With the assistance of: Deborah Pickett Philip Deluty Andrew Caranfil Kwan Kirn

Transcription

1 THE IMPACT OF INDUSTRIAL COUNTRY PROTECTIONISM ON SELECTED LDCs Maurice Ernst Jimmy U. Wheeler With contributions by George von Furstenberg Perry Wood Catherine Albrecht Bang Nam Jeon With the assistance of: Deborah Pickett Philip Deluty Andrew Caranfil Kwan Kirn Hudson Institute, Inc. Herman Kahn Center 5395 Emerson Way P.O. Box Indianapolis, IN 46226

2 KEY JUDGMENTS Industrial country protectionism affecting the seven LDCs covered by this study has clearly increased in the 1980s, although there have also been instances of liberalization. The most important specific areas of increased protection are: o The application of quotas in the United States and the European Community (EC) to exports of steel from South Korea, Brazil, and Mexico. o The tightening of quotas for textiles and clothing under the umbrella of the Multifiber Arrangement (MFA); this affects all seven countries of the study. o The large increase in anti-dumping and subsidy investigations by the United States, and to a lesser extent by the EC--from 58 per year in to 129 per year in involving a wide variety of products. o Increased protection of the sugar industry in the U.S., the EC, and Japan, resulting in a substantial decline in net imports from the developing countries from 5.2 million tons in to almost zero in ), with detrimental effects on Brazil and the Philippines. o An increase in tariff escalation and some non-tariff barriers for other raw and processed agricultural products. On the other hand, the quotas and other restrictions imposed by the U.S. on non-rubber footwear in the mid-1970s were allowed to expire or were removed during the period. The measurable direct impact of increased protectionism on the export earnings of the seven subject countries was small, ranging between one and four percent of total exports. Tables 1-7 summarize the impact. The major reason for the small impact is that most of the more important new restrictions took the form of quotas, not tariffs. Like tariffs, quotas raise prices in the countries imposing them. But, unlike tariffs, the windfalls from these higher prices are received by the exporting country. These so-called quota rents partly offset, and in some cases more than offset, the reductions in the volume of exports due to the quotas. Only some quota rents are reflected in our impact estimates; those would be even smaller if a complete estimate of quota results had been possible. The direct impact of protectionist measures was also reduced through a variety of adjustments by the exporting countries. For example:

3 11 o o Brazil shifted some 15 percent of its steel exports from the U.S., Western Europe, and other markets to China, which paid much lower prices. Several countries shifted the mix of their textile and clothing exports from items that were constrained by quotas to other that were not, and also shifted exports to non-mfa markets. In some countries, notably Brazil, government subsidies buffered producers of affected products (e.g. alcohol), and helped to sustain exports, at least temporarily (e.g. sugar), although at substantial cost to the budget. In other countries, however, notably the Philippines, government policies tended to reinforce the impact of restrictions on output. The long-term impact of recent protectionism is almost certainly greater than the short-term impact, but is impossible to quantify. Even though resources can be reallocated away from heavily protected areas, losses in efficiency may be substantial. This is particularly true when protection prevents the expansion of major industries in which one or more of the subject LDCs has a strong comparative advantage. Such industries include: steel in South Korea and Brazil, frozen orange juice in Brazil, textiles and clothing in South Korea. Protection also has affected the policies of these countries in a variety of ways. In Brazil, increased protectionism has caused losses equivalent to some two percent of export revenues, and even larger losses in national income, but there is no evidence that it has significantly affected production or employment. Faced with protectionist measures, the Brazilians have been as quick to adjust their markets and their product mix, as they had been to expand exports rapidly prior to the imposition of protection. Because of its small dependence on foreign trade, Brazil has substantial flexibility in shifting between domestic and foreign markets. By the same token, long-standing, deep-seated, and inward-looking economic policies and traditions of economic nationalism make Brazil more likely than most other LDCs to react strongly to foreign protection. Indeed, should the current dispute over Brazil's informatica policy lead to serious U.S. retaliation, Brazil may well turn toward even more comprehensive foreign trade and internal controls and become less cooperative with foreign creditors. For Mexico, the impact of industrial country protectionism has been recent and small (1-2 percent of export revenues). Mexico has hardly begun to try to penetrate industrial country markets outside the United States, and even there protectionism against Mexican goods was minimal until the 1980s. This is because of Mexico's predominant reliance on oil exports and its lack of success in developing exports of manufactured goods beyond those arising from foreign direct investments in Mexico. Recent protectionist measures, however, have had a substantial impact on the Mexican steel industry, whose

4 Ill exports have fallen by half (nearly $100 million), and where output and employment have declined. There have also been small effects on producers of fruit and vegetables, cement, glass, and a few other items. Unlike Brazil, Mexico has been unable to find new foreign markets for restricted products or to shift to other domestic markets, so that export losses have generally resulted in production losses. U.S. protectionism has not yet become a top policy issue in Mexico, and it is unlikely that the kinds of protection imposed to date will have much impact on Mexico's turn toward a more liberal import regime or on its policy emphasis on export diversification. For South Korea, the effects of protectionism have been mixed. Although the steel industry receives large quota rents in the U.S. market (prices of exports to the U.S. exceed average prices for steel exports to other markets by over 10 percent) and has had some success in shifting exports to other markets (in competition with other similarly affected countries), its long-term development is being constrained by protection. South Korea could expand textile and clothing exports if quotas had not been tightened. The rapid growth of shoe exports after U.S. quotas were allowed to expire in 1981 clearly shows that they had restricted export volume severely, although volume loss had been offset by quota rents. Overall, losses of only one to three percent of export revenues can be attributed to new protectionist measures. Income and output losses were even smaller in both absolute and share terms, since South Korea has been so flexible in adjusting to trade barriers. More generally, U.S. protective measures, including the anti-dumping and anti-subsidy investigations are causing serious concern in South Korea and are reinforcing the government's basic feelings of vulnerability. Although U.S. protectionism is politically sensitive, the South Koreans are not likely to change their economic policies in any substantial way, because they do not believe that they have any viable alternative to reliance on export-expansion and close relations with the U.S. Their reaction to U.S. protectionism has been and will be to try harder to sell in the U.S., while trying to diversify exports and markets. They will also be more reluctant to liberalize imports, although they will respond to U.S. pressures for reforms when the gains appear to outweigh the risks. In the Philippines, increased protection of industrial countries' sugar industries threatens to have a devastating impact on the Philippine sugar industry. Philippine sugar exports have fallen by more than half in volume since the late 1970s (from 1.7 million tons in 1980 to 0.6 million tons in 1985). The value of sugar exports has begun to decline and will fall much more when the long-term contracts fortuitously signed during the latest sugar price boom run out, with major impacts on regions of the country facing serious political unrest. Some losses have resulted from textile and clothing quotas, and tariff escalation on raw and processed agricultural products exports are also important constraints. Even though the estimates of export revenue losses are higher as a share of total export than for some of the other countries (4-5 percent), foreign protection is not one of the

5 major issues facing the Philippine government, which has far more difficult and basic problems to worry about. But if domestic economic conditions do not improve, protection could begin to play an important role in debt negotiations. In Malaysia, apart from textile restrictions, EC and Japanese restrictions on imports of oils and wood, and tariff escalation, foreign protectionism has not been a major political issue. Rather, it has been an increasingly serious annoyance, especially concerning access to the U.S. market, about which most Malaysian exporters are not very knowledgeable. The identifiable costs of protection are low (0.5 to 1.6 percent of export revenues). Because Malaysia's long-run development depends greatly upon its ability to move into exports of higher value-added, processed agriculture products, however, restraints on these products could raise costs considerably in the future. Even at present, the drop in oil prices and the slump in some other commodity markets has increased political sensitivity to foreign protectionism. Pakistan has been mainly concerned about protection faced by cotton, cotton textiles and clothing, even though its ability to fill quotas varies widely among products. Cotton, rice, and wheat subsidies in the industrial countries also receive considerable attention. Due to the large share of exports represented by cotton, textiles and clothing, direct export losses due to protection are larger as a share of total exports than for most of the other countries studied (3-7 percent). The business community is clearly growing increasingly concerned about protectionism and shows a tendency to link it to broader political issues, such as the security relationship with the U.S. vis-a-vis the USSR, and Afghanistan. While the government tends to have a broader perspective, this trend should be of concern to U.S. policymakers. Indonesia has not encountered any substantial increase in industrial country protection, but is pushing harder against existing barriers as it tries to upgrade and diversify its non-oil exports. The drop in oil prices makes both new and old increasingly important. Estimated losses from recent or increased barriers total some 0.8 to 2.2 percent of the somewhat depressed 1985 export revenue. Japanese restrictions and EC tariff quotas on plywood are hindering the expansion of that industry in Indonesia. Problems with manufactured exports are due more to Indonesian inexperience than to protectionist reactions, but this is not the perception of many Indonesians. Moreover, the impact of foreign protectionism on Indonesia's economic policy may be disproportionately large, because it enhances the arguments of the economic nationalists in the government (mainly in Sekeng and the sectoral ministries), who believe Indonesia should turn inward once again rather than undertake economic reforms to promote exports. Beyond its direct and indirect effects on the individual LDCs, industrial country protectionism causes major costs to the economies of industrial

6 countries, and large and growing distortions in the global economy. The nature of contemporary trade restrictions is such, moreover, that there are few obstacles to their further expansion. For the most part, these restrictions take the form of so-called voluntary agreements to restrict exports, or of ad hoc administrative decisions by importing governments. Because of GATT rules, these restrictions rarely take the form of overt tariffs or unilaterally imposed quotas. The problems with negotiated quantitative restrictions is that important interests on both sides gain: the affected industry in the importing country through higher prices and possibly production and employment in the short-term; and the affected industry in the exporting country through guaranteed higher prices in the restricted market. Moreover, these quantitative restrictions are generally administered in the exporting country by allocating export quotas among existing exporters, who consequently gain assured markets and protection against possible new competitors. It is no wonder then that such agreements can be negotiated, and there is consequently a high risk that more such agreements will be negotiated in the future. The expansion of administrative discretion, especially in the United States, with respect to determination of subsidies and dumping, also has detrimental affects. These actions can greatly disrupt a firm's exports, even though no subsidies or dumping are eventually found. Recent bills before Congress and possible future bills would make this problem far worse. With respect to the implications of increased protectionism for other aspects of U.S. policy, the following points can be made: o o o o So far at least, the increase in protectionist barriers has not been large enough to appreciably affect the economic growth of or the allocation of resources in the seven subject LDCs. Losses in income represent only a fraction of one percent of GDP. The direct impact on export earnings (1 to 3 percent) also has not been large enough to significantly reduce the ability of these seven countries to service their foreign debt. However, the indirect policy impact, especially in Brazil and the Philippines, could be sufficient to induce a much tougher stance towards creditor countries and banks. The use of "voluntary" agreements to establish quotas on exports of various products is inconsistent with the U.S. policy of trying to promote trade liberalization and the general move toward more market-oriented policies in the LDCs. These measures favor existing firms over new firms, encourage cartelization, and especially induce governments to impose tighter controls over the affected industries. Quantitative restrictions on such LDC exports as steel indirectly provide substantial benefits to countries, such as the Peoples

7 vi Republic of China, which take advantage of the dumping that the restrictions encourage--for example the Chinese pay some 30 percent less than average export prices for Brazilian steel products. Over time, growing quantitative restrictions force the affected countries to accelerate the development of higher value-added industries, and stimulate non-covered countries to invest in restricted industries to take advantage of the rents created. Both imply accelerated competition in industries and products that already face adjustment problems. In turn, this has led to more complex and costly government controls that have distorting effects, especially in agriculture, textiles, and steel.

8 vn Table 1 IMPACT OF RESTRICTIONS, SUMMARY: BRAZIL A. DIRECT IMPACT (LOSSES) ON 1. PRODUCT AREA (MIL. US$) EXPORT EARNINGS* NATIONAL INCOME* REAL STEEL TEXTILES & CLOTHING SUGAR Unclear ALCOHOL OTHER PRODUCTS TOTAL TOTAL AS A PERCENT OF: B. INDIRECT IMPACT o POTENTIAL GAINS IN ECONOMIC EFFICIENCY DUE TO GROWING EXPORTS IN HIGHLY COMPETITIVE INDUSTRIES (STEEL, SUGAR, ORANGE JUICE) ARE FOREGONE. o RISK OF NATIONALISTIC REACTION BRINGING INWARD-LOOKING IMPORT SUBSTITUTION POLICIES DETRIMENTAL TO LONG-TERM ECONOMIC GROWTH. o RISK OF REACTIONS RESULTING IN HARDER LINE ON DEBT SERVICING. BASED ON DATA.

9 vm Table 2 IMPACT OF RESTRICTIONS, SUMMARY: MEXICO A. DIRECT IMPACT (LOSSES) EXPORT EARNINGS* ON NATIONAL INCOME* REAL GNP* 1. PRODUCT AREA (MIL. US$) STEEL OTHER TOTAL 2. TOTAL AS A PERCENT OF: ioo B. INDIRECT IMPACT o LITTLE IF ANY IMPACT ON ECONOMIC AND TRADE POLICY, WHICH ARE DESIGNED TO PROMOTE EXPORT DIVERSIFICATION AND LIMITED IMPORT LIBERALIZATION. o LITTLE IMPACT ON DEBT SERVICE POLICIES OR CAPABILITIES. *BASED ON DATA.

10 IX Table 3 IMPACT OF RESTRICTIONS, SUMMARY: THE PHILIPPINES A. DIRECT IMPACT (Losses) EXPORT EARNINGS* ON NATIONAL INCOME* REAL GNP* 1. PRODUCT AREA (MIL. US$) RAW & PROCESSED AGRICULTURE (EXCEPT SUGAR) 50 SUGAR 100 TEXTILES & CLOTHING TOTAL 2. TOTAL AS A PERCENT OF: B. INDIRECT IMPACT INCREASED ECONOMIC STRESS IN POLITICALLY UNSTABLE AREAS. STRENGTHENING OF ANTI-U.S. POLITICAL GROUPS. WEAKENING OF CABINET MEMBERS AND OTHERS WHO SUPPORT BOTH DOMESTIC AND TRADE LIBERALIZATION. *BASED ON 1984 DATA.

11 X Table 4 IMPACT OF RESTRICTIONS SUMMARY: PAKISTAN, A. DIRECT IMPACT (LOSSES) EXPORT EARNINGS* ON NATIONAL INCOME* REAL GDP* 1. PRODUCT AREA (MIL. US$) -- TEXTILE & CLOTHING 2. TOTAL AS PERCENT OF: $ B. INDIRECT IMPACT o INTENSIFY DOMESTIC POLICY BIAS TOWARDS, AND NATIONAL ADVANTAGES OF, LARGE TEXTILE AND CLOTHING FIRMS BY PERMITTING THEM TO CARTELIZE THE MARKET WITH PRIVILEGED ACCESS TO QUOTA RIGHTS. o SOME SHIFT TO HIGHER VALUE PRODUCTS WITHIN QUOTA AREA THAT IS ACCELERATING FROM A VERY SMALL BASE. o INCREASES ATTRACTIVENESS AMONG THE BUSINESS COMMUNITY OF OVERTURES FROM THE U.S.S.R. TO GRANT SPECIAL ECONOMIC PRIVILEGES IN RETURN FOR IMPORTANT POLITICAL CONCESSIONS. o INTENSIFIES THE DISTRUST OF U.S. INTENSIONS AND LONG-TERM COMMITMENT TOWARDS PAKISTAN.

12 XT Table 5 IMPACT OF RESTRICTIONS SUMMARY: MALAYSIA A. DIRECT IMPACT (LOSSES) EXPORT EARNINGS* ON NATIONAL INCOME* REAL GNP* 1. PRODUCT AREA (MIL. US$) RAW & PROCESSED AGRICULTURE TEXTILES & CLOTHING TOTAL 2. TOTAL AS A PERCENT OF: B. INDIRECT IMPACT EMERGING PERCEPTION OF GROWING BARRIERS TO THESE INDUSTRIES MOST SUITABLE TO SERVE AS THE BASIS FOR FUTURE GROWTH. GROWING PERCEPTION THAT NEWCOMERS SUCH AS MALAYSIA ARE FACING UNFAIR DISCRIMINATORY TREATMENT COMPARED TO THE INDUSTRIAL COUNTRIES AND THE NICs, IN LARGE PART DUE TO FRUSTRATION OVER ECONOMIC ADJUSTMENTS IN THE U.S. AND WESTERN EUROPE. INCREASE OF MALAYSIA'S RELIANCE ON THE ASEAN FRAMEWORK TO INCREASE ITS NEGOTIATING STRENGTH. EXPLICIT POLICY BY BOTH GOVERNMENT AND INDUSTRY TO DIVERSIFY MARKETS.

13 xn Table 6 IMPACT OF INCREMENTAL RESTRICTIONS, SUMMARY: INDONESIA A. DIRECT IMPACT (Losses) 1. PRODUCT AREA (MIL. US$) ON EXPORT EARNINGS* NATIONAL REAL INCOME* WOOD & WOOD PRODUCTS TEXTILES & CLOTHING RAW & PROCESSED AGRICULTURE TOTAL 2. TOTAL AS A PERCENT OF: B. INDIRECT IMPACT ** o UNDERMINES THE POSITION OF THOSE GOVERNMENT OFFICIALS PUSHING FOR ECONOMIC LIBERALIZATION AND A MORE OPEN TRADING POLICY, AND MAY IMPEDE THE ADOPTION OF POLICIES NEEDED FOR LONG-TERM EMPLOYMENT GROWTH. o WEAKENS WHAT LITTLE INFLUENCE THAT THE U.S. AND OTHER INDUSTRIAL COUNTRIES HAVE ON INDONESIAN POLICY. *BASED ON DATA. **2.5 TO 6.8 PERCENT OF NON-OIL/LNG EXPORTS

14 xm Table 7 IMPACT OF RESTRICTIONS SUMMARY: SOUTH KOREA A. DIRECT IMPACT (LOSSES) ON EXPORT EARNINGS* NATIONAL INCOME* REAL GNP* 1. PRODUCT AREA (MIL. US$) TEXTILES & CLOTHING IRON & STEEL FOOTWEAR ITEMS NOT EXPLICITLY ESTIMATED $ $ (SMALL GAIN) $ $ $ $ $ $ $25-50 TOTAL 2. TOTAL AS A PERCENT OF: $ $ $ B. INDIRECT IMPACT LOSSES OF POTENTIAL ECONOMIC AND TRADE GROWTH AS RESOURCES ARE DIVERTED FROM HIGHLY COMPETITIVE INDUSTRIES. FORCED SHIFT OF INVESTMENT INTO HIGHER VALUE-ADDED PRODUCTS, AND THE POSSIBLE ACCELERATION OF FUTURE TRADE FRICTIONS IN SOME OF THOSE PRODUCTS. POLITICIZATION OF TRADE POLICYMAKING AS POLITICAL SYSTEMS SLOWLY OPEN, WITH A STRONG NEGATIVE REACTION OF PERCEIVED UNFAIRNESS IN POLICY CHANGES. o A CLEAR SHIFT IN GOVERNMENT AND COMPANY POLICY TO DIVERSIFY EXPORT MARKETS AND PRODUCTS, REDUCE SUBSIDIES, INFORM THE DOMESTIC INDUSTRY ON ANTI-DUMPING LAWS (ESPECIALLY IN THE U.S.), AND TO BECOME MUCH MORE POLITICALLY ACTIVE IN THE INDUSTRIAL COUNTRIES.

15 XV ABOUT THE AUTHORS Maurice C. Ernst Vice President for Economics, Hudson Institute Dr. Emst is responsible for the planning, management and review of Hudson's policy research studies on domestic and international issues involving economic and related political and social analyses. Before joining the U.S. government, Dr. Ernst taught economics at Adelphi College and American University. During more than 30 years in intelligence he worked on most areas of the world and most major economic issues. He began his intelligence career with the Department of State, Bureau of Intelligence and Research, joined CIA in 1954 as an economist, served as Director of CIA's Office of Economic Research and, most recently, was National Intelligence Officer for Economics. Jimmy W. Wheeler Director, Economic Studies, Hudson Institute Jimmy W. Wheeler is an economist specializing in the application of economic analysis to public policy and corporate planning. Since joining Hudson Institute in 1977, Mr. Wheeler has been project director or co-author of studies on international trade; international finance; world energy issues; the U.S. and Japanese economies; and political/economic prospects for various industrial and developing countries. In the national security area, he has participated in studies on mobilization, civil defense, and nuclear proliferation, among others. Mr. Wheeler's publications include: Western Economics in Transition: Structural Change and Adjustment Policies in Industrial Countries with Irving Leveson (Westview Press, 1980); The Competition: Dealing with Japan with T. Pepper and M.E. Janow (Praeger, 1985); and Western European Adjustment to Structural Economic Problems (University Press of America, Inc.; forthcoming, 1987), with Marie-Josec Drouin and Maurice Ernst.