well as interlinkages between the sectors. There are, however, many conceptual and empirical problems associated with the multicountry, multisectoral approach. Hence, for the purpose of this illustrative exercise, a simpler framework was adopted in which the available parameters could be used.

In the case of certain nontariff barriers (for example, voluntary export restraints), however, it is possible that part of the difference between 0Qd x 0PD and 0Qd x 0Pw accrued before liberalization to the exporter in the form of a rent. If this is so, gains to the exporter as a result of trade liberalization are somewhat less than assumed in the above model.

The higher the degree of substitutability, other things being equal, the greater would be both the shift in demand from the domestically produced to the imported commodity and the reallocation among imported commodities from different sources induced by trade liberalization. This relation, however, may depend on the time frame considered. In the short run, less competitive industries may respond by reducing profit margins and by expanding production in an attempt to maintain market shares. Over the medium term, however, resources would tend to shift out of these industries, or producers would introduce greater product differentiation.

Following Yeats (1979), estimates for France were used as indicators for the EC in the textile, clothing, and steel industries.

Morici and Megna (1983) give an assessment of U.S. trade policies implemented in the last ten years and provide estimates of the protection afforded by nontariff restrictions in several industries. For textiles and apparel, the authors calculated the reduction of imports induced by the 1974 Multifiber Agreement (MFA), and estimated the tariff equivalent of the MFA at 8.8 percent (p. 23). From this finding, Morici and Megna concluded that the protection provided to the U.S. clothing industry by nontariff barriers was around 8.8 percent in 1976 (p. 100). Yeats, however, estimated the tariff equivalent of nontariff barriers for the U.S. clothing industry at 40 percent in 1973. The estimate by Morici and Megna seems to reflect (and is used here as) additional protection by the MFA for the U.S. clothing industry, rather than the actual height of nontariff trade barriers in 1976.

The increases in imports derive from all sources and not only from the sample exporting countries. Of course, under the assumption of zero elasticity of export supply, import volumes would not increase.

In calculation of the increase in total exports, both the exports of the non-liberalized sectors and the exports of the liberalized sectors to the nonliberalizing markets were held constant.

Given the occasionally doubtful information on tariff equivalents of non-tariff barriers in Canada, another calculation was performed on the assumption of no change in Canadian rates of protection. The total increases in exports attributable to trade liberalization in the remaining three markets was 8.8 percent for the sample of developing countries under the assumption of infinite export supply.

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