1. The general trend of commercial policy during the postwar era was toward a liberal world trading system. Successive rounds of trade negotiations under the auspices of the gatt resulted in a progressive lowering of barriers to trade, and by the beginning of the 1970s trade in industrial products was substantially free of restrictions—although trade in agriculture had in the main escaped this trend. The progress achieved in liberalizing trade within a stable international framework fostered an unprecedented increase in the volume of world trade during the postwar years.
2. In contrast to this trend, pressures for protection have emerged in many countries recently. As economic problems in several industrial sectors have become increasingly acute, the resolve of some governments to resist these pressures, and hence their commitment to a liberal trading system, have weakened. It is difficult to quantify the net effect on world trade of the trade actions taken recently, but the evidence indicates that the global impact to date has been limited. Nevertheless, the recent shift in the direction of commercial policies is a cause for serious concern, even though it may be unwarranted to compare—as some have done—current developments in trade policies with the situation in the 1930s.
3. A survey of trade actions by the major industrial countries shows that so far they have tended to be concentrated in certain industrial sectors—i.e., textiles and clothing, footwear, steel, shipbuilding, and a variety of other manufactures, especially consumer electrical goods—although several other products, beef in particular, have also been affected. While these measures, particularly in respect to steel, have had an effect on trade among the industrial countries of North America and Western Europe, the main impact has been on exports originating in Japan and some developing countries. More generally, the measures adopted have affected sectors in which many developing and primary producing countries have an actual or potential comparative advantage and where the proliferation of restrictions can seriously jeopardize their scope for export expansion and economic growth.
4. Various kinds of trade actions have been used by the countries surveyed. There has been increasing resort to “escape clause” actions (to protect a domestic industry against injury from imports), although the gatt “escape clause” provisions (under Art. XIX) themselves have been invoked relatively infrequently. Antidumping and countervailing duties have been used with increasing frequency. While in principle these are not measures of protection as such, it is difficult to make a judgment as to whether the uncertainties caused by their introduction have significant trade-retarding effects. In this connection, a particularly significant development is the adoption in December 1977 of minimum price systems in regard to steel imports by the United States and the eec and the announced intention of the latter to negotiate bilateral agreements with suppliers. The growing use of an array of nontariff measures (such as health and quality standards) that may have the effect of impeding imports is also evident in some countries. Another important development is the increased reliance on various kinds of bilateral arrangements that quantitatively limit trade and often remain outside existing international rules, thus escaping multilateral surveillance.
5. No single factor can explain the increasing recourse to protectionist measures. The longer-term factors underlying protectionist pressures have been present for some time. Such pressures had already been felt in the late 1960s with the emergence of Japan as a major world exporter and the increasing competitiveness of a number of developing countries in a widening array of products. Moreover, industrial countries have had longer-term structural problems in several sectors: these problems have been associated with shifts in the pattern of world consumption and production; the propensity of wages to rise at similar rates despite divergences in the rates of growth of labor productivity in different sectors; large additions to productive capacity in some sectors; and social and economic obstacles to making the necessary structural adjustments.
6. The favorable economic conditions that prevailed throughout much of the postwar period, while affording an opportunity to address these problems, also mitigated or veiled their seriousness. Protectionist pressures surfaced with vigor, however, with the onset of the particularly severe and tenacious recession in 1974 and, especially, the persistently high levels of unemployment. In cyclical downturns, forceful demands for protection against imports are made by management and union spokesmen for domestic industries, and when unemployment is severe, governments sometimes find it difficult to resist these demands. The difficulties were exacerbated where large additions to capacity from previous investment came on-stream at the very time that demand began to stagnate. With slackening demand, pressures may have multiplied to increase exports to maintain profits and employment, and this may have created difficulties for trading partners, especially if disruptive price competition occurred where exports were priced below cost or were subsidized.
7. One of the most frequently cited arguments for trade restrictions is related to import penetration—i.e., imports as a proportion of domestic consumption. If this ratio rises, the suggestion is often made that imports have disrupted markets, injured domestic industry, and caused unemployment. There seems little doubt that in some product lines a sudden surge of imports, at times due to a concentrated marketing effort, has created difficulties. However, from an economic point of view the ratio of imports to domestic consumption (or production) is not in itself meaningful. The ratio may be high or low depending on such factors as resource endowment, technological change, and the degree of specialization. Traditionally, import-penetration ratios in industrial countries have been high for some agricultural products and raw materials but, except for a few specific items, relatively low for manufactured goods. Moreover, in view of the constantly evolving patterns of comparative advantage, the freezing of such ratios or the setting of upper limits, which could result from the current preoccupation with import penetration, would effectively prevent the realization of the advantages to be gained from increased specialization and trade.
8. A significant new development is the diversification of the export base of developing countries and the challenge presented by them in several new sectors. This development has some notable features. First, in some of the more traditional export lines in manufactures (e.g., textiles, clothing, footwear, and a number of other consumer products), developing countries first succeeded in capturing their domestic markets before moving to compete in third markets and in the markets of the countries from which they had previously imported; but in some of the newer lines (in particular, steel, shipbuilding, and electronics), industries have been built up and capacities developed in some countries mainly for the export market. Second, the expansion of manufactured exports by many developing countries was a predictable consequence of earlier investments in industry carried out at the urging—and frequently with the financial, technical, and managerial encouragement—of industrial countries; indeed, it has been made progressively easier for developing countries to overcome some of the traditional obstacles to industrialization: lack of financial resources, dearth of managerial talent, and absence of a technologically oriented labor force. In certain sectors, such as electronics, the activities of transnational corporations and the establishment of subsidiaries have actively promoted industrialization. Third, the growth of export capacity in developing countries has also meant the growth of their import capacity, and with the exception of some oil producing developing countries, the latter has normally exceeded the former. Thus, while greater import competition from developing countries may have caused difficulties for some sectors in the industrial countries, it has enabled others to expand.
9. The pressure for structural adjustment in industrial countries because of competing imports from developing countries—which to date have been significant in a narrow but expanding band of products—can thus be expected to be greater in coming years; and the extent of the readjustment needed will be increased by other factors, in particular, normal technological changes and competition in domestic and foreign markets from sources within the industrial countries themselves. As a result, it will become more difficult to maintain a liberal trading policy and high levels of employment while preserving relatively high wages in the affected sectors; hence, the process of structural adjustment must be improved in industrial countries if protectionist pressures are to be reduced.
10. In these circumstances, it will be difficult to reconcile an open and liberal commercial policy—a policy repeatedly avowed and supported by industrial countries—with the need to cope with the problems of uncompetitive industries. The dilemma for governments in industrial countries is to choose among policies from a limited range of options: to furnish import protection, which may provide short-term relief by postponing the needed adjustments at the cost of fostering inflation and inhibiting growth; to refrain from any actions in the field of trade policy, allowing possibly disruptive adjustments to take place but at the social and political cost of temporarily higher unemployment; or—the preferred alternative from an international point of view—to encourage structural adjustments that will promote the transfer of resources to more efficient uses and will supplement the efforts of the affected industries to improve their productivity. The choice of policy is also influenced by the asymmetry of pressures for protection: the diffused impact of protectionist actions and the difficulty of organizing the consuming public limit the possibilities for the potential losers to influence the authorities against protection, whereas the potential beneficiaries are often well organized and more effective in bringing pressure to bear. And the slim electoral majorities polled by some governments in recent years may have made them more vulnerable to these pressures.
11. Many of the factors that underlie the rise in protectionism are likely to persist in the years ahead. If, as may well be the case, unemployment in the industrial countries remains high, the difficulties of effecting structural adjustments in these countries may remain serious. The problem of import competition in industrial products is expected to grow. In the developing countries, diversification of the export base is likely to continue, enabling them to compete in new lines of manufacturing, particularly where low labor costs are a major determinant of the pattern of comparative advantage. In such sectors as steel and shipbuilding, large excess capacities are expected to remain for a number of years. Thus, even with a revival of aggregate demand, some sectors in the industrial countries will continue to experience difficulties.
12. It therefore seems probable that the pressures for protectionism will continue. If these pressures are given in to, the consequences for the international economy will become increasingly serious, especially for developing and other primary producing countries whose development and industrialization are affected.
13. Perhaps the most disquieting feature of recent developments is the apparent erosion of political commitment to a liberal trading system. A reflection of this is the growing trend toward the organization and structuring of world trade involving quantitative regulation of trade flows. This trend originated in the textile sector in the early 1960s, when bilaterally negotiated restraint agreements under multilateral rules were accepted because even more disruptive restrictions were feared in their absence. As mentioned above, there has been an increasing tendency to resort to bilateral trade restraints outside the framework of existing rules. These developments have culminated in recent proposals for the organization of international trade which appear to favor multilateraliza-tion of restraint arrangements and international surveillance of market shares. Experience with the operation of bilateral restraint agreements—either in a multilateral framework, as for textiles, or on a purely ad hoc bilateral basis—suggests that such restraints may introduce an element of certainty in trade relations over the short term. Even so, the organization of markets does not appear to be conducive to the dynamic evolution of trade according to the principles of comparative advantage, efficiency, and nondiscrimination, especially if the negotiated arrangements are unable to provide adequately for the emergence of new suppliers, technological change, and changes in the relative costs of production. There are, then, two fundamental issues of international commercial policy—whether the principles of nondiscrimination and reciprocity, on which the world trading system is based, can withstand the growing pressures and stresses being placed on trade relations, and whether the existing forms and instruments of multilateral cooperation are adequate to cope with the conflict between the short-term interests of trading nations and the broader objectives of promoting the growth of world trade, employment, and income.
14. In the light of the foregoing, determined and broadly conceived efforts at the national and international level will be required to arrest the drift toward protectionism. The multilateral trade negotiations—whose objectives encompass not only reductions in trade barriers but also improvements in the rules for the conduct of world trade—have offered a timely opportunity for action at the international level to avoid the use of restrictive or distorting trade actions and to encourage more effective policies for balance of payments adjustment. The International Monetary Fund, in all its relations with member countries, but especially in connection with the use of its resources, encourages the maintenance of liberal trade and payments systems. But the determining impulse for directing policies toward renewed liberalization must come from national governments.