Mar 22, 1985

REBOUNDS FROM RECESSION, BUT LESS VIGOROUSLY.

GENEVA, MARCH 20 (IFDA/CHAKRAVARTHI RAGHAVAN)— World trade rebounded in 1984, after the recession of 1980-82, but the trade recovery shows "a little less vigour" than after past recessions, according to the general agreement on tariffs and trade.

In its first assessment of world trade and major economic developments in 1984, the GATT secretariat notes that the rebound of world trade in 1984, nine percent in volume and 6-1/2 percent in dollar values, was one of the key features of the cyclical recovery of the world economy from the 1980-82 recession.

But while strong, the recovery in world trade was not exceptional, when compared to the recoveries in 1968 and -1976.

In 1984, the overall volume of world trade expanded less rapidly than during the 1968 recovery (when it was 12-1/2 percent), and at about the same pace as during the 1976 recovery.

"If the differences in the growth of world real income during the recoveries are taken into account, the most recent trade recovery reveals a little less vigour than the two previous ones", GATT adds.

In 1984, GATT points out, each one percent increase in world real income was associated with a 1.8 percent increase in volume of world trade.

In 1968 and 1976, the corresponding figure was two percent.

At least a part of the decline in average GDP growth rates during 1979-84, GATT says, must be attributed to the observed deceleration of trade expansion during the period, when it grew by only an average two percent.

"It is also likely that certain factors, including increasing uncertainty about future access to foreign markets, acted to reduce income and trade growth simultaneously".

The regional pattern of the recent growth in world trade also deviates markedly from past experience.

Imports into North America, including intra-north American trade, accounted for almost two-thirds of the increase in dollar value of world trade.

The share of west European imports in the increase dropped sharply from the 40 to 50 percent recorded in the previous recoveries to less than 13 percent in 1984.

At the same time, west European exports, traditionally the largest gainer, just edged out Japan for second place, behind North America, in 1984.

Unlike in the past two trade recoveries, Japan participated more strongly, on the import and especially exports side.

From recovery to recovery, there is a sizeable increase in the importance of the Third World, other than OPEC members, in the growth of world exports and imports.

Increased exports by OPEC members, unlike in earlier recoveries, added only marginally to the 1984 growth in world exports, while on import sides their values actually declined in 1984.

Trade within Western Europe contributed only seven percent to the increase in world trade, in contrast to a quarter in earlier recoveries.

Trade within the third world remained "a minor source" of the 1984 increase in world trade.

But over l979-1984, intra-Third World trade contributed a much larger share of the increase than in 1984 alone - 13.9 percent versus 3.3 percent.

The belief that recovery in world output and trade would arrest rise in protectionist pressures, and enable protection to be brought down, has thus far been disappointed, GATT notes.

While a number of factors have contributed to this, the most visible one is the "lopsided nature of the economic expansion" - impressive growth in output and employment in the U.S., weak growth and increased unemployment in western Europe, and an even greater disparity in economic performance in the third world.

Even within the U.S., not all sectors of the economy have shared equally in the growth.

While the high value of the dollar could have played a role in the U.S., there was also "a decline of a more fundamental nature in the international competitiveness of the basic industries"-

Questioning the view in the U.S., that increased import restrictions would reduce the current account deficit and expand employment, GATT blames the U.S. current account deficit on shortfall in domestic savings relative to investments.

The current U.S. situation, GATT says, differs from that of a typical country with a balance of payments problem, in which the current account deficit is aggravated by private capital outflows.

In this situation, the principal option open to the U.S. government to reduce current account deficits is reduction of federal budget deficit, and thus government's demand for borrowed capital.

Increased import restrictions would only have a short-term impact, and would be ineffective to deal with the serious current account deficit problems.

An import surcharge, now advocated in the U.S., would be "very poor policy" even as a fiscal measure, and being a temporary one, would merely postpone the need to take more permanent steps, GATT argues.

Whether through a surcharge or through quantitative import restrictions, it would only reduce economic efficiency and growth at home and abroad, stimulate inflation, and penalise exporters by increasing their production costs.

"The recovery of world trade in 1984, brisk as it was, is no reason for complacency", GATT warns.

"Tensions over trade issues are at least as strong as during the recession years. Even more so than in the past, substantial progress in improving trade policies will require joint efforts, with each country's resolve being strengthened by the knowledge that it is a cooperative effort".