Recent Developments

The international trading environment came under considerable strain in 1990–93. Although trade policy developments were mixed, five were prominent. First, under the Uruguay Round, countries were engaged in the most ambitious multilateral trade negotiations (MTN) in history; but discussions were difficult and protracted, which in turn added to trade tensions and undermined confidence in multilateralism.

Second, the trend toward regional integration intensified, partly reflecting frustration with the multilateral process, but in the main motivated by the political and economic imperatives of regional partners; fears of the emergence of warring trade blocs did not materialize, but the perception that they might added to prevailing uncertainties.

Third, unilateral (or “autonomous”) trade liberalization was relatively limited among industrial countries but was the hallmark of the reform efforts of many developing countries and economies in transition as disenchantment with interventionist approaches prompted them to intensify moves to outward-oriented market strategies; this, in many instances, strengthened the export capacities of these countries and increased their integration into the world economy.

Fourth, protectionist pressures and trade frictions persisted, and escalated in some areas. This occurred against the background of slow growth and high unemployment in major trading nations, delays in concluding the Uruguay Round, and new competitive challenges emanating from globalization and the dynamic trade performance of some developing and transition economies. Resort to bilateral¹ and unilateral approaches to trade disputes intensified at the same time as disputes brought to the General Agreement on Tariffs and Trade (GATT) also increased. Notwithstanding increasing trade frictions, resort to nontariff measures did not increase in industrial countries. Nonetheless, subsidies remained high, voluntary export restraints (VERs) continued, and increasing attention was given to the efficacy of setting import targets (i.e., “voluntary import expansions” (VIEs)), for example, in trade with Japan. Equally, a disturbing upward trend was witnessed in the use of trade remedy laws, especially antidumping, as an instrument of protection; such resort spread to developing countries, even as they liberalized their trade in other respects.

Fifth, the links between trade policies and important domestic policy objectives—for example, competition policy and better environment and labor standards—were increasingly discussed in national and international forums.

The Uruguay Round and Beyond

Under these circumstances, the conclusion of the Uruguay Round toward the end of 1993 was welcome. Not only was it a major achievement and a crucial element in world growth in the medium term, but it substantially improved the prospects for restoring the credibility of the multilateral trading system. In terms of the scope and breadth of coverage, the Round was unique among MTNs. Significant progress was made in all three areas tackled: (1) market liberalization, which could add approximately 1 percent to world real GDP ($212-274 billion) and 12 percent to world trade upon full implementation of the agreement;² (2) strengthening of rules and institutional structures, particularly the creation of the World Trade Organization (WTO), which could adjudicate disputes more efficiently and better restrain unilateral and bilateral approaches outside the multilateral system; and (3) integration of new areas (e.g., agreements on services and trade-related intellectual property rights (TRIPs)) and the traditional “sensitive” sectors (agriculture, textiles, and clothing) into the multilateral trading system. This last element may well be the most remarkable achievement, given the history of the Multifiber Arrangement (MFA), failure of past attempts to bring agriculture under multilateral disciplines, and the North-South differences over TRIPs and services.

With over one hundred participants with very diverse interests, it is inevitable that the Round’s final results represent compromises that may not fully satisfy any one participant’s original goals. Examples of concerns include (1) textiles and clothing, that exporting developing countries’ own markets are not sufficiently liberalized, or that the back loaded liberalization of the MFA creates room for delaying the hard decisions on adjustment in industrial countries to the eleventh hour; (2) agriculture, that replacing quantitative restrictions (QRs) with tariffs may lead to prohibitive tariffs, or that higher food import costs may cause financing problems; (3) TRIPs, that their transition periods are too long, or that they may lead to higher prices for essential medicines with adverse effects on public health in some developing countries; (4) antidumping measures, that the codification of existing practices will not rein in their use; and (5) tariffs, that these are bound well above applied rates in developing countries, or that preferences will erode, and so forth. The extent to which these concerns materialize and the agreement’s benefits are realized will be determined by the manner of the agreement’s implementation.

The immediate task ahead is ratifying and effectively implementing the Uruguay Round agreement. As with any major liberalization initiative, implementation will disturb the benefits associated with the status quo (whether from protection received or preferences extended) and will entail adjustment to a new, more efficient market structure. This may involve transitional costs in specific areas for some countries and benefits for others. Preliminary analyses suggest that the Round will in general be beneficial for all countries. Given the fairly long implementation period, any transition costs are likely to be felt gradually, providing time to exploit the opportunities opened up by the Round.

Two types of transition costs identified by some developing countries stem from the erosion of preference margins and possible higher costs of food imports. Preliminary analyses suggest that the erosion of preferences is likely to be small for most African and Caribbean countries but could be more significant for some North African countries. Moreover, as tariffs come down in successive rounds, and the world economy gets increasingly integrated, reliance on preferences as a basis for longer-term export growth is not a viable strategy. Regarding food imports, the direct impact of possible higher prices is likely to be felt by those relying most heavily on commercial food imports and will depend on the extent of the rise in food prices. The Fund will need to monitor carefully members’ adjustment to the Uruguay Round agreement, including its impact on their balance of payments, and help countries manage an orderly transition. The Fund and the World Bank stand ready to use their existing facilities where appropriate to address external financing and policy adjustment needs arising from implementation of the Uruguay Round. Generally, the Fund’s work should continue to be supportive of, and consistent with, the agreement.

The post-Uruguay Round agenda comprises many subjects, and the list keeps growing.³ It includes completing negotiations in key service sectors (including financial services, telecommunications, and transportation). Additional liberalization in areas such as agriculture, steel, and civil aircraft needs to be considered, as distortions would remain high even after full implementation of the Round. Competition policy issues need better definition and analysis before multilateral approaches can be formulated to tackle emerging trade frictions in this area. The links between trade policy and environmental and labor policies are likely to get further attention in the future. Environmental and labor objectives are undoubtedly important and can be advanced without reliance on trade sanctions as an enforcement mechanism. Proposals to use trade restrictions to counter “eco-” or “social” dumping are conceptually weak and potentially dangerous. Developing countries fear that protectionist measures may be used against them on the pretext of securing improved standards. In general, there is concern that overloading the trade policy instrument to serve too many objectives—revenue, balance of payments, income distribution, competition policy, environment, labor standards, and human rights—could undermine the efficacy of its primary function of resource allocation.

Role of the Fund

A review of the Fund’s activity in the trade area indicates that trade policy issues have featured importantly in the exercise of Fund surveillance. Further attention is likely to be given to strengthening the analysis of the effects of trade measures; the links between trade policy and other macroeconomic and structural policies, including assessment of the impact of protection on domestic adjustment; more regional analysis; and market access problems of developing countries and economies in transition. With greater emphasis on structural issues, the trade policy content of Fund-supported programs has increased significantly. Fund staff collaborate closely with the World Bank in assisting members in the design of trade reforms. A review of design issues highlights the importance of integrating trade policy with other program policies—particularly fiscal and exchange rate—and adhering to a medium-term trade reform strategy with clearly established short- and medium-term goals.

While pursuing common objectives, the Fund and the GATT have played complementary roles without significant duplication, and this should continue after the establishment of the WTO. Indeed, such collaboration is expected to be strengthened in the future. It would be important for the Fund and the WTO, at both the staff and institutional levels, to remain alert to each other’s concerns, taking into account the links between macroeconomic and trade policies and the respective jurisdictions of the two institutions. The need to ensure that Fund policy advice and program design are consistent with the GATT/WTO⁴ may require greater vigilance in the future, given that the scope of commitments under the Uruguay Round of common members has expanded sharply, particularly among developing countries. This may require strengthening internal review procedures, as well as intensified informal staff contacts to exchange views and information with the GATT/WTO. The collaborative relationship, including its informal and formal aspects, will evolve and develop further as the WTO is established and gains experience. Of course, better coherence and consistency of macroeconomic and trade policy at the national level is essential.