Feb 22, 1985

LIBERALISATION MUST INVOLVE STRUCTURAL ADJUSTMENT.

GENEVA, FEBRUARY (IFDA/CHAKRAVARTHI RAGHAVAN) – Any future negotiations on trade liberalisation, must have as its integral concomitant adequate commitments on structural adjustment, according to the UN conference on Trade and Development.

In a report (TD/B/1039), the UNCTAD secretariat says that without this "resistance to meaningful liberalisation will increase in importing countries".

The secretariat sees a contradiction in present approach to trade liberalisation whereby governments strive to maximise concessions in foreign markets in return for domestic concessions requiring as little adjustment as possible for domestic producers.

"Governments must free themselves from narrowly perceived notions of reciprocity and base their actions on considerations of communality of interests", the secretariat argues.

In any trade liberalisation scenario, governments have to ask themselves a number of questions.

Since tariffs are no longer the main form of protection, which is now afforded through non-tariff measures (MTNs), would not future trade liberalisation initiatives need new ground rules?

Secondly, how could a balance be envisaged between concessions on tariff and non-tariff measures, when there are vast differences among countries in their use – in extent, kind, and sectoral coverage as well as economic effects?

Thirdly, in the absence of an improved and more efficient safeguard system, what sort of assurances could be given so that "negotiated concessions" are not eroded by other actions? Could negotiations start without agreed ground rules on "legitimate safeguard actions"?

Fourthly, should not international trade rules and/or domestic rules be revised to remove "the double standards currently applied between domestic and international trade through non-tariff measures"?

The report points out that apart from structural and cyclical events with primary impact on trade, a number of longer-term trends in the world economy have important implications for the world economy and in particular for third world countries.

The growing tendency in industrial countries for smaller inputs of energy and primary commodities for a given increment of GNP growth, has had a major depressant effect on key commodity prices, and has implications for future production and investment patterns.

The growing instability in international monetary and financial markets has entailed additional costs for the third world and rendered their process of rational development planning more difficult.

The shift of emphasis, both of enterprises and governments, favouring stability as opposed to economic growth, has been reflected in voluntary export restraint arrangements to ensure domestic production while guaranteeing limited access to foreign suppliers.

These have resulted in deep-rooted rigidities and price distortion in economies of both exporting and importing countries, with long-term structural implications for conduct of trade relations and management of the world economy.

In many industries where third world countries have comparative advantage of where there are longer-term structural adjustment problems (as in textiles, apparel, footwear, and iron and steel), restrictions have been imposed in a discriminatory manner, particularly against third world countries.

A large number of NTMs applied in industrial countries are country-specific, discriminatory, and highly concentrated in certain product sectors.

The result is a large difference in the extent of protection facing different groups of exporters.

While 33.5 percent of imports from the third world and 33.3 percent of imports from the socialist countries of eastern Europe face volume controls in industrial markets, only 17.8 percent of imports from other industrial countries face similar controls.

Also, the current system of protection has an adverse impact on adjustment in other areas of vital interest to the third world.

UNCTAD studies have shown that very high and fluctuating levels of protection in agricultural sector of some of the industrial countries are a major constraint on positive structural adjustment and prevent many third world countries from realising their full potential in this area of production.

"Protection in the agricultural sector is also linked directly to the problems of absolute poverty which exists in many developing countries and the potential relief that could be associated with an expansion of export opportunities.

"Such opportunities could be a particularly important stimulus to improving conditions in many African countries".

Apart from problems associated with levels of protection in sectors like agriculture, the incidence of trade barriers at different stages of product processing is also posing major structural adjustment problems for the third world.

A particularly sensitive issue, UNCTAD says, relates to the fact that both nominal and effective rates of protection in industrial markets have been shown to increase or "escalate" in general with the degree of products processing.

These structures of protection pose a major constraint to the expansion of processing activity in the third world.

Recent UNCTAD studies have also shown that a variety of other institutional barriers pertaining to shipping, restrictive business practices, marketing and distribution also combine to limit processing activity in the third world countries.

The impact of these barriers would appear to fall particularly hard on the poorer third world countries, such as those in Africa, where an expansion of processing activity seemingly is one of the most promising avenues for raising the levels of industrialisation and development.

Besides trade policies, industrial policies in the industrialised countries also exert a key influence on the magnitude and pace of structural adjustment, UNCTAD says.

"There is evidence of a growing use of industrial policies by national governments to deal with or influence trade matters", and these have an impact on the degree and success of structural adjustment in countries.

In the case of the textiles and clothing sector, for example, while Italy, the Federal Republic of Germany and Switzerland appear to have dealt with the changing environment fairly successfully, markets of the U.K. and France "display all the symptoms of a ‘disrupted’ market with stagnating output".

The U.S. has preserved output levels, and to a large extent employment levels, but at the cost of reduced competition in terms of prices on domestic markets.

While it is difficult to assess the longer-term consequences of strategies pursued by these countries, "it is clear that these policies will have a major direct bearing on global structural change".

Any multilateral trade liberalisation efforts aimed at removing border measures such as tariffs and NTMs must hence also consider related industrial policies, since the latter could be used to offset the effects of liberalisation effort.

"It is clear", UNCTAD says, "that there is a pressing need for closer consultations on the use of industrial policies at an international level to prevent losses to the developing countries through trade interventionist and trade diversionary effects of such policies".

Policy consultations can prevent "disruptive imbalances" and promote the desired inter-sectoral and intra-sectoral specialisation of industries among the industrial countries themselves, and between industrial and third world countries.

But for such consultations to be effective, "it will be necessary to improve information relating to probable future investment trends and on trends in sectoral developments".

In addition, exchange of information at the international level would facilitate the identification of problems and allow time to initiate the necessary adjustments, UNCTAD concludes.