SOUTH'S LIBERALIZATION ENDANGERED BY NORTH'S NON-RESPONSE

6:02 AM Nov 5, 1993

SOUTH'S LIBERALIZATION ENDANGERED BY NORTH'S NON-RESPONSE
Geneva 5 Nov (Chakravarthi Raghavan) -- The increasing trade liberalization and openness of developing countries, if unaccompanied by reciprocal trade liberalization by the developed countries, could immiserize growth in the developing world and endanger the sustainability and political viability of their trade liberalization policies.

This warning, by two leading trade policy experts from the South, Manuel Agosin and Diana Tussie, is in their overview chapter of the just published book "Trade and Growth: New Dilemmas in Trade Policy".

Published by St. Martin's Press, the book, edited by Agosin and Tussie, contains chapters by various authors on the position of developing countries in the international trading system. new approaches and policy options, and country studies in trade policy reform of South Korea, Turkey, Chile, Argentina and Mexico.

Agosin, who was till recently a senior economist in the UNCTAD's Trade Policy division is now Professor of Economics at the University of Chile. Diana Tussie is Senior Fellow at Facultad Latinoamericana de Ciencias Sociales (FLASCO) in Buenos Aires.

Developing countries, the two authors note, have become the vanguard of trade liberalization and upholders of 'free trade'. But the greatest obstacle to their full integration into the trading system rests on the "very inadequate market access" enjoyed by them in the industrialized countries.

And if developed countries are serious about bringing developing countries into the system as full partners, they should show their good faith by eliminating the asymmetry that exists between their demands on developing countries and what they are willing to offer them in terms of market access, Agosin and Tussie add in their overview chapter.

They note that the fundamental change of direction towards more openness in a growing number of developing countries was taking place against an international context where they are under increasing pressure "to tie their hands" with respect to traditional tools of trade policy and accept new disciplines in an ever-widening number of areas.

At the same the developed countries have shown themselves loth to grant developing countries the significantly enhanced market access on which successful outward growth depends.

Some of the new trade theories and experiences of individual countries with trade policy reform however suggest that strong government guidance of the economy and retention of incentive selectivity are more likely to induce outward-oriented growth than passive government policies, Agosin and Tussie point out.

In the past the great majority of developing countries had restrictive import regimes and relied heavily on government intervention in trade. But they have now shifted to more orthodox trade policies, and increasingly prone to reduce and even abandon their former defensive style and are showing a widespread willingness to accept fuller GATT disciplines unilaterally.

A growing number of them have turned into faithful upholders of genuinely free-trade principles and, in broad terms, a growing number of them seem to be upholding an enfeebled system which has yet to address their needs in a balanced fashion. But the largest stumbling block to their full integration into the system rests on their very inadequate market access in the sectors in which they enjoy or are developing comparative advantage.

The chief incentive for the widespread changes in trade strategies in developing countries is the promise of a trade liberalization as a new engine of growth. But a legitimate question is whether under the conditions likely to prevail till end of the 1990s, it will be possible for a large number of countries to sustain simultaneously an export-oriented growth path?

For a country viewed in isolation, export-oriented growth would appear to be desirable regardless of conditions of market access. But in the aggregate, simultaneous emulation of these policies by a large number of countries is likely to lead to an escalation of protectionism which would render the ex-ante expansion of manufactured exports infeasible at unchanged export prices and exporting countries' exchange rates.

"This fallacy of composition problem gains more relevance when analysing the sectoral breakdown of international trade flows. The sectors where a protectionist response is most likely are precisely those that loom large in the exports of developing countries. Under current political realities, a large increase in exports of manufactures from developing to developed countries would surely encounter serious resistance...

In sum, Agosin and Tussie argue, increasing export orientation in a significant group of developing countries at the same time, unaccompanied by reciprocal liberalizations in developed countries, can result in immiserizing growth for the developing countries concerned.

And the persistence of protectionism in the sectors where developing countries are most likely to enter international markets will certainly endanger the sustainability and political viability of the trade liberalizations taking place in the developing world.

The change of direction in the developing world is taking place at a time of rapid internationalization of the world economy. The underpinnings of the trading system has so far been based on "shallow integration" -- the reciprocal freeing of trade pursued primarily by dealing with instruments and issues reflected at the border and once they cross the border by guarantees of national treatment. But different national practices with effects on trade were tolerated, and domestic policy goals were not the subject of contention..

But with globalization and more complex forms of economic interpenetration of markets, the problems associated with different practices that affect competitive environment have become a source of potential friction and the agenda of international negotiations is at a turning point with negotiations are shifting from treatment of products to treatment of policies. One type of response has been to proceed from 'shallow' towards 'deep integration' whereby countries smooth out policy differences.

However, at the level of the system it is an unmanageable option, the authors say, adding: "the pursuit of structural economic harmonization in wholly new and rather disparate areas, such as workers' rights, environmental policies, the incidence of savings rates, land costs and shopping habits, is essentially positing that everything has trade effects and must therefore be the object of international scrutiny.

"The search for a wider mandate for GATT in the direction of assessing policy and institutional differences as sources of 'distortion' is a straightjacket, essentially caught in the notion that every policy, or for that matter absence of policy, can have an impact on competitiveness and must be subject to international scrutiny."

This view, Agosin and Tussie note, has critical implications for developing countries. The pressures on them to align their policies and practices to those of their main trading partners has already gone beyond the socalled 'new issues' in GATT. Questions such as environmental policies and wage levels and their incidence on international competitiveness have already been put on the agenda of multilateral and regional trade negotiations.

And, if adopted in anything close to its present form, the Uruguay Round Draft Final Act would "severely limit the autonomy of developing countries in trade policy matters in several crucial areas", but could benefit from the strengthening of the multilateral system resulting from some of the provisions of the DFA, such as disciplining of the antidumping actions, phasing out of the MFA and creation of an MTO.

But whether these provisions would be sufficient "to provide significantly enhanced market access to developing countries and whether they will be able to discipline unilateral action by the most powerful trading nations still remains to be seen," they add.

The two authors note that at present many governments, developed and developing, are inclined to conduct deliberate industrial policies to lend direction and support to firms to improve their international competitiveness. But such policies of 'industrial targeting' or 'picking winners', have become a source of friction. For developing countries, atleast those that have already succeeded in penetrating developed country markets for manufactures, the implications are clear: henceforth trade negotiations may well involve their right to conduct active industrial policies.

"For developing countries, the quid pro quo of accepting increasingly severe restrictions on their policy autonomy is the promise of significantly enhanced market access. Yet such improvements do not seem to be forthcoming, regardless of the commitments made.

"The balanced incorporation of developing countries into the system requires, therefore, not only what they have already shown a disposition to do, namely, give up their acquired rights to derogation from GATT rules on development grounds, but it also requires that the goods they export or could potentially export be incorporated fully into the system of reciprocal bargaining."

Paradoxically, while the number of parties to the GATT are expanding, so are the regional and subregional trading arrangements. And for developing countries as a whole, the regional alternatives could turn out to be distinctly inferior to multilateral liberalization, particularly if the improved market access for one group of countries is accompanied by more stringent restrictions on the exports of others.

While movement towards greater liberalization and policy convergence entails increasing pressures on governments' policy autonomy, the need of developing countries to conduct active industrial and trade policies, to build competitive supply capabilities, remains undisputed by evidence, the two authors underline.

The record of the postwar period, is unkind to the hypothesis that incentive neutrality or import liberalization has led to faster economic growth, the two authors stress.

While higher rates of growth of manufactured exports were indeed statistically associated with higher rates of economic growth, thee was no statistical relationship between rates of growth of manufactured exports or GDP, on the one hand, and available measures of restrictiveness of trade regimes.

In outlining some policy implications, the two authors say that on the one hand in a globalizing world economy, integration into international markets has become a principal source of growth and, therefore, developing countries cannot afford to stay on the sidelines. On the other, it is becoming increasingly clear that there is a tension between the development needs of developing countries and the demands on them for policy conformity.

While doctrine of liberalization is gaining widespread acceptance in developing countries, trade relations between developed and developing countries are undergoing more change than at any other time in the post-war period.

Developing countries have drastically altered their approach both to their own trade policies and to participation in the GATT negotiations. But this shift coincides with a growing ambivalence by key developed countries with regard to the principles of rule-based multilateralism.

The markets of the developing countries are of growing importance to the industrialized world and hence the demands on Third World to assume greater responsibilities within the system have become more insistent.

But on the other hand, the turn by the developed countries to more aggressive demands for reciprocity is not being matched by a willingness to open up their markets to developing countries.

This contradiction is an element undermining the success of trade liberalization in developing countries.

The new ideas in trade theory and the evidence from case studies, suggest some clear conclusions for national policy at variance both with the liberalizing trend that one can observe in developing countries and the pressures towards policy convergence and surrender of policy autonomy.

Since exchange rate management is crucial to the success of trade policy reform (as the case studies have brought out), "it is essential that policy-makers retain control over international capital flows". This requirement must be taken into account in the design of an international agreement on trade in banking services, which undoubtedly deal with setting up of affiliates of international banks in developing countries and may curtail discretion of host governments to limit the freedom of international banks to move foreign exchange across national boundaries.

Secondly, governments must retain the right to apply selective trade and industrial policies. This is not an argument for import substitution in the old style, but the proper use of selectivity in identifying sectors with potential comparative advantage and gearing policies towards their acquisition.

There is also a need for selective export subsidization, particularly for non-traditional exports with high start-up costs of export promotion. There are also other activities that governments should undertake on behalf of exporters of new arguments.

Thus, a solid argument can be built for retention of a degree of selectivity in trade policy. The drift of trade policies in developed countries towards managed trade and regional preferential agreements and gradual de facto abandonment of multilateralism reinforce the desirability of selectivity.

At the present time, in view of the trends towards unilateral action and politically motivated preferences on the part of the major trading powers, the costs of exclusion are likely to be higher than costs of being parts of any eventual new global trade compact.

But an interesting option for developing countries would be to bargain for retention of "development clauses" in the global and regional rules being negotiated. These could involve temporary and internationally agreed derogations from rules which would be subject to a periodic review mechanism -- say every ten years.

The development clause exception would bind all participants and cover all trade issues, not just tariffs, and would involve commonly agreed criteria to accede to benefits of derogation, set, renewable, time limits and establish an international review to determine graduation.

As a quid pro quo, developing countries could accept to bind their tariff schedules, in the form of a ceiling to their tariffs somewhat above their level of actual tariffs.

The incorporation of developing countries to the system as it now exists is far from completed. Now that a growing number of them are willing to accept fuller GATT disciplines, the main reason for their exclusion is the non-applicability of GATT principles to a significant share of their exports by major importing countries.

If the developed countries are serious about bringing developing countries into the system as full partners, they should show their good faith by eliminating the asymmetry that exists between their demands on developing countries and what they are willing to offer them in terms of market access.

While individual developing countries, in isolation, don't have much bargaining strength, collectively they may be able to extract meaningful concessions as a quid pro quo for past and prospective liberalization. Flexible coalitions of countries around specific interests might prove to be an avenue worth exploring.