Chapter

II Trade Policy Developments, 1990–93

Author(s):
Arvind Subramanian, Richard Harmsen, Peter Uimonen, Naheed Kirmani, and Michael Leidy
Published Date:
February 1995
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During 1990–93, the growth of trade (as measured by trade volumes) outstripped the increase in real GDP, in line with the trend toward increased integration of the world economy over most of the past three decades (Chart 1). The growth of both trade and output were lower during this period than in previous decades. A contributing factor was the recession in a number of industrial countries in 1990–91 although, in contrast with the 1981–82 period, the growth in trade still exceeded that of output.

Chart 1.Real World Trade and GDP Growth

(Annual changes; in percent)

Source: IMF(1994b).

While real export growth decelerated in 1990–93 in both industrial and developing countries compared with the previous four-year period, the developing countries experienced growth rates over twice as high as those of the industrial countries (Table 1). Among the developing countries, particularly striking were the real export gains in Asia and the Western Hemisphere. Export growth in sub-Saharan Africa was negligible, although the aggregate numbers mask improvements in export growth experienced by some countries that have undertaken extensive economic reforms.

Table 1.Export Growth and Terms of Trade
Export VolumesTerms of TradeWorld Export Shares1
1986–891990–931986–891990–93198019901993
(Annual percentage changes)(In percent)
Industrial countries5.83.22.60.968.173.669.4
United States11.56.8–1.20.212.011.812.6
Japan2.12.38.54.87.18.710.0
European Union25.42.32,80.716.716.215.3
Developing and transition economies39.77.8–4.0–0.831.926.430 6
Africa2.82.4–6.0–2.13.52.52.5
(Sub-Saharan Africa)(2.2)(1.0)(–5.0)(–3.4)(…)(…)(…)
Asia14.19.80.30.38.913.617.7
(Asian NIEs)4(15.7)(11.0)(2.2)(0.1)(…)(…)(…)
Middle East and Europe58.85.2–8.6–1.710.54.84.4
Western Hemisphere4.66,5–3.9–2.95.63.84.6
Sources: International Monetary Fund, Direction of Trade Statistics; and IMF (1994b).

World exports are from IMF. Direction of Trade Statistics, which excludes Albania, Bulgaria, Cuba, the former Eastern Germany, Mongolia, North Korea, and the countries of the former Soviet Union.

Figures exclude intra-European Union trade.

Data for regional export shares do not include figures for the Czech Republic, Faeroe Islands, Gibraltar, Hungary, Poland, Romania, the Slovak Republic, and Federal Republic of Yugoslavia; the totals for developing and transition economies do include figures for these countries.

Newly industrializing economies (NIEs). that is, Hong Kong, Korea, Singapore, and Taiwan Province of China.

European countries included are Cyprus, Malta, and Turkey.

Sources: International Monetary Fund, Direction of Trade Statistics; and IMF (1994b).

World exports are from IMF. Direction of Trade Statistics, which excludes Albania, Bulgaria, Cuba, the former Eastern Germany, Mongolia, North Korea, and the countries of the former Soviet Union.

Figures exclude intra-European Union trade.

Data for regional export shares do not include figures for the Czech Republic, Faeroe Islands, Gibraltar, Hungary, Poland, Romania, the Slovak Republic, and Federal Republic of Yugoslavia; the totals for developing and transition economies do include figures for these countries.

Newly industrializing economies (NIEs). that is, Hong Kong, Korea, Singapore, and Taiwan Province of China.

European countries included are Cyprus, Malta, and Turkey.

Developing countries experienced a deterioration in their terms of trade in 1990–93 (with sub-Saharan Africa witnessing the largest deterioration), although it was not as severe as in the previous four-year period. The dynamic export performance of Asia and the Western Hemisphere in 1990–93 led to a rise in the share of developing countries as a whole in world exports to about 31 percent in 1993; this was still marginally below their share in 1980 when oil exports had been more prominent.

Industrial Countries

Trade policy developments in industrial countries during 1990–93 were characterized by significant regional liberalization, limited unilateral market opening, and the continued presence (and, in some areas, escalation) of trade frictions. These themes were also recurrent in the Fund’s consultation discussions and the World Economic Outlook over the past several years.

Multilateral liberalization under the Uruguay Round was the most prominent trade policy objective of most industrial countries during 1990–93, but negotiations were difficult and protracted. Industrial countries intensified moves toward regional trade liberalization in both Europe and North America in the context of formal regional trading arrangements. Two prominent examples were the Internal Market program (also referred to as the Single Market program) of the European Union (EU)5 and the North American Free Trade Agreement (NAFTA) between Canada, Mexico, and the United States.6 The Internal Market program, providing for harmonization of legislation and the elimination of barriers to trade in goods and services, capital flows, and movements of labor, is a major recent European initiative aimed at stimulating growth. Competition policies are an important component of this program.7 Its impact on the level of real GDP is estimated to be between 2.4 percent and 3.4 percent.8 While the Internal Market program is associated with some pockets of discrimination (e.g., import quotas on bananas, “voluntary” restraints on Japanese automobiles, and public procurement rules), trade diversion has been generally limited (less than 2.5 percent of extra-EU imports). Thus, earlier fears by third countries of a “Fortress Europe” have so far proved unwarranted.

The NAFTA provides for improved market access on a preferential basis in many sectors (agriculture, automotive, and textiles and apparel), covers areas not traditionally included in free trade arrangements (intellectual property, investment), and strengthens trade rules; supplementary agreements cover environmental and labor standards. All three countries are expected to benefit from the NAFTA, with Mexico likely to experience the largest percentage increase in real national income (up to 5 percent of GDP). Trade diversion effects are expected to be modest (generally less than 1 percent of a country’s exports to North America) but may be larger (up to 5 percent) for specific products and suppliers.9

Broad-based unilateral trade liberalization among industrial countries was undertaken only by Australia10 and New Zealand:11 promotion of transparency and public awareness of the costs of protection helped them implement trade reforms (Box 1). There were instances of liberalization in specific areas by several other countries; for example, Sweden dispensed with quantitative restrictions on imports of textiles and clothing under the MFA and moved to deregulate the agricultural sector. The EU eliminated a large number of national QRs against third countries in the context of the internal Market program. In the context of its bilateral agreements with the United States, Japan liberalized (on an MFN basis) QRs on some agricultural products and coal, and reduced tariffs on selected agricultural and industrial products; it agreed (under the Structural Impediments Initiative) to take liberalization measures in areas such as foreign direct investment, deregulation of the distribution system, and stricter enforcement of competition laws;12 and it also undertook to improve transparency and promote liberalization in government procurement in construction.

Notwithstanding closer cooperation on a regional basis, trade relations among industrial countries (and between them and others) deteriorated in 1990–93. Protectionist pressures remained strong and trade frictions escalated against a background of slow growth and high unemployment in major trading nations, and new competitive challenges emanating from globalization and the dynamic trade performance of some developing and transition economies. Initiation of GATT disputes reached an annual peak often in 1991/92,13 and many others were handled outside the GATT. Trade relations were marked by bilateral and unilateral approaches to market opening. For example, during 1990–June 1993, there were 15 new investigations under the Section 301 family of U.S. trade laws.14 Trade tensions intensified in particular with Japan, fueled by alleged difficulties of market entry and its persistent external current account surplus. With the declining importance of formal Japanese trade barriers in manufacturing, scrutiny increased of possible trade-restrictive effects of “informal” barriers and of domestic competition policy instruments. As a consequence, increased attention began to be paid to market opening through various sector-specific and other initiatives, culminating in the United States—Japan Framework Agreement of July 1993.15 This has resulted in an ongoing debate over the economic and political efficacy of “numerical targets,” “results-oriented approaches,” and voluntary import expansions as instruments for market opening (see Box 2). In the particular case of the Framework Agreement, the two parties involved are agreed on the objectives, although views on the means may differ. More generally, bilateral approaches can be instrumental in reducing trade or trade-related barriers—but they also risk introducing (even if unintended) elements of trade management and discrimination in practice, and thereby could undermine confidence in the multilateral trading system. Such approaches are unlikely to affect significantly the external balances, which are typically grounded in savings-investment balances.

Box 1.Helping to Counter Protectionist Pressures Through Transparency

Economists agree that properly phased unilateral trade liberalization is generally in the national interest.1 Yet resistance to trade liberalization and recurring protectionist pressures often seem to dominate public debate and ultimately influence policy decisions. The fundamental asymmetry between the costs and benefits of protection makes the pursuit of liberal trade politically difficult. The benefits of liberal trade (to consumers and industrial users) tend to be relatively nontransparent and diffuse, while the costs of liberal trade (to protected industries) are typically concentrated and transparent. Thus efforts to mobilize political resources to oppose liberalization or to support protectionist policies are often more successful than efforts to mobilize political resources to seek liberal trade policies.

Governments can play a role in helping to tip the balance of political forces in favor of trade liberalization. They can do so, in part, by helping to lift the veil of complexity that often conceals the net social costs associated with protectionist trade policies. Mobilizing political support for liberal trade can be facilitated by systematically exposing the implications of trade measures (which at times are effectively buried in the esoterica of trade legislation) and evaluating the associated costs for the economy as a whole.

Underlying the recent unilateral liberalization initiatives in Australia, for example, is an institutional base that promotes transparency and supports an economy-wide perspective in the evaluation of government policies. Of note in this regard is the role of the Industry Commission, the Government’s major review and advisory body in the area of industrial economic policy, broadly defined. The Commission is an independent body whose charge is to assess prospective policy measures from a national perspective with a view to promoting a high degree of transparency in government policymaking, furthering public education, and bringing a well-informed voice to the public debate. The debate that preceded the 1988 tariff cuts was influenced by the Commission’s work on effective rates of assistance, and the Commission has continued as a steady voice for trade liberalization and an effective critic of the remaining pockets of protection in Australia.

A related development at the international level is the GATT’s Trade Policy Review Mechanism (TPRM) initiated in 1989 and made permanent under the Uruguay Round agreement. The TPRM process reviews individual countries’ trade regimes with a view to enhancing transparency, improving adherence to GATT/WTO rules, and supporting the smooth functioning of the multilateral trading system. These reviews have become an important reference on trade policy for consumer groups, researchers, and international organizations, and over time may help to strengthen public opposition to existing and newly emerging protectionist trade measures throughout the world. In its policy advice and program design, the Fund (and the World Bank) encourages transparent exchange and trade regimes.

1 Two well-known, but often overstated, exceptions to this prescription are those presented by optimal tariff and strategic trade theory.

Notwithstanding escalating trade frictions and strong protectionist pressures, governments in industrial countries managed to restrain the most serious protectionist elements. The combined resort by the EU, Japan, and the United States to nontariff measures remained essentially unchanged between 1988 and 1993 (Table 2). Nevertheless, serious distortions remained in many sectors (agriculture, steel, textiles and clothing, footwear, autos, electronics, aircraft), resort to VERs continued, and a disturbing upward trend occurred in the use of trade remedy laws, especially antidumping.

Table 2.The European Union, Japan, and the United States: Trade Coverage Ratios of Core Nontariff Measures1(Percent of imports covered)
19881993
Core NTMs14.614.0
Quantitative restrictions12.19.8
Export restraints8.06.6
Antidumping, countervailing, etc.2.43.7
Other price measures1.61.6
Source: IMF staff estimates derived front provisional OECD data.

Core NTMs include quantitative restrictions and price-based import measures.

Source: IMF staff estimates derived front provisional OECD data.

Core NTMs include quantitative restrictions and price-based import measures.

Although recent data are not available, the levels of state aid to industries have likely remained high, especially in the EU. Given budgetary pressures in most industrial countries, however, the slightly declining trend observed in the second half of the 1980s has probably continued since 1990.16 Also, the composition of subsidies is changing, with an increased emphasis on less-trade-distortive supports such as investment in infrastructure and regional assistance.

Subsidies to the agricultural sector have continued growing since 1989, with total transfers in OECD countries associated with agricultural policies increasing from $302 billion in 1990 to $335 billion in 1993. Producer subsidy equivalents17 for OECD countries as a whole remained practically stable during 1990–93 at about $165 billion, or over 40 percent (Table 3). These subsidies have seriously distorted markets and adversely affected efficient agricultural exporting countries. Several industrial countries introduced agricultural reforms, of which the 1992 reform of the EU’s Common Agricultural Policy (CAP) was the most notable. The reform aimed most noticeably at curbing excess production of cereals by means of set-asides of arable land and reductions in guaranteed prices, with compensation to farmers in the form of a fixed payment per hectare under cultivation. These reforms are an important step toward a more market-oriented system. Nevertheless, the basic features of the CAP (minimum prices, trade protection) remain in place; and the impact on production incentives of decreases in institutional prices, which are expressed in European currency units (ECUs), was significantly reduced by the depreciation in terms of the ECU of a number of European Monetary System (EMS) currencies in 1992 and 1993. Also, the compensatory payments will inhibit reductions in the overall budgetary cost of support to the agricultural sector. New reforms will therefore be necessary in the future if further market liberalization and a reduction of budgetary costs are to be achieved.

Box 2.Voluntary Import Expansions

Voluntary import expansions (VIEs) refer to quantitative targets set by governments, typically in response to allegations that nontransparent market barriers impede market access. VIEs and VERs thus emphasize quantitative outcomes as opposed to trade rules as a way of resolving trade tensions. VIEs and VERs are a manifestation of managed trade, because they involve governments specifying outcomes for domestic producers that would otherwise be determined by markets. The Uruguay Round agreement on safeguards calls for the elimination of VERs and of “any other similar measures on the export or import side” that afford protection. VIEs that do not afford protection would appear not to be covered by the Uruguay Round prohibition, but this remains to be tested in the future. From the perspective of economic efficiency, the use of VIEs carries serious costs.

First, some have argued that VIEs can be distinguished from VERs, because the former could promote competition by increasing the number of firms operating in the market.1 However, it is also recognized that the implementation of VIEs requires coordination among firms (by governments), which could lead to cartel formation and higher prices in a manner analogous to VERs.2 VIEs may not lead to significant market opening, because typically producer groups in the exporting country will seek privileged access (excluding potential competitors) to foreign markets. The VIE-implementing country may also define the VIE narrowly to assure its implementation. The result could be some market opening, but at the expense of new entrants.

Second, VIEs are inherently arbitrary; in addition to doubts about the validity of targets, their implementation is problematic. If uncompetitive sectors are the beneficiaries of VIEs, the resulting expansion of such sectors could entail an overall loss in welfare of the VIE-seeking country: VIEs thus become instruments of “export protectionism.”3 Further, there are risks that they may not prove temporary as intended, if they come to be seen as entitlements.

Third, VIEs may become discriminatory in application, in view of pressures to appease the complaining country or industry, or both, at the expense of third parties. Bhagwati (1988) provides examples of discriminatory market opening.

Fourth. VIEs could proliferate across industries (as did VERs), because the existence of targets in one industry creates an incentive for other exporters to lobby their governments for similar deals. A global spread of VIEs would lead to market segmentation and exacerbate trade tensions between countries.

Finally, VIEs do not resolve the fundamental problem of closed markets. Improving competition policy rules and enforcement and agreeing multilaterally to eliminate regulations and discriminatory government procurement practices would be a more appropriate and effective policy response.

1 See Tyson (1993): Bergsten and Noland (1993).2 See Irwin(1994).3 See Bhagwati(1988).
Table 3.Agricultural Producer Subsidy Equivalents1
Annual

Average

1979–86
199019921993
(in billions of US. dollars)
Australia1.001.331.110.96
Austria1.022.683.172.97
Canada3.727.205.994.77
European Union39.6182.1182.7979.57
Finland2.185.083.292.65
Japan20.9629.8536.0734.99
New Zealand0.690.170.100.10
Norway1.693.053.092.66
Sweden1.683.152.741.92
Switzerland2.615.134.544.49
United States22.7327.7025.4128.35
Total OECD97.88167.44168.29163.12
(in percent of farm gate pikes)
Australia1012109
Austria31495556
Canada28463832
European Union37464748
Finland56706767
Japan64657170
New Zealand24533
Norway70757776
Sweden44575852
Switzerland68787577
United Stales21232123
Total OECD34424142
Source: OECD (1994).

Agricultural producer subsidy equivalent is assistance to producers in the form of market price support direct payments, and transfers that indirectly benefit producers.

Source: OECD (1994).

Agricultural producer subsidy equivalent is assistance to producers in the form of market price support direct payments, and transfers that indirectly benefit producers.

Developing Countries

Despite continued barriers to market access in industrial countries, developing countries in 1990–93 undertook several reforms in their trade policies. Both aspects were highlighted in the Fund’s consultations with members and in the World Economic Outlook during this period.

Developing countries accelerated unilateral trade liberalization in line with the trend toward outward-oriented strategies. Trade reforms were often part of comprehensive integrated packages that included macroeconomic and other structural reforms (including exchange systems),18 which led to increased capital flows, particularly to Asia and Latin America, and helped boost productivity and exports.19 Trade liberalization was also pursued in the regional context.

Integration in the multilateral trading system was pursued through membership in the GATT,20 more tariff bindings,21 less reliance on trade restrictions allowed under GATT’s balance of payments provisions (Article XVIII: B),22 and more active participation in the Uruguay Round as compared with previous Rounds. This assisted in achieving a Uruguay Round result that took into account areas of interest to developing countries more so than before.

As QRs were abolished and tariffs were brought down, protectionist pressures increased in the more vulnerable domestic industries exposed to international competition. In some cases, governments responded by introducing minimum import price systems to sensitive sectors (especially agriculture). In others, there was increased use of trade remedy laws, particularly antidumping, and introduction or reactivation of antidumping and countervailing legislation. The use of antidumping actions increased, particularly in those countries that had significantly liberalized their trade regimes, indicating that this measure is sometimes being used in lieu of a normal safeguards instrument. Nevertheless, antidumping initiations by developing countries as a proportion of total initiations of trade remedy actions remain small.

Developing countries face a range of tariff and non-tariff trade barriers in industrial country markets. Tariff escalation is a problem especially in “sensitive” sectors, such as agriculture, textiles, and apparel, and is likely to remain important in the post-Uruguay Round period. In addition, developing countries’ exports face various tariff peaks (some reaching 60 percent), agricultural levies, and minimum import prices.

Regarding nontariff measures, QRs have had the most adverse effects on developing countries’ exports of textiles and clothing, fish and fish products, and footwear (Chart 2). The effect of price-based measures was generally not as great, although still high in agriculture, as well as in iron and steel. Antidumping and countervailing measures, on the other hand, have intensified in recent years, affecting developing countries’ exports; the number of these actions initiated has risen from 67 in 1988/89 to 136 in 1991/92 (Table 4). Subsidies to the agricultural sector in OECD countries have also acted as a barrier to developing countries’ exports to the extent that they exerted downward influence on export prices and displaced exports from developing countries, or the availability of subsidized imports inhibited domestic production. Eliminating such market access barriers would improve the export prospects of developing countries and further encourage the liberalization of their trade and payments restrictions.

Chart 2.Nontariff Measures by Industrial Countries, 1992

(Import coverage ratios)

Source: UNCTAD (1993).

1 Prohibitions, quotas, licensing, state monopolies, VERs, MFA.

2Minimum prices, antidumping and countervailing duties, other measures.

Table 4.Antidumping and Countervailing Actions on Imports from Developing Countries
Cases Initiated from July 1 to June 30Cases Outstanding at June 30
Initialing Country1988/891991/9219891992
Total actions67136320443
Antidumping58118233362
Australia3351451
Brazil1518
Canada424540
European Union262094117
India4?1
Japan11
Mexico417627
New Zealand112318
United States14227096
Countervailing9188781
Australia313
Canada124
Chile23
European Union244
United States6138067
Memorandum items
Antidumping and countervailing actions initiated by selected developing countries1
Antidumping
Brazil19213
India55
Mexico17252659
Countervailing
Brazil88
Source: UNCTAD (1993).

Figures are on actions on imports from all countries.

Source: UNCTAD (1993).

Figures are on actions on imports from all countries.

Economies in Transition

Trade policy developments among economies in transition were highlighted by radical transformations in Eastern Europe and the countries of the former Soviet Union toward market-oriented and more liberal trade regimes and moves toward integration into the world trade system. The Fund has actively promoted these features through its surveillance and lending activities.

Elimination of monopoly control of international trade by large state trading corporations, the abolition of QRs, and the adoption of relatively low to moderate average tariffs were the priorities for reform in economies in transition. The pace and sequencing of trade reforms varied. Eastern Europe and the Baltic countries undertook the most extensive reforms.23 Imports of industrial products were rapidly freed from QRs, except in Hungary where they were liberalized over a three-year period. QRs remained on exports of a few products whose domestic prices were not fully liberalized and on agricultural trade in some countries to control domestic supplies of foodstuffs or provide support to farmers. Tariffs on imports of agricultural goods were usually kept higher than those on manufactures. Some of these countries resorted to temporary import surcharges to deal with the difficulties of the transition, including at times real exchange rate appreciation, rising unemployment, or the need to raise revenues to curtail public sector deficits. Notwithstanding these setbacks, the countries generally kept to their reform programs. Estonia, Hungary, and the Czech Republic were particularly successful in achieving a low and relatively uniform tariff structure. Others maintained average tariffs closer to 20 percent.

The collapse of payments arrangements and large macroeconomic imbalances seriously disrupted trade in the countries of the former Soviet Union, as well as others within the former Council for Mutual Economic Assistance (CMEA) area. Although trade among the countries of the former Soviet Union remained largely free of import tariffs, payments problems and price controls severely curtailed the extent of such trade. Bilateral trade agreements and trading through state-controlled foreign trade organizations, used partly to overcome payments problems, had limited effectiveness because of increased enterprise autonomy. Lack of suitable payments mechanisms hampered enterprise trade. In trade with countries other than those of the former Soviet Union, import regimes were characterized by relatively moderate tariffs levied mainly for revenue purposes, and limited recourse to formal import prohibitions, quotas, or licenses, A number of export QRs, however, remained because of extensive price controls.24 Substantial distortions continued in a number of countries of the former Soviet Union because of imperfect foreign exchange markets, in part reflecting official interventions, the continued (and sometimes dominant) role of the state, and lack of an appropriate institutional infrastructure. Also, pressures for protection are likely to increase as import competition becomes more effective. This is already evident in Russia, where an increase in average tariffs from 8 percent to about 12 percent was implemented in July 1994.

The broad pattern of reform was similar, but more gradual, in the transition economies of Asia (Cambodia, China, Lao People’s Democratic Republic, Mongolia, and Viet Nam). Cambodia substantially liberalized its trade regime in September 1993 with elimination of most QRs and licensing and adoption of a simplified tariff structure. In the other states, trade reform has been implemented gradually; the ending of the trading monopoly of large state enterprises and trading houses has often preceded reforms of QRs and tariffs. These countries still retain QRs on both exports and imports, and the tariff structure remains quite dispersed, although Mongolia (with a relatively uniform tariff structure and few QRs) has proceeded further with trade reform.

Most East European economies renegotiated their protocols of accession to GATT, or are doing so, to reflect better progress in their transformation into market economies. GATT working parties on accession were established for Bulgaria, and for many of the countries of the former Soviet Union;25 other countries of the former Soviet Union also intend to join GATT/WTO. China’s reaccession has proved time consuming, having started in 1986, Important issues regarding transparency of the trade regime and the level of GATT obligations to be assumed by China may be relevant also for the accession of some of the countries of the former Soviet Union.

Economic and political factors motivated Eastern Europe and the Baltic countries to seek integration with Western Europe. East European countries’ association agreements with the EU provide for immediate elimination of tariffs and QRs on many EU imports of industrial products, and phased liberalization of others, although agriculture is mostly excluded and special provisions apply to sensitive products such as steel and textiles and clothing. The reforms and agreements are contributing to a growth of Eastern Europe’s exports to Western Europe (Chart 3), The redirection of trade is leading to the establishment of new industries, many of which are labor intensive and should help improve the employment situation. The Baltic countries signed trade agreements with EFTA members and are negotiating them with the EU. The EU is likely to sign trade agreements with other countries of the former Soviet Union—partnership and cooperation agreements have been reached with Russia, Ukraine, Kazakhstan, and the Kyrgyz Republic. Central Asian republics, particularly those with oil and gas, are seeking to increase their commercial links with countries in the Middle East and some have become members of the Economic Cooperation Organization (ECO). Central Asian republics are also expanding trade with the eastern regions of China,

Chart 3.Eastern Europe: Shifts in Geographical Trade Patterns

(Changes in shares between 1990 and 1992: in percentage points)

Source: National authorities and IMF staff estimates.

1Former Czech and Slovak Federal Republic, which on January 1, 1993 was succeeded by the Czech Republic and the Slovak Republic.

Regional Integration

A characteristic of the 1990s has been an increasing trend toward regional integration. This can be attributed to a variety of factors, including, for example, linkages to the Uruguay Round negotiations, fear of being excluded from emerging regional groupings, and various non-economic objectives. While the completion of the Uruguay Round may lessen some of the impetus toward regionalism, indications are that such interest—especially in the Western Hemisphere and in Europe—is likely to remain strong. Regional integration was not a major item of discussion during the Uruguay Round.26 Many of the major regional initiatives in the recent past have been associated with outward orientation, as evidenced by the MFN liberalization that preceded or accompanied regional liberalization (e.g., in Latin America). The receptivity of the EU to broadening the reach of integration to the north and east is encouraging; it indicates that regional initiatives can transmit the forces of trade liberalization outward. The general accession clause in NAFTA and the apparent willingness of the parties to proceed with the process of admitting new members is also consistent with the view that regionalism can be a “building block” to multilateral liberalization.

While existing regional arrangements can be viewed on the whole as building blocks, unfettered regionalism is not without risk. The recent trend toward regional trading arrangements should not divert the attention of the international community from the fact that the first-best policy is MFN liberalization and the ultimate goal is global free trade. The challenge ahead is to ensure that regional initiatives are implemented in a manner that ties them securely to the long-run goal of multilateral trade liberalization, while firmly resisting those regional trading arrangements that would segment the world economy into competing trading blocs. In this regard, strict adherence to the multilateral rules governing regional trading arrangements would be a minimum requirement, and other steps not required by the multilateral rules—including, for example, liberal terms of accession and simultaneous MFN liberalization—would be highly desirable.

The EU, which came into effect in 1993. is used in this paper to also refer to the European Community.

Other formal trading arrangements involving industrial countries included the European Economic Area (EEA) together with the EU’s accession negotiations with Austria, Finland, Norway, and Sweden; the European Union’s association agreements with six Eastern European countries and cooperation agreements with the countries of the former Soviet Union: and similar agreements under negotiation between the European Free Trade Association (EFTA) and Eastern European countries. Under the Canada-United Slates Free Trade Agreement (CUSFTA), there have been three rounds of accelerated tariff cuts since 1990. Australia, Canada, Japan, New Zealand, and the United States participated with a number of Asian developing countries in the Asia-Pacific Economic Cooperation Forum (APEC).

Enforcement of competition rules has increasingly focused on the elimination of remaining commercial and public sector monopolies, further reductions in state aids, deregulation of private anticompetitive arrangements, and mergers and acquisitions.

See USITC(I993).

(“Australia initiated a general program of unilateral trade liberalization in 1988, and a second program of phased tariff cuts commenced on July 1, 1992. With a few sectoral exceptions, the aim is to reduce most-favored-nation (MFN) tariffs on those items not already duly free to a tariff rate of 5 percent by July 1, 1996. In the sensitive area of textiles, clothing, and footwear, the highest tariff by the year 2000 will be 25 percent on apparel (down from about 47 percent), while textiles and footwear will face a maximum of 15 percent. Tariffs on motor vehicles are to be reduced to 15 percent (from just over 30 percent) by January 1, 2000.

New Zealand embarked on a program of unilateral trade liberalization in the mid-1980s, with phased cuts in MFN tariffs on manufactured goods, and the elimination of most quota and import licensing restrictions. A second round of trade liberalization pursued deeper tariff cuts in 1992 and, with the exception ?f a few sensitive sectors, non-zero tariffs (which at present cover about 10 percent of imports) will range predominantly from 8 percent to 12 percent by July 1996.

Notable among these were the Large-Scale Retail Store Law of 1990 permitting easier entry for foreign and domestic firms into the retail business and more effective enforcement of the Anti-Monopoly Act.

This was in part also the result of many disputes having been held back awaiting the outcome of the Round, and of Contracting Parlies beginning to clear some of this backlog after the expiration of the initial deadline for the Round in 1990.

Section 301 provides authority to enforce U.S. rights under trade agreements or to respond to foreign measures considered unfair, unreasonable, or discriminatory toward U.S. commerce abroad with the threat of sanctions. The “Super 301” law expired in 1990 but was renewed by executive order in March 1994—Super 301 introduces automaticity to Section 301 investigations.

This covered an array of macroeconomic and sectoral issues and encompassed previous initiatives on government procurement in computers, supercomputers, satellites, medical technology and telecommunications, and market access in the automotive and insurance sectors.

In the EU, total state aid to the manufacturing sector reached 3.5 percent of value added in 1988–90, down from 4 percent in 1986–88 (Commission of I=the European Communities (1992), p.10).

Producer subsidy equivalents are measured by market support, direct payments, and transfers that indirectly benefit producers. Total transfers is a broader concept as it includes, in addition to producer subsidy equivalents, items such as expenditures on public stockholding not received directly by producers, subsidies to food processing and distribution, expenditures not entirely specific to the agricultural sector, etc. See OECD (1994).

In the developing couniries, trade restrictions are often administered through the exchange system and exchange-based measures, including multiple exchange rates for exports and imports and ex change-based taxes and subsidies. Moves toward full current account convertibility and trade liberalization therefore often go hand in hand.

“The number of developing country contracting parties in the GATT increased from 67 in 1990 to 93 in April 1994. As at the latter date, about 11 developing countries (excluding countries of the former Soviet Union and Central and Eastern European countries) were negotiating accession discussions.

For example, as part of their GATT accessions, Bolivia, Costa Rica, El Salvador, and Venezuela bound their tariff schedule in the GATT at 40 percent, 55 percent, 34.5 percent, and 50 percent, respectively.

GATT Article XVIII: B provides for the temporary imposition of trade restrictions to safeguard the balance of payments. Examples of countries that disinvoked GATT Article XVIII: B in the recent past include Argentina, Brazil. Colombia, Ghana, and Peru.

Eastern European countries covered in this analysis are Albania, Bulgaria, Hungary, Poland. Romania, and the Czech and Slovak Republics. Hungary had undertaken limited reforms in the 1980s. Unlike the other Eastern European countries, Albania does not have an association agreement with the EU.

As of mid-June 1994, there were GATT working parties on accession for Armenia, Belarus, Estonia, Latvia, Lithuania, Moldova, Russia, and Ukraine.

With the exception of Japan, all industrial countries are part of at least one formal regional trading arrangement. Japan has raised regionalism as a topic for the post-Uruguay Round agenda.

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