Sep 27, 1985

WORLD ECONOMY SLIPPING BACK INTO ANAEMIC PERFORMANCE AGAIN?

GENEVA, SEPTEMBER 26 (IFDA/CHAKRAVARTHI RAGHAVAN)— The world economy is slowing down, and this could signal that it is in danger of slipping back into the anaemic performance of the post-1973 era, the GATT secretariat has warned.-

The secretariat advocates a combination of strengthened trade disciplines and increased market access "as an important additional option for giving a strong macro-economic boost to output and employment in countries around the world".-

Towards this end the secretariat supports a new round of multilateral trade negotiations, and argues that getting negotiations under way, with an agreed agenda, would improve the business climate and provide a credible signal that governments are prepared to reverse the protectionist trends.-

The secretariat's views and support for the new round, on the eve of the special session of the Contracting Parties of GATT summoned at U.S. request for the same purpose, is in the first chapter of the GATT report on "international trade l984/85".-The first chapter on the "prospects for international trade", and the main policy conclusions of the secretariat, has been released in advance of the publication of the full report later in October.-

In the report, the GATT secretariat says that currently available statistics for 1985 not only confirm the predicted moderation in growth of world output and trade, but suggests that the slowdown is more pronounced than earlier forecast.-

The GATT secretariat now expects that volume growth in world trade in 1985 will be less than four percent over 1984.-

The GATT secretariat's projection of a less than four percent growth in world trade this year would be in line with other recent projections that the world output growth this year is unlikely to be more than 2-1/2 to three percent.-

The current projections involve a downward revision of consensus forecasts made just a few months ago - for a 3 to 3-1/2 percent growth in output and a 5 to 5-1/2 percent growth in trade.-

Recovery in 1984, according to GATT, was as strong as in 19767 but weaker than in 1968.-Indications that slowdown in recovery in North America and parts of south-east Asia is more than expected, GATT secretariat adds, "could signal that the world economy is in danger of slipping back into the anaemic performance of the post-1973 era".-The GATT secretariat argues that protectionist trade actions are only on element in the mosaic of policy-related problems burdening the world economy.-

Better trade policies alone could not strengthen and spread economic growth and create jobs.-

But policy reforms outside the trade field could not be fully effective if they are introduced in an environment burdened with high levels of protection and uncertainty about future course of trade policies.-

The trading system is now being seriously strained by the erosion of the observance of the principles and rules of the GATT multilateral trading system.-

Secondly, there is the neglect of the close interaction between the functioning of the trading system and the policies adopted in other areas.-

"In particular, it has become obvious that well-designed monetary and fiscal policies are essential to the smooth operation of the trading system, just as effective trade rules and open markets are essential for efficient macro-economic management".-"The most immediate danger to the trading system is that it will become a scapegoat for problems whose origins lie outside the trade area".-If difficulties in macro-economic management result in trade-distorting measures, efforts to strengthen worldwide economic growth would be frustrated.-But a combination of strengthened trade disciplines and increased market access represents an important additional option to give medium-term macro-economic boost to output and employment in countries around the world.-

A more predictable and more open framework for world trade would also be an important way of orderly resolution of the debt problem, thereby reducing the heavy burden of austerity and foregone development entailed by import-contracting adjustment.-

It would promote sustained economic growth in the industrial countries, improved access to foreign markets, and resumption of economic growth in the indebted countries themselves.-

The report notes that while the collective trade performance of the 16 indebted Third World countries improved significantly in 1984, as compared to 1982 and 1983, preliminary data show that in the first half of 1985, the values of both the exports and imports of the majority of these 16 have started to decline again.-

The GATT data shows that of the 16, seven (Argentina, South Korea, Mexico, Morocco, Thailand, Turkey and Venezuela) had carried out, as part of their adjustment in l984 (compared to 1983), both export and import expansion.-

Seven others (Brazil, Colombia, Indonesia, Nigeria, Peru, Philippines, and Yugoslavia) adopted policies of export expansion import contraction, and had improved merchandise balance.-

Egypt tried export and import contraction, while Chile tried export contraction and import expansion.-

The secretariat advocates export and import expansion, the former at a faster rate than the latter, as the "most desirable adjustment".But its own data show that of those that tried this, only Argentina, South Korea and Thailand, managed to improve their trade balance, while Mexico, Morocco, Turkey and Venezuela either had an increased trade deficit or reduced surplus.-

The data show that over the last decade, South Korea, China, Hong Kong, Taiwan, Mexico and Singapore have come within the category of the world's 20 leading exporters. Five of them South Korea, Singapore, China, Hong Kong and Taiwan - have also come within the category of 20 largest importers.-

This, the secretariat notes, underlines the point that dynamic exporters are also importers, and that Third World countries use their increased export earnings to import more.-The GATT secretariat also notes that between 1950 and 1973, every one percent increase in world income was on average accompanied by a 1.6 percent increase in volume of world trade.-But between 1973 and 1983, a one percent rise in income produced only a 1.1 percent rise in world trade.-

Among the reasons for this lower correlation ship, according to GATT, are the increasing trade restrictions and uncertainties.-

The GATT secretariat warns of a danger of rekindling inflation, as in the 70's, if governments adopt the policies of periodic stimulation of demand through expansive monetary or fiscal policies.-

Though there is now a change in perceptions among governments on effective economic policies, "a large gap exists between the new policy perceptions and current policies".-It cites in this connected the substantial increase in U.S. budget deficits.-

Also, the mix of monetary and fiscal policies - both nationally and internationally - has not prevented large rapid movements in exchange rates.-

At micro-levels, distorted wage and price signals still face workers and investors, markets are fragmented, and measures to prop up inefficient production are still widespread.-

This situation, the GATT suggests, is a source of serious concern, since national trade policies and the multilateral trading system are particularly vulnerable to spillover effects from inept policies outside the trade area.-

GATT refers in this connection to the current pressures to impose an import surcharge to deal with the U.S. large U.S. trade deficit, when most experts agree about the close link between the large U.S. federal deficit on the one hand and the strong dollar and large trade deficit on the other.-

An import surcharge, it suggests, would have at most only a small and temporary impact on the budget deficit, and could cause a further appreciation of the dollar.-

It is thus unlikely to reduce the trade deficit, but could cause a major escalation of trade frictions.-

The GATT secretariat also expresses concern over the rising trend towards market sharing arrangements and managed trade.-

The prototype arrangement in this area is the multifibre arrangement for textiles and clothing, involving discriminatory quantitative restrictions against Third World countries.-But policies already in place or proposed in the steel, automobiles, consumer electronics and agricultural product sectors, point in the direction of more market sharing and managed trade.-