II Prospects for Global Trade Liberalization

Naheed Kirmani, Shailendra Anjaria, and Arne Petersen
Published Date:
July 1985
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Since the last session of the GATT Contracting Parties11 in November 1984, a broader international consensus has begun to emerge on the need to launch a new round of multilateral trade negotiations under GATT auspices to deal with problems facing the international trading system. Although it is premature to predict the timing of such negotiations, an assessment may be made of the four key areas that will determine the scope and content of trade liberalization.

Structural Adjustment

Structural adjustment, and the role of government intervention in adaptation to competitive forces, strongly influences the stance of trade policies. Failure to adapt to shifts in demand, technological change, and improved productivity generate protectionist pressures which, unless resisted, are translated into progressively restrictive trade policies. Policymakers, in principle, have long recognized the link between open trade policies and the promotion of adjustment. Indeed, GATT rules are based on two main propositions regarding these links. One is that a liberal trade system is necessary to allow the effects of shifts in comparative advantage to be felt across national boundaries over time. Thus, protection of national industries through tariffs rather than quantitative restrictions is permissible under GATT rules. Successive trade negotiations have aimed at lowering protection and thus increasing the exposure of economies to foreign competition. The other proposition derives from the principle that a safety valve should permit countries to impose nondiscriminatory restrictions on a temporary basis when domestic industries face unforeseen difficulties as a result of previous trade liberalization. Recourse, however, to such safeguard measures is subject to strict guidelines to prevent abuses. In practice, unauthorized bilateral restrictions have tended to proliferate, and the “safety valve” has often been misused.

A report by a special OECD group on positive adjustment policies adopted in 1982 suggested criteria that should be adopted by governments to promote adjustment. A working party on structural adjustment in the GATT concluded recently that “the main contribution that the CONTRACTING PARTIES could make to the adjustment process would be to abide by their obligations under the GATT.”12 In 1984, the GATT Secretariat concluded that structural adjustment problems were not fundamentally different in the textiles and clothing sectors than in other sectors.13

These advances in elaborating the links between trade and adjustment have thus far had a limited effect on actual trade policy formulation. A central problem is how to define the appropriate role of government intervention in promoting more efficient resource allocation through the use of instruments such as tax policies, government subsidies, antitrust legislation, labor legislation, and government ownership of production facilities. Structural adjustment issues have surfaced in four areas.

First, in the established manufacturing sectors in the main industrial countries, such as textiles, clothing, and steel, observed losses of employment and under-utilization of capacity are sometimes considered as providing sufficient evidence of an ongoing adjustment. For example, employment losses occurred in the textiles sector in industrial countries throughout the postwar period, when the sector was heavily protected. The recent GATT study notes that these losses reflect in part the incentive for firms to adopt more labor-saving innovations. Focusing on employment trends in declining sectors obscures the costs of lost job opportunities in other, more efficient industries. Also, increases in the market share of developing countries in certain sectors do not necessarily indicate that trade restrictions have been ineffective. For example, developing countries’ share of world exports of textiles rose from 34 percent in 1973 to 46 percent in 1982, and their share in clothing exports rose from 30 percent to 40 percent. Since this took place with protection, the implication is that the cost advantage of developing countries was such that they could have captured an even larger share of the market, thus promoting a more efficient expansion of world trade.

Second, in the area of agricultural policies, there is a greater appreciation among industrial countries of the unsustainable budgetary costs of open-ended farm price or income support programs, and initial steps have been taken in the Community, Japan, and the United States toward bringing these under control. Further, the GATT Committee on Trade in Agriculture recently reached understandings on the need for a more coordinated approach to agricultural trade barriers. It established a framework within which future negotiations on agricultural trade liberalization could be conducted. These recent advances are welcome, but they must be viewed against the background of increased frictions that have come to characterize trade relations in agriculture among the major trading nations in the past three years. The reform measures implemented thus far are not sufficiently far-reaching to offer the prospect or assurance that the problems arising from structural surpluses, and their disposal in world markets, will be resolved in the medium term.

A third—and relatively new—issue concerns the role of trade policy in shaping the establishment of new, high technology industries in the industrial countries. The products range from new consumer goods with a high technological content, such as videocassette recorders and digital audio components, to products with office or industrial applications, such as computer chips, advanced computers, office automation equipment, and numerically controlled machine tools. Of particular relevance to trade policy in this sector is the appropriate degree of public support for research and development. Such support is sometimes said to “create” comparative advantage and is included under the heading of “targeting.” To forestall the spread of trade barriers in this sector, the United States has proposed a GATT study on high technology. Given the different attitudes of governments concerning their role in promoting industrial development, this proposal has not yet been adopted, and trade frictions have emerged in high technology goods.

The fourth area in which the links between trade policy and structural adjustment require clarification and strengthening concerns the trade policies of developing countries. The role of more open trade policies in inducing faster growth and greater efficiency is frequently not sufficiently acknowledged, and the adjustment issue in developing countries is sometimes viewed as a problem caused by exogenous factors, including trade restrictions applied in the industrial countries. Limiting protection strictly to infant industry considerations and progressively eliminating protection as the industry matures would improve the adjustment process in developing countries.

Trade Relations Between Developed and Developing Countries

The second major issue for the next round of trade negotiations is trade relations between developed and developing countries, which will influence prospects for trade liberalization more generally. At the last session of the Contracting Parties in November 1984, developing member countries of the GATT issued a statement setting forth their main views:14 (a) they considered that the industrial countries had not observed the principles of the GATT ministerial declaration to make determined efforts to resist protectionist pressures and avoid measures inconsistent with GATT principles; (b) they urged the abolition of restrictions inconsistent with the GATT and the completion of the GATT work program agreed by the ministerial meeting; and (c) they declared their intention to participate in negotiations that would concentrate on removing restrictions on merchandise trade impeding developing countries’ exports, without extending the scope of GATT rules to cover new areas such as services.

Statements made by several industrial countries at the GATT session, in contrast, urged an early launching of negotiations to liberalize trade in goods and services, and fuller participation of the developing countries in the new round. The most controversial issue during the GATT session was the possible inclusion of services in the new round. In the compromise that was developed, some advance was made on future studies of the services sector by the GATT Secretariat. However, the Chairman of the Contracting Parties announced that this compromise did not prejudge any country’s position on the possible inclusion of trade in services in the multilateral trading system.

The framework of rules governing trade relations between developed and developing countries has been under more or less continuous discussion since the inception of the GATT. Provisions have been incorporated in the GATT to allow developing countries to maintain trade restrictions for development purposes. In addition, in 1966, the General Agreement was amended by including Part IV, the main feature of which was an acknowledgment by the Contracting Parties that developing countries should not be required to offer reciprocal concessions to the developed countries.15 Moreover, in the conduct of trade policy, developed countries were enjoined to take account of the special needs of developing countries, for example, in undertaking liberalization or imposing trade restrictions. As a result of these provisions for special and differential treatment of developing countries, the issue of the best way to encourage the expansion of trade between developed and developing countries came to occupy a special place in multilateral trade negotiations. With the export successes and industrial development of several developing countries, developed countries have suggested that developing countries should gradually assume a more central place in the multilateral trading system, in particular by taking an active part in the formulation and improvement of trade rules and by undertaking GATT obligations commensurate with their development needs.

Developing countries have over the years participated more actively in trade negotiations. During the Tokyo Round of trade negotiations in 1973–79, several major exporters among the developing countries participated in drafting the trade codes negotiated. At the end of the Tokyo Round, 21 developing countries, whose exports account for three fourths of the combined exports of developing GATT members, adhered to one of the two protocols on tariff concessions negotiated in the Round, and 24 countries, with a nearly 80 percent share in developing country exports, signed one or more of the GATT codes on nontariff barriers.

Developing countries receive trade preferences from developed countries. Over the years, there has been considerable debate on strengthening preferential treatment versus trade liberalization on a nondiscriminatory basis. This important issue remains unresolved. In their 1982 report, the Commonwealth Expert Group addressed this issue as follows:

The apparently conflicting objectives of preferences and non-discrimination, and the trade arrangements reflecting these orientations, have been considered with a view to identifying areas for rationalization. The long-term objective must be non-discrimination. We do not start with a tabula rasa, but with historically determined regional preferences and there exists a powerful rationale for the granting of general preferences to developing countries. Some countries are likely to gain more from a universal application of non-discrimination than they would lose from giving up their preferences: if, however, universal non-discrimination cannot be guaranteed, these countries cannot be expected to enjoy losing advantages which they now possess.16

Given the impasse on reciprocity and special and differential treatment, a pragmatic and flexible approach appears inevitable. How the multilateral trade negotiations handle the delicate and complex issues involved in North-South trade will thus be a major determinant of the future strength of the multilateral trading system.

A Strengthened GATT

The third main issue concerns the extent to which GATT discipline could be strengthened, so that the liberal trading system could better withstand any strains that may arise as a result of trade friction, slow economic growth, and the more diverse interests of governments in a multipolar world. Decisions on strengthening the GATT could reinforce the viability of the multilateral trading system.

In successive rounds of trade negotiations, considerable attention has been focused on this question. In the past 35 years, success has been achieved in lowering tariff barriers and introducing a measure of discipline on nontariff restrictions. International trade rules have been adapted to meet the challenges posed by new issues—such as the inclusion of Part IV in the General Agreement, the tighter international discipline on the use of export subsidies, and the conclusion of GATT codes on a variety of nontariff measures during the Tokyo Round. At the same time, recent developments obviously pose new challenges. GATT members agreed in 1982 to avoid introducing measures inconsistent with the GATT and to roll back such existing restrictions, but there has in fact been little progress in this direction. Recognizing the broader problems of the multilateral trading system, the Director-General of the GATT, late in 1983, appointed a Study Group on the Problems of the International Trade System—under the chairmanship of Mr. Fritz Leutwiler—to “identify the fundamental causes of the problems afflicting the international trading system and to consider how these may be overcome during the remainder of the 1980s.”17

A crucial point, as governments consider issues relating to the trading system, is the extent to which the GATT could be strengthened as an international body with resources and authority to influence trade policy formulation more directly. Owing to the failure of plans to establish an International Trade Organization soon after World War II, the General Agreement on Tariffs and Trade came into existence by virtue of a Protocol of Provisional Application. As a result, the functions of the GATT Secretariat have not been elaborated in detail.18 Bilateral, sector-specific trade restrictions have proliferated not only because governments of exporting and importing countries have been unable to withstand the pressures for such bilateral accommodation, but also because the international interest in preserving the system is not brought to play before the process of accommodation reaches the stage of negotiated decisions, and frequently not even then. Improvements in the decision-making process that give a more effective voice to the international interest in a liberal trading order will add a critical element in ensuring more open trading conditions on a lasting basis. Regardless of the specific features of the rules on international trade, a more effective surveillance and monitoring mechanism based in the GATT will be required.

Toward this end, two elements are important: an increase in national governments’ accountability for their trade and trade-related actions, and the international community’s adherence to the GATT system. These could be advanced by providing the GATT Secretariat with a mandate to undertake independent analysis, to propose options and solutions, and to advise on the implementation of trade policies on its own initiative, as well as at the request of contracting parties. Over the longer run, a strengthened GATT could involve establishing a stronger executive committee of GATT members for more regular formulation and interpretation of policy decisions to which national governments would be answerable. Another aspect of a strengthened GATT could be a further improvement of the dispute settlement procedure and provisions for following up settlements. To be effective, improvements such as these would require the necessary political will and national government support.

Modalities of a New Round

How the different elements of negotiations will be linked is the fourth main issue. A particular question will be whether, in some areas, trade barriers can be liberalized before the negotiations as a whole are concluded. How such interlinkages are dealt with will affect the scope and timing of global trade liberalization.

Central to all recent multilateral trade negotiations has been the principle of reciprocity of mutual trade concessions. With the inclusion of nontariff barriers in trade negotiations, the effort to achieve “overall reciprocity” encourages trade-offs across a broader range of issues and trade barriers than would be possible if governments sought to achieve a narrower balance of concessions in each area under negotiation. In principle, the concept of overall reciprocity thus makes it possible to achieve greater trade liberalization.

Although overall reciprocity is also likely to be a guiding principle for any future trade negotiating round, it remains unclear how it will be translated into practice. Several features of the next round are likely to add to the technical and political complexities of achieving an acceptable mutuality of concessions on the basis of overall reciprocity. First, on issues such as safeguards and agricultural trade restrictions, the formulation of generally acceptable international discipline has eluded governments for several years. Discussions on strengthened discipline on safeguards, launched in the context of the 1973–79 Tokyo Round negotiations and continued subsequently in the GATT, have failed to develop a generally acceptable standard for whether temporary import restrictions designed to protect domestic industry from injurious import competition should be permissible only if applied on a nondiscriminatory basis, or whether selective (i.e., discriminatory) restrictions should be permitted against countries whose exports are judged to be primarily responsible for the injury to the domestic industry. Meanwhile, in the past decade, “gray area” and GATT illegal measures such as bilateral export restraint arrangements have proliferated. In agricultural trade, the recent compromise in the GATT considerably advances the prospects of meaningful trade liberalization. Nevertheless, whether issues such as safe-guards and agricultural trade that remain largely unresolved from the previous trade negotiating round could or should be dealt with more expeditiously than other areas of interest in a new round has not yet been addressed or resolved.

Second, the issue of possible interlinkages in broader trade liberalization arises in the context of the Multi-fiber Arrangement, currently scheduled to expire in July 1986. GATT discussions on the future of the Multifiber Arrangement are expected to begin in mid-1985. The question that many governments face is whether decisions taken for textiles and clothing should form part of the new trade negotiating round, or be arrived at and implemented without directly linking possible liberalization in this sector with progress in other areas. Given that restrictions in this sector are directed specifically toward regulating exports of developing countries, the manner in which this issue is resolved could have a broader bearing on trade relations between developed and developing countries.

Finally, how possible negotiations in so-called new areas, such as trade in services, high technology goods, and others, are linked to the more traditional negotiations on tariff and nontariff trade barriers, is also likely to influence the pace and content of trade liberalization in the new round. A liberal environment for services is, in principle, desirable as a means of promoting the expansion of economic activity based on comparative advantage. Indeed, obligations of Fund members to maintain a payments system that is free of restrictions apply to all current transactions, including services. As a trade policy issue, however, it is widely acknowledged that preparatory work in the “new” areas is not yet sufficiently advanced to permit an early start to actual negotiations. If this perception is valid, the question then arises of how the pace of overall negotiations will be influenced by the decisions made in these areas. Given the strongly divergent views of some governments on the feasibility and desirability of negotiations in “new” areas, a generally acceptable formula for dealing with them will be technically and politically difficult to devise.

Each of the successive rounds of trade negotiations has involved resolution of increasingly complex issues. The Kennedy Round of trade negotiations, launched in 1964, required four years to complete; the Tokyo Round, which placed even greater emphasis on liberalizing nontariff barriers, took place over a six-year period. There is little doubt that a new round is likely to entail considerably more complex trade-offs. Even if substantive new negotiations could be launched within the next 12–18 months, it is difficult to be confident that the actual liberalization of trade resulting from the new round will take place before the end of this decade, or even in the early 1990s. A critical issue for governments is how to accelerate this process.

The term “contracting parties” refers to GATT members acting individually. “Contracting Parties” is used in this paper in place of “CONTRACTING PARTIES” as used in GATT official documents to refer to actions by signatory countries as a group.

GATT, Working Party on Structural Adjustment and Trade Policy. Report to the Council, Document L/5568 (October 20, 1983), p. 14.

GATT (1984c), p. 12.

GATT, Improvement of World Trade Relations Through the Implementation of the Work Programme of the GATT, Document L/5744 (November 23, 1984).

Similarly, the GATT enabling clause introduced in 1979 states that the “developed countries do not expect the developing countries, in the course of trade negotiations, to make contributions which are inconsistent with their individual development, financial and trade needs.” GATT, Agreements Relating to the Framework for the Conduct of International Trade (Geneva, 1979), p. 6.

GATT, Press Release 1349 (November 22, 1983). The report of this group, Trade Policies for a Better Future: Proposals for Action, was published in March 1985, after completion of the present paper.

As defined by a working party on the administration of the General Agreement, the functions of the GATT Secretariat include “examining proposals submitted for the agenda of the CONTRACTING PARTIES, consulting contracting parties concerned and submitting reports to the CONTRACTING PARTIES.” GATT, Basic Instruments and Selected Documents: Decisions, Declarations, Resolutions, Rulings and Reports, Vol. II (Geneva, May 1952), p. 208.

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