INTERNATIONAL TRADE POLICY
By the same author *MIGRATION OF FINANCIAL RESOURCES TO DEVELOPING COUNTRIES INDIA AND THE INTERNATIONAL FINANCIAL MARKETS INTERNATIONAL CAPITAL MARKETS AND THE DEVELOPING COUNTRIES *A/so published by Macmillan
International Trade Policy: A Developing Country Perspective Dilip K. Das Professor and Area Chairman Indian Institute ofmanagement, Lucknow
Dilip K. Das 1990 Softcover reprint of the hardcover 1st edition 1990978-0-333-51152-7 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 33--4 Alfred Place, London We1 E 7DP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1990 Published by THE MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world British Library Cataloguing in Publication Data Das, Dilip K., 1945- International trade policy: a developing country perspective. 1. Developing countries. Foreign trade. Policies of government I. Title 382'.3'091724 ISBN 978-1-349-38917-9 DOl 10.1057/9780230379251 ISBN 978-0-230-37925-1 (ebook) 1098765432 06 05 04 03 02 01 00 99
For Tanushree and Siddharth
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VB Contents Acronyms and Initials List of Tables Preface IX X Xl 1 The Contemporary Trade Scenario 1 1 The Issue 1 2 The Theoretical Rationale of the Policy 2 3 Trends in LDC Trade 5 4 The Intra-Trade 10 5 The NICs and the LDC Trade in Manufactures 16 2 The Link: Trade Policy and Economic Growth 21 1 The Veracity of the Link 21 'The Engine of Growth' Hypothesis 22 Various Studies and their Implications 23 2 The Economic Themes at Work 32 3 Are There Limits to Export Expansion? 37 3 Developing Countries in the Multilateral Trading System 42 1 The Initiation 42 2 Reluctant Multilateral Participation 43 3 The Growth of Illiberal Trade Regimes in LOCs 45 4 The Generalised System of Preferences and the other Preferential Trading Agreements 51 5 The State of Trade Policies in the 1980s 58 6 Plus Ga Change, Plus C'Est la Meme Chose 60 Trade in Services 66 The Newest Disputes 70 4 The Erosion of the GAIT Framework 72 1 The Framework 72 2 GAIT Vis-a- Vis the International Economy 73
VIl1 Contents 3 The Setting in of Erosion 74 Agriculture 78 Textiles and Apparel 79 Steel 81 Economic Integration 81 4 Reciprocity and Graduation 82 5 Defensive Adjustments Under the Safeguard Clause 84 5 The Policy Blueprint 87 Introduction 87 1 The Domestic Dimensions 87 From an Illiberal to a Liberal Strategy 87 Import Substitution Versus Export Promotion 93 Prerequisites for an Outward-Oriented Strategy 95 Exchange Rates 96 2 The International Dimensions 98 Progressing Towards Freer Trade 98 Developing Countries in the Trade Negotiations: An Asymmetry 100 Intra-Trade Among Developing 'Countries 101 The GSP and its Transitory Utility 103 Reforming the Safeguard Clause 104 The Services Sector 108 Strengthening the GATT 110 6 The Uruguay Round of Multilateral Trade Negotiations 115 1 The Initiation of the Movement 115 2 The Participation of the Developing Countries 118 3 The Road to Wisdom 121 The Standstill with a Difference 122 The Rollback 122 The Expansion of the Scope of the GATT 123 Dismantling the QRs and NTBs 124 Promoting Fair Trade 125 The Conditional MFN Principle 127 Dispute Settlement Procedures 129 Surveillance and Monitoring 130 Notes 131 Bibliography 140 Index 147
Acronyms and Initials IX GATT GSP ICOR IMF ITO LDe MFA MFN MTN NBER NIC NTB OMA QRs REER TNC VER General Agreement on Tariffs and Trade Generalised System of Preferences Incremental Capital Output Ratio International Monetary Fund International Trade Organisation Less Developed Country Multifibre Arrangement Most-Favoured-Nation Multilateral Trade Negotiations National Bureau of Economic Research Newly Industrialising Country Non-Tariff Barrier Orderly Marketing Arrangement Quantitative Restrictions Real Effective Exchange Rate Trade Negotiation Committee Voluntary Export Restraints
x List of Tables 1.1 Growth of Merchandise Trade Value for Selected Economies, 1970-87. 6-7 1.2 Value and Volume of Exports from Developing Countries 8 1.3 Intra-LDC Trade 12 1.4 Growth of Exports of Manufactures 17 2.1 Macroeconomic Performance of LDCs Grouped by their Trade Orientation 27 3.1 Unweighted Average Tariff Rates and their Ad Valorem Incidence on Imports in Selected LDCs 48-9 3.2 Pre-and Post-Tokyo Round Tariff Structures 60 3.3 Export Restraint Arrangements in force in September 1986 62 3.4 Frequency Measures of the Application of NTBs from a Sample of 50 LDCs (1985-86) 65 4.1 Tariffs and Quota Measures Used under Article XIX 85 5.1 Domestic Distortions and Growth Performance 89 5.2 Growth of GOP, Factor Inputs and Factor Productivity 94 5.3 Annual Domestic Costs and Benefits of Agricultural Protection 100 5.4 Share of Services in Total Exports 111' 6.1 Exports and Imports of Major Trading LDCs 119
Xl Preface The primal objective of this book is to bring theory and knowledge of the economics of international trade to bear on the policy decisions in the developing countries. I try to bring together the academic research and the real life trade issues, without 'blue yondering'. The unification of analysis and policy-making was, according to Plato, the function of the philosopher king. In our age it has been taken over by the trade economists and the mandarins in the national and supranational systems. The binding element in this book is neither the depth nor the intensity of research, but an eagerness to relate policy-making to positive trade economics so that optimal decisions are arrived at, and, in the process, the developing countries are able to solve their complex growth problems as well as integrate into the international economy. There is little doubt that the majority of developing economies fall short of their productive potential. Yet a handful of them have done a superlative job. One of the factors which helped this group of developing countries was that they followed a different kind of trade policy package from the rest. It is now generally realised that the level of economic efficiency achieved in an economy is determined by the degree of openness, and the trade policy package adopted by the developing country in question. The trade policies also have a decisive and measurable impact on employment and output. That economic liberalisation and adoption of a.neutral policy package can lead to a dramatic turn around in a developing economy is well known. Chile and Taiwan are two excellent I ecent illustrations of this fact. Yet soft thinking regarding trade policy is ubiquitous. Most developing countries still have illiberal and controlled policy regimes. Serious policy errors leading to welfare contracting outcomes are commonplace. The repercussions of the policy actions are not limited to the domestic economy; they transcend national boundaries. Therefore, the proposed policy package also needs to be judged in the international context. The developing country perspective, it seems, includes a less complete appreciation of
xu Preface the value and tragility of a coherent international trading system. At times it is also based on the mercantilistic fallacies. The trade policies have been the victim of more than their share of bad economics in a large number of developing countries. In this book I take my inspiration from the standard neo-classical economic theory in order to counter misleading ideas, false concepts and invalid theoretical premises. I agree with the neo-classical economists in their emphasis on the appropriateness of domestic policies and their welfare implications. I go one step ahead and recommend an economic and organisational structure which would enable a developing country to benefit from its potential comparative advantage. Since the early 1970s the international economy has been buffeted by many exogenous shocks. The shifting pattern of comparative advantage and the sharpened competitiveness of a sub-set of developing countries have added to the complexities, and the industrialised countries have been sorely tempted to adopt protectionist policies. In fact, many of them have already succumbed to accepting protectionism as a way of contemporary economic life. Several industrialised countries, in particular the large traders, have taken measures to control developing countries' access to their markets. These policy actions have made the present international trading regime neurotically protectionist, which undermines productivity and growth in the world economy. On one hand, the developed countries have encouraged the developing countries to become the Contracting Parties of the GATT and allowed them several concessions under Article XVIII and Part IV of the GATT Charter. They have accepted the formal derogation from the principle of non-discrimination, the foundation-stone of the GATT, to permit the establishment of the Generalised System of Preferences. On the other hand, developing countries, in particular the newly industrialisin-g ones, face a progressively increasing number of discriminatory protectionist measure~ against their exports. What is more baneful, the export-restricting arrangements are negotiated outside the framework of the GATT. The industrialised and the developing countries have reached an impasse in their trade relations. At the time of writing this prefatory note, the multilateral negotiations under the Uruguay Round were, at best, making a plodding progress. The mid-term
Preface XlII review conference of the trade ministers, held in Montreal in December 1988, brought to the fore several major contentious issues between the negotiating country groups. The positions held by them were wide apart, with each group taking a self-righteously intransigent stand. Inasmuch as the international trade strategies need to be judged in national and international contexts, this book deals with the domestic and international aspect of trade policy from the perspective of the developing countries. Its scope also encompasses the issue generated out of an interaction between the industrialised and developing countries in the international trade arena. It is hoped that it will benefit both students and researchers in the field of international trade as well' as bureaucrats and functionaries in national and international organisations related to trade. DILIP K. DAS