Chapter

II Trade Trends and Economic Setting

Author(s):
Naheed Kirmani, Lorenzo Pérez, Shailendra Anjaria, and Zubair Iqbal
Published Date:
November 1982
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Changing Trade Trends and Patterns

Since 1973, the growth of international trade has been slower and more uneven than in the previous two decades, and there have been significant shifts in the structure of trade (Table 1). During 1963–73, world exports (in volume terms) increased every year, at an average rate of 8½ per cent. During 1974–81, there was a striking variation in annual growth rates, ranging from a decline of 3 per cent to an increase of 11 per cent; on average, exports grew by 3½ per cent annually. In 1980–81, export growth was negligible (0.5 per cent a year). On the assumption that there will be no increase in protectionism, the April 1982 World Economic Outlook by the Fund staff projected a modest increase of 2 per cent in world trade in 1982 and an average growth of between 4 and 5 per cent annually in the subsequent years up to 1986. Thus, it is evident that the dynamism that was characteristic of international trade in the 1960s and early 1970s is unlikely to be restored under the central assumption of unchanged policies.

The recent evolution of international trade is attributable primarily to the slowdown of economic growth since 1973. World commodity output (excluding services and construction) grew by 6 per cent annually during 1963–73, but by only 3 per cent during 1974–81. The weakness of economic activity has been accompanied by a marked increase in underutilization of resources. In seven major industrial countries, the unemployment rate, which averaged just over 3 per cent in 1963–73, jumped to 5½ per cent in 1975 and has subsequently remained at a high level. In 1981, the unemployment rate rose to over 6½ per cent, and it is expected to exceed 7½ per cent in 1982. Although economic growth under the central scenario projected in the World Economic Outlook until 1986 is expected to be higher, compared with the past two years, no significant improvement in resource utilization is foreseen; thus, the average level of unemployment for 1986 will probably remain at the current high level of 7–8 per cent.

A principal consequence of the relatively rapid growth of world trade in much of the period since World War II has been the growing interdependence among economies. More recently, the pace of integration appears to have slowed somewhat, as evidenced by the sharper decline in the growth of world exports than in the growth of world output between 1963–73 and 1974–81. Nevertheless, the growth of international trade has been generally in excess of the growth of output, and this relationship is expected to be maintained.

The postwar expansion of international trade has been aided by the steady liberalization of trade and payments restrictions undertaken under Fund and GATT auspices over three decades. Although the liberalization of payments systems in the industrial countries had been virtually completed by the middle to late 1950s, trade liberalization, which consisted mainly of tariff reductions implemented in successive rounds of trade negotiations under GATT auspices, was under way until the early 1970s.7 The 1973–79 Tokyo Round of Multilateral Trade Negotiations, which took place in the context of increased economic and financial instability, sharp changes in relative prices, and pronounced uncertainties about the course of economic policy, represented an ambitious attempt to negotiate not only reductions in tariffs—which by then had been lowered to insignificant levels for a large portion of products entering world trade—but also the liberalization of nontariff barriers.8 The codes of conduct that were agreed at the conclusion of the MTN aim at strengthening multilateral discipline in the use of nontariff restrictions, although it is difficult to assess precisely the extent to which such barriers were actually reduced as a result of the new rules.

The oil price increases of 1973 and 1979–80 have had significant effects on the structure of world trade (Table 1). The share of fuels in world exports, which had remained virtually constant between 1963 and 1973 at about one tenth, jumped to 20 per cent in 1974, and by 1980 it had reached 24 per cent.9 There was an asymmetrical development in the export shares of agricultural products and manufactures. Agricultural trade grew at a slower but steadier rate, compared with manufactures. Between 1963 and 1973 the share of agricultural exports declined from 29 per cent to 21 per cent and subsequently fell steadily, reaching 15 per cent in 1980, a postwar low. In contrast, the share of manufactures increased from 52 per cent to 61 per cent in 1973 but declined to 55 per cent in 1980.

The direction of trade has also shifted: the shares of both exports and imports of the traditional oil exporting developing countries virtually doubled, and other developing countries where petroleum is also a major export increased their shares in world exports and imports. The export shares of oil importing developing countries declined slightly, from 10½ per cent in 1973 to 10 per cent in 1980, while their share in imports rose from 13 per cent to 15 per cent.10

Although industrial countries’ share in world exports of manufactures remained virtually unchanged during 1973–80 at about four fifths, there was a reduction in their intratrade (from 74 per cent to 67 per cent), while their exports to all developing countries (including oil exporting countries) increased from 19 per cent to nearly 26 per cent (Table 2). The share of world exports of manufactures absorbed by non-oil developing countries increased from 14½ per cent to 17 per cent, and the increase was widely shared among all the major country groupings. Thus, industrial countries’ exports of manufactures to non-oil developing countries increased from 14 per cent to 16½ per cent, oil exporting developing countries’ share rose from 16 per cent to 32 per cent, and the proportion of Eastern trading countries’ exports to these countries climbed from 10 per cent to 13 per cent. The share of intratrade among non-oil developing countries increased from 22½ per cent to 26 per cent.

The slower growth of total trade since 1973 has been marked by wide differences in export performance and import growth within broad country groupings. For example, between 1963–73 and 1974–80, there was a slower deceleration of export growth in the United States than in the European Community and Japan. The differences in the rates of growth of imports are even more striking: Japan’s import growth averaged only 1 per cent during the more recent period, compared with 14½ per cent in 1963–73, while the deceleration was much less for the European Community and the United States.

There were also wide differences among the developing countries. Most of the increase in their share of world exports occurred in manufactures, and a few developing countries and areas (notably Brazil, Hong Kong, Korea, Malaysia, the Philippines, and Singapore) accounted for much of this expansion. Export shares in manufactures of the great majority of developing countries were relatively stable (Table 3), and the share of their manufactured exports in apparent consumption of manufactured goods in industrial countries remained very small (Table 4).

Factors Influencing Trade Policies11

Protectionist pressures tend to increase during periods of cyclical downturn in economic activity and associated rise in unemployment, as industries and workers seek government action to insulate sectors of the economy from import competition. Such pressures become particularly acute when recessionary conditions spread worldwide—as, for example, during the periods 1974–75 and 1980–81—and the possibilities of maintaining employment through increased export activity diminish. Furthermore, the stance of trade policies is not necessarily symmetrical in relation to the phases of the business cycle. Protection granted through restraints on imports and/or subsidies for exports during periods of rising unemployment is, in practice, difficult to dismantle speedily when economic activity takes an upturn, as industries resist an erosion of existing privileges. Unless the period of recovery is sustained over relatively long periods, there is thus a tendency for a ratchet effect in protection.

Apart from cyclical factors, protectionist pressures have been importantly related to the underlying structural rigidities in several industrial countries that had gradually developed over the past two decades and that became increasingly apparent following the first oil crisis and the worldwide economic recession and strong inflationary pressures in 1974–75. These rigidities have been manifested as: (1) successive rounds of inflation over the last two decades, each of which began at a higher level than the preceding round; (2) high and growing unemployment, particularly of semiskilled laborers in traditional industries, who are difficult to retrain and relocate; and (3) sluggish private investment. They have slowed the process of resource transfers necessary to adjust to rapidly changing comparative advantage deriving from such factors as technological change, shifts in the pattern of demand, and the emergence of new competitors in the world economy. Domestic and trade measures to ease the pace of adjustment and/or the absence of strong corrective action may have increased structural rigidities, thereby encouraging the persistence of protectionist pressures.

Even after the recovery of global output and world trade in 1976–78, protectionist pressures remained high as economies continued to encounter structural rigidities. With the onset of the recession again in 1980, investment declined, and unemployment rates increased further. Meanwhile, the rate of inflation in the industrial countries, while declining sharply in 1976 from the double-digit levels attained in the previous two years, still remained in excess of 7 per cent and climbed to nearly 9 per cent in 1980.

By the mid-1970s it became increasingly apparent that many of the economic difficulties of the major trading nations were of a long-term character, and that, for a variety of reasons, the capacity of many industrial countries to adapt to changing circumstances was limited by structural rigidities. This realization led to a systematic examination at an intergovernmental level in the OECD of the forces that influence the competitiveness of economies and the constraints and barriers to economic recovery. The OECD, in 1978, adopted guidelines on positive adjustment that emphasized the importance of pursuing policies consistent with efficient resource allocation. A special group was set up to begin examination of individual country experience in dealing with problems of structural adjustment. Not unexpectedly, a wide variety of country situations and policy responses to structural difficulties came to light during the course of this examination. A major and obvious difference among countries has been in the impact of the oil price increases on costs of production and demand and in the response of individual governments to these increases.

As a result of these efforts, there is a more widespread recognition of the principle, adopted by the OECD governments as a part of the guidelines on positive adjustment, that “a more constructive approach is to further adjustment to new conditions, relying as much as possible on market forces to encourage mobility of labour and capital to their most productive uses.”12 Commitment to this principle was renewed by governments in the OECD Declaration on Trade Policy, adopted June 4, 1980, which includes the intention of members to pursue policies

which facilitate positive adjustment to structural changes in demand and production in the world economy and which therefore further the objective of securing an open trading system, and to avoid internal measures which have protectionist effects.

A major problem in the area of structural adjustment has been the difficulty of translating these accepted principles into practical application. The difficulties of adopting more positive adjustment policies were compounded by the further cyclical downturn that began in 1980, as governments found themselves increasingly pressured to adopt policies to further protect domestic markets from import competition and to encourage the promotion of exports through measures, such as subsidies, that distort competition and risk retaliation. Moreover, in the period since the 1974–75 recession, several governments, particularly those in Europe, had been pursuing more active policies of supporting ailing industries. With the downturn of 1980, and partly in response to the perceived unfairness of support policies in partner countries, pressures for protection and government support also mounted in other countries, notably the United States, which had thus far generally refrained from stepping up government support to industries. In addition, differences of approach among the industrial countries on the appropriate role of government in promoting adjustment probably deepened following the downturn of 1980. Difficulties in the pursuit of internationally agreed guidelines for structural adjustment also stemmed from divergent national approaches toward private business restrictive practices and national competition laws.

Following the expiry of its mandate, the OECD Special Group of the Economic Policy Committee on Positive Adjustment Policies agreed on its final report, which was submitted to the OECD Council at the ministerial meeting in May 1982. It concluded that

it is difficult to believe that the oil shock of 1973, the wage-price spiral thereafter and the subsequent energy price increase in 1979 can entirely explain the persistence of poor overall economic performance. Even if other factors bringing about structural adjustment pressures such as shifts in demand, changes in the size and composition of the labour force, introduction of new technologies, more stringent environment standards and new patterns in international trade and capital flows are also taken into account, it appears that a well functioning market economy should normally be able to cope with such challenges…. The presumption is, therefore, that it is not only the adjustment requirements which have been too great or which came too abruptly, but also a diminished capacity and/or willingness of the economy and society in the industrialised countries to respond positively to them, which makes present economic difficulties so troublesome to resolve….13

The report identifies four elements of inflexibility: (1) slow adaptation of attitudes and institutions, developed during the period of uninterrupted high levels of employment, to the entirely different circumstances of the 1970s; (2) the rapid growth of the public sector and social programs that had adverse effects on incentives to save, work, and invest; (3) the attempts by governments to alleviate or avoid the social consequences of structural change by preserving given production and employment structures; and (4) the slow economic growth, which makes structural adjustment more difficult. The report suggests criteria that should be used by governments to promote adjustment.

The problems ensuing from structural rigidities in many major trading nations have been compounded by the rapid emergence of the so-called newly industrializing countries as competitors in a wide range of sectors. This is attributable to several factors, especially insofar as the manufacturing sector is concerned. Faced with mounting balance of payments problems, pressures in these developing countries to maintain growth rates through increased exports have been very high. The increased size and efficiency of international financial markets, as well as the availability of modern technologies, have enabled them to acquire the capital and technical skills necessary to improve their export performance. Low relative costs of labor and raw materials, combined with a rapid rate of capital formation, have made them strong competitors in the industrial countries in traditional sectors such as steel, shipbuilding, and textiles and clothing, and have given them an advantage over firms in industrial countries operating with high labor costs and often outdated plant and machinery and production processes.

Given the success of this relatively small group of developing countries, and the failure of some major trading nations to deal with emerging structural problems, it is not surprising that demands for more systematic regulation of markets have multiplied in recent years. So long as technological improvements are widely available and the newly industrializing countries are able to acquire the needed capital to finance a high level of investment, this source of import competition can only intensify in the coming years.

Implications for Developing Countries

In the aggregate, non-oil developing countries’ exports have in recent years grown rather well, but within this group there have been wide disparities in export performance.14 During 1973–81, the volume of world exports of 40 low-income developing countries grew annually by just under 3 per cent; in 48 other net oil importing countries, the growth rate was 3 per cent. The comparable figure for the 11 developing countries classified as major exporters of manufactures was 8 per cent, and for all 112 developing countries (including China) it was over 5½ per cent. While protectionism in industrial countries has hampered developing countries’ efforts to specialize in production in accordance with their comparative advantage, the negative effects of developing countries’ own protectionist policies, which are not covered in this paper, are also important. The MTN most-favored-nation tariff reductions on industrial products exported by developing countries were, on average, less deep than the overall cut.15 Tariff escalation on products of export interest to developing countries remains a problem, on which increased attention has been focused recently in the GATT and elsewhere. The incidence of nontariff barriers is frequently higher in sectors where developing countries have a comparative advantage; as discussed in the following sections, the imposition of nontariff barriers in agricultural commodities produced in both industrial and developing countries is widespread; and in textiles and clothing, restrictions are applied to exports of developing countries, while exports of other countries are generally unrestricted in most trading nations. Tables 5 through 9 are indicative of the types of restrictions presently applied to selected developing countries.16

During the MTN and subsequently, considerable controversy has arisen with regard to the concept of “graduation.” The enabling clause agreed in the MTN states that, with the progressive development in their economies and improvement in their trade situation, developing countries would be expected to participate more fully in the framework of rights and obligations under the GATT. Attempts to apply this clause have, however, generated trade frictions, as trade policies of major trading nations have tended to discriminate against the more efficient producers; in manufactures and competing zone agricultural products, this often adversely affects the developing countries. The precise criteria for what constitutes “development” and “improvement in trade situation,” particularly in the context of slow growth in world trade and efforts to accelerate growth and diversification in the developing countries, are—and probably will remain—controversial issues. To the extent that successful efforts by more advanced developing countries to pursue export-oriented development strategies are frustrated by selective protection directed against them, export diversification of other developing countries and their greater integration in the world economy may well be hindered. Inward-looking, bilateral and regional approaches to trade policy could be encouraged, and these would be contrary to the interests of all countries.

The existing structure of protection and the tendency of major trading nations to approach trade issues on a bilateral or sectoral basis also have detrimental effects on developing countries’ longer-term prospects for increasing exports. Even in sectors where access to major markets is relatively liberal, these approaches generate uncertainty about future continued access and, hence, are detrimental to investment and exports. To the extent that major trading nations avoid pressures for structural change—which may or may not originate from import competition per se—by applying policies that necessitate or validate restrictions or perpetuate trade distortions, longer-term investment planning becomes more uncertain. This can occur even if individual trade restrictions are not directed specifically at imports from developing countries. For example, the recent restrictions on automobiles ostensibly affect only Japanese exports but would probably affect investment decisions and production prospects elsewhere as well, particularly when restrictions encourage some deflection of exports to third countries, thus impeding export-oriented development. In addition, increased protection in intermediate goods sectors, such as steel, may prompt calls for protection in user industries.

In recent years, several developing countries, including some newly industrializing countries, have begun to rationalize and simplify their import regimes, as well as to reduce import restrictions and reliance on export subsidies. These efforts would be greatly discouraged if open, multilateral approaches to trade problems were seen as being abandoned by the major trading nations. Experience indicates that when restrictions, such as those in the agricultural and textile and clothing sectors, become entrenched, the relatively smaller trading nations are obliged to seek the best possible accommodation of their commercial interests in the framework of existing restrictions in order to avoid the loss of markets. This further weakens the basis for the pursuit of more fundamental liberalization or reform of trade policies deriving from multilateral rules of general application.

7

The Kennedy Round of Multilateral Trade Negotiations (1964–67) achieved average tariff reductions larger than any of the previous five rounds of trade negotiations; the last tariff reduction under the Kennedy Round was implemented on January 1, 1972.

8

At the outset of the Tokyo Round, almost one third of most-favored-nation imports of industrial products by ten industrial countries were already free of duty.

9

Unless otherwise specified, commodity and regional classifications of trade are based on GATT definitions throughout this paper. For details, see Appendix II.

10

GATT, International Trade, 1980/81 (Geneva, 1981), p. 5. GATT statistical groupings distinguish between traditional oil exporting countries and new oil exporting countries. See Appendix II for details.

11

Issues relating to exchange rate developments are discussed in Section I.

12

OECD. “Policies for Adjustment: Some General Orientations,” Activities of OECD in 1978: Report by the Secretary-General (Paris, 1979), p. 104.

13

OECD, Positive Adjustment Policies, Final Report: Summary and Conclusions (Paris, April 1982), p. 1.

14

See World Economic Outlook, IMF Occasional Paper No. 9 (April 1982), pp. 154–55.

15

GATT, The Tokyo Round of Multilateral Trade Negotiations (Geneva, April 1979), p. 121.

16

Similar information on New Zealand is summarized in Table 10.

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