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OverseasDevelopmentInstitute

A Hand Worth Playing

The Stake of Developing Countries in the International Trade and Monetary Negotiations

Kathryn Morton

GDI

AAE

GDI AAE Mor

/4 Hand Worth Playing shows how Idcs can benefit from the inter national trade and monetary negotiations which began in late 1973. It examines the interests of Idcs in the issues under negotiation in the liberalisation of trade barriers, in new rules to govern inter national trade policies and in reform of the monetary system. But while these issues are vitally important to them, Idcs can only influ ence the course of the negotiations to a limited extent. Much will depend on developed countries' readiness to act in Ides' interests. Since all their interests will not be met during the negotiations, priorities must be selected. A Hand Worth Playing identifies these priorities.

The report is based on discussion by an expert study group convened by ODI. The author is Kathryn Morton, Research Officer at ODI.

Price: £1.00

A Hand Worth Playing*-,.-~^-«<^'

The Stake of Developing Countries in

the International Trade and Monetary

Negotiations0 00001097

Overseas Development Institute

Kathryn Morton

Overseas Development Institute Ltd. London

© Copyright

Overseas Development Institute Ltd.1974

The Overseas Development Institute Ltd. is responsible for determining that this work should be presented to the public, but individual members of the Council are not responsible for statements of fact and expressions of opinion contained herein.

ContentsPage

Introduction ... ... ... ... ... ... ... ... 1

1 The GATT Trade Negotiations: A General View ... ... 6

2 Identification of Interests and ObstaclesPrimary commodities ... ... ... ... ... ... 11

Competing foodstuffs ... ... ... ... ... 13

'Non-competing'primary commodities ... ... ... 17

Manufactures and agricultural processed products ... ... 20

Tariff barriers ... ... ... ... ... ... 28

Non-tariff barriers ... ... ... ... ... ... 32

Liberalisation of trade barriers ... ... ... ... 33

Safeguards and adjustment assistance ... ... ... 37

The textile example ... ... ... ... ... ... 39

3 Problems and Priorities for Ldcs in the GATT Negotiations... 42

4 The IMF International Monetary Negotiations: A General View ... ... ... ... ... ... ... 46

5 Identification of Interests and Obstacles ... ... ... 51

6 Problems and Priorities for Ldcs in the IMF Negotiations ... 55

Summary and Conclusions ... ... ... ... ... 56

iii

Index to TablesTable Page

1 Ldcs' exports in world trade by destination, 1965, 1970and 1972 ... ... ... ... ... ... ... 6

2 Composition of Ides' export trade with industrial areas andof world exports to these areas, 1972 ... ... ... 9

3 Ldc exports of primary products by commodity and shareof world exports in given commodities, 1969 ... ... 12

4 Ldc exporters by main export commodity groups, popula tion and income ... ... ... ... ... ... 21-26

5 Imports of manufactures from Ides by twenty-one devel oped market economy countries ... ... ... ... 27

6 Incidence of non-tariff barriers applied by industrial coun tries on manufactures of export interest to less developed countries, 1969 ... ... ... ... ... ... 34

IV

PrefaceThis is the report of a Study Group, convened by the Overseas Devel opment Institute and financed by the Nuffield Foundation. Its object is to identify the stake of developing countries in the current interna tional trade and monetary negotiations, and, particularly, to focus attention on those policies which developed countries, especially the EEC, should adopt so as to benefit the developing countries.

The study group comprised academics, businessmen and officials from Britain, the EEC Commission, and international bodies, and was chaired by John Finder, Director of Political and Economic Planning. Its first meeting was held in 1973 and the work of the study group was completed in March 1974.

The report is based on discussions held by the study group and has benefited from the comments, help and advice given by study group members. Responsibility for errors and omissions in the report, how ever, rests with the author. Grateful acknowledgements are due to all study group members and particularly to John Finder for his chairman ship and support.

Kathryn Morton

INTRODUCTION

IntroductionFollowing the US dollar crisis and the stop-gap Smithsonian Agreement on currency realignments in 1971, the major Western trading nations agreed to the need for the reform of the international economic system. Preparatory talks for a new round of negotiations on trade liberalisation began under the auspices of GATT. Meanwhile, the Committee of Twenty was set up under the auspices of the Inter national Monetary Fund (IMF) to work out proposals for the reform of the monetary system. In September 1973, the multilateral trade negotiations were inaugurated at Tokyo, and shortly afterwards the Committee of Twenty presented its first outline of reform to the annual meeting of the IMF. Thus two important, and interlinked, sets of negotiations are currently hi progress.

As in previous negotiations of this kind, the main protagonists are developed countries and in particular the United States, Japan and the member states of the EEC. The negotiations are, however, of no less interest to the less developed nations, despite their relative insignificance in world trade and monetary affairs. It is partly in recognition of this, that some attempt has been made to change the traditional focus of such negotiations on the problems of rich coun tries both by specifying the need to consider, as well, the problems of Ides and by providing for increased Idc representation.

In the Tokyo Declaration, issued last autumn, the objects of the multilateral trade talks were stated as follows:

'[to] achieve the expansion and ever-greater liberalisation of world trade . . . through the progressive dismantling of obstacles to trade and the improvement of the international framework for the conduct of world trade.''[to] secure additional benefits for the international trade of developing countries through, in the largest possible measure, a substantial improvement in the conditions of access for the pro ducts of interest to the developing countries and, wherever appropriate, measures designed to attain stable, equitable and remunerative prices for primary products.'1

Further, GATT has sought to involve Ides in the talks, whether or not they are contracting parties to the General Agreement.

On the monetary side, the Committee of Twenty (C-20), which is charged with negotiating the reform of the monetary system (to be agreed subsequently by the members of the IMF), includes the promo tion of economic development as one of the main objectives of a reformed world monetary order. And specifically, its First Outline of Reform states that the 'main features of the international monetary

1 GATT. PreM Relenw. 'Ministerial meeting, Tokyo 12-14 September, 1973', GATT/1134, 14 September, 1973, pp. 1-2.

A HAND WORTH PLAYING

reform should include . . . the promotion of the flow of real resources to developing countries'.1 Meanwhile the Committee of Twenty is in itself an advance for Ides in that their representatives form half its total membership. This is a departure from the tendency for developed countries to dominate IMF decision-making, both in terms of their for mal voting strength (which represents more than 70% of total voting power in the IMF) and in terms of their informal control via the Group of Ten a group which consists only of developed countries.

In respect of both the trade and the monetary negotiations, some doubts are in order as to the extent to which the apparent commitment to take account of Ides' interests will be met. It is not the first tune that multilateral trade negotiations have been prefaced by some such commitment. Yet specific improvements in the conditions of access for developing countries' exports resulting from these past negotiations, under the auspices of both GATT and of UNCTAD, have been relat ively limited. In the new round of trade talks, moreover, one import ant area of interest to Ides that of access for their textiles and clothing exports has already been virtually removed from the arena by the institution of the Multifibre Textile Arrangement in December 1973. Ldcs have an interest in measures which will facilitate the expansion of the world economy and, to some extent, their interests in the multi lateral negotiations concur with those of the developed countries. Thus, whether or not their special interests are catered for, Ides stand to gain from the negotiations. But their gains could be significantly greater if developed countries take account of the Ides' special prob lems. It is therefore important that the general commitments to this end are honoured.

Still more doubts are raised as to the very future of the negotiations as a result of the oil crisis. Doubts about the developed and also some of the developing world's commitment to carrying through multilateral trade and monetary reforms via the GATT and IMF nego tiations are not new. Even before the oil crisis, the conditions which led the USA to call for multilateral reform had changed in such a way as to reduce the urgency felt by that country for such reform. Meanwhile, domestic conditions within the USA, combined with the dictates of White House foreign policy, have hindered the pro gress of the Trade Reform Bill through Congress and until the Bill becomes law, American officials have no mandate to negotiate in the GATT talks. The EEC commitment to multilateral trade reform has always been limited by the priority attached to intra-European trade liberalisation and to the protection of certain Community industries in particular the farming industry and the importance given to the maintenance, and indeed development, of special links with certain

1 IMF, Report to the Board of Governors by the Chairman of Committee on Reform of the Internationa! Monetary System and Related Issues, Document No. 4, September 1973, p. 1.

INTRODUCTION

regions of the Third World. This 'regionalist' approach in EEC rela tions with developing countries in turn inevitably tempers the interests in multilateral trade reform of some of those countries, which now receive, or expect to receive, preferential treatment from the EEC. Against this background of less than wholehearted commitment, the progress cif setting up negotiations on the reform of the international economic system has been halting. The oil crisis now threatens to put them on ice.

The threat posed by the oil crisis derives largely from the impact of the quadrupling of oil prices on the balance of payments position of the developed world. Although not all are affected to the same extent, all face mounting deficits on their current accounts. If anything, this points to the need for multilateral co-operation in order to prevent a beggar-my-neighbour situation emerging, in which individual developed nations seek to protect their own balance of payments position by com petitive devaluations, protectionism and/or bilateral deals with oil pro ducers. Certainly, for the majority of less developed countries which are not fortunate enough to possess oil, anything short of a multilateral solution can only exacerbate further the grave difficulties they now face as a result of the oil price rise. But even if a financial solution to the immediate problem posed by the oil crisis is agreed on a multilat eral basis, developed nations may still be reluctant to embark on long- term reforms. It would seem rational, with mounting trade deficits, to seek to expand trading opportunities in the world, and to ensure that monetary arrangements are consistent with this end. But during 1974, at least, the developed world is likely to be chiefly pre-occupied with short-term adjustment to the oil situation and wary of embarking on major long-term reforms until the full implications of the oil crisis have been assessed. And the other major effect of the oil crisis namely its demonstration of the dangers of reliance on external sources of essen tial supplies since exports, as well as imports, may be restricted may inhibit developed countries' willingness to liberalise trade in com modities which will increase such external dependence. This applies particularly to the GATT proposals for the liberalisation of agricul tural trade, the wisdom of which had already been thrown into doubt in some quarters by other events of 1973 for instance, the rise in world food prices and US restrictions on soya bean exports. In this context, given that individual nations cannot achieve self-sufficiency, and that developed countries have shown a preference for developing links with selected Idc groupings, deals on a bilateral basis or between regional groupings to secure essential supplies might appear more attractive than multilateral trade liberalisation.

It would be unduly pessimistic, however, to suggest that the oil situa tion radically alters the basis for reform. It is still in the interests of both developed and developing countries to remove obstacles to inter-


national trade and to ensure that the world monetary system functions smoothly. Indeed the case for international co-operation to this end is increased rather than diminished by the oil situation, and the inter dependence of financial and trade reform has become more evident. On the other hand, it is clear that the priorities for international reform are likely to be changed, with increased emphasis on the need for effective international regulation of the conditions under which nations trade.

Ldcs have an obvious stake in multilateral solutions to oil-induced problems and in multilateral reform, since these are the most likely to protect and further the interests of the economically weak. The dangers posed by the oil crisis illustrate this. Some Idcs might gain from an increase hi regionalism or bilateralism, but many would not and most would gain more from a more liberal world order; any increase in pro tectionism by developed countries would damage Ides' efforts to expand their exports, particularly of manufactured and processed goods; a failure to bring about multilateral solutions to the oil situation and to the need for monetary reform could leave all but the richest Idcs in grave financial difficulties. At the same time, the oil crisis has demonstrated two important features of the Third World's position. First, it has clearly shown that Idcs simply cannot be treated as a single interest group. The OPEC countries are clearly differen tiated from the rest of the Idcs. But both within the OPEC and non- OPEC countries, interests differ widely: the position of Kuwait and Abu Dhabi is in many ways not comparable with that of Nigeria and Indonesia; the position of India and Sri Lanka greatly differs from that of Chad and Upper Volta. Second, Idcs are by no means without bargaining strength: the OPEC countries have provided a dramatic illustration of this fact. But, although it is probable that no other Idc group has so much power potential to hand, it is true that Idcs, as sup pliers of raw materials, as hosts to developed countries' investments, and as buyers of their goods, do have bargaining strength vis-a-vis the developed world.

The main object of this report is to examine the general interests of Idcs in the international trade and monetary negotiations and to iden tify some of the particular interests of different groups of Idcs, to indicate how developed countries and in particular the EEC could act to meet them. Concern at Ides' problems in participating in inter national affairs is largely based on the fact that their poverty and con sequent weakness limits their ability to secure for themselves a fair deal. Clearly this predicament of poverty and weakness is not shared by all countries labelled as less developed. Some, such as Israel, Argen tina and Greece, have incomes per head almost the same as developed countries, while others, such as the Idc OPEC members, can fend for themselves, by virtue of their power as key suppliers of an essential

INTRODUCTION

commodity. In this report attention is focused on the needs of the poorer, and weaker, Idcs. Ldcs cannot hope for the removal of all external impediments to their participation in the international economy. Therefore this report aims to identify priorities for measures to assist them in the negotiations. A basic criterion in the selection of priorities is the promotion of equity by ensuring that the measures undertaken will benefit the poorer groups of Idcs. At the same time, the report considers the bargaining strength of Idcs, to identify what is possible, as well as what is desirable.

Chapter 1The GATT Trade Negotiations: A General ViewIt is widely, but not universally, accepted that external trade plays an important role in the development process. Export earnings are required to finance imports of capital and intermediate goods needed for development. While capital inflows through aid programmes, com mercial credits and foreign private investment contribute to this end, they are insufficient currently only about a fifth of Ides' imports are so financed. But participation in international trade is also important as a means of promoting a rational and competitive structure of produc tion within the domestic economies of Ides. As comparative studies of Ides' development performance have shown, too great a stress on protectionist, import-substituting policies often leads to costly devel opment.1 It is therefore important that the growth of exports from

TABLE 1 Ldcs' exports in world trade by destination, 1965,1970 and 1972

Ldc exports to: Industrial areas1Of which: EEC

EFTA

1965 $ billion fob

26-038-885-12

1970 8 billion fob

40-5313-816-76

1972* %ofbillion total fob

53-8618-248-67

73-024-811-7

Share Annual of Ides' average exports growth in total 1965- exports 1972 in 1972

18-315-913-9

10-610-67-9

Ldcs

NorthAmerica 7-49 11-25 15-70 21-2 21-8 11-2Japan 2-68 5-84 7-96 10-8 41-1 16-7

7-65 10-90 15-30 20-7 21-2 10-4Eastern trading areas 2-39 3-10 3-37 4-5 8-2 4-2World2 36-43 55-45 73-76 100-0 17-9 10-5Total world exports 186-65 312-00 412-79 n.a. n.a. 12-0

Notes: l Includes Australia, New Zealand and South Africa which are separatelylisted by GATT.

Total includes exports for which direction is unspecified.Source: GATT, International Trade 1972, Geneva 1973, Appendix Table E.

1 See, for instance, I. Little, T. Scitovsky and M. Scott, Industry and Trade In Some Developing Countries. O.E.C.D. and O.U.P., London 1970.

THE GATT TRADE NEGOTIATIONS: A GENERAL VIEW

developing countries is not impeded by the policies of their trading partners.

The major part of Ides' exports 73% of their total exports in 1972 goes to Western developed countries, a situation primarily reflecting the relative importance of these countries' markets in the world econ omy. Intra-ldc trade constitutes only 21% of their total exports while exports to communist countries are even less significant, accounting for 8% of Ides' total exports (see Table 1). With this pattern of trade it is clear that, insofar as the policies of importing countries affect export possibilities, the commercial policies of the West are potentially the most important to Idc exporters. And, within the context of the GATT negotiations, it is the need to change these that Idc represen tatives have stressed.

Since the Second World War world trade has grown rapidly, encouraged by the progress made in trade liberalisation. While Idc sup pliers have benefited from the global expansion of trade, the process of liberalisation has tended to discriminate against them hi two ways. First, a significant part of post-war liberalisation has been confined to rich countries, and in particular European countries, so that the Idc exporters of a given product often face greater trade barriers than developed country suppliers. It is true that certain developing countries enjoy privileged access to the European markets, but the general effect of the establishment and enlargement of the EEC, and the trade agree ments between the EEC and EFTA, has been to discriminate against outsiders. Second, where liberalisation has been undertaken on a multi lateral basis, less action has been taken on products of export interest to Idcs. The Kennedy Round, the predecessor of the present negotia tions, resulted hi relatively fewer and smaller cuts hi tariffs on these items than on products of interest to developed countries.1 Further more, the effect of the Round was to increase the effective rate of pro tection against exports of some processed products of particular interest to Idc primary producers attempting to diversify their exports.

Post-war trade liberalisation has been more successful hi the field of tariff barriers than hi non-tariff barriers (NTBs), such as quotas and domestic subsidies. Yet these are now regarded as more important than tariffs hi their trade-impeding effects. Indeed the increase hi agricul tural protectionism hi developed countries and the growing involve ment of the state hi economic and social affairs may well have resulted hi an increase hi non-tariff barriers, despite the removal of some which were prevalent during the early post-war period.

Both tariff and non-tariff barriers to trade hi developed countries arc frequently higher against Idc exports than against developed country

1 But the absolute fall in tariffs on goods of interest to Idcs was greater and the cut in the total import price of Idc exports was proportionally slightly greater than that resulting for imports of developed country exports.


exports. An UNCTAD study1 of the effects of the Kennedy Round indicated that before the Round Idc exports of manufactured products on which the Round concentrated faced an average nominal tariff rate of 17.1% in developed country markets, as compared with 10.9% for developed country exports. After the Round, the respective rates were 11.8% and 6.5%. Data on NTBs are far from satisfactory but such empirical evidence as exists suggests that the incidence of NTBs is greater on exports of interest to developing countries than on exports of interest to developed countries. Moreover Ides are likely to find it more difficult to cope with NTBs than developed countries, because of their relative lack of expertise and the rigidities in their domestic economies.

This general picture of discrimination against Ides by developed countries is mitigated for some Ides by the availability of preferential treatment in certain markets, and for all Ides by the introduction of the Generalised System of Preferences (GSP) on manufactured goods. But as a result of Britain's accession to the EEC, the position of many Ides has deteriorated with ultra-European liberalisation, the ending of Commonwealth preferences and the merging of Britain's GSP with that of the other EEC members. The GSP offer of the enlarged EEC, while more generous than that of the original Six, is less generous than Britain's pre-accession offer, and is unlikely to compensate all bene ficiaries for the loss of the better terms offered under the former British scheme.

Many of the smaller preference-receiving Commonwealth countries have been offered association with the EEC which will largely compen sate for their loss of preferences in the UK market. But even if all associable Commonwealth countries join with the present EEC Associates, the arrangement will only cover 12% of the total population of the Third World (excluding China). The rest of the developing world including the more populous Asian Commonwealth countries will be relatively worse off. Moreover the GSP's potential for liberalising entry for Ides' exports via preferential tariff cuts is diminished by its partial implementation, limited product coverage and restrictive rules.2

While it is possible to show that barriers to trade occur more fre quently against Idc exports, it is difficult to assess their impact, particu larly in the case of non-quantitative NTBs. As Table 1 indicates, the growth of Ides' exports by value between 1965 and 1972 has been slower than that of total world exports; this trend, which has character ised Idc trade in the post-war period, was reversed by the 1973 com modity boom,8 which is, however, likely to be a temporary phenomenon for most products concerned. As Table 2 indicates, a substantial pro-

1 UNCTAD The Kennedy Round Estimated Effects on Trade Barriers TD/6 Rev. 1, Geneva. 1968.* See pp. 29-32 for a discussion of the GSP. A. Hone has estimated that Ides' share of world exports would Increase to 19%: see ODI Review

1-1974.

8

THE GATT TRADE NEGOTIATIONS: A GENERAL VIEW

portion1 of Ides' exports are in primary products, for which global demand in general has tended to grow more slowly than for pro cessed and manufactured products. It is the relatively slow growth in the value of these exports the 1973 experience aside which has helped to keep the overall growth rate of Idc exports below that of world exports. Significantly, primary commodities apart from food products tend to be subject to fewer trade restrictions in developed countries than are manufactures. The domestic policies of some Ides themselves must also account in part for the relatively slow growth of exports. It is significant that the developing countries such as Hong Kong, Taiwan and South Korea, which have adopted export-oriented development strategies, and which have largely eschewed protectionist commercial policies, are among the Ides with the highest export growth. The exceptional experience of these countries illustrates

TABLE 2Composition of Ides' export trade with industrial areas1 and of

world exports to these areas, 1972

Commodity

FoodRaw materialsOres and mineralsFuelsTotal primary productsNon-ferrous metalsIron and steelChemicalsEngineering productsRoad motor vehiclesTextiles and clothingOther manufacturesTotal manufacturesResidueTotal exports

Ldcs' exports toindustrial areas8 billion % offob total

12-50 23-43-60 6-72-85 5-3

21-50 40-340-75 75-7

2-50 4-70-40 0-70-52 1-01-75 3-30-03 0-13-50 6-63-60 6-7

12-30 23-00-65 1-2

53-40 100-0

World exports toindustrial areas$ billion %offob total

43-30 15-016-50 5-78-70 3-0

32-70 11-4101-20 35-1

9-60 3-312-80 4-418-50 6-462-10 21-624-60 8-518-40 6-437-00 12-8

183-00 63-53-90 1-4

288-10 100-0

Share of Ides' exports in totalexportsto industrial areas%

28-921-832-865-740-026-0

3-12-82-80-1

19-09-76-7

16-618-5

Note: 1 Excludes Australia, New Zealand and South Africa which received81 -38 billion of Ides* exports in 1972. All data are provisional.

Source: GATT, International Trade 1972, Geneva 1973. Table 7, p. 32.

1 The proportion is. however, an over-estimate because some processed products are included in the primary commodity category.


another internal limit on many Ides' export performance their relative lack of experience in marketing their products abroad.

These factors help to account for the relatively slow growth of Ides' exports. But it cannot be assumed from them that Ides' exports would not have grown faster in the absence of external impediments to the growth of demand for then- products and to their access to developed country markets. Although some developing countries might have found it difficult to respond to an increase in export opportunities in the developed world, most would have experienced more rapid export growth if they had not faced relatively greater barriers to trade than developed countries and an increase in discrimination against their exports in recent years.

In this pamphlet the products of interest to Ides in the coming trade negotiations are classified under two broad heads: primary commod ities and manufactures. This classification, together with the various sub-classifications adopted, is by no means exclusive. The intention, however, is to group different commodities according to the type of obstacles faced by Idc exporters, as a result of developed country, and in particular EEC, policies, and according to the nature of other problems affecting exports of a particular commodity. The importance of negotiating a reduction in trade barriers on a given commodity is then assessed. Ideally this should be carried out on the basis of a set of criteria which take into account both the seriousness of the barriers in reducing potential trade and the extent to which an increase hi trade would be beneficial to the individual exporting countries in social cost- benefit terms, and which weight the importance of the gain according to the poverty and population size of the exporting countries. Existing data are insufficient for a comprehensive analysis of this sort. But the approach adopted here is based upon this framework: the main pro ducts or product groups significantly affected by trade barriers and the volume of trade currently affected, together with the poverty and population of current exporters, are taken as the basis for assessing priorities for negotiation.

Within each commodity group, the main problems of liberalisation are then noted. This is followed by a discussion of the key issue in trade liberalisation as far as developed countries are concerned the solution of the problems which gave rise to trade-restricting measures: this aspect is considered in the section on safeguards and adjustment assistance. Finally, an attempt is made to reconcile the desirable with the possible, by considering the Ides' bargaining strength and the devel oped countries' interests in trade liberalisation.

10

Chapter 2

Identification of Interests and ObstaclesPrimary commoditiesDuring the Kennedy Round, attention was concentrated on tariff- cutting on manufactured products. The new round of GATT negotia tions has a considerably wider scope.1 The Tokyo Declaration specifies that the negotiations should aim to reduce both tariff and non-tariff barriers and include agricultural trade and tropical products. There is considerable doubt as to the extent to which the developed countries will be prepared to negotiate on matters which touch closely on their domestic agricultural policies. Nevertheless, the restrictions imposed by developed countries on agricultural trade are an important part of all restrictions facing developing countries and deserve attention, even if the prospects for their removal are at present poor.

For the majority of Ides, agricultural exports are the most import ant source of export earnings: for fifty-six of the eighty-seven Ides listed in Table 3, the average share of agricultural products in total merchandise exports between 1967-69 exceeded 50%, for twenty- seven of these countries it was between 70% and for a further fourteen in excess of 90%. Ldcs which are predominantly agricultural exporters tend to be characterised by relatively low levels of GNP per head, and by the relatively slow growth in both GNP and export earnings (although not all Idc agricultural exporters are so characterised and not all non-agricultural exporters present the oppo site picture). The rise in commodity prices in 1973 brought a rapid growth in the export earnings of many Idc exporters of agricultural products and, probably, in GNP, but this growth is unlikely to be sustained. In general, agricultural exports are important to a large number of the poorer and less dynamic Ides. Moreover the agricul tural sector is generally the largest source of employment, production and export earnings within Ides, and the sector with greatest potential for absorbing their rapidly-growing labour force, Consequently meas ures which facilitate the expansion of agricultural export earnings are clearly desirable. Although external impediments to agricultural exports are only one of the obstacles to such an expansion, they are considerable. A recent FAO study* looked at the effects of the complete removal, by all countries, of barriers to trade on eighteen major edible agricultural commodities. On this basis, projected Idc export earnings would be $10.1 billion more than they would otherwise have been

1 It should be noted, however, that the statements of intent prior to the Round were very similar to the Tokyo Declaration.

* FAO. 'A world price equilibrium model'. Projections Research Working Paper No. 3, CCP 72/WP3.

11


TABLE 3Ldc exports of primary products by commodity and share of

world exports in given commodities, 1969Share of iotal Share of Idc

Value primary product exports in world Commodities $ billion exports exports of

product

1. Food, drink, tobaccoa. Temperate:

Fats and oils1Sugar Meat2CerealsRiceTobaccoCitrus fruitWineFish3Total

b. Tropical: CoffeeCocoa4TeaBananasPepperTotal

2. Agricultural rawCottonRubberHides and SkinsJuteWoolHard fibresForest products 6Total

3. Metals, minerals and ores

4. Others

1-701-56 0-970-660-440-420-330-110-666-85

2-360-920-460-460-064-26

materials1-501-200-210-210-190-081-244-63

6-463-06

6-76-2 3-82-61-81-71-30-52-6

27-2

9-43-61-81-80-2

16-8

5-94-80-80-80-80-34-9

18-3

25-612-1

33-374-3 18-112-344-032-147-114-327-527-4

100-0100-0100-085-2

100-098-2

69-1100-026-6

100-011-9

100-020-037-6

19-417-4

5. All primaryproducts 25-26 100-0 27-6

Notes: * Includes oilcakes and meals.1 Includes live animals.9 Excludes fish meals and solubles.1 Includes cocoa products.8 Excludes processed wood products.

Source: Ceres, FAO Review Vol. 5, No. 2, March-April 1972, p. 64.

12

IDENTIFICATION OF INTERESTS AND OBSTACLES

in 1980. An IBRD study,1 covering a slightly different range of agricultural products, looked at the effects on Ides' export earnings in 1980 of the partial removal of trade barriers in developed countries. An increase of some $4 billion was projected. The large difference between the two estimates appears to be mainly explained by the different assumptions on the extent of trade liberalisation the IBRD was more realistic and by the more conservative IBRD views on Ides' ability to respond to expanded trading opportunities. Both estimates would clearly be altered if 1972-73 trade data were used as a basis for the 1980 projections rather than data for earlier years. As they stand, however, they indicate that Ides could make substantial gains if agricultural trade were liberalised, the FAO estimate being akin to the maximum possible but unlikely gain and the IBRD estimate the more feasible. The main external obstacles facing Idc exports of primary products tend to occur among agricul tural products, while exports of other raw materials metals, minerals, and fuels are generally free of such problems. Consequently, atten tion is focused on the former set of exports, divided here into two main groups competing agricultural foodstuffs, and non-competing edible and inedible agricultural products.

Competing foodstuffsThe mam primary products in this category are listed in Table 4 (Section la). It will be seen that the most important, in value terms, are fats and oils, sugar, meat, cereals, rice and tobacco, which accounted for 27% of Idc exports in 1969. The term primary product is, however, something of a misnomer, since some products included in the list are only exported after a degree of processing hi the export ing country. However, primary and partly processed products share similar problems, in that they have to compete with the protected agri cultural sector of developed countries. A significant proportion of processed food products, normally classified by UNCTAD as manu factures but considered in this sector, also face such problems. Dairy products and some canned fruits, for instance, are subject to trade restrictions in the EEC to protect not only local processing industries, but also their local suppliers. The same is true of some 'primary' pro cessed foods, for instance, fats and oils.

The main problems faced by Idc exporters of competing foodstuffs derive from the agricultural policies of developed countries. These policies restrict the market access of outside suppliers by a variety of means, such as tariffs, levies, subsidies, quantitative restrictions and other forms of NTBs, which combine to allow a level of domestic pro duction far above that which would occur if domestic producers were subject to international competition. With the frequent exception of

1 IBRD, 'Effect of elimination of developed countries' protection on agricultural primary product! to the Ides' 1980 export earnings', 1973. Mimeo.

13


fish, none of the products listed in Table 3 (Section la) are exempt from some form of protective device in developed countries. In the case of the EEC, agricultural production is protected by a system of internal price support backed by variable import levies, sometimes especially in the case of processed goods operated with flat-rate import duties, on goods imported from outside the EEC. Effectively, this eliminates price competition between EEC and external producers. At the same time, a system of export subsidies permits European pro ducers to export surpluses at competitive prices. The EEC Common Agricultural Policy (CAP) has several other effects on world trade. First, like other protectionist agricultural policies, it narrows world markets, thereby increasing the potential for price fluctuations in affected commodities. Second, where surpluses are released on to world markets and the EEC price support system encourages surplus production world prices tend to be depressed. Third, the price struc ture adopted by the EEC for farm products distorts the structure of world prices. This last effect was recently demonstrated in the case of EEC grain prices: put simply, these prices were set high, with the result that EEC beef producers switched to substitutes for animal feed, such as oilseed cakes and cassava. The consequent increase in soya bean production particularly in the USA depressed prices for oils, because of the accompanying increase hi soya oil production.

Britain's entry to the EEC has resulted in an extension of the pro blems faced by developing countries and others in exporting competing agricultural goods. Certain Commonwealth Ides will pro bably receive preferential treatment in the enlarged EEC to com pensate for the loss of Commonwealth preferences. The experience of the associate countries in respect of CAP products suggests, however, that their gams will be restricted by the limited preferential treatment accorded by the EEC on such products. The Commonwealth non- associables, and other Ides, face increased discrimination against their exports as a result of EEC enlargement and the extension of associate status to some Commonwealth countries. So far as the Commonwealth non-associables are concerned, their exports of vegetable oils, canned fruit, tobacco, and sugar are most affected.1

The findings of the IBRD and the FAO studies mentioned above suggest that the main gains to Ides would accrue from the removal of barriers to trade in sugar, rice and beef. Other competing products where liberalisation would be of considerable interest to Ides are cereals, fruit and specifically citrus fruits vegetables, vegetable oils and tobacco. All these products are protected by the CAP.

Present beef exports of Ides are liable to mfn duties and CAP levies within the EEC, and other forms of protectionism elsewhere, for

1 See P. Tulloch, The Seven Outside, ODI, 1973. The revised 1974 EEC GSP extends tariff preferences to coconut oil and canned pineapples (within a quota).

14


instance 'voluntary' quota restrictions on exports to the USA. The health regulations of importing countries are also a significant barrier to trade. The FAO study estimated that with complete trade liberali sation, net beef exports from Ides could double in volume, and export earnings could increase by about $2 billion per annum by 1980. The more conservative IBRD study estimated that the removal of import duties and levies in the USA, UK and the original Six EEC members would lead to an increase in imports from Ides of some $100m, while if domestic prices were brought into line with world prices, imports from Ides would increase by a further $275m. The major part of the increase would derive from higher demand in EEC countries.1 The liberalisation of barriers to EEC imports of beef, however, requires concomitant action on the high cereal prices which lead to the relatively high level of protection to beef. The main Idc beef exporters are the richer, Latin American countries and it is these that would be most likely to gain from liberalisation. On the other hand, many poorer African Idc beef producers, for instance Tanzania, Kenya, and Bots wana, would also stand to gain, provided that some relaxation in openly restrictive health regulations formed part of the liberalisation moves.

Rice exports from Ides to developed countries are limited by the array of duties, quotas and levies, which encourage developed country production and restrict market access for Idc suppliers. Complete lib eralisation of trade in rice would, according to FAO estimates, yield very substantial gains in the region of $2 billion to Idc exporters by 1980. More limited measures to modify the price support systems of the USA, Japan, and the EEC could yield a gain of some $360 million to Ides' exporters by 1980. These gains would largely accrue to the major rice exporters Burma, Thailand, China, and Cambodia all of which have relatively low incomes per head. Some richer, but less important, producers hi Latin America could also benefit, as could some of the poorer African countries. However, the liberalisation of rice trade would not be without drawbacks for those Ides, such as India, which are major importers: protectionism has in the past tended to depress world prices, and its removal is expected initially at least to increase them. But while this may increase some Ides' import bills in the short term, it may also stimulate an increase in their domestic rice production in the longer term.

The EEC's protection of sugar is widely criticised. Essentially it encourages beet sugar production despite the fact that Idc cane sugar producers tend to have a clear-cut comparative advantage in sugar production. Both the FAO and the IBRD studies predict sizable increases in Ides' export earnings from sugar $1.8 billion and $ 1 bil-

1 The considerable difference between the IBRD and the FAO estimates for the increase in beef exports, as for other commodities, was explained above.

15


lion respectively if protectionist measures hi developed countries were removed. The major Idc sugar exporters are often richer than the average Idc and they are likely to gain most from liberalisation. On the other hand, poorer countries, such as India, Pakistan, and Uganda, could also gain. And it has to be pointed out that, even though sugar- producing Ides may tend to have relatively higher GNP per head, sugar is frequently their main source of employment and export earn ings and an improvement in either depends largely on an expanded overseas market for their sugar production.

In respect of two of the three products considered, some richer Ides are likely to figure largely among the potential gainers from liberalisa tion in the short run. This is also the case for processed products affected by agricultural protectionism. But potential gains among poorer Ides, provided that they are able to respond to new trade oppor tunities, could be considerable. And apart from the products noted above, liberalisation of trade in vegetable oils and oilseeds in partic ular would benefit the poorer Ides. A move to more liberal trade in competing agricultural products would, however, be costly to some Ides for instance, in the case of rice (see above). At the same time, those Ides enjoying preferential access to the EEC, or expecting to receive it, would lose to the extent that they have to share their prefer ential access with other Ides. However, as pointed out earlier, the actual concessions received on products subject to the CAP are limited.1

Although certain individual Ides might oppose liberalisation in com peting foodstuffs, the main opposition is from developed countries, which, along with GATT, tend to regard agricultural trade as subject to different rules from those governing trade in other products. In some respects, the causes of agricultural protectionism are similar to those of protectionism in other sectors. It exists partly to protect domestic producers from international competition so as to avoid and in small part to facilitate the supposedly painful process of adjustment. As always, the domestic consumer suffers, but the dispro portionate political power of farming communities in developed coun tries creates pressures for the maintenance, or increase, of protec tionism. Further, special ties with particular overseas producers, such as those of the EEC with the Associates, are a barrier to general lib eralisation. The seriousness of this obstacle within the EEC, however, is largely dependent on the force with which France and with the new association agreement, Britain presses the case of the preferred suppliers (although the 'regionalist' approach to the Third World does have other supporters in the EEC).

1 See P. Tulloch, 'Agricultural Trade and the Enlarged EEC* ODI Review 6, ODI, 1973, pp. 94-96, and also Ellis, Marsh, and Ritson Farmers and Foreigners, ODI, 1973, pp. 12-14.

16


Two other, special, factors are also important. First, the agricultural sector provides domestic consumers with essential food supplies. Exter nal dependence for such essential supplies is to varying degrees regarded as undesirable for reasons of national security. Second, since world prices of agricultural products tend to be more unstable than most prices, it is regarded as desirable to minimise this potential destabilising force on the balance of payments. (Protectionism, while insulating the domestic market, may, of course, add to the instability of world markets.) Recent events have tended to increase the apparent importance of these two factors. The 1973 boom in world commodity prices would have had a far greater impact on developed countries' balance of payments and fuelled domestic inflation further had it not been for protectionist policies in agriculture. Meanwhile, fears that high foodstuffs prices reflect a global trend towards increasing short ages, brought about by the growing world population and greater affluence, appear to strengthen the case against liberalisation, which would tend to reduce some production incentives in developed coun tries. Further, the oil crisis has, if anything, increased developed countries' desire to maintain local sources of supply for essential commodities.

But hi fact, the recent pressures in food prices and supplies increase rather than diminish the case for liberalisation. The IBRD and FAO studies suggest, as would be expected, that world food production would increase with the liberalisation of agricultural trade. The latter would raise world prices, but not generally the prices paid by consumers in protected developed country markets. Given that most developed countries cannot become totally self-sufficient in food pro duction, it is as desirable for them as for other countries that the efficiency of agricultural production is increased through liberalisation. At the same time, as the recent and probably temporary boom in prices has indicated, such liberalisation should also be accompanied by some global means of ensuring that temporary shortages (or gluts) do not result in excessive price fluctuations which have particularly harmful effects on the poorer importers of foodstuffs.

'Non-competing' primary commoditiesCommodities in this group fall into two main categories: non-compet ing tropical foodstuffs and agricultural raw materials, which chiefly compete with synthetic substitutes produced hi developed countries. The former group, in which coffee, cocoa, tea, and bananas predom inate, accounted for 16.8% of Ides' total primary product exports in 1969. The latter group, hi which cotton, rubber, hides and skins, and jute predominate, accounted for 18.3% (see Table 4).

Price fluctuations constitute the main problem facing exporters of tropical foodstuffs and beverages, for while demand is relatively slow-

17


growing and fairly unresponsive to price changes, supply levels are subject to considerable variations. In addition, Idc exporters face certain barriers to trade with developed countries. Apart from some bilateral quotas on bananas, chiefly designed to protect suppliers, the main barriers are tariffs and internal excise duties. Tariffs on some major tropical primary foodstuffs, which exist largely to maintain pre ferential access for certain suppliers, have, however, been suspended or reduced by the EEC, although some tariffs remain: for instance, the mfn rate on coffee is 7% and on cocoa 4%. The case for further mfn reduction is weakened by the fact that, with the extension of EEC asso ciation to Commonwealth Associables, most of the poorest Idc pro ducers will in fact have duty-free entry to the EEC market. The South Asian tea producers seem to be an obvious exception, but the Common External Tariff only applies to packaged tea, which now receives duty- free treatment under the EEC's 1974 GSP offer. Excise taxes, which affect coffee, cocoa, tea and bananas in European countries in particular Germany and Italy are of far more importance in restrict ing demand, and countries which would benefit from their removal are among the poorer Ides. It has been estimated that the removal of revenue charges would increase import demand for these products by $100m to SaOOm.1

The main problem facing exporters of inedible agricultural raw mat erials is similar to that facing tropical foodstuffs that of price fluctua tions. However, because most of these products compete with sub stitutes produced in developed countries, price fluctuations are more serious. If importers switch to synthetics or other developed-country alternative products when Idc raw material prices are high and supplies short, the change may become permanent. Where production tech niques have to be adapted to cope with a different raw material input, and a significant capital outlay is involved, importers are unlikely to revert to Idc suppliers when their exports increase and prices fall. Thus, export instability can erode export markets over the long term.

Export instability has long been assumed to be of major importance to Ides because of its supposed adverse impact on Ides' growth poten tial. This view has more credibility, particularly in the case of primary products facing synthetic competition, than that postulating a long- term decline in primary producers' terms of trade. Nevertheless, empirical evidence is contradictory and the case is unproven. And even if there was a clear-cut case indicating the damaging effects of export instability, considerable obstacles would have to be overcome hi order to solve this problem.

The problem of instability of export earnings can be tackled by financial measures, which as hi the proposed EEC scheme for

1 Hans Singer et al. Trade Liberalisation, Employment and Income Distribution, IDS Discussion Paper No. 31, 1974, Project HI, p. 19.

18


Associates provide export earnings guarantees on the basis of an agreed 'normal' price and agreed average export quantities. Such measures, however, fail to overcome the problem, outlined above, fac ing exporters of primary commodities competing with synthetics. In these cases, agreements are required not only in respect of prices but also on the quantities to be exported. Despite many attempts, there are few examples of successful commodity agreements of either sort; because of the difficulty of reconciling different interests, producers and consumers are liable to have conflicting views on price levels and quantity growth rates, while individual producers and consumers are liable to be in conflict among themselves over market shares. More over, the oil crisis and the commodity price boom have not enhanced the prospects for the successful negotiation of commodity agreements on tropical products. The massive increase in oil prices is likely to reduce competition of synthetics with tropical raw materials, and hence diminish the interest of Idc exporters in stabilisation agreements. The rise in other commodity prices may make developed countries more amenable to such agreements but the reverse will be true for many Idc producers. Indeed, so far as Idc producers are concerned, if attention is to be directed towards tropical products, then it would probably be better directed towards the removal or reduction of mfn duties on processed tropical products. Greater gains are likely to accrue from efforts to secure the removal of tariffs on goods at the early stages of processing, which currently inhibit the development of processing industries in Ides and the growth of export earnings, than from efforts to establish commodity agreements.

There are, however, two reasons why proposals for commodity stabilisation agreements should not be ignored altogether. In the first place, if the EEC stabilisation scheme1 is introduced, it could provide a foundation, and an incentive, for more widely-based agreements. It is generally in the interests of Ides to conclude global rather than regional agreements. And it is particularly in the interests of those that will be excluded from the EEC schemes to do so: these countries, which represent the majority of the Third World's population, have an interest in ensuring that new trade (or aid2) agreements do not add to the vested interests of certain Ides in treatment which discriminates against other Ides. Second, although some Ides have made considerable gains over the past year from the commodity boom, all of them face rapidly-rising import prices as a result of inflation in the developed countries and the oil price rise. It may be that some trade-off might be made between developed countries' interest in relatively stable prices and secure supplies and Ides' interest in protecting themselves

1 The products involved arc sugar, groundnut] and groundnut oil, cotton, cocoa, coffee, bananas, and copper.

In principle, the EEC export revenue stabilisation schemes are intended to be self-financing. In practice, they include an aid element, which could result in a diversion of aid to associate countries.

19


from the effects of inflation on their import bills. The latter implies the need to consider not only methods of ironing out fluctuations in export volume and price, but also some means of ensuring a growth in export earnings or foreign exchange inflows to compensate for higher import prices. Various possible solutions exist, of which one is a commodity agreement scheme in which commodity prices are fixed with reference to an import prices index. Whether or not Ides can secure a trade-off in this way, it is clear that they will want some means by which they can be compensated for rising import prices.

Manufactures and agricultural processed productsAround two-thirds of developing countries' exports of manufactures and semi-manufactures are to developed countries, but these items account for a relatively small proportion of their total exports to developed countries. According to the definition of manufactures and semi-manufactures, these products represented between 16% and 34% of Idc exports to developed countries in 1970. This report uses the UNCTAD definition of manufactures, which excludes petroleum products and unworked non-ferrous metals but includes processed agricultural products. By this definition 18% of Idc exports to devel oped countries were manufactures. For the majority of Ides, manu factures exports are even less significant than this proportion suggests since production is highly concentrated among a few countries. As can be seen from Table 4, there were only fifteen countries where exports of manufactures account for more than 20% of total exports by value, while for more than half the Ides covered such exports accounted for less than 5%. The concentration is also illustrated by the fact that, in 1971, 64% of manufactures exports to developed countries came from the six leading Idc manufactures exporters, and 88% from the twenty leading exporters.1 With two major exceptions India and Pakistan the main manufactures exporters tend to be among the richer Ides.2

Unlike most other exports from Ides, exports of manufactures to developed countries as a whole have grown rapidly, albeit from a small base. Between 1962 and 1970 the average annual growth rate of these exports was 13.6%, and thus their share of total Idc exports increased from 11.6% to 18.3%. This growth rate was, however, no greater than the average rise hi import demand for manufactures in developed countries, so that Ides' share of their imports has remained roughly 5%. The performance of different types of Idc manufactures

1 UNCTAD 1972 Review, Table A.2. Taiwan, a leading Idc manufactures exporter, is excluded since it is no longer a UN member.

1 In terms of the share of manufactures in total exports Hong Kong, S. Korea, Israel, Taiwan. Yugoslavia, India, Pakistan, and Lebanon are the main manufactures exporters (see Table 3). In terms of their share of total Idc manufactures exports, Hong Kong, S. Korea, Yugoslavia, India, Mexico and Brazil are the leaders. Of these ten countries only three had an average GNP per head below $400 in 1971: S. Korea ($290), Pakistan ($130) and India ($110).

20

TAB

LE 4

Ldc

expo

rter

s by

mai

n ex

port

com

mod

ity g

roup

s, p

opul

atio

n an

d in

com

eE

xpor

ting

Cou

ntry

1

Petr

oleu

m E

xpor

ters

Lib

yaV

enez

uela

Tri

nida

d &

Tob

ago

Saud

i A

rabi

aIr

anIr

aqA

lger

iaN

iger

iaIn

done

sia

Man

ufac

ture

s ex

porte

rsIs

rael

Gre

ece

Sing

apor

eSp

ain

Hon

g K

ong2

Yug

osla

via

Pop

ulat

ion

GN

P m

id-1

971

per h

ead

m

1971

$

2-0

10-6 1-0

7-4

29-8 9-8

14-4

56-5

119-

1

3-0

9-0

2-1

34-0 4-0

20-7

1,45

01,

060

940

540

450

370

360

140 80

2,19

01,

250

1,20

01,

100

900

730

Ave

rage

M

erch

andi

se e

xpor

ts (

1967

-196

9):

% o

f to

tal

annu

al

Fue

ls

Man

ufac

- O

res,

A

gric

ultu

ral

grow

th i

n tu

res

min

eral

s pr

oduc

ts

GN

P p

er h

ead

and

met

als

1960

-197

1o/

/O

1 1

M

17-6 2-3

2-1

8-1

6-5

2-4

3-5

2-1

1-3

4-7

6-7

6-8

5-6

5-8

4-5

99-5

92-2

77-6

92-1

89-5

92-6

74-0

31-9

41-3 0-0

1-1

20-0 7-0

0-3

1-2

0-0

0-7

12-7 0-0

3-4

0-0

3-0

1-2

18-4

69-7

21-0

24-0

47-7

92-1

58-3

0-1

5-5

0-4

0-0

1-0

0-0

2-5

5-8

6-5

3-8

13-7 1-6

5-2

1-2

11-1

0-1

1-4

8-7

n.a.

5-1

3-6

18-1

52-6

30-6

25-3

64-0

45-7

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29-3

w Z 5 o H 0 Z o Z ya C/

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TAB

LE 4

(co

ntd.

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Ldc

expo

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mai

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port

com

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ity g

roup

s, p

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d in

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e

Exp

ortin

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ount

ry1

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ulat

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GN

P m

id-1

971

per

head

m

19

71

$

Ave

rage

M

erch

andi

se e

xpor

ts (1

967-

1969

): %

of t

otal

an

nual

Fu

els

Man

ufac

- O

res,

A

gric

ultu

ral

grow

th i

n tu

res

min

eral

s pr

oduc

ts

GN

P pe

r he

ad

and

met

als

1960

-197

1

Man

ufac

ture

s ex

port

ers

(con

td.)

Mex

ico

Leb

anon

Tai

wan

Gua

tem

ala8

El S

alva

dor

Tun

isia

S. K

orea

Egyp

t Pa

kist

anIn

dia

Non

-fue

l min

eral

Cyp

rus

Chi

leJa

mai

caG

abon

Peru

52-4 2-8

14-9 5-4

3-7

5-2

31-8

34-1

62

-755

1-1

expo

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0-6

10-0 1-9

0-5

14-0

700

660

430

390

320

320

290

220

130

110

1,10

0 76

072

070

048

0

3-5

0-7

7-1

1-7

1-6

2-8

7-4

1-6

3-7

1-3

5-7

2-4

3-3

5-2

2-0

3-0

0-3

0-8

0-1

1-7

20-4 0-6

3-2

1-1

0-8

0-0

0-1

2-7

33-7 1-1

19-3

51-6

64-3

21-2

29-8

20-1

73-3

25-2

51

-051

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3-5

8-5

7-1

0-0

18-4 2-5

1-1

1-3

1-3

20-1 7-2

1-0

0-5

10-7

24-7

88

-350

-828

-435

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59-2

45-8

29-6

78-7

67-2

39-1

18-8

70-0

47-3

36-5

57-0

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*~ '

Botswana Kenya

m ^fvo inOS OO

O fiO m

O t--o r-

o soO m

SO ^Om o

§ §

•*!• fNo r^

0

3ex

Gambia Malagasy Re

0 0Os fNoo so

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p 33

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cCD

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so O0 0

so n->CO OO

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-H OO

f> O

28

fN OOro fNfH

Tanzania Dahomey

fN m>n ooOS OO

n Tf0 0

O ON-* o

0 00 0

in oofN —(

1

88

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rtC

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)

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port

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roup

s, p

opul

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com

e

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ortin

g C

ount

ry1

Pop

ulat

ion

GN

P

mid

197

1 pe

r he

ad

m

1971

9

Agr

icul

tura

l exp

orte

rs (c

ontd

.)M

alaw

i 4-

6A

fgha

nist

an

Burm

aC

had

Eth

iopi

a M

ali

Som

alia

Upp

er V

olta

Bu

rund

i

14-6

29

-6 3-7

25-2

5-

12-

95-

5 3-

6

90 80

80 80 80

70 70 70

60

Ave

rage

M

erch

andi

se e

xpor

ts (

1967

-196

9):

% o

f to

tal

annu

al

Fue

ls

Man

ufac

- O

res,

A

gric

ultu

ral

grow

th i

n tu

res

min

eral

s pr

oduc

ts

GN

P p

er h

ead

and

met

als

1960

-197

1/O 2-5

0-3

0-3

0-6

2-7

1-4

-0-9 0-

9 1-

1

0-0

10-9

0-

50-

00-

0 0-

80-

30-

0 0-

0

1-5

8-0

1-0

1-0

0-4

1-5

2-3

4-0

2-8

0-0

0-0

4-3

0-3

0-6

0-8

0-0

0-0

0-0

80-5

79-6

93

-398

-796

-4

93-1

89-0

96-0

94

.4

> > I

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* C

ount

ries

in e

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grou

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e ra

nked

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of G

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. s

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'

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196

7-19

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, whi

ch a

re c

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ified

as

man

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ture

s in

the

UN

Tra

de Y

earb

ooks

, hav

e be

en c

lass

ified

as

min

eral

s fo

r the

pur

pose

of th

is ta

ble.

The

y ac

coun

t for

64-

4, 2

2-1,

27-0

and

48-

0% o

f the

exp

orts

of S

ierr

a L

eone

, Les

otho

, Con

go a

nd C

entr

al A

fric

anR

epub

lic r

espe

ctiv

ely.

6

1966

-71

only

.So

urce

s: T

rade

dat

a fr

om U

N Y

earb

ooks

of T

rade

Sta

tistic

s.G

NP

and

popu

latio

n fr

om I

BR

D W

orld

Ban

k A

tlas

1973

.


exports to developed countries has varied widely as can be seen from Table 5. In all but four product groups, the rate of growth in Idc exports to developed countries between 1962 and 1970 actually exceeded the rate of growth of exports from elsewhere, so that there was no change in their overall share.

TABLE 5

Imports of manufactures from Ides by twenty-one developed market economy countries

Imports Share Share Average annual growth of Product group from of of Imports In

Ides product imports 1962-1970 1970-19711971 $m

Clothing 1,453-2Textiles 1,174-2Engineering and

metal products 1,010-6Food products 850-3Miscellaneous light

manufactures 755-2Wood products and

furniture 664-6Chemicals 510-3Leather and

footwear 396-8Iron and steel 277-7Worked non-ferrous

metals 140-5Drink and tobacco 101 -0Non-metallic mineral

manufactures 72-0Pulp, paper and

board 44-5Road motor

vehicles 42-7Rubber products 27-8Total 7,521-6

group In total Imports from Ides In 1971 %

19-315-6

13-411-3

10-0

8-86-8

5-33-7

1-91-3

1-0

0-6

0-60-4

1000

from Ides In total Imports In 1971

%

24-711-7

1-916-4

8-6

11-83-3

14-22-6

5-14.4

2-4

0-7

0-21-3

49

from Ides

%

21-47-8

31-08-4

26-5

11-89-4

15-724-9

24-2-4-5

12-6

12-9

12-021-5

136

from world

%

18-19-4

13-97-9

16-0

10-314-2

14-413-3

15-38-0

11-9

9-2

20-313-7

136

from Ides

%

32-017-2

26-09-3

-7-4

7-911-2

28-9

- 5-5

-12-5-51-9

16-4

4-5

74-61-2

12-2

from world

%

21-816-5

12-110-7

12-1

14-09-4

20-51-2

-6-610-8

10-8

2-6

26-917-612-7

Source: UNCTAD, Trade in Manufactures of Developing Countries: 1972 Review, TD/B/C.2/124, June 1973, Tables 2.2 and 2.5.

27


The concentration of developing country exports among a few pro ducts, as well as among few exporters, is another notable feature of their manufactures trade: it will be seen in Table 5 that 70% of Idc exports are accounted for by the top five product groups listed, while clothing alone accounts for nearly a fifth of their exports of manu factures.

There has been a general tendency for Idc exporters to be relatively disadvantaged as compared with developed country exporters, because of the structure of trade barriers (see below) and because recent trade liberalisation has been largely confined to developed countries. Ldc exporters of manufactures have recently, however, been offered pre ferential treatment for their products with the implementation of the Generalised Scheme of Preferences (GSP). This might suggest that efforts to secure further liberalisation in this area should not be a high priority for Ides. Such a conclusion might apparently be supported by the relative insignificance of manufactures exports to most Ides' exports and their healthy growth rate even before liberalisation compared with other Idc exports. And the fact that the countries likely to gain most from liberalisation of manufactures trade the leading Idc exporters tend to be relatively prosperous would also appear to suggest that such liberalisation should have low priority, given that priority is accorded to liberalisation benefiting the poorer Ides. But this argument overestimates the value of the GSP as a trade liberalis ing measure, and underestimates both the extent of barriers to trade in manufactures still in existence and the potential gains of liberalisa tion to the poorer Ides including, among the major exporters, India and Pakistan.

Tariff barriersThe tariff structure facing exports of manufactures from developing countries has two significant features. First, tariffs on goods of export interest to Ides are generally higher than those faced by developed country exporters, although this situation, observed in the mid-sixties, has probably eased somewhat since Ides have broadened their range of manufactures exports. Secondly, tariff rates on Ides' exports tend to rise with progressive increases in the degree of fabrication. Thus the effective rates of protection against Idc exports tend to be higher than the nominal rates. Tariffs generally limit demand for the imports to which they are applied. To the extent that Idc producers need preferen tial treatment to compete initially in developed country markets, tariffs may also inhibit the establishment of Idc manufacturing industries, which frequently cannot produce efficiently for the domestic market alone. And the escalation of tariffs on Idc products has the effect of inhibiting the development of processing industries within Ides.

The two major post-war moves to liberalise trade the Kennedy Round and the establishment of free trade areas within Europe (and

28


in particular the recent enlargement of the EEC) have increased the discrimination against exporters by developed countries. EEC enlargement, moreover, has actually led to an increase in some of the tariff (and non-tariff) barriers facing certain developing and devel oped countries. The special preferences accorded to certain Ides under the various EEC agreements and the implementation of the GSP help to mitigate the unfavourable effects of developed countries' tariff structure on Ides. But both have a limited impact: the former because they are accorded to countries accounting for only a small proportion of the Third World's population and the latter because of shortcomings in its operation which are discussed below. The planned extension of EEC association agreements to Commonwealth African, Pacific and Caribbean countries will offset their loss of preferential access to the UK market and enhance their trading opportunities in the rest of the EEC market, but it will worsen the relative position of those countries and particularly the Commonwealth Asian countries excluded from such agreements.

The introduction of the GSP, with the aim of providing preferential tariff access to all Ides over a wide range of manufactured goods, including processed agricultural goods, could have been an important step forward for Ides insofar as tariffs, and third country competition at mfn tariff rates, constitute a major barrier to the growth of Idc manufactures exports. The non-discriminatory between Ides extension of preferences would have eroded the preferential margins enjoyed by those countries with special agreements with particular developed countries. But it could be argued that this loss would be compensated by the gain of preferential markets in a far greater num ber of other developed countries. In the event, the GSP has not yet resulted in the widespread liberalisation of tariffs on manufactured goods and even if it had, the remaining non-tariff barriers would have been a sizable impediment to the expansion of important manu factures exports from Ides.

The first limitation of the impact of the GSP is that the USA and Canada, together accounting for 45% 1 of imports of manufactures from Ides to developed countries, have not yet implemented their schemes. Initially, the delay in the implementation of the US GSP was largely due to objections to the reverse preferences offered to the EEC members by associate countries as part of the association agree ments. Now implementation of a new GSP version, which will not be offered to Ides providing reverse preferences to developed countries, awaits the passing of the US Trade Reform Bill. It is also significant that both the USA and Canada have experienced a relatively rapid growth of manufactures imports from Ides in recent years. The UNCTAD appraisal of the proposed US GSP (on the basis of the

1 USA 42-1% and Canada 2-9%, 1971 figures.

29


product coverage included in the earlier 1970 proposal) suggests that its implementation would be unlikely to foster any marked expansion of trade. Even so, until the North American GSPs are implemented, the potential impact of the whole scheme is virtually halved, and the prospects for improving the individual schemes in existence are limited by fears that this will lead to a trade diversion of Idc exports from North American markets and consequently an increase in the 'burden' on preference-giving countries.

Secondly, certain products of key export interest to Ides are not given preferential treatment under existing GSPs. Few countries extend preferences under the GSP to processed agricultural products. Agricul tural exports represent roughly 45% of all dutiable exports by GSP beneficiaries to countries operating a GSP. Yet on the basis of 1970 trade flows, UNCTAD1 estimated that less than $200m worth or 4% of these agricultural exports were eligible for preferential treat ment under the GSP.a Moreover, under most GSPs, mm tariffs on agricultural goods are only subject to proportional cuts and not reduced to zero for beneficiaries. This picture is unlikely to have been significantly changed by the modest extension of preferences to Ides' processed agricultural goods that took place with the introduction of the enlarged EEC's GSP in January 1974 (which also signified the end ing of the independent UK GSP, which was more generous in its treat ment of such goods than the new EEC scheme). Meanwhile, the cover age of GSPs in respect of manufactured and semi-manufactured goods in BTN Chapters 25-99 is such that a substantial volume of Idc exports involving relatively few products is excluded: UNCTAD estimates suggest that more than three-fifths of dutiable imports of such pro ducts are excluded by preference-giving countries.8 These exclusions affect such major items as textiles, leather and petroleum products, as well as some minor items, for instance, china and glassware, furniture, cycles and motor cycles under the Scandinavian schemes, and some rubber products under the Japanese and Scandinavian schemes.

The operation of individual schemes further limits the benefits to Idc exporters. While most schemes offer duty-free entry for the products covered, some countries grant only linear reductions in tariffs in all or some products, particularly agricultural processed goods. More import ant is the fact that preferences are hedged by safeguard measures limitations on the value of exports eligible for preferences and escape clauses allowing the suspension of preferences should exports cause or

1 UNCTAD, Review of the Schemes of Generalised Preferences, TD/B/C. 5/9, 1973.* Some dutiable agricultural exports are primary products, for which the Scheme was not devised.

If a conservative definition is employed, taking into account only those agricultural goods in the UNCTAD manufactures groups of food and drink and tobacco products, the proportion of pro cessed agricultural goods receiving preferences under the GSP rises from 4% to roughly 33%. This assumes that all Idc processed agricultural goods defined as manufactures face mfn duties. No allowance is made to exclude those exports which enjoy special preferences in certain markets.

1 Op. c!l, p. 14.

30


threaten to cause some, ill-defined, injury to domestic producers, or market disruption, in the preference-giving country. The general effect of the limitations, as operated by the EEC and Japan, is to reduce preferential imports of 'sensitive' products, on which tariff quotas are strictly applied, to a level below the actual value of imports in the products concerned, despite some annual allowance for growth. To some extent this affects only the dominant Idc exporters, because of limits on the share of the quota available to any one country. These countries are arguably the least in need of preferential access, since their past performance indicates that they can cope with tariff barriers. However, the complex system of exporting and importing country quotas operated in the EEC scheme, combined with the low level of the global quotas, does little to foster the expansion of exports from even the weaker Idc producers. Indeed, this system creates the uncertainty that one would expect quota schemes to avoid. Outside the EEC and Japanese GSP, safeguard clauses, which also apply to processed agricultural products under the EEC and Japanese schemes, are used to ensure the right to protect domestic industries should Idc imports constitute a danger. Safeguard clauses clearly inhibit the expansion of manufactures exports, on the basis of the availability of preferences, because of uncertainty as to when and how they might be invoked. Complicated rules of origin further limit the benefits avail able under the schemes.

UNCTAD1 estimated that on the basis of 1970 trade flows, approx imately $2.1 billion of GSP beneficiaries' exports to preference-giving countries were eligible for GSP treatment. However, because of the preference quotas and origin requirements, only $1.1 billion of those exports would actually have received preferential treatment. Thus, leaving aside processed agricultural products, only about 18% of bene ficiaries' manufactured exports benefit from the GSP. These benefits, moreover, accrue significantly to only a limited number of the more prosperous Ides: leaving aside India and South Korea, with incomes per head of $110 and $290 respectively, the five main beneficiaries Yugoslavia, Iran, Brazil, Mexico, and Argentina all have incomes per head in excess of $400.

Preliminary information from more recent studies of the trade effects of certain GSPs suggests that developing countries are increas ingly taking advantage of generalised preferences. As a result, the value of Idc exports receiving preferential treatment under the GSP has been rising. Some individual GSPs have, moreover, been improved since the UNCTAD study was undertaken. But it is clear that, despite the GSP, tariffs remain obstacles to the expansion of certain Idc exports of manufactured and processed goods. And although the special preferences offered to associate EEC countries do result in a

» Ibid, p. 14.

31


more favourable tariff structure for certain Ides in the EEC market, the proportion of Idc manufactures exports to benefit is small as is the proportion of the total Idc population involved.

Non-tariff barriersNon-tariff barriers (NTBs) to trade in manufactures and semi-manu factures consist of a wide range of policy measures, not all of which are related to commercial policy or adopted with the object of restrict ing trade. The precise effects, and to a lesser extent the incidence, of NTBs are far from clear. Nevertheless, the general view is that NTBs are now relatively more important than tariffs in their trade-restricting effects.

Using the UNCTAD classification, NTBs may be divided into three categories: (i) commercial policy measures designed primarily to pro tect domestic suppliers from foreign competition, including quanti tative restrictions and internal measures affecting costs and prices; (ii) measures designed to deal with problems unrelated to commercial marketing restrictions, health and safety regulations, customs regula- policy, but which are sometimes used for protectionist ends, including tions; (iii) measures consistently applied without trade-distorting intent, including regional policies. The last type of NTB is generally not regarded as negotiable and such work as has been done on the effects of NTBs on Ides' exports has been confined to the first two types. In particular, attention has been focused on quantitative restrictions which are regarded as the most harmful in their effects on Ides' exports, because of the absolute limits to trade they impose.

Although there has been some liberalisation of NTBs, which were at their height in the immediate post-war period, this has proceeded at a slower pace than the liberalisation of tariff barriers. Meanwhile, certain kinds of NTBs particularly, but not only, NTBs of the second and third type have increased with the greater involvement of governments in social and economic activities. And, as with tariff barriers, there are good grounds for considering that the adverse effects of NTBs are greater on Idc exports of manufactures and semi manufactures than on developed country exports. First, NTBs need more expertise and experience to overcome than do tariff barriers and, in the case of quantitative restrictions, require flexibility to adjust to changed market conditions. It is these qualities which Ides tend in general to lack, in comparison with developed countries. Second, studies of the first two types of NTBs have convincingly demonstrated that the incidence of NTBs on Ides' exports is proportionally greater than on those of developed countries. In 1969, for instance, 11% of all imports by developed countries were subject to NTBs as compared with 28.2% of their imports from Ides.1

1 UN Economic and Social Council estimate quoted in Chapter IV, p. 13 of Hans Singer el al.. Trade Liberalisation, Employment and Income Distribution, IDS Discussion Paper No. 13, 1973,

32


This discrimination against Idc exports is largely a reflection of the composition of Idc manufactures exports: products of major interest to Ides are frequently those products that are least efficiently produced by developed countries and are hence more heavily protected. A recent attempt was made to estimate the intensity of NTBs on diff erent product groups of export interest to Ides.1 This sought to measure the incidence of NTBs of the first two types on products with relatively low value-added per employee. (A summary of their findings and methodology is presented in Table 6.) Clothing proved to have the highest NTB incidence, followed by processed foods, electrical appli ances and equipment, and textiles all products of considerable interest to Ides. The study also noted that, as in the case of tariffs, the incidence of NTBs tended to increase with the level of fabrication. This finding is illustrated in Table 6 by the difference between the NTB incidence for textiles and that for clothing, and emerged clearly from more detailed tables in the study on individual product groups for instance cocoa butter had an NTB incidence of 1.1, while that for chocolate preparations was 6.2.2

Quantitative restrictions on developed countries' imports of manu factures and semi-manufactures again tend to be mainly on products of relatively greater export interest to Ides. Excluding textiles and clothing, UNCTAD has estimated that 61.9% of all quantitative restrictions fall on processed agricultural goods.3 The main product groups affected are processed meat, cereal, fruit and vegetable pro ducts, edible oils and fats, alcoholic beverages, and tobacco.' Among industrial products, the main incidence has been on textiles and cloth ing, both inside and outside the GATT Long Term Textile Agreement a situation which is unlikely to be changed by the recently negotiated Multifibre Textile Arrangement.5 Petroleum products, chemical pro ducts, and engineering and metal products are other export groups on which quantitative restrictions are significant.

Liberalisation of trade barriersThree main groups of manufactures stand out as being subject to con siderable trade barriers and are of great interest to Idc exporters, existing and potential. They are clothing, textiles, and processed agricultural products. The more important non-tariff barriers to trade in clothing and textiles are no longer a subject for the GATT talks, following the signing of the Multifibre Textile Arrangement (MTA). which is considered below. Nevertheless, the issues involved in liberalis-

1 C. Pestieau and J. Henry, Non-Tariff Barriers as a Problem In International Development, Private Planning Association of Canada, 1972.

• Ibid, Table 23, pp. 84-89.• UNCTAD, Liberalisation of tariff and non-tariff barriers. Part I, TD/B/C.2/83. Geneva. 1970, p. 31.• Ibid, p. 32.* See below p. 39.

33


ing processed agricultural goods and generally reducing barriers to manufactures trade are also of relevance to Idc trade in clothing and textiles. In looking at possible approaches to liberalisation, a number of points should be noted. First, it is clear that tariff and non-tariff barriers have to be tackled together. Second, as is considered hi the

TABLE 6Incidence of non-tariff barriers1 applied by industrial countries on manufactures of export interest to less developed countries,

1969Value of Idc exports to

Product group Index of NTB OECD countriesIncidence 1 1969

$'000

Clothing fTl1,074,925Processed food2 4.28 Electrical and light transport

equipment 3-97 448,423Textiles 3-03 937,825Chemicals 1-98 538,422Industrial materials2 1 -21 Miscellaneous manufactures 0-98 578,276 Footwear and other leather,

plastic and rubber products 0-91 175,635Optical and control instruments 0-4 39,997Miscellaneous metal manufactures 0-3 77,024Non-electrical machinery 0-25 136,464Transport equipment1 0-00 108,961Furniture1 0-00 51,840Notes: 1 Zero incidence does not necessarily imply that no NTBs are applied:

those which do exist may have become negligible via averaging. The method used assumes that NTBs, whether, for instance, a quota or a customs classification difficulty, are equal in their effects; that the more countries and the more NTBs applied to a product, the greater the incidence; and that the larger the size of the market in the country applying the NTBs, the greater their incidence. NTB incidence was

n measured according to the formula: Wj = [Ni(Yi) + ... + Nn(Yn)]/ S Yi

where Wj is the weighted incidence of NTBs applied to product j adjusted for the market size of the applying country; Ni is the number of NTBs imposed on j by country i; Yi is the GNP (indicator of market size) of

n country i; S Yi is the combined GNP of all countries considered.

i=l * Sufficiently detailed data not available to indicate value of Idc exports

involved in this product groupSource: C. Pestieau and J. Henry, Non-Tariff Barriers as a Problem in International

Development, Private Planning Association of Canada, 1972, p. 84.

34


next section, a corollary of effective trade liberalisation is that the problems which gave rise to the trade barriers in the first place must be solved in such a way as to avoid the reimposition or the use of different trade barriers. Third, conflicts of interests between different groups of Ides may arise. The liberalisation options can be ranked. The best outcome of the negotiations for Ides would be a decision to improve the GSP, along the lines indicated earlier,1 so as to provide unlimited preferential access for Idc exports of manufactured and pro cessed goods. Failing this, the removal of barriers which restrict access for Idc products, such as quantitative restrictions and CAP levies, should generally have priority over the extension of tariff preferences or reduction of mm duties. The first set of barriers tends to limit Idc export opportunities more than do tariffs. So far as the latter are con cerned, it is clearly advantageous that Ides should receive further tariff preferences rather than share mm tariff reductions with developed countries. Inevitably, mfn reductions on products included in the GSPs will erode existing margins of preference. However, if the GSP system is not improved, mfn cuts could be beneficial. They would not, as in the case of the present GSP, be subject to arbitrary safeguards applicable at the sole discretion of preference-giving countries, and they would operate in those developed countries not yet offering a GSP. Further, where mfn reductions occur on products for which GSP tariff quotas are below the current level of Idc exports, or which are excluded from GSPs, the Idc exporters would gain. This latter benefit is unlikely, however, unless the tariff cuts are across-the-board, rather than product-by-product or sectoral. For without an across-the-board approach, the factors which caused developed countries to exclude or restrict preferences on certain products, would probably lead them to ignore these products in the negotiations.

In considering Ides' interests in liberalisation, two broad areas of actual or potential conflict emerge. The first derives from the EEC special preferences, which mainly affect processed agricultural goods. Associates and Associables have an interest hi ensuring that these pre ferences are not diluted by the extension of the EEC's GSP coverage to more processed agricultural goods or eroded by an increase in the GSP preferences on such goods both of which would be hi the interests of non-associables. But the successful pursuit of associable and non-associable countries' interests hi this sphere could have reper cussions on these Ides as well as on non-associables. Because of developed countries' concern that the burden be shared equitably, failure to improve the EEC's GSP is likely to impede improvements hi others' GSPs, and thus reduce the potential expansion of trading opportunities for all Ides. Even disregarding this possible outcome, the real importance of the conflict of interest is debatable. The vested

1 Seep. 29.

35


interests of present associate countries will be reduced by the enlarge ment of the association agreement, and the consequent sharing of pre ferences with some of the more dynamic Commonwealth Associables. Further, part of the conflict arises from the fact that especially where products affected by CAP are concerned access to the EEC market is limited even for Associates and Associables. If the extension of pre ferences to non-associables were accompanied by the removal of access restrictions the conflict would be reduced.

The second area of potential conflict is that between established exporters of manufactures and new Idc entrants. For the former, the main trade problems arise from barriers which prevent them from competing with domestic producers and the developed country sup pliers on an equitable basis. It matters less to them whether trade bar riers are removed on a basis which gives Ides preferential access or which gives all external suppliers the same improved market access. For new Idc entrants, arguably preferential treatment is required until they, too, become established. But for some products, competition from other Ides can be as important for new entrants as competition from other suppliers. For this reason, it has been suggested that the EEC should provide duty-free reserve quotas within the GSP for each of the new entrants on products of interest to those countries often the smaller and poorer Ides. This approach would provide the weaker countries with guaranteed access, but no tariff advantage over other Ides. Other, simpler, approaches could provide both access and tariff preferences. But such schemes have several shortcomings. They are administratively cumbersome. They create vested interests among a limited number of Ides which might subsequently be an impediment to more widespread improvements in Ides' trading conditions and, other things being equal, they would restrict the GSP benefits available to other Ides including such poor, but established, suppliers as India and Pakistan. If particular efforts are to be made to improve the trading opportunities of new entrants as seems desirable then an exten sion of duty-free entry under the GSP to products of particular interest to these countries, such as handicrafts and processed agricul tural goods, is preferable to such schemes. The most compelling objec tion to them, however, is their implicit acceptance of the need for tariff quotas within GSPs and their failure to cope with the more pressing problem the limited access for all Ides' exports of certain products. If freer access were granted, the problems of new Idc entrants competing with, among others, more established Idc exporters would be substantially lessened. The unfair advantages given by protection to domestic suppliers and to members of developed country free trade areas would be removed and export opportunities would be increased for all Ides.

36


Safeguards and adjustment assistanceTrade liberalisation implies that importing countries adopt some other measures of dealing with the problems that they sought to solve, or shelve, by imposition of trade barriers. The two main causes of trade barriers against imports (leaving aside those NTBs which occur incidentally as a result of domestic policies unrelated to commercial aims) are balance of payments problems and the existence of non-com petitive domestic industries. The latter are the chief cause for the imposition by developed countries of trade barriers against imports from developing countries. The removal of these trade barriers will generally increase economic welfare in the importing country as well as in the exporting country. But the entry of cheaper imports into the domestic market may impose considerable costs on those engaged in the affected industry even if the country as a whole gains. Government measures may assist the adjustment of industries to the new market conditions and so lessen the hardships borne by particular groups. Such measures are, however, essentially medium- to long-term in their effects. In the short-term, those affected by liberalisation should have some safeguards against a rapid growth of imports that severely disrupts the domestic market. And generally safeguards are required to avoid market disruption through dumping: that is, an influx of goods at prices below those prevailing in the country of origin. It is, however, important, that a balance is struck between short-term safe guards and measures which will permit the growth of free trade.

International agreement on rules to bring about such a balance does not currently exist. There are two international provisions which permit countries to impose trade barriers when external competition threatens to disrupt domestic industries: Article 6 of GAIT (the anti-dumping code) and Article 19 of GATT which authorises emergency import restraints, under rather strict conditions, when market disruption is not caused by 'dumping'. Article 19 has largely been ignored by GATT signatories mainly because emergency action under the Article has to be across-the-board no discriminatory safeguards may be applied. As a 'liberal' safeguard, ie a safeguard designed to further free trade, it is, moreover, unsatisfactory. In taking emergency action under its provisions, importing governments are not committed to any time scale for a return to free trade. Thus 'emergency' protection can become permanent.

In the absence of an adequate international safeguard rule, the danger is that trade liberalisation will be impermanent and that exist ing free trade will be threatened. Where exporting countries have less economic power than importing countries as is the case of most Idcs vis-a-vis developed countries they can do little to protect themselves from unilateral trade-restricting action by importers. But if exporters and importers have equal economic strength, mutual retaliation can

37


lead to escalating protectionism. In present conditions, developed countries have a clear interest in agreeing to international regulation which will avoid this latter outcome. Meanwhile, developing countries entering or enlarging export markets for manufactures and processed goods have a direct interest in seeing that their growing exports are not subject to arbitrary and unilateral restriction in importing countries because of alleged 'market disruption', or subject to 'voluntary' export limitation agreements with no fixed terms, as happened in many cases of Ides' textile exports. Therefore, the GATT negotiations should aim at agreement on criteria for judging 'market disruption' and on inter national rules governing the application of safeguards. These should be based on three main principles: 1

(i) emergency protection should have a finite time limit, and be progressively cut back over the period. The time scale will pre sumably vary from sector to sector.

(ii) emergency protection must go together with a visible effort by the importing-country government, and the industry, to 'adjust', modernise or diversify into competitive lines of production.

(iii) some multilateral body, presumably GATT, should act as a 'referee' over such schemes.

Adjustment assistance programmes related to trade liberalisation in the developed countries have not generally been particularly effective. The question thus arises as to whether some international regulation of adjustment effort, to ensure that it actually takes place, would be desir able and feasible. The chief difficulty is that while the basic problems of adjustment are similar, the actual policies required to bring about adjustment will vary according to the particular countries involved, and, more specifically, the sectors and regions concerned. Individual countries may learn from the adjustment experience of other countries, but it would be virtually impossible to construct, let alone apply, an adjustment code which did more than specify basic principles. It is important, however, that the means of ensuring that adjustment takes place are not solely negative, such as a time limit on emergency protec tion. If countries failed to carry out the necessary adjustment, the time limit would probably be disregarded, and the new safeguard system would fall into disuse. A safeguard system is needed which places the onus of adjustment on the country imposing an emergency trade barrier, but which encourages that country to carry out adjustment. A way of achieving this object is to oblige countries requesting permis sion to erect trade barriers to provide details of the policies they will employ to facilitate the adjustment of the protected industry. These details would include a time schedule. If accepted by the body super-

1 See J. Tumlir, Proposals for Emergency Protection Against Sharp Increases in Imports, Guest Paper No. 1, Trade Policy Research Centre. London 1973.

38


vising the safeguards system, import restrictions could then be applied. And over the period of their application, the country concerned would be bound to report on its adjustment progress and to accept recom mendations from this body. Clearly any scheme of this sort would have to include also the possibility of imposing sanctions.

However, this proposal fails to deal with another major problem, that of creating conditions in developed countries such that they will be willing to remove existing trade barriers. For the reason stated earlier, an international approach to this problem is difficult. While basic principles for adjustment policies might be agreed internationally, and active measures to promote an exchange of information on such policies are desirable, the domestic problems of adjustment must be dealt with on a national or in the case of the EEC a multinational basis.

The textile exampleIt was pointed out initially that the present international safeguard system has largely been ignored. The new GATT Multifibre Textile Arrangement1 (MTA) which has effectively removed textiles and cloth ing from the general GATT talks except so far as tariffs are concerned, represents a new attempt, within one sector, to develop an alternative safeguard system. The MTA thus provides a picture of what may be possible rather than what may be desirable in a new safeguard system.

The perceived need for the MTA stemmed from the attempts throughout the 1960s by developed countries to slow down the flow of imports of textiles and clothing from developing countries. Successful imposition of 'voluntary' export limitation agreements on cottons led to a diversification (particularly in Far Eastern economies) into synthet ics and woollens. Pressure consequently grew to protect Western industries from low-cost (though often good-quality) competition in these sectors, and most developed countries imposed further restric tions on woollens and synthetics in the form of unilaterally imposed quotas or so-called bilateral restraint agreements. The MTA negotia tions were intended to allow some liberalisation of the textile trade and some regulation of the mass of restrictions in operation.

The agreement covers substantially all classes of textiles and clothing except those certified as 'handicraft' or 'cottage industry' products. Importing countries may, under Article 3, unilaterally limit imports of 'disruptive' products from particular sources (if consultation with the exporters fails to produce an agreement within sixty days) to the pre vious year's level in the first year of restrictions; thereafter, imports must be allowed to rise by a minimum rate of 6% annually (whether

1 Textiles' are defined as 'tops, yarns, piece-goods, made-up articles, garments and other textile manufactures of cotton, wool, man-made fibres or blends thereof*. Raw materials for man-made fabrics are also included in general terms.

39


in value or in volume is not specified). The exporting country, or coun tries, may, however, refer the matter to the Textile Surveillance Body, set up under the Arrangement, for review and recommendations and, in any case, measures to restrict trade adopted by signatories to the MTA have to be referred to this Body. Under Article 4 of the MTA, importing countries may conclude 'voluntary' bilateral agreements with exporting countries to 'eliminate real risks of market disruption' while ensuring 'the expansion and orderly development of trade in textiles and the equitable treatment of participating countries'. Such bilateral agreements should, in principle, be more liberal than unilateral restric tions. Developing countries' exports should also, in principle, be more liberally treated (with higher basic quotas and annual minimum growth rates) than those from other countries; exports from new entrants to particular markets should be allowed to grow more rapidly than past performance would indicate, and supplies from countries whose total exports are small should not be restricted. The Textiles Surveillance Body, responsible for the supervision of the Arrangement, has only weak sanctions. It must review any new quota arrangements or volun tary restrictions, and can recommend changes, but importing countries are under no obligation to follow its recommendations. Exporting countries may, however, appeal in the last resort to the GATT Council if they are not satisfied with the state of affairs.

The Arrangement is far from ideal for those developing countries with an interest in exporting textile products. The minimum growth rate is low compared to the actual growth of developed countries' textile imports from Ides (estimated to be 23.7% per annum in current values hi the period 1965-1972, and accelerating in the later years). There are no tune-related specific provisions for adjustment pro grammes hi importing countries (although Article 1 provides that 'actions taken under this Arrangement should be accompanied by ... appropriate economic and social policies ... to encourage businesses which are less competitive internationally to move progressively into more viable lines of production or into other sectors of the economy, and provide increased access to their markets for imports from less- developed countries'). Existing quantitative restrictions and 'voluntary' agreements can be retained as long as they are brought into line with the general provisions of the Arrangement (such as the 6% annual growth rate). The definition of 'market disruption' used is loose: 'a sharp and substantial increase or imminent increase of imports of particular products from one particular source', offered at a 'price sub stantially below those prevailing for similar goods of comparable quality in the market of the importing country' although the price comparison must, laudably, be with other imports as well as with domestic production. Meanwhile the effectiveness of the Surveillance Body is hampered by its lack of mandatory powers.

40


Despite these limitations, the Arrangement is probably better than nothing for Idc textile exporters, particularly in the present protec tionist climate. Without it, more arbitrary restrictions might have been added to those which preceded the MTA. And although the Surveil lance Body is, given the present state of international co-operation, necessarily weak, the procedural framework for its operation indicates that its establishment is a serious attempt to provide for the inter national regulation of trade. It is moreover almost the only authority of its kind which has the power to initiate reviews or make recommend ations of its own accord. It is too early to judge how the Arrange ment will work. Its value will depend on how strictly or liberally it is applied. But it is not a particularly hopeful indicator for progress in the general GATT talks on either safeguards or the liberalisation of Idc trade in 'sensitive products'.

41

Chapter 3Problems and Priorities for Ldcs in theGATT NegotiationsDeveloping countries' prospects in the GATT negotiations largely depend on the developed countries' willingness to engage in measures to liberalise trade, and in particular to negotiate in areas of interest to developing countries. The extent to which developed countries will be willing to improve market access for Idc exports will depend partly on their moral commitment to assist the Ides. But it will also depend on their interests in so doing. In other words, the existence of some mutual advantage in such liberalisation is an important condition for its taking place.

Developed countries' interests in the GATT talks lie largely, but not exclusively, in the improvement of trading conditions between them selves. The main impetus for the talks arose from the US desire to improve its trading position vis-a-vis the EEC and Japan. The USA was interested in securing the liberalisation of trade not only in industrial goods but also in agricultural products, and in the ending of discriminatory agreements between the EEC and sections of the Third World. Its Improved balance of payments position may well reduce its readiness to negotiate. And the oil crisis could have similar effects on most developed countries' willingness to engage in multi lateral trade talks, except insofar as these lead to international agree ment on rules that will prevent an outbreak of protectionism.

Developed countries do have interests hi trade liberalisation both among themselves and with developing countries and the oil crisis should reinforce these interests. The oil-induced deficits and the danger of recession increase the need for measures to expand the world economy. Developing countries constitute a small but not insignificant part of that economy: some 17% of developed countries' world exports were purchased by developing countries in 1972. The oil situa tion and the widespread rise in commodity prices underline the need for measures on a global basis to safeguard supplies and stabilise prices. Inflation in developed countries should also have increased their interest in trade liberalisation, particularly in respect of low-cost imports from Ides, and in price stabilisation agreements. At the same time, as developed countries move further towards high-wage econ omies with a concentration on capital- and technology-intensive industries, there is an incentive to encourage the international division of labour with the low-wage economies engaging in labour-intensive production and part-processing for export to the high-wage economies. The corollary to the location of labour-intensive industries in low-wage, developing-country economies is the assurance of investment access in

42

PROBLEMS AND PRIORITIES FOR LDCS

Ides and export access in developed countries. The same holds for the 'environmental' incentive to locate those industries which give rise to pollution outside developed countries.

The EEC, however, has shown that these particular interests of developed countries in the developing world can be pursued by bilat eral or regional deals with Ides rather than by multilateral agreements. While the EEC approach is clearly not in the interests of those Ides excluded from its regional agreements, it may also not be in the inter ests of the EEC itself. It is likely to encourage regionalist policies towards the Third World by other developed countries, which encounter limits on then- access to commercial and investment opp ortunities in the EEC sphere of influence. Quite apart from possible pol itical problems arising from such divisive policies, the long-term econ omic interests of the EEC can hardly be served by a concentration on the small countries of Africa and the Caribbean and a relative neglect of the large and important markets existing in Asia and Latin America. And unless the EEC adopts a more global approach, the potential for multilateral improvements in Ides' trading conditions will be consider ably reduced.

Ldcs have stated that they wish to participate in the GATT negotia tions on the basis that concessions granted to them by developed coun tries should be non-reciprocal and non-discriminatory as between Ides. The principle of non-discrimination is enshrined in the Articles of GATT, and it makes sense for Ides to seek non-discriminatory conces sions, since they reduce existing vested interests and prevent the crea tion of others. It is precisely the existence of vested interests which gives rise to conflict between Ides. Nevertheless, the short-term costs of those whose preferential treatment is diminished by non-discrim inatory concessions should be set against the gains that these same Ides will derive from improved access in non-preference-giving markets. Because of the difficulties created by providing discriminatory conces sions, any measures designed to assist the poorer Ides should take the form of non-discriminatory concessions on products of greatest interest to those countries rather than of preferential treatment.

The principle of non-reciprocity is, however, a curious one to adopt in negotiations, given that their underlying basis is that both or all parties should gain from a process of give and take, not that one side should take and the other give. The case for proposing this one-way traffic in concessions rests on the fact first that Ides are poor, and hence cannot afford to reciprocate, and second, that they have been relatively disadvantaged by the commercial policies of the rich, hence non-reciprorated concessions will help to restore the balance of advantage. However, it is questionable whether it is in the Ides' best interests to rely on the moral commitment of the rich to help the poor. It is true that developed countries will gain from unreciprocated steps

43


to improve Ides' trading position to the extent that an increase hi Ides' prosperity will increase their trading and investment opportunities in the Third World. But developed countries might be prepared to make more concessions if there were some other quid pro quo. Indeed, by effectively opting out of the negotiations, Idcs may find that they are encouraging the established tendency of developed countries to focus on the problems of trade amongst themselves. And they may lose in another way too, since reciprocity could bring additional benefits to Idcs, to the extent that liberalisation of Ides' own trade barriers encour ages a more efficient use of resources within their own economies.

On the other hand, developed countries' interests in the security of raw material supplies, the removal of trade barriers to their imports, and access and security for their investment, affect some Idcs more than others. And it may be that the smaller and poorer countries, because they have less to offer, will be left out if reciprocity became the basis for negotiations between developed and developing countries. The relevant question is whether they would be better served by the begging bowl tactic. All concessions, whether reciprocated or not, will benefit some Idcs more than others. If the more mfluential Idcs were to use their bargaining strength to increase the number of trade con cessions from the developed countries, the weaker Idcs would also stand to gain more, since such trade liberalisation would be non- discriminatory.

But even if Idcs were prepared to use their bargaining strength vis-a vis the developed countries, it is obvious that they cannot expect all the concessions they desire. Priorities must be adopted. In general terms, the most valuable concessions to Idcs are those which will improve their access to developed country markets. Ideally these should permit unlimited access on preferential terms for goods of export interest to Idcs. The question of access is, however, more important than that of preferences. Preferences are of limited value to Idc exporters if their access to markets is restricted. It is clear that if significant advances are to be made, priority must be given to the development of a liberal safeguards system, involving a commitment to adjustment assistance measures among developed countries. It will then be possible to remove trade barriers to products of export interest to Idcs which are particularly affected by such barriers without causing undue hardship to those engaged in uncompetitive industries in developed countries.

It was shown earlier that, while some products are of greater export interest to the poorer among Idcs, in most cases the greatest gains from liberalisation are likely to accrue initially to the richer Idcs. Even so, the liberalisation of trade hi competing primary and processed agricul tural goods and hi simpler manufactures could yield substantial gains to the poorer Idcs and it is to these three broad areas that priority

44

PROBLEMS AND PRIORITIES FOR LDCS

should be attached, particularly insofar as Idc trade with the EEC is concerned. In respect of primary products, the removal of trade bar riers to beef, rice and oil seeds from Ides should be singled out. Mean while, sugar emerges as a special case for priority treatment. The Ides which export sugar tend to be among the richer Ides although India is a significant exception. Nevertheless, it is important that their access to the British market, which could now be supplied by producers within the EEC, is assured, otherwise their position could be consider ably worsened. Ldc exports of agricultural processed products tend to receive smaller margins of preferences than other manufactures, when included in GSP offers, and are frequently excepted from the offers. This treatment is clearly illustrated in the EEC GSP. Yet these pro ducts, particularly processed foodstuffs, are of considerable interest to the poorest Ides, seeking to extend their meagre industrial base. Thus efforts should be made during the negotiations to improve the condi tions of access for these products, involving the removal of NTBs as well as tariffs. Preferably, the improvement should take place within the context of the GSP. The extension of the EEC GSP to cover handi crafts would also yield benefits to poorer Ides. Among other simple manufactures, textiles, clothing and hard fibre products are of con siderable interest to the poorer Ides, and especially to the poorest of the Commonwealth Asian countries India and Bangladesh which, particularly since they have already been adversely affected by EEC enlargement, should receive priority treatment. Because of the signing of the MTA, little improvement in the conditions of access for textiles and clothing can be sought via the GATT negotiations. Even so, efforts should be made to remove tariff barriers to trade in these products, and to improve the access conditions for jute and hard fibres exports. This set of products singled out for priority treatment by no means exhausts the scope for liberalisation that would benefit Ides. It does, however, indicate the main areas where trade concessions could enhance the development prospects of the poor.

45

Chapter 4The IMF International Monetary Negotiations: A General ViewThe dollar crisis of 1971 provided the trigger for the current efforts to reform the international monetary system. The USA was unwilling to bear the full brunt of the crisis in order to preserve unchanged its role as world banker. The operation of the Bretton Woods system of fixed but adjustable exchange rates tended to place greater pressures on deficit, than on surplus, countries to bring their balance of payments into equilibrium. Debtor countries had either to devalue or to carry out deflationary domestic policies. In the case of the banker for the system, that is the country whose currency was used as the international reserve, devaluation was not considered an option until 1971. And although the system required that its liquidity needs were met, it also constrained the banker to keep its payments deficit, and hence its external liabilities, in line with its reserve backing. In 1970-71, the US deficit increased rapidly for a variety of reasons, and with speculative capital outflows undermining confidence in the dollar, monetary authorities became more reluctant to restrain demands for a conversion of their increasing dollar holdings into gold. The US response to this situation a suspen sion of dollar convertibility and the imposition of an import surcharge was accompanied by a demand that all developed nations, and parti cularly those in chronic payments surplus, should share the burden of adjustment required to restore US balance of payments equilibrium. Underlying this demand was the view that the international economic system was working against US trading interests by adversely affecting its share of world markets. The Smithsonian Agreement on the realign ment of parities was the first step. It was accompanied by a call for the long-term reform of the monetary system.

The 1971 crisis was not the first to prompt calls for reform. It did, however, illustrate the shortcomings of the monetary system. The con sequences of these shortcomings were to be seen in the failure of the system to bring about smooth adjustment of international payments disequilibrium and its tendency, instead, to encourage monetary instability and periodic restrictions on trade and capital flows. Thus, at times, the system operated so as to impede the orderly expansion of world trade rather than permit it.

International money disorder has several damaging effects on devel oping countries. In the first place, since they are so heavily reliant on the West for their export markets, their exports are directly affected by the system's impeding of orderly economic expansion. Further, when developed countries impose import restrictions (as did the USA temporarily in 1971) these tend to hit the growth point of developing

46

THE IMF INTERNATIONAL MONETARY NEGOTIATIONS

countries' exports1 manufactures since the rich are generally con cerned to ensure their raw material supplies. Additionally, because many Idcs depend heavily on one developed country for their export market, restrictions on access to any one market tend to have dispro portionately greater adverse effects on particular Idcs, as compared with other suppliers to that market. When restrictions on capital flows are imposed, the developing countries suffer: the stagnation of aid flows during the sixties can be traced in part to the payments difficulties of the major donors, and the failure of surplus countries to take suffi cient compensating action. In an even more direct way, the discrete changes in the exchange rate values of reserve currencies can damage, or at least affect significantly, Ides' economic prospects. The Smith- sonian Agreement on new par values for the major currencies changed Ides' reserve and indebtedness position at a stroke. It is true that there were gains as well as losses, and that the net effect for Idcs of the changes may have been small, but for individual countries it was con siderable. And after the exchange rate changes, Idcs had to adapt their trade to the new international conditions. Because of Ides' greater diffi culties in adjusting rapidly to such changes, their impact on Idcs is potentially more harmful than on developed countries.

At the same time, the Smithsonian Agreement illustrated, as other ad hoc decisions hi the monetary sphere had done before, the relative powerlessness of the Idcs to influence such events, despite their effects on the developing world: the US reaction to the dollar crisis was unilat eral, the subsequent agreement was made among developed countries only. But the developing countries have not been wholly without influence. Within the IMF, they have managed to secure certain con cessions which take account of their particular difficulties: for instance, easier access to IMF lending via compensatory finance, enlarged quotas, and special relaxations on their limits to borrowing. However, major decisions affecting the system as a whole have been made by the developed countries alone, and made with reference to their interests, not to those of the developing countries.

The establishment of the Committee of Twenty to work out pro posals for the long-term reform of the monetary system was a signi ficant advance for the developing countries. The extent to which Idcs are able to press their own particular interests within the Committee still largely depends on the concurrence of the developed countries. It is unlikely that the size of the Idc representation in the C-20 half the total membership will significantly alter this fact. Nevertheless, the C-20 is a forum in which Idcs can present their views and participate in discussions for the reform of the system.

The object of the C-20's deliberations is generally agreed: it is 'a reformed world monetary order, based on co-operation and consulta-

1 Although the USA did except some Idc exports from the 1971 restrictions.

47


tion within the framework of a strengthened International Monetary Fund, that will encourage the growth of world trade and employment, promote economic development and help to avoid both inflation and deflation'.1 Arrangements are sought for a smooth, symmetrical adjust ment process, better management of liquidity growth, and a viable system of reserve assets and of settlements. Consistency is sought between the various elements of the international system, and between the system and national policies. A 'related issue' which has acquired some prominence, mainly because of the SDR link proposal, is that of finding ways to promote the transfer of real resources to Ides from developed countries.

The First Outline of Reform, presented by the C-20 to the Annual Meeting of the Board of Governors of IMF in September 1973, indicated that, while agreement in principle had been reached on the general shape of the reformed system and on certain issues, the institu tion of a reformed monetary system was by no means imminent. As the Committee's Chairman pointed out: 'This position reflects the complex and difficult nature of ... reform which involves changes in the patterns of countries' behaviour that have persisted for many years'.2 It might be added that the reduction in the US balance of pay ments deficit, and the adjustment of the world economy to the r6gime of floating exchange rates, have also reduced the urgency with which reform was originally sought. The oil crisis hi many ways restores that urgency. But the danger remains of ad hoc remedies to developed countries' immediate difficulties, ignoring the graver difficulties of the developing countries and the need for fundamental reform of the system.

The problems posed by the oil situation derive from the huge current account payments imbalance between oil-consuming and oil-producing countries, which even if there is some decline in the price of oil will remain for some tune to come. In one form or another, the increase hi oil revenue will return to the consuming countries, either as payments for increased exports, or in greater proportion, as capital inflows of a short- or long-term character. But these return flows will not be distributed among oil-consuming countries in proportion to their deficits. Other things being equal, the developed countries will receive most of the return flows, but their individual payments' posi tion will vary according to the form of payment eg dollar that the OPEC countries demand in return for oil, according to where they place their export orders, and according to which country's assets they choose to hold. Because of its economic strength and relatively small dependence on external trade, the USA appears the most likely to benefit from the disposition of the OPEC surplus, and their choice of

1 IMF op. ctl., p. 1.' Ibid, Introduction, p. 2.

48

THE IMF INTERNATIONAL MONETARY NEGOTIATIONS

reserve unit for payment. The oil-consuming developing countries, on the other hand, face a large increase in their import bill as a result of the oil price rise but have little prospect of attracting or earning suffi cient funds to finance it. They are unlikely to benefit significantly either from capital inflows for OPEC countries have made token gestures to Ides but show few signs of channelling funds on an appro priate scale to them or from an increase in OPEC import demand. At the same time, because of their current indebtedness and economic weakness, their prospects for borrowing to finance their deficits are generally poor. Nor do they have much scope to limit oil or other imports without severe deflationary effects. Thus, non oil-producing Ides are the hardest hit of all oil-consuming countries. And some of the poorest Ides in particular India and Sri Lanka are likely to suffer the most.

In this situation a means should be sought of recycling the oil revenue flows in such a way that deficit countries are not tempted to carry out competitive and thus self-defeating devaluations to boost their current account revenues, or forced into drastic measures to curb import demand. A solution could be found which involved developed countries alone, but should be avoided in favour of one which also includes the developing countries, whose economic pros pects are severely threatened. It would require agreement on non- oil balance of payments amis, and a more orderly basis for payments adjustment than presently exists. However, a solution which rests on borrowing by deficit countries and the accumulation of OPEC invest ment hi the West is unlikely to appeal to developed countries in the longer term. A formula which directed oil surpluses for use by devel oping countries and which generated export demand for goods from developed countries would be desirable. However, to be feasible, it requires that enough attractive investment opportunities exist in Ides, which hi turn implies a more open world economy hi which they can sell the goods they produce. Further, it requires security for the OPEC interest in such investment. Considerable multilateral co-operation would be needed. A more immediate problem posed by the oil sur pluses derives precisely from the present inadequacy of investment opportunities open to OPEC producers. Until these match OPEC investible resources, OPEC producers will have to hold more liquid resources. This could not only increase monetary instability but also, precisely because of that effect, reduce OPEC willingness to accept payment hi foreign exchange, which in turn could reduce their willing ness to produce and sell oil at all. The need is consequently greater for measures to decrease the present instability of exchange rates and for an acceptable international unit of payment.

In short, the oil situation poses severe problems for both developed and developing oil-consuming countries and difficult problems of a

49


different kind for oil-producing countries. These problems impinge upon both the monetary and the trading arrangements of the world economy, and increase rather than diminish the need for multilateral co-operation and reform. And it is only in a multilateral context that a discussion between all parties including the newly powerful OPEC countries can take place.

50

Chapter 5Identification of Interests and ObstaclesAs stated above, Ides have a general interest in the reform of the mone tary system. Without reform which permits a smoothly functioning international payments system, Ides will lose from the adverse effects on trade and capital flows, which they are hi a weak position to counter. And they have a strong interest in the development and adop tion of a multilateral solution to the monetary and trade problems created by the oil crisis. Such a solution would include some elements of the reform package proposed by the C-20 but would also require measures to cope with the recycling of oil funds flowing from the OPEC producers. Besides these overriding general interests, Ides have certain specific interests in the current reform proposals. These relate to the reform package itself and also to the C-20's brief to consider ways of promoting real resource transfers to Ides. In addition, Ides have an interest hi ensuring in the context of organisational reform within the IMF that they have effective representation in the process of decision-making on international monetary affairs. This also is con sidered below.

Insofar as the reform package is concerned, Ides have a number of specific interests, which are more important to some Ides than to others. One of their most frequently expressed interests is in exchange rate stability. This arises because, as a group, they face greater difficulties and so bear a higher cost hi coping with exchange rate fluctuations hi major currencies than do developed countries. This is not to suggest that Ides automatically lose as a direct result of changes in exchange rates, whether through a floating regime or through discrete changes in a fixed exchange regime. Analysis of the Smithsonian exchange rate changes suggests that the reserve losses which undoubtedly occurred may have been matched for Ides as a whole by gains through reduced liabilities on public debt. However, because a relatively larger share of Idc reserves is held in foreign exchange than is the case with developed countries, fluctuations hi exchange rate values have a potentially greater impact on their reserve position. This hi turn increases the need for reserve and exchange rate management hi Ides. Such manage ment is, however, made more problematic hi Ides by their relative administrative weakness, their lack of technical skills and their remote ness from financial centres. Further, monetary instability increases administrative pressures for Ides to maintain or adopt exchange rate links with one of the major currencies, which runs counter to Ides' desire to diversify their economic relations with the rest of the world.

The system of stable but adjustable exchange rates proposed by the C-20 would not fully avoid these problems faced by Ides and hi partic-

51


ukr by the smaller and administratively weaker Ides. On the other hand, past experience indicates that a regime of more rigid exchange rates results in shocks to the international system with potentially adverse effects on trade and capital flows. Such shocks present Ides with greater difficulties than do the problems of reserve management. Thus Ides have a greater interest in the adoption of an exchange rate regime which permits a smooth adjustment of international payments than they have in a more rigid regime which would not do so, but would alleviate their difficulties in reserve and exchange rate manage ment. And, in any case, these difficulties could hi part be met by increased technical assistance in this field.

The emergence of a reserve asset with an assured value is, hi this context, of considerable interest to Ides. They would benefit if the pro posal agreed in principle that the Special Drawing Right (SDR) become the principal reserve asset of the reformed system were imple mented. For this to occur, three conditions need to be met: first, that the SDR be strengthened, to increase its acceptability vis-a-vis strong currencies; second, that countries accept some limitations on the com position of their reserve holdings; and third, that existing large balances of reserve currencies should be mopped up. While Ides want to see the role of the SDR enhanced not the least because of the link proposal considered below many are unwilling to accept these corollaries. This is understandable. First, the main net borrowers of SDRs have been Ides, although some, like developed countries, have accumulated SDR holdings. If the SDRs are strengthened, either in terms of their valuation or by an increase in their interest rate, they will become more expensive for those Ides which have used SDRs in the past and expect to use them hi the future. Second, their ability to cope with exchange rate fluctuations currently depends on the poss ibility of varying the composition of their reserve holdings. Third, the creation of SDRs to consolidate reserve currency balances might if no other changes occurred reduce the allocation of SDRs to Ides. On the other hand, all three corollaries would increase the possibility of SDRs being used as the principal reserve asset and of being regularly created to meet global liquidity needs. This is clearly to the advantage of the majority of Ides, and would seem to override their objections to the individual measures required to bring it about.

The SDR is of further interest to Ides because of the proposal to link a portion of any SDR creation with development aid the so-called SDR link. This proposal has not yet been accepted in principle by all IMF members, but is backed by Ides and some developed countries. The main opposition rests on fears that the link will be inflationary because, for any given allocation, more SDRs will be spent if larger proportions of the total are channelled to Ides, or because Ides will press for larger allocations of SDRs than the needs of global liquidity

52


justify. These problems are not difficult to solve, nor are they unique to the link proposal: managed liquidity creation requires careful assessment of the inflationary dangers arising from the different behaviour patterns of individual countries, however the newly created assets are allocated; and Ides are not the only countries which might seek a total allocation of SDRs which is more (or less) than is globally required and they are certainly among the least powerful.

The actual form of the link has also caused conflict both among Ides, resolved in the Group of 24 proposal, and, unresolved, between Ides and developed countries. There are three main variations on the link theme. The first merely allows that the link SDRs, as ordinary SDRs, be allocated directly to Ides in proportion to their IMF quotas. The second has SDRs allocated directly according to some formula which reflects need. In the third variation, the link SDRs are allocated first to some multilateral aid-giving agency the World Bank soft- lending agency, IDA, is most favoured and are then distributed between Ides to finance development projects according to existing multilateral aid-giving criteria. The two main issues at stake are whether SDRs should be allocated directly or indirectly to Ides, and on what basis they should be distributed among them. Ldcs understand ably favour direct allocation, but the distribution so far agreed by the Group of 24 only permits special allocations over and above IMF quotas to the twenty-five least developed countries, thus leaving out most of the Indian subcontinent. The developed countries understand ably favour the indirect variation, where responsibility for allocation and supervision of SDR use is vested in the World Bank, which they control.

If an allocation criterion which took fuller account of need could be accepted by Ides, the direct version of the link is clearly preferable, particularly given the balance of payments difficulties caused by the oil crisis. Resources would be transferred without strings. However, Ides' aversion to the indirect link proposal is partly due to the individual countries' fear of smaller allocations: the richer Latin Americans thought they would lose in a system of allocation based on need, the African states doubted their capacity to generate acceptable projects, and other radical states feared IDA discrimination. It is difficult to see how the richer Ides could be reconciled to an allocation formula based largely on need. Yet, as it stands, the Group of 24's version of the link could be less beneficial to those poorer Ides which are not classi fied as least developed, than the indirect link proposal. For the latter to be acceptable, however, Idc fears of developed country leverage and of receiving fewer SDRs through inability to produce acceptable projects would have to assuaged. The leverage problem could be over come by the use of a different multilateral agency or agencies to allo cate SDRs, and the regional banks seem to be the main candidate

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for this purpose. The problem of generating suitable projects is matched (if not surpassed, given that SDR aid may not be additional) on the agency side by the problem of appraising and supervising an increased aid programe. Both suggest that more flexible forms of aid- giving be found, to prevent slow disbursement rates or an SDR distri bution in favour of the speedy rather than the needy or both.

Although the form of the link is important, particularly hi case, as some have feared, link SDKs become in effect a substitute for develop ment aid, some form of link is clearly better for Ides than none at all. Other proposals have been made to promote the transfer of real resources to Ides via monetary reform, such as aid targets, related to the balance of payments position of donor countries1 and under the surveillance of the IMF. But at present the prospects for increasing resource transfers to Ides in this way are dim. The link, on the other hand, is within reach and it makes sense to concentrate efforts on its establishment.

It is, however, important that Ides secure their right to participate in decisions concerning international monetary affairs so that they can pursue their interests in the longer term. At present, outside the IMF Boards of Governors which is far too unwieldy for real decision- making Ides' official representation at top level is confined to the Committee of Twenty, which is to have its final meeting in June 1974. The C-20 has proposed that a Council of Governors, with similar representation, be formed to continue the work of reform, which is recognised to be a continuous process. The Council should have decision-making powers and be responsible for the management and adaptation of the international monetary system. Such a Council would provide an opportunity for continued Idc representation at the top level. Such representation will, however, be meaningless if the Council is not an effective decision-making body. Two conditions, at least, must be met to ensure that this is not the case: total membership should be limited, and no one group of countries have representation in excess of its actual power. Otherwise the more powerful but under- represented countries would break away and decision-making would tend to be concentrated in exclusive developed country groupings.

1 Countries in balance of payments deficit would be under an obligation - as a minimum - to maintain the level of their real resource transfers, which countries in surplus would increase these transfers.

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Chapter 6Problems and Priorities for Ldcs in theIMF NegotiationsLdcs do not, on the whole, face the problem that conflicts among them selves will reduce their ability to secure gains in the monetary negotia tions. They are generally agreed on the nature of their interests, not withstanding some differences between the richer and poorer Ides, and in the relative importance attached to certain interests by different countries, and certain inconsistencies between their specific and general interests. Their chief problem derives from their lack of bargaining strength, compounded by the difficulty of organising large numbers of Ides to pursue their collective interests. Their power lies largely in their ability to sabotage reform, since changes in IMF articles require their compliance. But the threat of Third World veto is unlikely to sway multilateral reform in Ides' favour. Thus the extent to which Idc inter ests are met depends largely, but not solely, on the willingness of the developed countries to take account of them.

The immediate priority for Ides is the adoption of a multilateral solution to the monetary problem created by the oil crisis, so that their development prospects are not damaged. The Witteveen proposal for a supplementary oil facility for IMF members to help them meet the initial impact of the increased oil import costs is a first step in this direction. It is important that, in extending this facility to Ides, account is taken of their special problems on debt-servicing.1 Beyond this, Ides have a clear interest in the reform of the system so as to ensure its orderly functioning. It is agreed in principle that SDRs play an enhanced role in the reformed system. The establishment of a link between SDR creation and development aid should be pressed in this context in the interests of equity and global economic expansion. Finally, priority should be given to organisational reform which will allow Ides to bring their particular problems into consideration, and to participate in an effective decision-making body on international monetary affairs. It is in the long term interests of the developed countries that developing countries are permitted such participation and that the various problems which reduce their development pros pects are solved. And it is only in this way that the interests of the weaker and poorer Ides will receive attention.

1 It is clear that the currently proposed interest charge or 7% would be too high for many Ides.

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Summary and ConclusionsDeveloping countries are, in economic terms, relatively insignificant members of the world economy. But their economic relations with the rest of the world are frequently crucial to their development. Con sequently they have a considerable stake in the current negotiations, which seek to alter the conditions under which international economic transactions occur. And although the impetus for the multilateral talks arose from the problems of developed countries, it is the stated aim of both sets of negotiations to take account of Ides' particular needs and problems. The climate for the negotiations has considerably changed since their inauguration. The difficulties which led the USA to press for the talks have eased. Meanwhile the action of the OPEC member states has brought widespread changes to the position of both developed and developing countries, and a certain preoccupation among developed countries with the more immediate of the oil- induced problems. The growing trade imbalance between oil-pro ducing and oil-consuming nations and the virtually catastrophic plight of many oil-consuming Ides points to the need for rapid multi lateral action. Neither the oil crisis nor the change in the US economic situation, however, radically alter the basis for negotiations for the longer-term reform of the monetary system and for the adoption of measures to encourage the expansion of global economic activity. And it is largely with these issues that this report has been concerned. In this concluding section, the problems and priorities for developing countries in both sets of negotiations are summarised. Since the majority of Ides have relatively little bargaining strength, the onus of ensuring that their interests are met rests largely with the developed countries. In this report attention has focused on measures which should be pursued by the EEC.

Over 70% of Ides' exports are to Western developed countries, and a large proportion are primary commodities. Apart from 1973 when the commodity prices boom provided a rapid but, probably short-lived, surge in their export earnings Idc exports to developed countries have grown more slowly than developed country exports to each other. This phenomenon is partly explained by the relatively slow growth in demand for certain major tropical products and the competition from synthetics facing others in Western countries. But developed country trade barriers both tariff and non-tariff against products of export interest to Ides tend to be greater than those against exports of interest to developed countries. Indeed some of the barriers faced by Idc exporters to Europe have actually increased as a result of intra-European liberalisation and, in particular, as a result of EEC enlargement. And trade barriers have also helped to slow Ides' export growth. Ldcs are seeking the removal or reduction

56

SUMMARY AND CONCLUSIONS

of the restrictions on access to their main export markets via the GATT negotiations.

Tariff barriers, particularly on products at the early stages of fab rication, remain a problem to Ides despite past multilateral trade liberalisation and the recent introduction of the Generalised Scheme of Preferences for Ides, which is intended to provide preferential entry for their manufactured and agricultural processed goods. But non-tariff barriers present a greater obstacle and particularly quantitative restrictions which place an absolute limit on Idc exports. The incidence of trade barriers is most marked in three broad areas of trade, competing agricultural primary products, agricultural pro cessed goods, and textiles and clothing, all of which are of consider able importance to poorer Idc exporters and should receive priority.

The Multifibre Textile Arrangement, agreed in December 1973, effectively removes most of textile and clothing trade from the general GATT negotiations. Only tariffs on products covered by the Arrangement are subject to negotiation and these at least should be removed. Jute and hard fibre products were excluded from the MTA. Thus the conditions of access of jute products, particularly important in the EEC market, can, and should, be unproved. This would benefit both India and Bangladesh, which merit attention from the EEC not only because they are poor, but also because of the adverse effects on then: trading position of Britain's accession to the EEC.

Liberalisation of barriers against competing agricultural primary products could bring significant gains to Ides in particular, those on beef, rice and vegetables. Meanwhile the Idc sugar exporters to the British market deserve special attention so as to ensure that their position is not actually worsened by Britain's membership of the EEC. Initially the gains from trade liberalisation in most areas of interest to Idc exporters are likely to accrue mainly to the more established and often richer Ides. But liberalisation will expand the opportunities open to all Ides. Two particular product areas, agricultural processed goods and handicrafts, are of great potential interest to those, often poorer, Ides seeking to extend their meagre industrial base and to diversify their exports. It is thus important that efforts are made to remove barriers to such products.

Ideally trade concessions should provide Ides with preferential and unlimited access to developed country markets. Preferences alone are of little value if an absolute limit is placed on Idc exports. Aside from the liberalisation of agricultural trade hi primary products, the GSP should provide the framework for trade liberalisation. Those Ides the Associates and the Associables enjoying or about to enjoy special preferences hi the EEC market appear to have little interest in general concessions which will erode their margin of pre-

57


ference. However, in the area where this is most likely to occur competing agricultural processed goods existing special preferences are anyway limited by the provisions of the Common Agricultural Policy. Further, all Ides including the Associates and Associables are likely to lose since if the EEC's GSP treatment of processed goods is not improved other developed countries are likely to be unwilling, because of their concern over burden-sharing, to improve their GSPs in this area either. It is important therefore that the EEC moves towards the adoption of a global approach in its relations with Ides.

Successful trade liberalisation requires that the problems which protectionist measures were designed to solve or shelve can be tackled in another way. Otherwise liberalisation would be shortlived. Frequently barriers to Idc exports exist to protect uncompetitive, often labour-intensive, domestic industries, at the expense of devel oped country consumers as well as Ides. What is required is commit ment to domestic policies which will ensure that those working in affected industries do not suffer undue hardship as a result of lib eralisation but are assisted to adjust to the new market conditions. Such policies are medium- to long-term in their effect and it is clear that if liberalisation is to be acceptable, there must be some inter national safeguard allowing temporary protection against a sharp, disruptive flow of imports. The imposition of such a safeguard would have to be subject to international regulation to ensure that it does not become permanent and to encourage adjustment measures. A reform of the GATT Articles is required to this end.

The liberalisation of agricultural trade would give rise to a special problem, the importance of which has been illustrated by the oil crisis and the commodity boom, that of ensuring that essential sup plies from overseas are maintained as international interdependence is increased with liberalisation, and that consumers are not subject to large upward price movements. The prospects for dismantling trade-distorting protectionist agricultural policies are poor at present, despite the need for more efficiency in global food production so as to meet increased demand arising from the growing world population and higher income levels. If liberalisation is to occur, however, it is important that effective buffer stock policies are adopted, combined perhaps with some way of obliging suppliers to maintain exports at a certain level.

The above provides a brief, but not exhaustive, checklist of the areas which should receive priority in the GATT negotiations in order to ensure that Ides and particularly the poorer Ides benefit. Developed countries have some interest in adopting measures that will expand Ides' export opportunities since this, in turn, is likely to increase their commercial and investment opportunities in Ides. And

58

SUMMARY AND CONCLUSIONS

certain factors, such as concern over raw material supplies, pressures to shift labour-intensive processes and environmentally polluting industries to Idcs, and the desire to have better access to Idc markets, provide developed countries with specific interests in improving their trade relations with Idcs. Whether or not they can pursue these interests in the GATT negotiations depends partly on the Ides' will ingness to enter into the bargaining process. Ldcs have maintained that any trade concessions received from developed countries be non- reciprocal. This defensible attitude could, however, limit the extent of Idc gains from the negotiations not only by reducing the conces sions offered to them but possibly also by eliminating such gains as might be derived from the removal of Ides' trade barriers and the subsequent increase in their domestic efficiency.

In the monetary negotiations, Idcs have little to offer by way of a bargaining counter to developed countries except their compliance in any required changes to IMF articles: in combination, Idcs have sufficient voting strength to exercise a veto. They are largely dependent on the developed countries taking account of their interests.

Oil-consuming Idcs have suffered a large and adverse shift in their terms of trade as a result of the oil price rise, and now face grave balance of payments difficulties. For them, the immediate priority is the adoption of a multilateral solution to the monetary problems created by the oil crisis. The proposed supplementary oil facility within the IMF could help them meet the initial impact of the oil crisis. To do so, it would have to allow for their special debt servic ing problems.

In more general terms, Idcs have, like developed countries, an interest hi reforms to ensure the smooth working of the monetary system. They have a particular interest that the SDR should, as agreed in principle, play an enhanced role in the reformed system, and that the proposed link between SDR creation and development aid be established.

The priorities for Idcs suggested here for the negotiations would substantially improve the conditions under which they participate in the world economy. Not all measures suggested, particularly in the trade sphere, need be undertaken on a multilateral basis and indeed many of the problems which developed countries are seeking to solve via the multilateral negotiations could be dealt with by ad hoc solu tions between themselves in conjunction with particular Idcs. But a resort to ad hoc-ery would risk a reduction in potential gains to Idcs and a neglect of the interests of the weaker among them.

59

Printed in England by V. Cooper & Partners Ltd., London.

OverseasDevelopmentInstitute

The Overseas Development Institute (ODI) is an independent, non government body aiming to promote wise action in the field of over seas development. It was set up in 1960 and is financed by donations from British business and by grants from British and American foundations and other sources. Its policies are determined by its Council.

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The Seven OutsideCommonwealth Asia's Trade with the Enlarged EECPeter Tulloch68 pages £1.00

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