It is indeed my pleasure to welcome you to this seminar on Trade Policy Issues organized by the IMF Institute, headed by Patrick de Fontenay, and the Policy Development and Review Department of the Fund, headed by Jack Boorman. I am very pleased that you have been able to take time from your busy schedules to come to Washington for this seminar.

It is indeed my pleasure to welcome you to this seminar on Trade Policy Issues organized by the IMF Institute, headed by Patrick de Fontenay, and the Policy Development and Review Department of the Fund, headed by Jack Boorman. I am very pleased that you have been able to take time from your busy schedules to come to Washington for this seminar.

The seminar is timely because, as you know, the World Trade Organization (WTO) has just been established and there are many issues to be discussed regarding the implementation of the Uruguay Round, its economic effects, and the post-Uruguay Round agenda. More generally, this is a unique opportunity for you to exchange views among yourselves, and with the staffs of the Fund, the Bank, and the WTO, on current issues in trade in industrial, developing, and transition economies.

What is the role of the IMF in the trade area? We could say that the IMF, the World Bank, the WTO, and the United Nations (UN) system are the four pillars of the institutional structure of multilateral cooperation for global development, with each having essential and interdependent roles to play. The IMF’s direct responsibilities mainly concern macroeconomic policies, international payments, and exchange relations, rather than trade relations, which are more the responsibility of the WTO. But why has the IMF been given the responsibilities it has? Part of the answer is the objective of promoting international trade. This is clear from Article I of our Articles of Agreement, which states that one of the purposes of the Fund is “to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.” The Fund has pursued the purpose of facilitating the expansion of international trade in four principal ways. First, by promoting the adoption by its member countries of macroeconomic policies conducive to sustainable growth. Second, by providing temporary financial assistance to countries with balance of payments difficulties, thereby (and I quote again from Article I) “… providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.” Among such measures to be avoided are certainly trade and exchange restrictions. Third, the Fund has promoted the convertibility of currencies, which has been essential to the development of a multilateral system of payments and therefore also to multilateral trade relations. And fourth, the Fund, in collaboration with the General Agreement on Tariffs and Trade (GATT), and now the WTO, has promoted trade liberalization in the context of Fund-supported adjustment programs and Fund surveillance.

The WTO is now responsible for developing and safeguarding the multilateral trading system, while the Fund remains responsible for developing and safeguarding the multilateral payments system. The two roles are complementary, and the two institutions will necessarily continue to work hand in hand.

The benefits of liberal trade and exchange regimes in terms of resource allocation, growth, and welfare, are well-known—as are the costs of the alternative—and I am sure that this audience does not need me to elaborate on them. Let me just refer briefly to experience.

First, in the early postwar decades, following the establishment of the IMF, the World Bank, and the GATT, there were major reductions in trade and exchange restrictions. Average tariffs on manufactured goods in industrial countries were reduced from about 40 percent in the late 1940s to about 6 percent four decades later. At the same time, there was a widespread move among the industrial countries toward current account convertibility. These developments contributed to a virtually unprecedented growth of both trade and output, providing a striking example of trade as an engine of growth.

Second, in the past decade or so many developing countries have taken unilateral action to reduce their trade and exchange restrictions, often as part of comprehensive adjustment and reform programs supported by the IMF and the World Bank. The results of these reforms are illustrated by some global data. Between 1961 and 1975, the volume of exports of non-oil developing countries grew at half the pace of exports by the industrial countries; this relationship has since been reversed, so that, for instance, between 1986 and 1993 the volume of exports of non-oil developing countries grew at an average annual rate of 10 percent, compared with 5 percent for the industrial countries. Moreover, the growth rates in developing countries have clearly been influenced by their trade strategies. Thus, since the mid-1980s real GDP in strongly outward-oriented developing countries has grown much faster than in other developing countries. In fact, the dynamism of the outward-oriented, successfully adjusting countries has not only significantly strengthened the foundations of their own economies but has also provided crucial support for global growth during the recent period when the industrial world experienced weak activity. This was most striking in 1993, when these countries accounted for virtually the whole of global growth.

Third, in the countries in transition from central planning to market-based economic systems, where trade and payments have been liberalized, and where this has been accompanied by effective macroeconomic stabilization and by other reforms required for markets to work, positive results have become visible. In fact, positive output growth, led to a significant extent by exports, was recorded last year in a number of countries in Central and Eastern Europe, including Estonia, Hungary, and Poland among the countries represented here today. Impressive progress has also been made by a number of countries in transition in Asia, notably China, on the basis of outward-oriented strategies.

So the lessons of experience are clear. Nevertheless, over the last decade prior to the conclusion of the Uruguay Round, we have seen, especially in industrial countries, a proliferation of new nontariff barriers, including quotas and voluntary export restraints, as well as an increased tendency toward countervailing and antidumping measures. Regional initiatives have proliferated, and there has been a growing tendency to manage trade relations through unilateral and bilateral approaches. These trends have no doubt been encouraged by periods of weak growth, by persistently high unemployment in industrial countries, and by new competitive challenges arising from globalization and the dynamic trade performance of some developing countries. Unfortunately, we have been learning again that while defensive trade policies feed on economic weakness, economic weakness is exacerbated by the ensuing protection.

The eventual conclusion of the Uruguay Round was a testimony to the commitment of participating countries to check these protectionist trends and to strengthen the liberal trading order. During the next few days, you will discuss the agreements reached by, and the likely impact of, the Uruguay Round, as well as trade policy issues for the 1990s. Here, I would just mention a couple of points.

First, trade liberalization in any country needs to be supported by appropriate macroeconomic and other structural policies. Sound fiscal, monetary, and exchange rate policies can help ensure that a country’s balance of payments and reserves are sufficiently strong to withstand the short-term pressures that may arise as a result of liberalization. This point becomes increasingly important as capital markets are globalized, because the balance of payments position and the exchange rate can change dramatically within a short period of time, as a result of changes in foreign investors’ confidence. The recent financial crisis in Mexico is a case in point.

Among the structural policies that are complementary to freer trade, I would emphasize labor market policies. In many industrial countries where structural unemployment has grown to unacceptable levels over the past two decades, there is now greater recognition of the need to take action to improve labor market flexibility and to ensure that new jobs can replace old ones that inevitably will surrender to the forces of competition.

The second point I would like to make is that unilateral trade liberalization and regional trade agreements can realize their full benefits only in the context of a liberal, rule-based, multilateral trading system. As I mentioned earlier, many developing countries and economies in transition in recent years have benefited from unilateral trade liberalization. But these countries also need access to markets in other countries to ensure the success of their adjustment efforts, and this can be gained through multilateral agreements that remove protectionist measures. Similarly, regional trade agreements can provide their members with benefits through trade creation and the creation of new opportunities for economies of scale. There is also the serious risk, however, that they divert trade away from third countries by discriminating against them. A strong multilateral system is necessary to ensure that regional agreements remain outward-oriented and are consistent with and complementary to the objective of global free trade.

The conclusion of the Uruguay Round will lead to significant progress in many respects, but I would like to emphasize that many obstacles to free trade remain and new issues, such as labor standards and environmental considerations, are emerging that could affect the trading order. The Fund will be collaborating closely with the WTO to seek to ensure that appropriate policies are pursued at the national and global level to keep the world economy open and strong.