Chapter

I Overview

Author(s):
International Monetary Fund
Published Date:
January 1992
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This paper reviews recent developments and issues in trade and trade-related policies of the industrial. Eastern European, and developing countries, focusing primarily on the period since the most recent occasional paper prepared in 1988.1 The paper is organized as follows. Section I reviews the international economic environment and describes briefly the recent developments in trade policy. Section II describes recent trade trends in industrial and developing countries against which developments in trade policies are analyzed. Sections III, IV, and V review developments and issues in trade policy for the industrial, Eastern European, and developing countries, respectively. Section VI provides more detailed coverage of trade-related policies in the agricultural sector and surveys the empirical evidence on the costs of protection and the possible effects of trade liberalization in this sector. Section VII provides an overview of the issues that will be central to the trade policy discussions of the 1990s. Appendix I reviews activities of the General Agreement on Tariffs and Trade (GATT). Appendix II surveys the relationship between trade and competition policies. Appendix III discusses some of the methodological issues involved in measuring the incidence and effects of nontariff barriers, looks at estimates of the costs of protection in selected industrial sectors affected by nontariff barriers, and compares the results of researchers’ efforts to estimate the possible gains from multilateral trade liberalization.

Major Developments in Trade and Trade-Related Policies

Background to Developments

Following the 1981–82 recession, the 1980s witnessed a sustained expansion of output and trade and a further integration of the world economy. The decade was marked by a renewed focus on market principles as the means of achieving greater efficiency in resource use and higher economic growth. In industrial countries, the reorientation of policies was most apparent in steps taken to liberalize financial markets and foreign direct investment, privatize public enterprises, and deregulate services, particularly in the transportation and communication sectors. Among developing countries, a growing number recognized the merits of outward, market-oriented policies and took steps to liberalize their trade regimes and open their economies to international competition. There was also a renewed interest in regional integration as a spur to efficiency and an assurance of market access in a more competitive and uncertain world trading environment. These developments and the globalization of business strategies were reflected in a rapid expansion of foreign direct investment and a growing importance of services in international commerce.

By and large, the increased focus on market principles in industrial countries did not carry over to trade and industrial policies nor, most notable, to the agricultural sector. Despite strong growth performance in 1983–89, little progress was made in rolling back the protective barriers that had risen during the preceding recessionary period; protection persists in agriculture and declining sectors and has spread to newer “high-tech” areas (aerospace, electronics, biotechnology). In general, the western industrial countries have been slow to adjust to the fundamental changes in the structure of world production and trade, including the shift in comparative advantage toward developing countries in mature industries.

Against this background, developments in the multilateral trade system are a cause for concern. The Uruguay Round of trade negotiations was not concluded on schedule, owing in significant part to differences over the liberalization of agriculture. The extension of the Round, though essential to its successful conclusion, continues to postpone important reforms that would strengthen the multilateral trade system. In this uncertain trade environment, countries are tending increasingly to address their concerns in the context of bilateral and regional trade arrangements.

Industrial Countries

Since the Uruguay Round began in 1986, protectionist pressure has persisted despite the expansion of output and trade in the industrial countries. While restraint has been exercised during the trade negotiations, liberalizing measures have been limited, and the evidence suggests that little, if any, overall reduction in protection in industrial countries has occurred since the beginning of the Round, particularly with respect to exports from developing countries. A few countries have liberalized unilaterally on a most-favored-nation (MFN) basis, mainly in conjunction with a reorientation of domestic policies, but most other trade liberalization has been undertaken on a preferential basis in the context of regional, bilateral, or sectoral initiatives. Progress in addressing long-standing problems in agriculture and declining industries, such as textiles, clothing, steel, and shipbuilding, is linked to negotiations under way in multilateral forums; most countries have delayed liberalizing action pending the outcome of these negotiations.

Trade tensions remain high. Major sources of friction are the competitive subsidization of agriculture and industry, including through export credits. In agriculture, this has increased agricultural surpluses, depressed commodity prices on world markets, and weakened export prospects for efficient producers, some of whom are heavily indebted developing countries. In the second half of the 1980s, there was an unprecedented number of GATT disputes, many of which dealt with trade in agriculture (Appendix I). Other areas frequently contested relate to the use of subsidies (the Airbus controversy), where GATT rules are vague; antidumping practices (anticircumvention legislation); and rules of origin (European Community (EC) and U.S.-Canada Free Trade Agreement). A number of GATT panel decisions have not been implemented, and trade disputes are frequently settled bilaterally (the U.S.-Japan semiconductor agreement, EC-Japan automobile agreement, U.S.-Japan Structural Impediments Initiative) or unilaterally (the U.S. Export Enhancement Program, Section 301 of the 1974 U.S. Trade Act, as amended).

Industry

During the 1980s, industrial countries resorted increasingly to nontariff measures to protect trade-sensitive industries from foreign competition. The percentage of manufactured products affected by nontariff measures is estimated to have risen from 14 percent in 1981 to nearly 19 percent in 1990 and reflects primarily the increased reliance on voluntary export restraints (VERs) and antidumping and countervailing actions.2 The EC and the United States made the most frequent use of VERs to protect steel, textiles, automobiles, machine tools, and electronics. In addition to these, the coverage of the Multifiber Arrangement (MFA) has been progressively broadened since it replaced earlier arrangements in 1974 and, in July 1991, the MFA was extended without change through 1992 because of the delay in concluding the Uruguay Round.3 A substantial proportion of nontariff measures have been directed against Japan and the dynamic Asian economies.4

On the positive side, protectionist measures are being recognized as inefficient and costly. Apart from the Uruguay Round, multilateral efforts are progressing toward making steel and shipbuilding subject to stricter international rules on subsidies and gray-area measures.5 Domestic policies have been reoriented during the 1980s to strengthen market mechanisms and to achieve greater flexibility in output and factor markets.6 Trends toward rising subsidies have been contained and cut back in some countries (most notably in the United Kingdom and New Zealand), in part owing to budget constraints and, in the EC, to the closer scrutiny of state aids under EC competition policy, and government assistance is becoming less sector-specific. There is little evidence, however, that overall assistance to industry has declined with the shift in government support to more broadly based programs, such as research and development funding, support for small and medium-sized enterprises, and regional assistance. Moreover, increased reliance on non-tariff measures suggests that these measures are being used to “assist” industries.

Since the mid-1980s, Australia, New Zealand, and, to a lesser extent, Japan. Canada, and Sweden have liberalized unilaterally, thereby reducing the need to resort to quantitative restrictions and other nontariff measures and lowering tariffs. In regional arrangements, trade barriers have been eliminated or progressively reduced between Australia and New Zealand, the United States and Canada, the United States and Israel, and within the EC. There has been some improvement in the access of developing countries to industrial country markets through preferential trade arrangements under the Generalized System of Preferences (GSP), the Caribbean Basin Initiative, and Lomé IV. Eastern European countries have benefitted from the dismantling of selected import restrictions against their exports, the extension of MFN treatment and GSP privileges in some cases, and the relaxation of export restrictions imposed by the Coordinating Committee on Multilateral Export Controls (COCOM), but their potential exports of manufactures still face important barriers in textiles, clothing, steel, and coal.

Agriculture

The major industrial countries have made little progress in reforming their costly, trade-distorting agricultural support policies. The level of agricultural support increased sharply in 1986, when the Uruguay Round was launched and has remained high since then. During 1988–89, the total value of agricultural support declined owing mainly to rising world prices. In 1990, however, world market prices fell, reflecting good harvests, and total transfers to farmers rose to about $300 billion, equivalent to 2 percent of the gross domestic product (GDP) of the countries of the Organization for Economic Cooperation and Development (OECD), compared with 1.8 percent of GDP in 1989.7 In 1991, lower world prices are expected to continue, keeping support levels high, especially export subsidies. It is estimated that about 40 percent of support comes from government budgets; the remainder is paid by consumers through higher domestic prices maintained by trade barriers.8

Among the major industrial countries, the United States has been a strong proponent of agricultural reform in the context of the Uruguay Round and has taken an aggressive stance on domestic farm policy to pursue its objectives. Its 1990 Farm Bill reduced some of the production distortions resulting from farm programs, but it also removed the limit on the funding of the Export Enhancement Program (EEP) and included a “GATT trigger” that will further increase export subsidies if an agreement in the Uruguay Round is not reached by July 1992.9 Export support policies have helped raise the U.S. share in world agricultural exports and to lower world market prices, putting pressure on the EC farm budget, but the gain in U.S. market share has been largely at the expense of unsubsidized third-country exporters.

In response to budget constraints and economic changes in Europe, the EC is crafting a program to reform the Common Agricultural Policy (CAP). Substantive negotiations on reform of the CAP will need to address the level and form of agricultural supports, the implications of the European Economic Area (EEA), market access, and environmental effects. The negative response by some EC member countries to the EC Commission’s proposed reform plan, which would cut support prices significantly and introduce income supports with new set-aside rules favoring small farmers, suggests that negotiations could be protracted, with implications for the Uruguay Round. The EC views CAP reform as separate from the negotiations in the Round, but other countries believe that a fundamental change in the CAP, with the prospect of ongoing reforms, is essential to break the impasse in agriculture.

Japan has opened its market to imported beef, citrus products, and some minor agricultural products, but its agricultural sector remains highly protected. The level of agricultural support, though declining, is the highest among the major OECD countries. Unlike the case in other major trading countries, no discussion of fundamental agricultural reforms is under way in Japan, although some suggestions have been made that import access to a small share of the domestic rice market could be permitted.

Canada, Australia, and New Zealand are members of the Cairns Group, which has pressed for a substantial reduction in the most trade-distorting measures (import restrictions, domestic supports, and export subsidies).10 Recently, Canada introduced major changes to its agricultural policies that will replace the ad hoc measures used to shelter Canadian producers from world price fluctuations with a unified program of income protection. Australia and New Zealand now have the lowest support levels for agriculture of any of the OECD countries; however, their reforms have been undermined by low world prices stemming from other countries’ agricultural support policies and by restrictions on market access.

Among the countries of the European Free Trade Association (EFTA), Sweden initiated, in July 1991, a three-year agricultural reform program to phase out agricultural price supports and export subsidies; these will be replaced by direct income supports during a transition period. A general reduction of border protection has been deferred, pending the outcome of the Uruguay Round.

Developing Countries

At the start of the 1980s, the trade regimes of many developing countries were highly restrictive following decades of import-substitution policies with a strong anti-export bias. Exceptions were the export-oriented Asian economies, whose largely price-based trade regimes promoted exports while restricting imports of “nonessential” consumer goods, and a few Latin American countries that had eliminated quantitative restrictions in the 1970s. During the 1980s, developing countries increasingly turned away from inward-looking trade and industrial policies and sought to participate more fully in world markets. This process accelerated toward the end of the decade when many countries in Latin America and Eastern Europe took major steps to open up their economies. The redirection of policies reflected the emerging consensus that countries following an outward-oriented, market-based development strategy had achieved relatively higher rates of growth and living standards, while countries with heavily regulated economies that were closed to foreign competition had fallen further behind.

While countries have implemented reforms in different ways depending on their circumstances, there are some observable regional patterns. The dynamic Asian economies, which did not have heavily restricted regimes in the early 1980s, further liberalized by gradually opening up import-competing sectors when domestic producers became more competitive internationally; some countries with sustained external surpluses also faced international pressure to liberalize. The outward-oriented growth strategy followed by these countries helped to ensure that external competitiveness was maintained and, in general, this was supported by fiscal discipline. Government intervention in the economy has varied among countries in this group. Most countries have supported indirectly productive capital, such as education and infrastructure. Some have also actively supported export industries (through subsidies, credit policies, duty exemptions schemes, informal guidance, and other means) with mixed results.11

In contrast to the dynamic Asian economies, many countries in Latin America and Eastern Europe that had followed import-substitution policies and inward-looking regional development strategies have liberalized their trade regimes more quickly and extensively in order to expose inefficient domestic industries to international competition. The opening of their economies is playing an important role in both stabilization and the reallocation of resources to more efficient uses. Most often, reforms have been implemented in the face of large external and domestic imbalances and in environments where the forces of competition had been suppressed through government intervention in the enterprise sector (Latin America) or through centrally planned economic systems (Eastern Europe).

During 1990–91, many Latin American countries simplified their tariff structures and lifted virtually all quantitative restrictions on trade; in recent accessions to GATT many of these countries locked in these reforms by binding their entire tariff schedules in the GATT. In Eastern Europe, all countries are now moving to transform their economies to market-based systems, and the liberalization of their trade and payments systems forms an integral part of this process. While some countries have advanced further in reforming their economies than others, in the area of trade policy all have abolished the state monopoly of foreign trade, lifted most quantitative restrictions, and now rely mainly on low import tariffs for protection.

Moves to liberalize trade have been less extensive in Africa and South Asia, where many countries continue to maintain high levels of protection that impede their export growth and development. Nevertheless, dramatic changes have occurred in a number of African countries during the past five years. Important liberalizations (Côte d’Ivoire, The Gambia, Ghana, Kenya, Zaïre) have virtually eliminated quantitative restrictions including the allocation of foreign exchange. In South Asia, Sri Lanka has maintained an open trade regime since the late 1970s and has continued to liberalize during the 1980s. Pakistan has taken steps to decontrol its trade regime, and India is beginning to liberalize its restrictive trade and business practices.

Regional Developments and Initiatives

A striking feature of the 1980s was the renewed interest in regional integration and free trade areas among the major industrial countries.12 The launching in 1985 of the Single European Market Program (EC 1992) and the difficulty of starting and concluding the Uruguay Round have frequently been mentioned as important factors behind the recent trend toward regionalism. The initiation of EC 1992 was followed by the negotiation of the U.S.-Canada Free Trade Agreement, which went into effect January 1, 1989. More recently, in June 1990, formal negotiations started between the EC and EFTA toward the creation of a European Economic Area (EEA) by 1993. Three EFTA members, Austria, Finland, and Sweden, have applied for EC membership, and the former German Democratic Republic became part of the EC as a consequence of German unification. The EC has also negotiated Association Agreements with several Eastern European countries (Czechoslovakia, Hungary, and Poland) that would involve preferential access to the EC market.

In the Western Hemisphere, U.S. President Bush announced the Enterprise for the Americas Initiative (EAI) in June 1990. In the area of trade, the aims for EAI are to complete the Uruguay Round and reduce barriers to trade and investment in the Western Hemisphere; ultimately, the EAI envisions a hemispheric free trade area. In April 1991, the governments of the United States, Canada, and Mexico launched tripartite negotiations for a North American Free Trade Area (NAFTA).

While formal regional arrangements have figured less prominently in Asia, during the 1980s intraregional trade grew at a faster pace in Asia than in the EC and North America. This reflected the rapid development of the dynamic Asian economies, as well as the increasing division of labor and capital in the region as Japan and, more recently, Korea and Taiwan Province of China have moved production facilities to lower-wage countries unaffected by VERs. Although the size of Japan’s economy, its extensive network of foreign direct investment in Asia, and its prominent role as a provider of foreign aid have increased its economic interrelations in the region, Japan has avoided membership in any formal regional trade arrangement.

In response to these developments, there is renewed interest in reviving regional arrangements in Africa, the Asia-Pacific region, and Latin America, in part, for defensive reasons. The EEA and the NAFTA would create markets of nearly equivalent size; together they accounted for 65 percent of world imports and 47 percent of developing country exports in 1990; clearly, the stance of trade policies in these two regions is of vital interest to all nations.

The completion of EC 1992, the prospective enlargement of the EC, and the possible extension of trade preferences to Eastern European countries have all raised concerns among the EC’s trade partners. The EC 1992 program calls for removal of internal barriers to trade. The net impact of this on nonmember countries is an empirical question that depends on whether the trade diversion owing to the reduction in costs and prices arising from the removal of trade barriers within the EC would be outweighed by the positive dynamic effects on economic activity and import growth. For example, UNCTAD estimates that the overall net effect of EC 1992 on exports from developing countries could be positive if the dynamic effects increase EC income by at least 5 percent, an estimate that is in line with the income effects estimated by the EC Commission.13

In the area of trade policy, EC 1992 calls for the elimination of national trade restrictions maintained under Article 115 of the Treaty of Rome, which mainly affect trade-sensitive nonagricultural imports (Japanese automobiles, motorbikes and mopeds, consumer electronics, footwear, textiles, and clothing). It is uncertain whether or not the implementation of the EC 1992 program will increase protection in these and other areas, for example, by converting national restrictions to EC-wide restrictions.14 Another concern is that the enlargement of the EC will extend distortionary EC policies, particularly the CAP, to a wider group of countries and intensify distortions in world agricultural markets. These fears may be mitigated to some extent by the budgetary costs arising from the agricultural surpluses that would be involved in any expansion of CAP in its present form, and are a factor underlying the search for reforms of the CAP. Access to the EC market by third countries would also be impaired if trade preferences were extended to Eastern European countries in heavily protected areas, such as agriculture, steel, textiles, and clothing.

The NAFTA and the prospects of a free trade area in the Western Hemisphere have raised questions concerning the greater scope for trade diversion in regional arrangements involving developed and developing countries, which generally have higher levels of protection. Asian countries, in particular, are concerned that the proximity of Mexico to the U.S. market, together with its lower wages and preferential access, could divert U.S. imports toward Mexico. The eventual reduction in barriers to trade in the heavily protected industries, such as footwear, textiles, and garments, would give Mexico significant advantages over third-country suppliers.

Apart from issues of access and trade diversion, another major concern is the potential distortionary effects of large regional blocs on investment. One of Mexico’s primary aims in pursuing a free trade area with the United States is to attract foreign direct investment and the associated technology needed to foster development. Similarly, Canada’s full participation in the NAFTA reflects in large part the concern that the hub-and-spoke model of regional integration with the United States at the center would seriously undermine Canada’s ability to attract foreign investment.15 At a more general level, uncertainty of access to outsiders conveys clear advantages to being inside a regional bloc, either as a member or through foreign investment that is a substitute for trade. This is apparent from the number of countries seeking entry into the EC and closer ties with the United States.

Developments in the Multilateral Trade System

The GATT provides the multilateral framework that governs international trade and the principal forum for multilateral trade negotiations (MTNs). Two key principles, nondiscrimination and transparency, underlying the GATT system have been severely challenged by the widespread use of selective nontariff measures; the exemption of important sectors (agriculture, textiles, and clothing) from GATT rules; the de facto management of major portions of trade in other sectors (steel, automobiles, electronics) through the use of gray-area measures and procedural protection; extended delays in adopting and implementing dispute panel findings; and the drift toward unilateral, bilateral, and regional initiatives to solve trade problems. These developments stem from weaknesses inherent in the GATT system (vague rules, multiple dispute settlement forums, weak enforcement mechanisms, cumbersome trade negotiations), the inadequate adjustment to changed economic conditions in both industrial and developing countries, and new issues arising from the evolution of the world trading environment (globalization of investment and production and the growing importance of trade in services).

The Uruguay Round, under way since 1986, is trying to address the erosion of GATT disciplines, the need to modernize the GATT, and ways to improve market access and the functioning of the GATT system. Countries differ little in their views on the importance of the Uruguay Round. At the London economic summit in July 1991, the heads of state and government of the seven major industrial countries and the representatives of the European Community concluded in their Economic Declaration that “[n]o issue has more far-reaching implications for the future prospects of the world economy than the successful conclusion of the Uruguay Round.” They considered a successful Round “essential to encourage the integration of developing countries and Central and Eastern European nations into the multilateral trading system,” and they committed themselves to “an ambitious, global and balanced package of results from the Round, with the widest possible participation by both developed and developing countries.” To this end, progress was urgently needed in the areas of market access, agriculture, services, and intellectual property, “taken together.”16

The evolution of the world trade system depends importantly on whether the commitments made in the Economic Declaration can be translated into concrete steps to conclude the Uruguay Round and preserve an open multilateral trade system based on clear, enforceable rules. Extending the Round postpones important reforms that would facilitate adjustment and increase market access and delays the full integration of Eastern Europe into the global trading system. Perhaps more important is that extension erodes confidence in the GATT system and encourages the trend toward regional trade arrangements, which holds risks for the multilateral system and could harm many developing countries excluded from trading blocs.

Beyond the Uruguay Round, the world trade system faces new challenges in the 1990s. The globalization of trade and investment, while a positive development, has increased the scope for conflicts between trade and domestic competition policies and raised questions concerning the appropriateness of traditional trade policy instruments and GATT rules. Conflicts are also increasing in “strategic” sectors as countries seek to maintain a competitive edge through “innovation” policies, which aim to assist firms in developing and adapting new technologies to commercial uses. These developments are confronting governments with the need to harmonize domestic competition, investment, and innovation policies.17 Another growing concern is the use of trade policies to pursue nontrade objectives in areas such as the environment and workers’ rights. Agreed guidelines would help to differentiate between legitimate social objectives and protectionist motives. These issues are under discussion in various forums, including the OECD and the United Nations Conference on Environment and Development, and they are likely to be on the agenda of future GATT rounds.

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