Chapter

6. Recent Trade Policy Developments1

Author(s):
International Monetary Fund
Published Date:
April 1984
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Overall Trends

International trade relations remained very difficult in 1983. Despite the acknowledged need to stem and reverse the drift toward protectionism, efforts at liberalization were limited. Under the auspices of the General Agreement on Tariffs and Trade (GATT), the Tokyo Round of tariff reductions took place, but little progress was made in many industrial countries in removing the nontariff trade barriers that had been progressively introduced in specific sectors since the mid-1970s. In Japan, however, new measures aimed at streamlining import procedures and accelerating tariff reductions agreed during the Tokyo Round were put into place, as a continuation of the liberalization efforts initiated since late 1981. In a few developing countries, the adoption of comprehensive adjustment policies aimed at restoring balance of payments viability enabled them, inter alia, to establish more realistic exchange rates and reduce external payments arrears, thus setting the stage for reducing the reliance on nontariff trade barriers.

Apart from these few instances, resort to protectionist measures continued to increase. Among industrial countries, these measures frequently took the form of nontariff barriers negotiated on a bilateral basis outside the framework of the GATT, thereby further weakening the open multilateral trading system. Trade restrictions were extended or intensified, particularly in the steel, automobiles, textiles and clothing, electronics, and agricultural sectors.2 In a number of developing countries, severe balance of payments difficulties over the past several years prompted increased reliance on exchange and trade restrictions, as described in the section on Restrictive Measures in Developing Countries, below.

Recent resort to nontariff trade barriers has taken a variety of forms, ranging from explicit import quotas to “nuisance” measures, such as limitation of customs clearance to fewer and/or less accessible locations. Among the wide range of techniques employed, two are most frequently adopted. The first is the technique of the “voluntary export restraint” arrangement (VER), under which the exporting country limits its exports to a specific level or exercises moderation in its exports, thus avoiding the imposition of unilateral—and presumably more severe—import restrictions by the importing country. This technique has been used predominantly for introducing new restrictions on automobiles, steel, consumer electronics, and certain other manufactured products. Although bilaterally negotiated agreements have long been the practice in the textile and clothing sectors, these have been developed within the overall framework of the Multifiber Arrangement, with some assurance, in principle, of international surveillance. The more recent VERs, however, have been a clear indication of the move toward managed trade and the fragmention of markets, and thus against multilateral principles. The implemention of VERs has required increased surveillance of trade flows on both the import and export side, with additional administrative costs. The second and an increasingly popular form of nontariff barrier has been the resort under existing legislation to avenues for redressing “unfair” competition from abroad. This has frequently involved a plethora of antidumping and countervailing suits by well-organized and powerful industries. Their most important effect has been to create uncertainty in trade flows and investment decisions. In order to avoid these effects, the exporting countries have sometimes accepted VERs. As a result, the filing of a suit has often been a precursor of a VER or a tightening of existing restrictions. The events leading to the VER on carbon steel between the United States and the European Community (EC) late in 1982 and the new textile policy announced by the United States late in 1983 are notable examples. Furthermore, moves to strengthen legislative provisions for combating “unfair” competition are under way in a number of industrial countries, including Canada, the EC, and the United States.

An issue that has become increasingly contentious is that of subsidies, which are the predominant source of complaints about unfair competition and a major cause of friction in the steel and agricultural sectors. For example, despite plans to phase out state aid for steel within the EC by 1985, the disruptive impact of subsidization on intra-EC trade flows has become a source of discontent for the more efficient producers and has occasionally threatened the operation of the Community’s internal steel price and production regulation system. In the United States, attention has to some extent shifted from EC steel subsidization, following the negotiation of the three-year VER late in 1982, to the subsidies given by developing countries to their steel industries. More generally, the concern about foreign subsidization is rapidly spilling over from export subsidies per se to the broader issue of foreign official support through industrial “targeting,”3 which may affect the competitiveness of a range of export sectors. This concern has raised demands for protection, as well as for matching subsidies and increased intervention.

Recent developments have again demonstrated the fallacy of relying on protectionist measures as temporary solutions and the ease with which protectionist sentiment tends to become entrenched. In addition to the classic cases of textiles and steel, a notable recent example is the extension of the three-year VER on automobiles between the United States and Japan, despite evidence of an improvement in the domestic sales and prospects of U.S. automobile manufacturers. Another lesson being relearnt is the inherent tendency of protection to spread across sectors and countries. For example, vertical and horizontal linkages (inputs and substitutes) encourage both intrasectoral and intersectoral protectionism, as demonstrated by the efforts to regulate imports of cereal substitutes in the EC. Trade restrictions also spread across countries, both when a country introduces a restriction to forestall deflection of exports from another market (such as by the VER between Canada and Japan on automobiles, which closely followed the agreement between the United States and Japan) and when existing restrictions are broadened to encompass emerging new suppliers (e.g., when the EC in recent years expanded the number of bilateral agreements on steel to include Brazil, Korea, and South Africa). Thus, moves toward managed market-sharing in a dynamic framework inevitably face potential loopholes that need to be plugged by additional protection.

Another concern is that the threat of retaliation has become increasingly real, as is illustrated by developments in the agricultural sector. While agricultural protectionism has long been entrenched and is relatively high in most major industrial countries, the mounting frictions in international agricultural trade, particularly over the past two years, have centered around the operations of the Common Agricultural Policy (CAP) of the EC, which has induced the production of large surpluses, the disposal of which has caused problems in third markets for other major agricultural producers. Proposals by EC members to reform the CAP, which are primarily motivated by severe budgetary constraints, remain under discussion. In any case, these proposals are considered by the EC’s trading partners to be inadequate to address the issue of surpluses, and problematic because they include measures to discourage imports of cereal substitutes and to tax vegetable oils and fats. The United States has responded to EC export subsidization by entering into subsidized sales of wheat flour to Egypt and has warned the Community of the possibility of further similar actions. Some Community members, in turn, have proposed intensified cereal export subsidization to counter the U.S. moves. Other moves of a similar nature include Turkey’s import surcharge, imposed in 1982, on steel imports from the EC following the EC’s measures affecting imports of Turkish textile products.

In the final analysis, the spread of protectionism is a manifestation of the weakening of the trade policy stance of governments and of the frequency with which they grant requests for protection against foreign competition. In the early stages of the recent recession, such a weakening was attributed primarily to concerns about rapidly rising unemployment levels, and it was expected that the rising trend in protectionism would be, at the very least, arrested when recovery began. Despite recent signs of actual or prospective recovery, however, protectionist pressures continue to rise. Many arguments are advanced for protectionism, such as concerns about safeguarding employment and avoiding disruption in the affected industries, the size of bilateral trade balances, the impact of exchange rate movements on export competitiveness, strategic reasons, and the need to combat a wide range of practices considered to be unfair. Indeed, it is tempting to conclude that some justification can be found to fit every case. In effect, however, governments have sometimes placed priority on short-term economic and political considerations to the detriment of policies to promote structural adjustment and a lasting economic recovery. At the same time, governments have made several pledges of antiprotectionism—for example, at the ministerial meeting of the GATT in November 1982, the ministerial meeting of the Organization for Economic Cooperation and Development in May 1983, the Williamsburg summit meeting of the seven major industrial nations in May 1983, and at the sixth session of the United Nations Conference on Trade and Development in June 1983.

At their thirty-ninth session in November 1983, the Contracting Parties of the GATT reviewed progress on the work program adopted at the November 1982 Ministerial meeting. In the past 18 months, little progress has been made on the issue of safeguards and the dispute-settlement mechanism. However, new procedures or groups have been set up to facilitate the review of the international trading system and to examine trade in agriculture, as well as the problem of quantitative restrictions and other nontariff measures. A study is in preparation on textiles and clothing to help to explore the possibility of reverting to normal GATT rules in this sector. Some GATT members have undertaken national studies in the services sector, and work has begun on the harmonization of tariff coding systems. The GATT Committee on Trade and Development has launched a series of consultations on tropical products and the implementation of Part IV of GATT, which provides differential and more favorable treatment for developing countries. At the thirty-ninth session, Japan and the United States proposed the launching of a new round of multilateral trade negotiations. Certain other countries, including some developing countries, expressed reservations at this and attached greater importance to satisfactory implementation of the current work program. Since then, the Director-General of the GATT has set up an independent study group to identify the fundamental causes of the problems affecting the international trading system and to consider how these may be overcome during the remainder of the 1980s.

Restrictive Measures in Developing Countries

Developing countries frequently pursue trade policies aimed at encouraging import substitution and safeguarding the balance of payments. During the 1970s, many of them adopted more open trade policies in order to promote competition in the internal market and reduce distortions in resource allocation. Subsequently, in the context of severe foreign exchange shortages compounded by disruptions in financial flows, many of these countries compressed imports to “financeable” levels. While the reduction in imports was brought about mainly through a reduction of domestic demand by tightening fiscal and monetary policies, many developing countries also increased their reliance on exchange and trade restrictions. In the exchange field, the most important restriction was the tightening of foreign exchange allocations in line with foreign exchange availability. Even so, there was a sharp buildup of external payments arrears on both imports and debt repayments. Import restrictions were intensified in the form of quantitative controls, especially on luxury or “nonessential” goods. Another aspect of the impact of the foreign exchange shortage on trade policies was the increasing resort to countertrade or barter-type arrangements in developing countries, despite frequent problems with the quality, cost, and range of goods obtained by one or both parties to the arrangements. The use of selective export incentives also increased, as several developing countries sought to promote their exports through new fiscal incentives or preferential financing facilities.

In 1983, as a result of some improvement in the external environment and developing countries’ own adjustment efforts, there tended to be, on balance, a containment of the drift toward increasing restrictions of the preceding year, although there was once again considerable variation among individual countries. In particular, moves toward more flexible and realistic exchange rates became more common, outstanding external payments arrears declined, and the frequency of resort to import restrictions was reduced. Furthermore, a number of developing countries initiated reviews and studies of their trade regimes in order to identify areas and methods to streamline import licensing, replace quantitative restrictions with a more efficient tariff system, and reduce reliance on export subsidies.

Clearly, the curtailment of imports and a reliance on restrictions over extended periods would damage the growth prospects of the developing countries and retard the development process. Over the medium term, countries will need to improve their own capacity for earning foreign exchange in order to service debt and finance much-needed increases in imports. In the past two years, an increasing number of developing countries have embarked upon adjustment programs supported by the use of Fund resources to bring about, in an orderly fashion, necessary changes in economic and financial conditions and to lay the basis for a sustainable improvement in their balance of payments and growth prospects. These adjustment efforts have involved both prudent demand management and structural measures to promote efficiency in the context of more out ward-oriented growth strategies. This has typically entailed moves toward more open exchange and trade systems, which would be brought about in stages involving, in the first instance, containment of the existing disorderly conditions, followed by moves toward liberalization. An immediate priority has normally been the establishment of more realistic exchange rates and a reduction in exchange restrictions, particularly the orderly elimination of external payments arrears, since this is essential for any meaningful trade liberalization. Among the developing countries which achieved some liberalization of their import regimes in 1982–83 were Bangladesh, Haiti, India, Jamaica, Korea, Mexico, Pakistan, Tunisia, Turkey, and Uganda. In many of these countries, the liberalization took place within the framework of adjustment programs supported by the use of Fund resources.

The scope for economic recovery in many developing countries will depend on how firmly the authorities implement the comprehensive adjustment programs they have recently adopted to reduce the severe internal and external imbalances that continue to afflict their economies. At the same time, the success of developing countries’ efforts to strengthen their current accounts through an expansion of trade depends largely on the external environment. The main elements of the latter aspect include avoidance of disruptions of foreign financial resources, recovery in their export markets, and increased access to foreign markets for their exports.

Trade Measures Affecting Developing Countries

Protectionist measures facing developing countries may be classified into three broad categories. First are measures directed specifically against developing countries. The classic example of this is to be found in the textiles and clothing sector, where trade among industrial countries remains generally free of nontariff restrictions, while restrictions against developing countries—particularly the newly industrialized countries—have been steadily tightened. The second category includes measures that are not directed solely at developing countries but that affect products of direct interest to them, in the sense that they have an existing or clearly emerging comparative advantage in these products. These include agricultural products, footwear and other leather products, steel, and certain other manufactures. There has been an increasing tendency in industrial countries to broaden the measures in these sectors and to extend them to developing countries. Third are measures in other sectors, such as automobiles, consumer electronics, and high-technology products. These may not have a significant direct impact on developing countries but have adverse indirect effects through increasing distortions and reducing efficiency globally and creating uncertainty in investment decisions, thereby discouraging export diversification and the pursuit of outward-oriented growth strategies. On the other hand, a feature of industrial countries’ trade policies toward developing countries has been the extension of preferences to them under the Generalized System of Preferences (GSP). However, in the aggregate, the impact of the GSP has been relatively limited, and, in recent years, the scope for growth of exports under some GSP schemes has been narrowed. Overall, conditions of access to foreign markets for developing countries have deteriorated in the past few years.

An improvement in market access for the exports of developing countries would make a significant contribution to the export and growth prospects and adjustment efforts of developing countries. This is substantiated by a number of studies that attribute positive overall welfare and trade effects to trade liberalization.4

Role of the Fund

In accordance with one of the underlying purposes of the Fund, viz., to facilitate the balanced expansion of international trade with a view to promoting economic growth—trade policy issues receive careful attention, both in the Fund’s exercise of surveillance and in connection with its lending programs.

Fund surveillance in the context of its Article IV consultations encompasses all Fund members and is aimed at assessing whether their policies are conducive to financial stability and economic growth. In the past 12 months, the coverage and analysis of trade policy matters in Article IV consultation reports have been expanded, particularly in consultations with major trading nations whose trade policy stance has important implications for the openness of world trade in general. Trade issues are featured during the consultation discussions with the authorities in the field, and staff assessments provide the basis for a critical appraisal of the trade policy stance of individual members. The consultation discussions in the Executive Board, based on the staff reports, have increasingly featured protectionism. Where the measures involve members’ exchange systems, Fund jurisdiction under Article VIII of its Articles of Agreement is directly relevant, and the measures in question are taken up in consultations under Article IV or on use of Fund resources.

Fund financial assistance directly and indirectly encourages trade policy reforms that augment the country’s capacity to maintain open markets and compete efficiently with other exporters. Fund-supported programs are often based on the authorities’ objective of achieving a shift toward a more outward-oriented development strategy. In these cases, trade policies are an important element in the policy mix designed to bring about the structural changes that promote balance of payments viability over the medium term. Adjustment programs thus often include recommendations for improvement in trade policies. All programs supported by the use of Fund resources in the upper credit tranches include a performance criterion designed to ensure that the country does not achieve its balance of payments objective by using trade policy instruments that are detrimental to its own economy or harmful to its trading partners.

The Fund maintains close links with the GATT in order to actively support the latter’s role in maintaining and strengthening an open multilateral trading system. There is a regular exchange of information with the GATT, and the Fund provides a major input for the GATT Balance of Payments Committee’s assessment of the justification for trade restrictions maintained by common members for balance of payments reasons. Recently, the Fund’s increased attention to trade issues has led to expanded Fund-GATT collaboration in the form of more frequent informal contacts between the staff’s of the two institutions. These contacts, along with the exchange of views by the Fund management and staff with officials from member countries and competent institutions, are designed to strengthen resistance to protectionism and encourage mutual trade liberalization among Fund members.

This brief survey of trade policy trends in the light of developments in 1983 updates the survey published in the May 1983 World Economic Outlook. A more comprehensive account of trade policy developments is contained in S.J. Anjaria, Z. Iqbal, N. Kirmani, and L.L. Perez, Developments in International Trade Policy, IMF Occasional Paper No. 16 (Washington, November 1982).

The main measures taken in 1983 were (1) a three-year understanding between the European Community (EC) and Japan, under which the latter will exercise moderation in the export of ten sensitive manufactured products to the EC, including price and/or quantity provisions for some of these products; (2) U.S. safeguard actions under Article XIX of GATT on speciality steels and motorcycles; (3) extension to a fourth year of the three-year agreement between the United States and Japan on automobiles, negotiated in 1981; (4) extension of the bilateral restraint agreement on exports of Japanese automobiles to Canada; (5) voluntary export restraint agreements on meat until the end of 1983 concluded by the United States with Australia, Canada, and New Zealand; (6) the new U.S. textile policy announced late in 1983, which expands the scope for surveillance and restrictions on exports of developing countries; (7) recourse by the EC and the United States to export subsidies in competition for third-country markets for agricultural products; (8) increased frequency of countervailing duty actions in the United States and the EC; and (9) tightening and extension of bilateral agreements on steel negotiated by the EC with foreign suppliers.

“Targeting” refers to the selection by government of target industries, product areas, or technologies for special government guidance and assistance in promoting their development. Targeting policies may include subsidies, pro-merger policies, protection of the favored sector from imports, buy-national procurement policies, discriminatory technical standards, and similar measures to favor domestic production and eventual export expansion from the secure home base.

See, for example, A.V. Deardorff and R.M. Stern, “Economic Effects of the Tokyo Round,”Southern Economic Journal, Vol. 49 (January 1983), pp. 605–24, and the studies cited therein.

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