Abstract

This section reviews the trade policy content of the Fund’s recent surveillance and lending activities, and issues of cooperation with the GATT/WTO.

This section reviews the trade policy content of the Fund’s recent surveillance and lending activities, and issues of cooperation with the GATT/WTO.

Surveillance

In seeking to facilitate the balanced expansion of international trade and to promote economic growth, the Fund in its surveillance—and without prejudice to the GATT’s primacy in the trade area—considers trade policy issues as they affect domestic adjustment of individual members, other members, and the global economy. Trade policy issues are featured prominently in the Fund’s multilateral surveillance (World Economic Outlook exercise and the deliberations of the Interim Committee) and in Article IV consultations with individual members.49 This section surveys the nature and coverage of trade policy issues in Article IV consultations during 1991–93.50

Trade policy issues were featured regularly in staff reports (and to a lesser extent also in accompanying background papers), and broadly focused on some or all of the following themes: (1) the stance of the member’s trade regime (protection); (2) regional integration; and (3) the strengthening of the multilateral trading system.

Most reports reviewed recent trade policy measures taken by the consulting country to liberalize its trade regime or increase sectoral or across-the-board protection. The Fund’s policy advice emphasized the importance of trade liberalization in the structural and macro-economic adjustment process of both industrial and developing countries.

For major trading nations, in addition to the assessment of the overall trade policy stance, specific topics of relevance were examined (e.g., competition policy, trade-distorting subsidies, agriculture, and automobile restrictions). More in-depth coverage was featured in some cases (e.g., potential welfare gains to the United States from liberalization in the textile and clothing, and steel sectors, and analysis of the impact of the keiretsu system on market access in Japan). The Fund has encouraged liberalization of trade-distorting measures both generally and with regard to specific items (e.g., the CAP, import bans on rice, antidumping). Reports on major industrial countries have also been cognizant of the need for better market access for developing and transition economies. This was particularly evident in reports of members of the EU, where the importance of access for the transforming economies in Eastern Europe (and the countries of the former Soviet Union) was repeatedly emphasized.

Article IV consultation reports on developing countries stressed the need to further liberalize QRs, reduce tariffs, and simplify the tariff structure. The thrust of recent trade reforms was generally reported, but coverage of the authorities’ future intentions in the trade area varied considerably across countries. An example of a good quantitative coverage was the report on China, which provided a comprehensive analysis of the scope of licensing and other import control measures and the characteristics of the tariff structure.

More attention is being paid in staff reports to the topic of regional integration. For example, the NAFTA and the CUSFTA were featured in the reports on the United States, Canada, and Mexico; the Internal Market Program and association agreements with Eastern Europe were discussed in the reports of the larger members of the EU; the Association of South East Asian Nations (ASEAN) was covered in the reports for Thailand and Malaysia; and more recent reports have referred to the Cross-Border Initiative among 13 eastern and southern African countries. Most of the coverage of regional trading arrangements remained rather descriptive, though there were exceptions (e.g., NAFTA and CUSFTA). Fund policy advice stressed the need to minimize possible trade diversion effects of regional trading arrangements by also reducing trade barriers against nonmembers. It also emphasized that regional liberalization should be supportive of, and complement, MFN liberalization.

With regard to the multilateral trading system, the Uruguay Round was prominently featured in the consultations with major trading nations. Some reports discussed the consulting country’s objectives and areas of interest in the Uruguay Round. Particularly in the case of the Group of Seven countries, the Fund urged them to exert leadership to bring about a rapid conclusion of the Round.

Overall, the survey revealed that the Fund has increasingly recognized the importance of trade policy issues in Article IV consultations. There is room to further improve consideration of these issues through analyses of the impact of prote tion on domestic adjustment and to link the discussion of trade policy more closely with other macroeconomic and structural policies. For members of a regional group, where competence on trade is with the regional authority (e.g., the EU), it is nevertheless important to feature the impact of the trade policy on the national economy, as well as the member's input into the formulation of the regional policy. In the coming years, the impact of the implementation of the Uruguay Round on the consulting member's economic and financial situation would need to be monitored. Improving the coverage of regional integration (including analysis of its internal and external impact) would also be important.

Trade Policy in Fund-Supported Programs

This section summarizes the main results of a staff survey of the trade policy content of recent Fundsupported programs and selected design issues. The survey covered 78 Fund-supported programs approved in 1990-93 with 59 countries under stand-by arrangements, the extended Fund facility (EFF), the structural adjustment facility (SAF), and the enhanced structural adjustment facility (ESAF).51

The survey reveals substantial progress in trade reforms during 1990-93 among program countries. The trend toward reduced reliance on QRs observed in the 1980s intensified in the 1990s. The number of restrictive QR regimes fell from 35 at the end of 1990 to 14 by the end of 1993, while relatively open ones increased from 14 to 40 over the same period. The greatest progress in eliminating QRs was made by economies in transition in Eastern Europe and the Baltic countries, where state involvement in trade was reduced sharply, and by program countries in the Western Hemisphere. Substantial progress was also made in Africa, particularly in countries where exchange system reforms allowed for the elimination of QRs used for the allocation of foreign exchange.

Progress on tariff reform was less rapid. The number of tariff-restrictive regimes declined from 38 at the end of 1990 to 26 at the end of 1993, while open tariff regimes remained unchanged at 5. Western Hemisphere countries made significant progress, as many of them adopted ambitious liberalization programs to restructure and open up their economies. Although many countries in Africa, Asia, and the Middle East lowered tariffs (and in some cases by large magnitudes), the reductions were only in a very few cases large enough to classify their tariff regimes as open or moderately restrictive.

The combined (QR plus tariff) trade regime showed at the end of 1990 53 countries with restrictive trade regimes, 5 with a moderately restrictive stance, and only 1 with a relatively open regime; by the end of 1993, the respective stances were 33, 22, and 4. The most rapid overall progress was recorded in Eastern Europe and the Western Hemisphere. According to certain macroeconomic indicators, and without inference of causality, the survey showed that slower trade reformers (as a group) initially faced more difficult macroeconomic conditions (in terms of current account and fiscal imbalances, reserve levels, and dependency on trade taxes) compared with the faster reformers. Over the period under review, the latter group improved significantly its fiscal and reserve positions and reduced reliance on trade taxes while containing the deterioration in external current account positions. On the other hand, the slower trade reformers experienced some improvement of their current account positions at the same time as their fiscal and reserve positions did not improve, and reliance on trade taxes declined by only a small amount. The macroeconomic characteristics of the slow and fast reformers suggested that fast reformers were more willing or able to undertake bolder, comprehensive reforms.

Reversals in trade liberalization were experienced in only 13 of the program countries (22 percent of the total). The extent and nature of reversals varied, but in most cases they were limited, as specific goods or imports from certain countries were targeted discriminatorily. Almost half the reversals involved economies in transition (often in the form of new import surcharges). This was due to the rise in protectionist pressures with appreciation of real exchange rates and the need to contain fiscal deficits, following difficulties in implementing timely or effective complementary domestic fiscal reforms.

The increased attention to trade liberalization in Fund-supported programs was evident in the conditionality applied to trade measures. In 34, or 44 percent, of the programs reviewed, disbursements were contingent on the implementation of trade measures, while in another 33 programs, governments made commitments to liberalize trade without the use of binding conditionality. Given their more structural orientation, it is not surprising that in about three fourths of the programs supported by ESAFs, SAFs, and EFFs, disbursements were contingent on trade measures; such conditionality was applied in only one fourth of stand-by arrangements. Tighter conditionality was more often applied to the liberalization of QRs than to tariff reform, as priority was given to the former. The type of conditionality depended to some extent on the country’s initial trade policy stance as well as on its willingness to liberalize trade unilaterally. Implementation of conditional trade measures in Fund-supported programs was broadly satisfactory; most cases where the targets were not met were in the nature of delays rather than complete failure of implementation.

Trade reforms are often integral parts of both Fund and World Bank lending operations, and collaboration between the two staffs is close, not only through the procedural requirements of SAFs and ESAFs (in terms of formulation of policy framework papers) but through other means as well. The survey of Fund-supported programs revealed that Fund staff have consulted or relied on Bank staff in the design of trade reforms in most of the programs. When complex tariff reforms were phased over time and were featured in Bank-supported adjustment operations. Bank staff took the lead in the negotiation and design of trade reform with the authorities, while consulting Fund staff on the macroeconomic effects of the reforms. Fund staff often took the lead in designing QR liberalization and the prerequisite modifications of exchange systems. With the decline in reliance on QRs in many countries, Fund staff are becoming more active in tariff reform design, especially when such reform is required early in the program.

The experience with Fund-supported programs highlights the issues that need to be considered in designing trade reform: (1) the importance of the interaction of trade and other program policies and hence the need for an integrated, comprehensive approach; and (2) the need to adhere to a medium-term trade reform strategy with clearly established and preannounced immediate and medium-term objectives. In many of the programs reviewed, fiscal considerations—generating and maintaining revenues—were a major determinant in limiting the magnitude of tariff reforms and the speed of their implementation. Similarly, exchange and trade restrictions often acted as substitutes, and appropriate exchange rate policies were needed to ensure that trade reforms were consistent with balance of payments objectives; the effectiveness of exchange rate policies in turn was enhanced when complemented by the liberalization of the trade and payments regime. Consequently, trade policy needs to be geared to medium-term efficiency goals, while deviations for short-term fiscal and balance of payments considerations should be limited and kept strictly temporary.

The survey revealed certain other lessons for the design of trade reforms. Since QRs are less transparent and more restrictive than tariffs, their removal at the outset of the program is important. When such an approach is not feasible and a phased approach is adopted, precisely defined and monitorable numerical targets for their reduction (as well as exceptions) are needed. To hasten the progress in liberalization, QRs can initially be replaced with their tariff equivalents.

Given the considerable progress that has so far been made in eliminating QRs, the focus, in the future, will increasingly be on tariff reform. The detailed features of the reform would depend, of course, on the particular circumstances of the country. While the aim of tariff reform would be to reduce effective protection, program design would need to be geared to easily monitorable targets, such as average and maximum nominal tariffs. The design of tariff reform should emphasize several elements, including to incorporate all import taxes and charges into the tariff structure, eliminate discretionary exemptions, simplify the tariff structure into a few bands, lower the maximum tariff with only a few exceptions, and reduce the average statutory tariff rate. The experience of successful tariff reformers, in particular those in Latin America, shows that it is possible within a period of 2-5 years to reduce tariff bands to 3 to 5, to bring high tariffs (in some cases, triple digit) initially to a maximum of 30-35 percent and then subsequently to 20 percent or less, and to reduce average statutory tariffs to about 15-20 percent initially and to about 10 percent in the subsequent stage.

Collaboration with the GATT/WTO

The GATT and the Fund pursue common objectives in promoting an international trade and payments system that is free of restrictions. The work of the two bodies has linkages and complementarities. The existing cooperative relationship between the GATT and the Fund is likely to intensify with the establishment of the WTO. Both institutions are approaching universal membership; globalization has heightened awareness of policy interdependence; and increased commitments under the Uruguay Round make it imperative to be alert to policy consistency issues. Issues for future Fund and WTO (and World Bank and WTO) collaborations are only now beginning to be addressed and thinking in this regard will probably evolve as the WTO is established and gains experience. The Fund (and the World Bank) and the WTO will be considering the institutional mechanisms—formal and informal—that might be necessary to further strengthen their cooperative relationships.

Jurisdictional Issues

The complementarity between the Fund and the GATT was recognized at the inception of the GATT. The cooperative relationship between the GATT and the Fund is provided by GATT Articles XIV and XV, whereby it was recognized that exchange measures under the jurisdiction of the Fund and trade measures under the jurisdiction of the GATT should not be used to impair the benefits that members derive from each institution. The Fund was accorded primacy in regulating exchange measures, including those that had trade effects. The principles of this cooperative relationship in the area of goods have been carried over into the WTO. With the inclusion of services in the WTO, the possibility of overlap will also arise in the services area in relation to exchange measures that affect services transactions, particularly on the current account. The Uruguay Round services agreement accords primacy to the Fund in regulating such measures.

Surveillance

The exercise of the respective surveillance functions of the Fund and the GATT has been characterized by complementarity rather than duplication. GATT exercises surveillance over specific aspects of trade policies (e.g., implementation of the MFA by the Textiles Surveillance Body, implementation of the Tokyo Round Code on Antidumping by the Committee on Antidumping, etc.). Since the establishment in 1989 of the trade policy review mechanism (TPRM), GATT also exercises surveillance over individual countries’ overall trade policies. The frequency and nature of this function, however, is different from that of Fund surveillance. In contrast to annual Fund surveillance, TPRM reports are prepared at intervals of two, four, and six years depending on the importance of the country in world trade (recently a flexibility of up to six months was introduced in these report cycles).52 The TPRM is primarily geared to enhancing the transparency of the trade regime and the reviews are published. TPRM reports feature the macroeconomic environment (including exchange rate policy) of the member as background information, but do not engage in independent macro-economic policy analysis.

The GATT assesses the trade policy stance of individual members, and adjudicates disputes over specific trade issues, but does not engage in discussion or negotiation of detailed trade reform packages. In contrast, Fund surveillance examines trade policy as part of the whole gamut of the member’s economic and financial policies, with emphasis on its impact on domestic adjustment and on other Fund members. Both in its policy advice and in the design of programs, the Fund engages in often detailed blueprints for future trade reform in the context of comprehensive integrated packages of macroeconomic and structural measures that often generate additional benefits in terms of improving confidence and credibility of the reform effort and catalyzing external financing.

The Fund (and World Bank) encourages members to undertake unilateral trade liberalization to improve the efficiency of the domestic economy, irrespective of “negotiating leverage.” Multilateral trade negotiations under the auspices of GATT deal with the reciprocal exchange of “concessions” among participants. MTNs tend to be slow but cover many countries and help generate political support domestically when it is perceived that others are also “giving up” protection. The two approaches—unilateral liberalization and multilateral trade negotiations—are both essential and can be simultaneously implemented without contradiction.53 GATT “concessions” are “bound” and therefore irreversible, providing predictability and security of access. Trade liberalization by developing and transition economies under Fund- (and World Bank-) supported programs is not bound; it has proceeded much faster and deeper than under the GATT, but is open to the risk of reversal.

Coherence of Macroeconomic and Trade Policy

During the Uruguay Round negotiations, some participants raised the issue of coherence of exchange rate and trade policies. While it is not clear precisely how this issue is defined, it reflects the value that is attached to exchange rate stability. It is often frustrating for trade negotiators to find that the benefits they believed they had obtained through hard-fought compromises on tariff concessions in specific sectors are perceived to be nullified by unforeseen exchange rate changes. Another concern relates to the possible harmful effects of exchange rate volatility on trade flows. Empirical studies provide ambiguous results in this respect (see Box 3). More generally, the Fund’s emphasis on the need for balanced and coordinated macroeconomic policies, by setting an environment for greater exchange rate stability, becomes all the more important if exchange rate volatility does have negative effects on trade. Examples of other aspects of concern that have been raised pertain to the persistence of current account imbalances that tend to generate protectionist pressures (as illustrated by the case of Japan); the efficacy (in the aggregate) of policy advice to individual countries to adopt export-oriented strategies against a background of world recession; or possible cumulative competitive devaluations that may result from encouraging devaluations in the individual country context.

On policy coherence, the WTO provides for cooperation with the Fund (and the World Bank) specifically (Article III) and more generally (Article V), but does not establish a mechanism for cooperation.54 A Minis terial Declaration in the Final Act calls for greater policy coherence.55 As established in its relationship with the GATT, future Fund and WTO cooperation should be founded on the efficient pursuit of shared objectives that take into account linkages between trade and macroeconomic policies, the need for policy consistency, and avoidance of duplication.

Exchange Rate Volatility and Trade

Exchange rate volatility has long been suspected of directly depressing international trade by introducing an additional measure of uncertainty. It has also been accused of fueling protectionist impulses, which, in turn, exert negative trade effects indirectly by stimulating protectionist commercial policies. The empirical evidence for both types of linkages is mixed.

At the request of the Director-General of the GATT, a Fund staff study reviewed the literature on the effects of exchange rate volatility on world trade: it concluded that the results were inconclusive.1 The large majority of empirical studies could not establish a significant link between exchange rate variability and the volume of trade. The Fund staff study also examined survey evidence in this area and reported that, by and large, the ability of firms to hedge in the forward market greatly mitigated the potentially adverse trade and investment effects of exchange rate variability.

Since the IMF (1984) review, a number of studies have appeared that also suggest inconclusive results. Following up on a study by Akhtar and Hilton (1984) that found significant adverse trade effects, Gotur (1985) examined the robustness of their results along several lines. When the basic model of Akhtar and Hilton was extended to cover additional countries, different sample periods, alternative indices of exchange rate volatility, and different estimation techniques, Gotur found that while significant adverse effects are sometimes observed for specific cases, viewed in the large, the results tend to be insignificant or unstable. Kenen and Rodrik (1986) examined the effect of real effective exchange rate (REER) volatility on global trade flows. Again, the results of their regression analysis were mixed, although the weight of their evidence seemed to support the negative-effects hypothesis. Thursby and Thursby (1987) investigated the effects of both nominal and real exchange rate volatility in a gravity-type trade model. Their model specification attempted to control for exchange-risk hedging activity in the forward market. When this was done. Thursby and Thursby found evidence of a negative relationship between exchange rate variability and bilateral trade whether nominal or real exchange rate indices were used.

More recently, Savvides (1992) argued that sufficient care has not been taken in past studies to separate anticipated from unanticipated exchange rate variability. If uncertainty is the problem, only the unanticipated component of exchange rate variability should exert a negative influence on trade flows.2 By estimating a separate equation to explain REER variability, Savvides was able to investigate the impact of unanticipated exchange rate variability on a country’s export growth. Unanticipated exchange rate variability was found to produce a negative and statistically significant effect on real export growth while the anticipated component of rate vari ability showed no such effect. Savvides suggested that this distinction may partly explain the inconclusive results of previous studies.

The studies cited so far focused principally on the uncertainty-generating effects of exchange rate volatility on trade. But exchange rate volatility may also exert negative trade effects by inducing more protectionist commercial policies over time, or alternatively by causing a slowdown in the pace of trade liberalization. An unanticipated appreciation in a country’s REER. for example, can prove costly to import-competing interests whose plans for production and investment were formulated under significantly different expectations. This development may stimulate new coordinated calls for stronger barriers to imports while also increasing political receptivity to petitions for protection. Because there is generally an asymmetry in the process of imposing and removing protectionist trade barriers, greater rate volatility may cause the level of protection to ratchet upward, or to ratchet downward at a slower rate.

In this regard, although focused on the effect of changing levels of the REER, Clifton (1985) concluded that his empirical work is “broadly consistent” with the view that exchange rate volatility can stimulate an increase in protectionist pressure. After finding a statistically significant relationship between the level of the real exchange rate and import penetration, he argued that when combined with earlier studies establishing a significant relationship between import penetration and levels of protection, this offers indirect support for the positive link via a “ratchet” effect between exchange rate variability and increased protectionism. In other words, if high levels of the REER tend to produce protectionist policies that are not removed when the REER declines, REER variability would tend to impede trade as protectionist commercial policies are ratcheted upward.

Brada and Mendez (1988) tested simultaneously the effects of unanticipated exchange rate volatility on trade via trade frictions due to uncertainty and via induced protectionist changes in commercial policies. They found general evidence of a negative relationship between rate volatility and trade, and this was particularly strong for bilateral trade flows between countries that each peg to different major currencies (e.g., dollar versus sterling pegs). Brada and Mendez argued that this appears to have occurred because both importers and the exporters tended to face highly restrictive trade policies—policies induced, in part, by rate volatility.

De Grauwe (1988) developed a simple theoretical model that showed that increases in exchange risk may cause exports to rise or fall depending on a Firm’s degree of risk aversion. He then suggested that if a systematic link between exchange rate variability and trade is to be found, one should look for a connection to trade policy developments. By focusing on longer-run real exchange rate variability, De Grauwe argues that his empirical design is well suited to capturing the effects of rate variability on protectionist pressures. He identified a statistically significant negative association between longer-term real exchange rate variability and trade flows, and argued that this is consistent with the proposition that periodic currency misalignments tend to enhance protectionist pressures and thereby negatively affect trade flows.

1 IMF (1984).2 It is noteworthy that Gotur (1985) pointed out this shortcoming in her concluding section and indicated that preliminary testing using a measure of unanticipated volalilily did not significantly change her results. Kenen and Rodrik (1986) also explicitly claimed to be investigating the effects of unexpected changes using several simple predictors of future rates.

Consistency with GATT/WTO Obligations

The Fund’s (and the World Bank’s) advice on trade policy needs to be consistent with GATT/WTO obligations of member countries. For example, Fund- and Bank-supported programs sometimes recommend increases in (minimum) tariffs in the context of comprehensive tariff reforms aimed at lowering average tariff levels and reducing tariff dispersion, and harmonizing the tariff structure. If such increases raise tariffs above their bound levels, they could breach the member’s obligations in the GATT/WTO. Another example relates to “other charges” on imports. When a GATT member binds its tariffs, it concomitantly commits not to raise the level of other charges on the relevant import item (in order not to vitiate the effect of the tariff binding). This needs to be taken into account before increases in service fees, statistical taxes or other similar charges are recommended for revenue or other purposes. Similarly, consideration of import surcharges for fiscal or balance of payments reasons needs to take account of GATT/WTO obligations.

In practice, instances of GATT-inconsistent Fund policy advice have been rare in the past. But with the marked increase in commitments under the Uruguay Round, especiaity the extensive coverage of developing countries’ tariff bindings, the need for vigilance on this matter is much greater. Increased informal consultation with GATT/WTO staff would help to better identify potential conflicts before recommendations are formulated and implemented. And, of course, national authorities need to be alert to potential consistency problems.

Similarly, the Fund (and the World Bank) need to be aware of GATT/WTO rules and regulations that may carry repercussions that could affect program implementation. For example, export promotion through export subsidies on manufactures and direct forgiveness of debt (including to specific enterprises in the context of privatization or restructuring programs) are countervailable. In a number of cases, debt forgiveness has been necessary to push through privatization programs and to put the reorganized enterprise on a firm footing; in such instances, trading partners need to exercise caution and discretion—in a manner favoring liberal solutions—on the use of countervailing duties, even though GATT/WTO rules sanction such duties.

While Fund-supported programs avoid including GATT-inconsistent measures in program design, they have in general also avoided directly linking program condilionalily to GATT obligations. Thus, for example. Fund programs may contain actions to reduce tariffs (in line with GATT objectives) but they do not require these tariffs to be “bound” in the GATT. Trade liberalization under Fund-supported programs has often helped developing countries subsequently to take the further step and bind (in whole or in part) their tariff schedules in the GATT (usually at levels higher than applied rates): but the two actions are separate and there is no direct or conditional link between them.

Balance of Payments Restrictions

Another manifestation of formal cooperation between the GATT and the Fund relates to the Fund’s participation in the consultations of the GATT Committee on Balance of Payments Restrictions; the Fund’s input helps the GATT Committee to judge the appropriateness of maintaining trade restrictions for balance of payments purposes. In the WTO, the role of the Fund in balance of payments consultations will be expanded to cover both goods and services.

Just as in the Fund there is increased emphasis on the desirability of members accepting the obligations of Fund Article VIII, so also there is now in the GATT a greater appreciation of the importance of encouraging members to reduce reliance on GATT Article XVI1I;B (or Article XII),56 This raises the question of the links, if any, between the member’s acceptance of Fund Article VIII and its disinvocation of GATT Articles XVIIFB and XII. There is no legal link in the sense that action in one area requires adjustment in the other. The acceptance of Fund Article VIII may suggest that the member has reached a stage of convertibility that may place it in a better position to disinvoke also GATT Articles XVIII: B and XII. The Fund’s assessment of the balance of payments justification for trade restrictions would be an important determinant of the GATT/WTO Balance of Payments Committee’s consideration of this matter. A number of developing countries have been reluctant to bind their tariffs at the (lower) actual prevailing rates because of concerns of potential balance of payments problems in the future. By assisting members to achieve convertibility and medium-term balance of payments viability, the Fund would also help them lay the conditions for sustainable trade liberalization that is made permanent through GATT/WTO bindings.

Appendix I Trade and Growth

While increased trade, promoted by liberalization of trade barriers, in concert with supporting exchange rate and stabilization policies, acts as a powerful stimulus to economic growth, trade theory traditionally has focused on the static benefits of trade liberalization, which tend to be rather small. It is often argued that static benefits as usually measured should be viewed as a lower bound since several potentially important effects are omitted, including elimination of rent seeking, gains to foreign producers from increased exports, elimination of disincentives to quality upgrading under QRs, and increased product variety.57 These effects can add significantly to static gains. Additionally, the trade literature has long emphasized that open trade regimes lead to higher rates of economic growth. Liberalization could lead to higher growth with the import of more efficient capital goods and reduction of monopoly power. Recent developments in the theory of economic growth have been applied in an open economy setting to capture more formally the links between trade and economic growth.

Dynamic Gains from Trade

The new growth models (endogenous growth theory) specify several channels through which international trade can lead to a permanent increase in economic growth via technical change, thereby providing a potentially important conceptual foundation for empirical studies.58 Trade may facilitate the international diffusion of knowledge, thereby speeding up growth. Liberalization may eliminate redundancy of product designs, if there is overlap under restricted trade. Trade may also stimulate innovation and growth by expanding the effective market size for producers. A high-skilled, labor-scarce country may see the cost of research and development fall because of trade liberalization, thereby stimulating innovation and growth. For a developing country, trade may provide access to a larger set of specialized inputs and production techniques, which may lead to increased growth. Learning by doing can also widen the range of specialized inputs available to producers, or expand the range of differentiated consumer goods, with the set of goods becoming increasingly sophisticated as learning proceeds; trade liberalization can increase the learning rate, thereby leading to increased economic growth. In any event, welfare (real national income) may increase as a result of trade liberalization even if growth falls and vice versa.

There have been few attempts to specify empirical models based on the new models of trade and growth. Baldwin (1989, 1992) computes the dynamic gains from the Internal Market program to eliminate all barriers to trade and factor movements within the European Union, and Kehoe (1994) draws upon crosscountry regressions over the 1970–85 period contained in Backus, Kehoe, and Kehoe (1992) to illustrate the potential dynamic gains from increased trade for Mexico. While admittedly rough, the calculations contained in Baldwin (1989) and Kehoe (1994) illustrate that dynamic gains from trade liberalization may dwarf static gains from trade.

Empirical Studies

The links between trade and growth are varied and complex, running in both directions. Consequently, while empirical studies have consistently supported a positive link between exports and economic growth, their conceptual underpinnings have sometimes been unclear. Additionally, it has proven difficult to assemble a reliable set of trade barrier measures that are comparable, across either countries or different time periods; this has posed a problem for establishing the precise quantitative nature of the links between trade liberalization and economic growth.

Empirical evidence on the relationship between trade and growth has taken many forms, including principally large multicountry case studies59 and econometric studies based on highly aggregated crosscountry data sets.60 A key element of such studies is the definition and measurement of outward orientation that is used. Some studies have stressed the nature of the trade regime while others have taken a more comprehensive approach to measurement of “openness.” The nature of the trade regime has been measured by many indicators, including the effective exchange rate for exports relative to imports, which indicates the distortion in export prices relative to prices of import substitutes, and the real exchange rate, defined as the price of tradable goods relative to the price of nontradables; the indicators have alternately been combined into one index or used separately. The multicountry case studies have documented many microeconomic inefficiencies resulting from a protectionist regime, all ultimately leading to high capital-output ratios and reduced economic growth.61

Cross-country econometric studies generally find that dismantling trade barriers stimulates exports and hence economic growth. Krueger (1978), for instance, finds a strong link between the real effective exchange rate faced by exporters and export growth, while movement toward a more liberal trade regime, measured by dummy variables to take account of relaxation of QRs, is statistically significant but substantially less important than the exchange rate. Krueger also finds substantial evidence of a strong link between exports and real GDP growth, although the direct effect of trade liberalization on economic growth (increasing the supply of foreign inputs may lead to an increase in capacity utilization or new investment) is not significant.

Dollar (1992) finds (in a cross-section study of 95 developing countries) that outward orientation is highly correlated with economic growth (measured by per capita GDP growth). His measure of outward orientation, which is based mainly on a country’s price of traded goods, relative to international (U.S.) prices of traded goods, corrects for misalignment of the exchange rate in addition to trade restrictions and other distortions, so that the effects of trade liberalization on economic growth are not separately identified in the study. He concludes that if countries in Latin America and Africa had achieved a level of outward orientation comparable with that in Asia, growth in these countries would have been substantially higher.

Edwards (1992) utilizes a cross-country data set (averaged over 1970–82) to analyze the relation between trade orientation and economic growth. A theoretical endogenous growth model is used as a rough guide to specify a model in which real GDP growth depends on aggregate investment as a share of GDP, the gap between the world’s and the country’s stock of knowledge, and an index of trade intervention for the country. The empirical results indicate that countries with less-restrictive trade policies have grown at a significantly more rapid pace than countries with more restrictive trade policy regimes. This result is robust with regard to the choice of trade restrictiveness measure used, measurement error, other influences on economic growth (human capital accumulation, political instability, and the share of government expenditure in GDP), and choice of time period.

Conclusion

While there are caveats attached to both the voluminous empirical literature, as well as the burgeoning new theoretical endogenous growth literature, and there is much additional work to be done in combining the two, the empirical evidence and economic theory generally support the long-held view that there is a strong link between international trade and economic growth.

Appendix II Glossary of Terms

Antidumping duty. Levy imposed on imports deemed as being “dumped.” Article VI of GATT and the Tokyo Round Antidumping Code permit the imposition of antidumping duties equivalent to the difference between the export price and the “normal value” of the product if it causes or threatens to cause material injury to an established industry or “materially retards” the establishment of a domestic industry.

Countervailing duty. Levy imposed on imports by the importing country to offset government subsidies in the exporting country. GATT Article VI and the Tokyo Round Subsidies Code allow, under certain circumstances, the imposition of countervailing duties in the case of material injury or threat of material injury to domestic producers from imports of like products that benefit from subsidies (export or domestic) or when such subsidies “materially retard” the establishment of a domestic industry.

Dumping. Price discrimination between exports and domestic sales of a given product. The dumping margin, which forms the basis of antidumping duties, may be determined according to GATT Article VI as the price difference between the price of the product exported from one country to another and (a) the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country or, in the absence of such domestic price, (b) the highest comparable price for the like product for export to any third country, or (c) the cost of production in the exporting country plus a reasonable addition for selling cost and profit.

Generalized System of Preferences (GSP). International agreement negotiated under the auspices of GATT, providing temporary and nonreciprocal duty preferences accorded by the developed to the developing countries. A ten-year waiver from the GATT most-favored-nation provision was granted in 1971 to permit implementation of the GSP. It was not necessary to review the waiver because a similar objective was achieved by the 1979 GATT decision on “Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries” resulting from the Tokyo Round (the Enabling Clause),

Gray area measures. Measures, such as orderly marketing arrangements and voluntary export restraint agreements, which were outside GATT surveillance and whose consistency with GATT was not determined (prior to the Uruguay Round Final Act).

Least-developed countries. The term “least-developed countries” refers to a category defined by the United Nations and used in the GATT to identify certain very low-income countries.

Margin of preference. Difference between the most-favored-nation and the preferential tariff.

Most favored nation. Fundamental principle embodied in GATT Article I and in GATS Article I, whereby any privilege or concession granted by one contracting party to a product or service of another country will be unconditionally granted to the like products or services of all other contracting parties.

Nontariff measures (NTMs). All government actions other than tariffs with a potential trade-distorting impact, including quantitative restrictions, subsidies, government procurement practices, and technical barriers to trade.

Rules of origin. Rules that define the criteria for establishing the country of origin of a product for purposes of assessing tariffs or other import restrictions. Origin rules are used to enforce the individual tariff schedules of countries participating in a free trade area. They usually stipulate a minimum value-added requirement for duty-free access of partner country products to the domestic country.

Safeguard measures. Temporary protective measure undertaken to (a) safeguard domestic producers of given goods from an import surge (GATT Article XIX permits such measures under certain conditions); (b) protect the country’s reserve and balance of payments position (GATT Articles XII and XVIII: B); and (c) protect infant industries in developing countries (GATT Article XVIII: C).

Subsidies. Government assistance to the development, production, or export of specific goods. Subsidies can take the form of either direct financial support or indirect support through tax exemptions, subsidized loans or loan writeoffs, government procurement practices, and subsidies to the production of inputs.

Tariff binding. Obligation undertaken in GATT not to raise tariff rates on specific products above a certain level without compensating reductions in other tariffs. Bindings are also referred to as tariff concessions in GATT terminology. Applied tariff rates may be lower than bound rates.

Tariff dispersion. Range of tariff rates within a country’s tariff schedule.

Tariff escalation. Progressively higher tariff rates as the stage of processing of goods advances, resulting in high effective rates of protection of final products.

Tariff peaks. Tariff rates that are particularly high compared with the general tariff schedule of a given country.

Tariff quota. Application of a higher tariff rate on imported goods after a specified quantity of the product has entered the country. In the context of the European Union’s GSP, for example, a tariff quota refers to the quantitative restriction on the amount of a certain good that can enter the EU duty free; after this threshold is reached, the MEN tariff applies.

Tariffication. Replacement of quantitative restrictions or other nontariff barriers with approximate tariff equivalents.

Trade-related aspects of intellectual property rights, including trade in counterfeit goods (TRIPs). The Uruguay Round TRIPs agreement will increase the standards of intellectual property protection around the world, improve the effectiveness of its enforcement nationally, and provide a forum for the multilateral settlement of disputes between countries.

The types of intellectual property covered are patents, trademarks, copyright and related rights, trade secrets, geographical indications, including appellations of origin, semiconductor layout design, and industrial designs.

Trade-related investment measures (TRIMs). Measures employed by countries, usually in relation to foreign enterprises, which require or induce them to meet certain yardsticks of performance. The most commonly used TRIMs are local (or domestic) content requirements (LCRs), when a firm must ensure that a specified amount or share of production (value or volume) uses local inputs; export performance requirements, when a firm must ensure that a specified amount or share of local production be exported; and trade (foreign exchange) balancing requirements, when a firm must ensure that imports be no greater than a specified proportion of exports.

Voluntary export restraint arrangements (VERs). Bilateral agreement between an exporter and an importer whereby the former agrees to limit exports of a given product. The agreement may be concluded at government or industry level.

World Economic and Financial Surveys

This series (ISSN 0258-7440) contains biannual, annual, and periodic studies covering monetary and financial issues of importance to the global economy. The core elements of the series are the World Economic Outlook report, usually published in May and October, and the annual report on International Capital Markets. Other studies assess international trade policy, private market and official financing for developing countries, exchange and payments systems, export credit policies, and issues raised in the World Economic Outlook.

World Economic Outlook: A Survey by the Staff of the International Monetary Fund

The World Economic Outlook, published twice a year in English, French, Spanish, and Arabic, presents IMF staff economists’ analyses of global economic developments during the near and medium term. Chapters give an overview of the world economy; consider issues affecting industrial countries, developing countries, and economies in transition to the market; and address topics of pressing current interest.

ISSN 0256-6877.

$34.00 (academic rate: $23.00; paper).

1995 (May). ISBN 1-55775-468-3, Stock #WEO-195.

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1994 (May). ISBN 1-55775-381-4, Stock #WEO-194.

1994 (Oct.). ISBN 1-55775-385-7. Stock #WEO-294.

International Capital Markets: Developments, Prospects, and Policy Issues

by an IMF Staff Team led by Morris Goldstein and David Folkerts-Landau

This annual report reviews developments in international capital markets, including recent bond market turbulence and the role of hedge funds, supervision of banks and nonbanks and the regulation of derivatives, structural changes in government securities markets, recent developments in private market financing for developing countries, and the role of capital markets in financing Chinese enterprises.

$20.00 (academic rate: $12.00; paper).

1994. ISBN 1-55775-426-8. Stock #WEO-694.

1993. Part I: Exchange Rate Management and International Capital Flows, by Morris Goldstein, David Folkerts-Landau, Perer Garber, Liliana Rojas-Suarez, and Michael Spencer.

ISBN 1-55775-290-7. Stock #WEO-693.

1993, Part II: Systemic Issues in International Finance, by an IMF Staff Team Led by Morris Goldstein and David Folkerts-Landau.

ISBN 1-55775-335-0. Stock #WEO-1293.

Staff Studies for the World Economic Outlook

by the IMF’s Research Department

These studies, supporting analyses and scenarios of the World Economic Outlook, provide a detailed examination of theory and evidence on major issues currently affecting the global economy.

$20.00 (academic rate: $12.00; paper).

1993. ISBN 1-55775-337-7. Stock #WEO-393.

Developments in International Exchange and Payments Systems

by a Staff Team from the IMF’s Exchange and Trade Relations Department

The global trend toward liberalization in countries’ international payments and transfer systems has been most dramatic in central and Eastern Europe. But developing countries in general have brought their exchange systems more in line with market principles and moved toward more flexible exchange rate arrangements, while industrial countries have moved toward more pegged arrangements,

$20,00 (academic rate; $12.00; paper).

1992. ISBN 1-55775-233-8. Stock #WEO-892.

Private Market Financing for Developing Countries

by a Staff Team from the IMF’s Policy Development and Review Department led by Charles Collyns

This study surveys recent trends in private market financing for developing countries, including flows to developing countries through banking and securities markets; the restoration of access to voluntary market financing for some developing countries; and the status of commercial bank debt in low-income countries.

$20.00 (academic rate: $12.00: paper).

1993. ISBN 1-55775-361-X. Stock #WEO-993.

1992. ISBN 1-55775-318-0. Stock #WEO-992.

International Trade Policies

by a Staff Team led by Naheed Kirmani

The study reviews major issues and developments in trade and their implications for the work of the IMF. Volume 1, The Uruguay Round and Beyond; Principal Issues, gives an overview of the principal issues and developments in the world trading system. Volume II, The Uruguay Round and Beyond; Background Papers, presents detailed background papers on selected trade and trade-related issues. This study updates previous studies published under the title Issues and Developments in International Trade Policy.

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1994.Volume I. The Uruguay Round and Beyond: Principal Issues

ISBN 1-55775-469-1. Stock #WEO-1094.

1994. Volume II, The Uruguay Round and Beyond: Background Papers

ISBN 1-55775-457-8. Stock #WEO-1494.

1992. ISBN 1-55775-311-3. Stock #WEO-1092.

Official Financing for Developing Countries

by a Staff Team from the IMF’s Policy Development and Review Departmentled by Michael Kuhn

This study provides information on official financing for developing countries, with the focus on low- and lower-middle-income countries. It updates and replaces Multilateral Official Debt Rescheduling: Recent Experience and reviews developments in direct financing by official and multilateral sources.

$20.00 (academic rate: $12.00; paper)

1994. ISBN 1-55775-378-4. Stock #WEO-1394.

Officially Supported Export Credits: Developments and Prospects

This study examines export credit and cover policies in the ten major industrial countries.

$15.00 (academic rate: $12.00; paper).

1990, By G.G. Johnson, Matthew Fisher, and Elliot Harris.

ISBN 1-55775-139-0. Stock #WEO-588.

Available by series subscription or single title (including back issues); academic rate available only to full-time university faculty and students.

Please send orders and inquiries to:

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1

International Monetary Fund, The Rise in Protectionism, IMF Pamphlet Series, No. 24 (Washington, 1978); Trade Policy Developments in Industrial Countries, IMF Occasional Paper. No. 5 (Washington, July 1981); Developments in International Trade Policy, IMF Occasional Paper, No. 16 (Washington, second printing, 1983); Trade Policy Issues and Developments. IMF Occasional Paper, No. 38 (Washington, July 1985); Issues and Developments in International Trade Policy. IMF Occasional Paper, No. 63 (Washington. December 1988); and Issues and Developments in International Trade Policy, World Economic and Financial Surveys (Washington, August 1992).

49

Article IV consultations refer to the annual economic policy discussions that lake place between the Fund and individual members.

50

The survey is based on a sample of 69 staff reports and 46 background papers covering 26 countries (the major industrial countries and randomly selected other nonprogram countries). The sample included Australia, Belgium, Bolivia, Canada, China, Finland. France, Germany, Greece, Italy, Japan, Korea, Malaysia, Mexico, New Zealand, Norway, Paraguay, Senegal, Sweden. Thailand, Trinidad and Tobago, Tunisia, Turkey, the United Kingdom, the United Slates, and Zambia.

51

The scope, methodology, and detailed analysis of the survey findings are featured in Volume II, Background Papers, of this study.

52

The first 4 trading entities (identified in terms of their share of world trade) are subject to review every 2 years, the next 16 are reviewed every 4 years, and the remaining countries are reviewed every 6 years (with the exception of some least-developed countries, which may be subject to longer review cycles).

53

ln practice, there have been linkages. For instance, some countries have considered holding back on unilateral liberalization for the sake of negotiating leverage. In the Uruguay Round, developing countries asked for—but did not receive—negotiating “credits” for their unilateral liberalizations.

54

Article III.5 (Functions of the WTO) says: “With a view to achieving greater coherence in global economic policymaking, the WTO shall cooperate, as appropriate, with the International Monetary Fund and with the International Bank for Reconstruction and Development and its affiliated agencies” (GATT (1994), p. 10). Article V (Relations with Other Organizations) calls upon the General Council, which will carry out the functions of the WTO, to ““make appropriate arrangements for effective cooperation with other intergovernmental organizations that have responsibilities related to those of the WTO” (GATT (1994), p. 11).

55

The Declaration on the Contribution of the WTO to Achieving Greater Coherence in Global Economic Policymaking calls upon the WTO to “pursue and develop cooperation with the international organizations responsible for monetary and financial matters, while respecting the mandate, the confidentiality requirements and the necessary autonomy in decision-making procedures of each institution, and avoiding the imposition on governments of cross-conditionality or additional conditions.” Accordingly, the Declaration invites the “Director-General of the WTO to review with the Managing Director of the International Monetary Fund and the President of the World Bank, the implications of the WTO’s responsibilities for its cooperation with the Bretton Woods institutions, as well as the forms such cooperation might take, with a view to achieving greater coherence in global economic policymaking” (GATT (1994), p. 387).

56

These Anicles allow developing countries (Article XVIII: B) and industrial countries (Article XII) to temporarily maintain trade restrictions (which would otherwise have been inconsistent with GATT) for balance of payments purposes. Currently, the following countries consult with the GATT Balance of Payments Committee under Article XVIII: B or XII: Bangladesh, Egypt, India, Israel, Nigeria, Pakistan, Philippines. Poland, the Slovak Republic, South Africa. Sri Lanka. Tunisia, and Turkey.

60

See Edwards (1993); Rodrik (1993); and IMI (1993).