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Ms. Kirmani, Assistant Chief in the Trade and Payments Division of the Exchange and Trade Relations Department, is a graduate of the University of Maryland.
Mr. Molajoni, economist in the Trade and Payments Division of the Exchange and Trade Relations Department, is a graduate of the University of California, Berkeley.
Mr. Mayer, economist in the Eastern European Division of the European Department, was in the Exchange and Trade Relations Department when this paper was prepared. He is a graduate of the University of Konstanz and of the University of Kiel in the Federal Republic of Germany.
The importing countries are the United States, the European Community (EC), Japan, and Canada. The seven sectors considered are meat, cereals, sugar, textiles, clothing, footwear, and iron and steel. The developing countries considered are Argentina, Brazil, India, Kenya, the Republic of Korea, Mexico, Pakistan, the Philippines, Turkey, and Yugoslavia.
Calculated from OECD and United Nations statistics. These ratios have important implications for the overall results, as discussed in a later section, but the main criterion in selecting the developing countries of the sample was representation of the various geographical regions (three are in the Western Hemisphere, three in Asia, two in Europe, one in the Middle East, and one in Africa), rather than the structure of the countries’ exports.
The studies cited above assume constant returns to scale and competitive market structures and, hence, disregard the effects of trade liberalization on economic efficiency. Furthermore, it can be argued that the foreign demand elasticities for the exports of developing countries are unrealistically low. Accordingly, the results of these studies have to be qualified.
The studies mentioned above use static frameworks for their analyses. Easton and Grubel (1982) have pointed out that, in a dynamic framework, the costs of protection are likely to grow at the rate at which international trade expands because protection impedes exploitation of the opportunity for gains from trade, such as economies of scale and intra-industry trade, which grow at that rate. They concluded that the welfare costs of protection, as measured in the economic literature, have tended to be substantially underestimated.
Ideally, global demand and supply models for the selected sectors would be needed that would take into account all the producing and consuming countries, as well as interlinkages between the sectors. There are, however, many conceptual and empirical problems associated with the multicountry, multisectoral approach. Hence, for the purpose of this illustrative exercise, a simpler framework was adopted in which the available parameters could be used.
In the case of certain nontariff barriers (for example, voluntary export restraints), however, it is possible that part of the difference between 0Qd x 0PD and 0Qd x 0Pw accrued before liberalization to the exporter in the form of a rent. If this is so, gains to the exporter as a result of trade liberalization are somewhat less than assumed in the above model.
The higher the degree of substitutability, other things being equal, the greater would be both the shift in demand from the domestically produced to the imported commodity and the reallocation among imported commodities from different sources induced by trade liberalization. This relation, however, may depend on the time frame considered. In the short run, less competitive industries may respond by reducing profit margins and by expanding production in an attempt to maintain market shares. Over the medium term, however, resources would tend to shift out of these industries, or producers would introduce greater product differentiation.
See Food and Agriculture Organization (1980), Koester (1982), Anjaria and others (1982), U.S. Department of Agriculture (1981), Commonwealth Secretariat (1982). For a discussion of the limitations of this approach, see Anjaria and others (1982, p. 36).
Following Yeats (1979), estimates for France were used as indicators for the EC in the textile, clothing, and steel industries.
Morici and Megna (1983) give an assessment of U.S. trade policies implemented in the last ten years and provide estimates of the protection afforded by nontariff restrictions in several industries. For textiles and apparel, the authors calculated the reduction of imports induced by the 1974 Multifiber Agreement (MFA), and estimated the tariff equivalent of the MFA at 8.8 percent (p. 23). From this finding, Morici and Megna concluded that the protection provided to the U.S. clothing industry by nontariff barriers was around 8.8 percent in 1976 (p. 100). Yeats, however, estimated the tariff equivalent of nontariff barriers for the U.S. clothing industry at 40 percent in 1973. The estimate by Morici and Megna seems to reflect (and is used here as) additional protection by the MFA for the U.S. clothing industry, rather than the actual height of nontariff trade barriers in 1976.
The increases in imports derive from all sources and not only from the sample exporting countries. Of course, under the assumption of zero elasticity of export supply, import volumes would not increase.
In calculation of the increase in total exports, both the exports of the non-liberalized sectors and the exports of the liberalized sectors to the nonliberalizing markets were held constant.
Given the occasionally doubtful information on tariff equivalents of non-tariff barriers in Canada, another calculation was performed on the assumption of no change in Canadian rates of protection. The total increases in exports attributable to trade liberalization in the remaining three markets was 8.8 percent for the sample of developing countries under the assumption of infinite export supply.