Abstract

The dismantling of trade barriers among the industrial countries in the 1950s and 1960s contributed to a period of unprecedented world economic growth (Chart 23). In the 1970s and the 1980s, an increasing number of developing countries adopted outward-looking trade policies as part of a strategy of structural economic reform. Those countries that have succeeded in implementing these reforms have experienced a significant and durable improvement in economic performance. Most recently, the countries in transition in central Europe have liberalized their previously distorted trading regimes as an essential element of the process of transformation to market-based economies, and some progress has been made in several countries of the former Soviet Union. Trade in both industrial and developing countries has tended to become more regionalized, in part because of regional trade arrangements, which are discussed in detail in Annex III.

The dismantling of trade barriers among the industrial countries in the 1950s and 1960s contributed to a period of unprecedented world economic growth (Chart 23). In the 1970s and the 1980s, an increasing number of developing countries adopted outward-looking trade policies as part of a strategy of structural economic reform. Those countries that have succeeded in implementing these reforms have experienced a significant and durable improvement in economic performance. Most recently, the countries in transition in central Europe have liberalized their previously distorted trading regimes as an essential element of the process of transformation to market-based economies, and some progress has been made in several countries of the former Soviet Union. Trade in both industrial and developing countries has tended to become more regionalized, in part because of regional trade arrangements, which are discussed in detail in Annex III.

Chart 23.
Chart 23.

World Exports and Production of Goods1

(Annual percent change)

Source: General Agreement on Tariffs and Trade, International Trade, several issues.1Agriculture, mining, and manufacturing.

The outward-oriented strategies of many developing countries and the economies in transition contrast with the increasingly negative attitudes toward free trade in the very same countries that drew the largest benefits from earlier efforts at trade liberalization. The re-emergence of large external imbalances and rising levels of unemployment in the industrial countries have contributed to heightened protectionist pressures and have spurred a large and growing interest in managed trade and in strategic trade theories (Box 9). At the same time, the Uruguay Round remains deadlocked, and there is widespread resort to countervailing and antidumping measures and to “voluntary” export restraint agreements.60 A reversal of these developments is essential to improve the economic climate and to provide new impetus to world growth during the period ahead.

New Theories of Growth and Trade

Recent developments in growth theory have emphasized the potential growth-enhancing roles of physical and human capital accumulation and research and development, as well as the possibility of increasing returns to scale at the aggregate level.1 This literature contrasts with traditional growth models, in which capital accumulation raises the level of output but not its long-term growth rate. In traditional growth models, policies that stimulate saving and investment raise output growth only temporarily because each addition to the capital stock is assumed to generate diminishing amounts of extra output.2 The new growth theories assume either that investment does not have such diminishing returns or that some of the extra output is used in activities that directly increase the rate of technical change and economic growth.

The new growth theories predict that structural reforms such as trade liberalization could permanently increase economic growth under some circumstances. Lowering barriers to trade, for example, could affect economic growth through several mechanisms.3 First, closer economic links increase the transmission of technology, thereby reducing the duplication of research and development activities. Because knowledge is a public good, its accumulation increases the rate of technical progress. Second, the international integration of sectors characterized by increasing returns to scale raises output without requiring more inputs. Third, the opening of trade reduces price distortions, reallocating resources across sectors and increasing economic efficiency. The first two effects unambiguously raise economic growth; the third raises growth to the extent that greater efficiency frees resources for research and development, but it could also lower growth if the change in relative prices causes resources to shift out of research and development.

Recent developments in trade theory, by contrast, have focused on economies of scale at the firm or industry level and on market imperfections that generate excess economic profits. In principle, trade barriers could be used to shift these oligopolistic profits from foreign to domestic producers.4 Alternatively, economies of scale at the industry level may provide strategic advantage to the country that first provides protection in order to establish an industry ahead of its trade partners. Although these theories have been used to support policies of government intervention in international trade, the key characteristic of such policies is that one country gains at the expense of its trading partners. Beggar-thy-neighbor policies will not promote worldwide growth; instead, they will reduce growth by misallocating resources and by provoking retaliation and a shrinkage of world trade.

In any case, governments have not been very successful in picking winners—determining which industries to support—because this depends on details of production technology and market structure about which governments typically know little. Moreover, if specific industries are “winners” because of market imperfections, trade policies should not aim to exploit these imperfections; rather, structural policies should seek to correct them by increasing competition and by encouraging new entrants. Protecting the wrong industries, providing the wrong degree of protection, or accepting market imperfections reduces living standards, even from the narrow perspective of one country. The few studies that have investigated initiatives potentially consistent with the recommendations of the new trade theory—in the automobile, semiconductor, and commercial aircraft sectors5—suggest that even the unilateral gains have been modest at best. Perhaps the most important consideration, however, is that a policy of granting selective protection would almost certainly open the door to calls for more widespread intervention, diverting resources to socially unproductive, rent-seeking activity.

1 See Paul M. Romer, “Crazy Explanations for the Productivity Slowdown,” NBER Macroeconomics Annual (Cambridge, Massachusetts: National Bureau of Economic Research, 1987), pp. 163–210; Xavier Sala-i-Martin, “Lecture Notes on Economic Growth (I): Introduction to the Literature and Neoclassical Models,” NBER Working Paper 3563 (Cambridge, Massachusetts: National Bureau of Economic Research, December 1990); and Elhanan Helpman, “Endogenous Macroeconomic Growth Theory,” European Economic Review, Vol. 36 (April 1992), pp. 237–67.2 This is a consequence of the assumption of constant returns to scale to all inputs—usually labor and capital—at the aggregate level, and hence diminishing returns to capital.3 Paul M. Romer and Luis A. Rivera-Batiz, “International Trade with Endogenous Technological Change,” European Economic Review, Vol. 35 (May 1991), pp. 971–1004.4 See Robert E. Baldwin, “Are Economists’ Traditional Trade Policy Views Still Valid?” Journal of Economic Literature, Vol. 30 (June 1992), pp. 804–29; and Paul R. Krugman, “Is Free Trade Passe?” Journal of Economic Perspectives, Vol. 1 (Fall 1987), pp. 131–44.5 See, respectively, Avinash K. Dixit, “Optimal Trade and Industrial Policy for the Automobile Industry,” and Richard E. Baldwin and Paul R. Krugman, “Market Access and International Competition: A Simulation Study of 16K Random Access Memories,” both in Empirical Methods for International Trade, edited by Robert C. Feenstra (Cambridge, Massachusetts: MIT Press, 1988); and Richard E. Baldwin and Paul R. Krugman, “Industrial Policy and International Competition in Wide-Bodied Jet Aircraft,” Trade Policy Issues and Empirical Analysis, edited by Robert E. Baldwin (Chicago: University of Chicago Press, 1988).

Trade and Growth in Industrial Countries

From 1950 to the early 1970s the industrial economies experienced unusually high productivity and real output growth, both by historical standards and by comparison with the two decades that followed.61 Trade also grew rapidly as the industrial economies became more closely integrated (Table 18). Those economies that recorded high rates of output growth also tended to experience large increases in trade growth. The links between trade and economic growth are complex and run in both directions, and this extraordinary performance must therefore be attributed to several factors. In particular, the reconstruction from World War II and reductions in the cost of transportation and communication fostered both growth and international trade.

Table 18.

Industrial Countries: Export Volume

(Annual percent change)

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Source: IMF, International Financial Statistics.

Aggregate excludes Portugal for 1951–60, 1961–70, and 1971–80.

1952–60.

1954–60.

1984–90.

The key policy initiatives, however, were the cuts in tariffs and nontariff barriers from the very high levels of the interwar period, and a widespread move toward currency convertibility for current account transactions. Successive rounds of multilateral trade negotiations reduced average tariffs for manufactured goods among industrial countries from about 40 percent in the late 1940s to as low as 5 percent after the Tokyo Round in 1979. These cuts were front-loaded, in the sense that particularly large reductions took place in the Geneva Round in 1947 and the Annecy Round in 1949. By 1961, after the Dillon Round, the average tariff for manufactured imports into the United States was only one-fifth of its prewar level, or just over 10 percent.62

Since the early 1970s, trend productivity and output growth have slowed significantly in the industrial countries, as has the growth of trade. The large tariff reductions undertaken during the 1950s may have had their main impact in the 1950s and 1960s and, therefore, provided less impetus to trade and growth in the period that followed.63 The rise in nontariff barriers in the 1970s and 1980s may also have played a part. Moreover, the output share of services, many of which are nontradable or are subject to trade barriers, has increased at the expense of manufactures. In contrast, even closer economic integration was fostered within Europe by the development of the European Community. Recent studies suggest that European integration has continued to contribute to productivity growth during the past two decades, although the impact has diminished over time, and that the single market project will further boost growth during the 1990s (see Annex III).64

The multilateral trade system has served the industrial economies well by greatly reducing barriers to trade in manufactured goods and by promoting a period of virtually unprecedented economic growth. Recently, however, these gains have been threatened by the resurgence of nontariff barriers, such as voluntary export restraints, quotas, import licensing, and state support for industry. If these nontariff barriers can be reduced and a return to tariff protection avoided, the achievements of the past four decades will be secured. Further growth through trade, however, now requires the expansion of free trade principles to include the agricultural, textile, and service sectors, and to encompass all trade with the developing countries and the countries in transition.

Outward-Oriented Growth Strategies in Developing Countries

As discussed in Chapter IV, an increasing number of developing countries have adopted outwardoriented economic policies. A basic feature of an outward-oriented strategy is that trade and industrial policies do not discriminate between production for the domestic market and exports, or between purchases of domestic and foreign goods. This approach explains the successful export performance and increased pace of economic development of many developing countries. From 1960 to 1990, exports of non-oil developing countries increased more than five times, broadly similar to the increase observed in industrial country exports (Table 19). In contrast to the industrial countries, the developing countries have registered the strongest growth in export volume since the mid-1970s. In value terms, however, the non-oil developing countries’ share of world exports changed little, because volume changes were offset by shifts in the terms of trade.65

Table 19.

Industrial and Developing Countries: Export Volume Growth

(In percent)

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Source: United Nations, Monthly Bulletin of Statistics.

The expansion of trade by the developing countries was accompanied by an increased importance of trade and direct foreign investment among them. The share of developing country nonfuel exports going to other developing countries rose from 19 percent in 1960 to 26 percent in 1975 and then jumped to 35 percent in 1990 (Table 20). This increase reflected higher demand growth in developing countries than in the industrial countries and a sharp increase in intraregional distribution of labor and direct investment among the developing countries, especially in Asia. The decreased dependence on industrial country export markets, together with the adoption of appropriate macroeconomic policies in many developing countries, has contributed to the resilience of growth in the developing countries during the recent downturn in the industrial countries.

Table 20.

Developing Countries: Destination and Source of Exports

(In percent of total)

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Source: United Nations, Monthly Bulletin of Statistics; and IMF, Direction of Trade Statistics.

Four newly industrializing economies. Data before 1970 exclude Singapore; data for 1970–80 include estimates for Taiwan Province of China.

The composition of developing countries’ exports has also changed substantially. Their exports of manufactures increased twenty fold from 1960 to 1990, and the share of manufactured goods in total nonfuel exports of the developing countries rose from 15 percent to 68 percent (Chart 24). By comparison, nonfuel primary exports only doubled over this period. The shift toward manufactures was spurred by weak demand and deteriorating terms of trade for commodities, but the main factor was the rapid integration of many developing countries into the world trading system in the 1970s and 1980s. The growing importance of developing countries in world trade has, however, largely been concentrated in Asia, where output growth has also been the highest. The share of all exports of developing countries originating in the developing countries of Asia rose from 29 percent in 1960 to 56 percent in 1990, and the share of nonfuel exports expanded even faster (see Table 20).

Chart 24.
Chart 24.

Developing Countries: Share of Manufactured Goods in Nonfuel Exports

(In percent)

Source: United Nations, Monthly Bulletin of Statistics.

The outward-oriented strategy—lowering trade barriers, removing disincentives to exports, and implementing currency convertibility—pursued by many, but by no means all, countries has promoted more efficient use of resources, the gains from which go well beyond those suggested by standard analyses of resource allocation and economies of scale. Dismantling the administrative systems associated with import licenses, selective credit policies, and foreign exchange controls redirects the energies of entrepreneurs away from unproductive rent-seeking activities toward the production of marketable goods. Because exporting firms have a clear incentive to keep up with modern technology and to improve management, they benefit from the transfer of technology and from the exposure to foreign know-how. The outward-oriented strategy also encourages the adoption of sustainable and prudent macroeconomic policies to ensure a stable domestic environment that safeguards external competitiveness and encourages domestic saving. Taken together, these benefits of liberalized trade raise the returns to productive investment, including foreign direct investment, which reduces reliance on debtcreating capital inflows.

The benefits of an outward-oriented strategy in terms of macroeconomic performance are clear (Table 21).66 The performance of the outwardoriented economies has been clearly superior to that of the inward-oriented economies, where tariff and nontariff barriers have been high and there has been a bias against exports in favor of import substitution. Although not all differences can be fully attributed to trade policy, growth rates of GDP per capita show a descending pattern from the strongly outward-oriented to the strongly inward-oriented economies; similar marked differences are seen in saving and investment rates; the variation in incremental capital-output ratios, which may reflect efficiency in the use of capital, suggests that investments have been more productive in the outwardoriented economies; and differences in the growth of total factor productivity, which measures the efficiency of both capital and labor inputs, also testify to the benefits of outward-oriented strategies.

Table 21.

Developing Countries: Trade Orientation and Economic Performance

(Annual percent change unless otherwise noted)

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Note: Developing countries are classified into four categories according to the orientation of their trade strategy during the past two decades: (1) strongly outward-oriented, where trade controls are either nonexistent or very low; (2) moderately outward-oriented, where the average rate of effective protection for the home market is relatively low and the range of effective protection rates relatively narrow; (3) moderately inward-oriented, where the overall incentive structure favors production for the domestic market; and (4) strongly inwardoriented, where the overall incentive structure strongly favors production for the domestic market.

Importance of Trade for Countries in Transition

Nowhere are the costs of rigid trade restrictions and isolation from the competitive forces of world markets more apparent than in the former centrally planned economies. Decades of central planning, including managed trade, resulted in unproductive investments and an obsolete capital stock. In recognition of the need to restructure their economies, the countries of central Europe have made early liberalization of the trade and exchange system a major component of their efforts to adopt market principles. Fundamental reforms have been undertaken in Hungary, the former Czechoslovakia, Poland, Bulgaria, and Romania to eliminate state monopolies on foreign trade operations, reduce quantitative import restrictions, and modify the structure of tariffs. All these countries have also unified their exchange rates and established current account (but not capital account) convertibility. More limited reforms have been carried out in the countries of the former Soviet Union and, at the same time, trade and payments relations within the former Soviet Union have deteriorated sharply. Although some of these countries have begun to liberalize their trade and payments systems, trade continues to be distorted by export restrictions, price controls, lack of currency convertibility, settlement problems, Russia’s “centralized exports” scheme, and other impediments.

The collapse of central planning was accompanied by a sharp decline in trade among the former members of the CMEA. Within central Europe, this decline has been especially severe for Romania and Bulgaria, although there has also been a significant drop in trade among Poland, Hungary, and the former Czechoslovakia. The contraction of trade between central Europe and the former Soviet Union has been even more pronounced, with recent estimates suggesting a cumulative decline of 60–70 percent in 1990–92.67 The causes of this steep fall—the breakdown of the command system, the switch to world market pricing, and the change in the CMEA settlement system—are well known and have been discussed in previous issues of the World Economic Outlook. The recent worsening of the disruptions in production and interregional economic relations in the former Soviet Union has been aggravated by reductions in the supply of energy and raw materials for export, which have in turn depressed demand for imports from central Europe.

A significant amount of CMEA trade had been an artifact of the planning system, and the reorientation of trade has been a necessary prerequisite to ending the artificial isolation of these economies from world markets. New patterns of trade, involving closer integration with market economies, are already emerging, and estimates point to increases in export volumes in 1992 of between 10 and 20 percent for Hungary, Poland, the former Czechoslovakia, and Bulgaria. This performance is remarkable against the background of depressed domestic demand in the industrial countries, and it demonstrates the importance of reduced trade barriers and the ability of firms in the central European countries to respond to new opportunities. In contrast, exports from Romania and Albania have continued to decline, in part because of severe input shortages.

The liberalization of international trade and the early exposure to world markets have played a key role in those economies of central Europe that have made the most progress. Trade liberalization has helped to establish a rational set of relative prices and has introduced competition in monopolistic sectors. Access to imports from industrial countries has provided much-needed investment goods, although foreign direct investment has lagged behind initial expectations. Export earnings have eased financing constraints, and the expansion of exports has also been an important factor in attracting foreign investment.

Much of the expansion of trade has been with the EC, in part because of the improved access to EC markets for some central European countries resulting from the bilateral Association Agreements (also called Europe Agreements) between the EC and Bulgaria, the former Czechoslovakia, Hungary, and Poland.68 These agreements envisage the eventual elimination of trade barriers on many goods, although separate provisions deal with textiles, steel, and agricultural products. For these goods, the lowering of trade barriers will be more gradual, and safeguard clauses and antidumping measures have been retained by the EC. The EC Commission has recently begun to explore a free trade agreement with Russia. The former Czechoslovakia, Poland, and Romania signed free trade agreements with the European Free Trade Association (EFTA) in 1992, while negotiations between Hungary and EFTA are still taking place. Central European countries that had been GATT members are in the process of negotiating the same obligations and advantages accorded to market economies.

A sustained effort by the industrial countries to open their markets to imports from the countries in transition will be crucial to the success and speed of the economic transformation now under way. The recent antidumping measures imposed by the EC and the United States are, therefore, a matter of concern.69 Such measures also increase the risk that trade barriers will be raised in the reforming countries. As domestic demand in these countries picks up, trade imbalances may appear, and it will be necessary to resist protectionist pressures. Although closer economic relations with the market economies will be important, trade opportunities within the region of the former CMEA—including those between central Europe and the former Soviet Union—should not be neglected, and the bilateral preferences granted by the EC and EFTA should not be allowed to unduly divert trade from former CMEA partners. The recent agreement between Poland, Hungary, the Czech Republic, and the Slovak Republic to establish a free trade zone by the end of the decade is an important step in this regard.

Extensions of the GATT Process

The sweeping reductions in trade barriers in the past four decades under the auspices of the GATT have left the important agricultural, textile, and service sectors largely outside the system of multilateral, nondiscriminatory agreements on tariffs. Moreover, protection of intellectual property varies considerably from country to country. The Uruguay Round has sought to broaden the multilateral trade liberalization process by including these areas, although the sensitive issues raised in relation to these sectors have made the negotiations difficult.

Most industrial countries have put in place complex policies to protect agriculture, the economic impact of which has been quantified by the OECD and others in calculations of producer subsidy equivalents (PSEs), a standardized measure of the degree of agricultural protection. By this measure, support for agriculture is considerable, with an average subsidy of roughly 45 percent of the domestic price, or the equivalent of $170 billion annually during 1990–91 (Table 22). In contrast, there is relatively little protection for agriculture in many developing countries.70 Although PSEs are not widely available for developing countries, estimates by the U.S. Department of Agriculture for a small group of large developing countries Argentina, Brazil, China, India, and Mexicoindicate levels of protection in 1985–88 that are generally low, typically less than 3 percent of the domestic price for most agricultural products.

Table 22.

Industrial Countries: Agricultural Producer Subsidy Equivalents1

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Sources: OECD, Agricultural Policies, Markets and Trade: Monitoring and Outlook (Paris, several issues).

For each country, the first row is the producer subsidy equivalent (PSE) in billions of U.S. dollars. The second row is the PSE expressed as a percentage of the value of agricultural production, inclusive of the PSE.

Estimate.

Preliminary.

The economic effects of the high levels of agricultural protection characteristic of the industrial countries are twofold. First, these policies distort production, employment, and consumption, thereby lowering real incomes. According to one estimate, eliminating agricultural support in the OECD countries from levels prevailing in 1988 would raise real incomes in the region by $72 billion in 1988 dollars (or by 1 percent of GDP in the OECD).71 Second, despite a shift in patterns of trade and production toward manufactured goods, many developing countries—especially those in the Western Hemisphere and Africa—remain dependent on agriculture. Liberalizing agricultural trade would, therefore, substantially increase the welfare of the developing world, although there is concern that higher world food prices would raise import costs. Multilateral liberalization would have a much larger impact in this region than would a reduction of agricultural support by the developing countries alone, in view of the relatively high levels of protection in the industrial countries.72

Managed trade of textiles and clothing was broadened significantly with the negotiation of the first Multifiber Arrangement (MFA) in 1974. The MFA is a web of bilateral agreements establishing country-specific import quotas that, contrary to the principles established by the GATT for other traded goods, discriminate extensively among countries. As in the case of agriculture, it is the developing countries that have the most to gain from a liberalization of textile trade, although some countries now benefit from the system of preferential agreements. The industrial countries would also benefit from lower prices and the rationalization of resources. Proposals currently under discussion envisage phasing out the MFA in the course of ten years, although in view of the inconclusiveness of the Uruguay Round it was decided to extend the current arrangement to end-1993.

International trade in services, although less distorted than agricultural and textile trade, is now under discussion in the Uruguay Round. In particular, it is proposed that an agreement on trade in services incorporate most favored nation treatment. Services trade raises issues that are distinct from those in trade in goods, largely because trade in services often does not require the cross-border shipment of a product, but rather movement of service providers or receivers. As a result, the barriers to trade have not mainly been tariffs, but regulations and an array of nontariff barriers. Although some regulations may not be intended to discriminate against foreign providers, they nevertheless hinder trade. Other barriers, however, are specifically designed to restrict international competition in services.

The subtle nature of these restrictions has complicated efforts to liberalize trade in services. The problems are compounded by a divergence of views between industrial and developing countries about what should be included in the definition of services. In general, developing countries prefer to limit the negotiations to cross-border movements of services and to factors of production specifically necessary for the provision of such services. Industrial countries argue, in contrast, that this would leave out services that require foreign direct investment and the right of establishment in the recipient country, which are important to compete effectively with domestic service providers. Initial commitments on services are still to be undertaken by Uruguay Round participants, so the outcome is still far from settled. The objective of integrating services into the GATT is, nevertheless, a positive development.

Another area that is now receiving attention is intellectual property. Without legal protection, the producers of inventions may lose royalties, which could undermine the incentive to carry out research. As trade in the products of research has grown, and as the importance of research and development in the growth process has become more widely recognized (see Box 9), the international extension of patent and copyright protection has taken on greater importance. In this case, as with other services, there is a conflict between the interests of the industrial, or “technology-exporting” countries, which seek relatively high levels of protection for intellectual property rights, and the developing, or “technologyimporting” countries, which are concerned that too much protection could give rise to excessive monopoly power, leading to higher prices for certain goods.

The outcome of the Uruguay Round remains in considerable doubt because the major trading powers—the United States, the EC, and Japan—as well as other participants have yet to come to full agreement. It now appears likely, however, that in many respects the Round will achieve less than had originally been hoped. The agreement on agriculture, for example, seems likely to fall far short of the goal of trade liberalization. Nevertheless, as was the case with manufactured goods after World War II, bringing agricultural and service trade into the GATT process would result in a formal, multilateral mechanism that might permit further reductions in trade distortions over time.

Trade Liberalization as a Strategy for World Growth

Although the links between trade and growth are complex, empirical evidence indicates a close relationship.73 An important way in which lower barriers to trade and access to world markets raise incomes is by promoting productive activity, increasing competition, stimulating foreign and domestic investment, and facilitating the exploitation of economies of scale and the transmission of technology and best-practice techniques. These mechanisms yield more than just “static” gains; they also promote dynamism by encouraging firms to adjust rapidly to changing circumstances in order to remain efficient and technologically competitive. Although specific enterprises or industries might suffer, at least initially, when exposed to world competition, all countries benefit from trade liberalization as they exploit more fully their comparative advantages. For these reasons, the mercantilist metaphors of “trade wars” and “sporting competitions,” with the implication that a country either loses or wins, are inappropriate. Similarly, the elevation of bilateral trade balances to the status of policy goals is misguided. Trade is not a zero-sum game; trade liberalization benefits all countries.

Despite the significant benefits in terms of economic growth that the rapid expansion of trade has brought to many countries, further advances now seem threatened, and there is a risk that the recent increases in trade barriers will accelerate. It has proved difficult to extend the multilateral, nondiscriminatory trade rules that have been negotiated for trade in manufactured goods under the GATT to other sectors, such as agriculture, textiles, and services. The industrial countries have increasingly resorted to countervailing and antidumping duties and to nontariff barriers. This has gone hand in hand with a focus on bilateral trade balances—sometimes even in specific sectors—and a heightened interest in managed trade, often in the context of regional trading blocs (see Annex III).

These developments have emerged against a backdrop of macroeconomic imbalances, including persistent current account imbalances, recessions or periods of slow growth, and historically high unemployment in Europe. In the near term, larger surpluses in Japan and larger deficits in the United States and Europe—in the latter case accompanied by increased unemployment—risk leading to still greater pressures to restrict trade.

In contrast to the significant trade liberalizations undertaken by many developing countries, tariffs and quantitative restrictions abound in others. These countries, which have much to gain from world trade, have a growing responsibility to open their markets further, both to each other and to the industrial countries. Those developing countries with sizable, sustained surpluses need to be aware of the reactions these can produce in their trading partners and need to implement both structural and macroeconomic policies to reduce these imbalances.

The multilateral trading system is particularly critical for the countries in transition. Granting access to their markets is probably the single most important way that the industrial countries can help to ensure that the countries in transition successfully manage the difficult process of restructuring and transformation. Impeding access to world markets could have severe consequences for these countries and for the rest of the world, at a minimum hindering the transition process, leading directly to a need for potentially much larger amounts of direct financial aid for both stabilization and structural reform.

It is crucial that the Uruguay Round of multilateral trade negotiations be successfully concluded. This would confirm and reinforce the longstanding commitment to the principles of free and nondiscriminatory trade. By further reducing trade barriers and by extending the GATT process to nonmanufactures, completion of the Round would also raise economic prosperity. Although quantitative estimates of the gains are necessarily uncertain, recent studies suggest that completing even the partial liberalization now envisaged would raise annual world real income permanently by $120 billion to $200 billion.74 The failure of the Round, in contrast, could roll back gains already made—notably reforms to dispute settlement—as well as raise pressures for protectionism and discourage the growing movement toward liberalization in the developing countries. The macroeconomic imbalances that could give rise to protectionism must also be addressed, in many cases by reducing excessive government budget deficits and raising national saving. By demonstrating the willingness of the major industrial countries to cooperate in solving common problems, such efforts would bolster confidence and provide a new spur to activity, in both the industrial and developing countries, and would provide an environment conducive to successful economic restructuring in the countries in transition.

60

For detailed analyses of trade policy developments in the 1980s, see Shailendra J. Anjaria, Naheed Kirmani, and Arne B. Petersen, Trade Policy Issues and Developments, Occasional Paper 38 (IMF, July 1985); and Margaret Kelly and Anne Kenny McGuirk, Issues and Developments in International Trade Policy, World Economic and Financial Survey (IMF, August 1992).

61

See Angus Maddison, The World Economy in the 20th Century (Paris: OECD, 1989), for extensive evidence on long-term growth trends in industrial economies.

62

For a discussion of the GATT process see J.M. Finger, “Trade Liberalization: A Public Choice Perspective,” in Challenges to a Liberal International Economic Order, edited by Ryan C. Amacher, Gottfried Haberler, and Thomas D. Willett (Washington: American Enterprise Institute for Public Policy Research, 1979).

63

See Charles Adams, Paul R. Fenton, and Flemming Larsen, “Potential Output in Major Industrial Countries,” Staff Studies for the World Economic Outlook (IMF, August 1987), pp. 1–38.

64

See Richard Baldwin, “The Growth Effects of 1992,” Economic Policy, Vol. 4 (October 1989), pp. 247–81; David T. Coe and Thomas Krueger, “Why Is Unemployment So High at Full Capacity? The Persistence of Unemployment, the Natural Rate, and Potential Output in the Federal Republic of Germany,” IMF Working Paper 90/101 (October 1990); and David T. Coe and Reza Moghadam, “Capital and Trade as Engines of Growth in France: An Application of Johansen’s Cointegration Methodology,” IMF Working Paper 93/11 (February 1993).

65

The terms of trade of the developing countries for their nonfuel exports rose by 11 percent between 1960 and 1975 but then declined by 20 percent between 1975 and 1990, leaving these countries’ share of world exports unchanged at slightly more than one-fifth.

66

Table 21 extends the analysis of 40 developing countries contained in the World Bank’s World Development Report 1987, Chapter 5 (New York: Oxford University Press, 1987), from which the classification of countries for the period 1973-85 is taken. This classification was extended to cover the 198592 period using IMF data. The analysis here is complementary to the one presented in the October 1992 World Economic Outlook (Chapter IV), which examined the role of structural reforms, including trade liberalization, in the successfully adjusting developing countries.

67

Economic Commission for Europe, Economic Bulletin for Europe, Vol. 44, Table 2.1.1 (November 1992).

68

These agreements, which cover a broad range of economic relations between the contracting parties, were signed at the end of 1991 and contain trade provisions that entered into force in March 1992 except for Bulgaria, which signed its agreement in March 1993. The arrangements provide for a move to free trade between the EC and each of the contracting countries, with tariffs and quotas for a number of goods being eliminated immediately and a timetable covering the next ten years being established for other products.

69

In 1992 the EC imposed antidumping duties on steel products from Hungary, Poland, the former Czechoslovakia, and Croatia. In early 1993, the United States imposed preliminary antidumping duties on steel imports from Poland and Romania.

70

See Anne O. Krueger, Maurice Schiff, and Antonio Valdes, “Agricultural Incentives in Developing Countries: Measuring the Effect of Sectoral and Economywide Policies,” World Bank Economic Review, Vol. 2 (September 1988), pp. 255–71.

71

John P. Martin, Jean-Marc Burniaux, Francois Delorme, Ian Lienert, and Dominique van der Mensbrugghe, “Economy-wide Effects of Agricultural Policies in OECD Countries: Simulation Results with WALRAS,” in OECD Economic Studies, Vol. 13 (Paris: OECD, 1989–90). Although a 1 percent gain seems small, it is worth recalling that agriculture accounts for only 3 percent of output.

72

Rod Tyers and Kym Andersen, Disarray in World Food Markets: A Quantitative Assessment (Cambridge and New York: Cambridge University Press, 1992); and Barry Krissoff, John Sullivan, and John Wainio, “Developing Countries in an Open Economy: The Case of Agriculture,” in Agricultural Trade Liberalization: Implications for Developing Countries, edited by Ian Goldin and Odin Knudsen (Paris: OECD Development Centre, 1990).

73

For econometric evidence on the relation between trade restrictions and growth, see Malcolm Knight, Norman Loayza, and Delano Villanueva, “Testing the Neoclassical Theory of Economic Growth: A Panel Data Approach,” IMF Working Paper 92/106 (December 1992).

74

See Ian Goldin and Dominique van der Mensbrugghe, “Trade Liberalization: What’s at Stake,” OECD Development Centre Policy Brief No. 5 (Paris: OECD, 1992); and Trien T. Nguyen, Carlo Perroni, and Randall M. Wigle, “The Value of a Uruguay Round Success,” World Economy, Vol. 14 (December 1991), pp. 359–74. The second study estimates the benefit of more complete liberalization to be twice that from partial liberalization.