TFR 21 – Trade in Manufactured Products with Developing Countries: Reinforcing North-South Partnership

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Trade in manufactures (manufactured products) takes us to the heart of the critical trade problem facing North and South over the long term: adjustment to a changing global division of labor. A relocation of world industrial capacity to the former "peripheral" countries is underway. Its accommodation is central to the agenda of the next two decades and beyond. Making room for the developing countries involves more than a division of material benefits. Gains from trade that can underwrite sustained economic growth are important, but do not exhaust the matter. At stake is the stability of international relations in a world of greater economic competition and diffusion of wealth.

The expansion of trade in manufactures in the early postwar era was concentrated among the industrialized countries. The transition to more developing country participation came in the 1960s. Exports of industrial products from developing countries increased in value at an annual rate of 19 percent between 1963 and 1973, by which time they represented about two-fifths of total developing country sales abroad (excluding petroleum). This transition for developing countries rested to some extent on favorable aspects of the international environment the progressively more liberal trade regime, sizable international flows of long-term capital and technology, and a stable framework of fixed exchange rates. The transition also rested on national policies in the South that no longer discriminated against exports. Several countries altered their development strategies in the early 1960s to begin to exploit the rapidly expanding world market.

The rise in oil prices in 1973 and 1974 radically altered the prospects for the international economy. The oil-importing developing countries, generally trying to sustain their higher rates of growth, greatly increased their external debt. This resort to debt in unprecedented amounts translated into greater demand for the exports of the industrial countries. It also impelled redoubled efforts by these countries to expand exports of manufactures, In the post-1973 situation, sharpened again by the second "oil shock" in 1979-80, trade has become even more vital to the development prospects of many developing countries.

Dimensions of North-South Trade in Manufactures (Chapter III)

Many observers are imperfectly informed about trade patterns between North and South. The penetration of cheap imports of manufactures from developing countries is frequently exaggerated. The reciprocal flow of exports of capital goods and intermediate products is often neglected.

Despite rapid expansion of developing country exports, their share of the market for manufactures in industrial countries remains small in absolute terms: The ratio of imports from developing countries to apparent consumption of all manufactures in industrial countries rose from 1.2 to 2.0 percent between 1959-60 and 1975. It is not total shares, however, but rather more concentrated sectoral penetration and the rapidity of recent change that informs the calls for protectionist measures against developing countries. For clothing, by far the most heavily penetrated sector, imports from developing countries still represented only 8.6 percent of apparent consumption in industrialized countries in 1975; but in several particular products this percentage was much higher, and 60 percent of the absolute increase in industrialized country imports of clothing between 1973 and 1976 was supplied by developing countries. Specialized advantage has been successfully pursued.

Comparing the three Trilateral regions as importers of manufactures, Japan in 1979 had the lowest ratios of imports of manufactures from developing countries to total manufactures consumption and to GDP. On the exporters' side, a few developing countries are dominant: Hong Kong, South Korea, Taiwan and Singapore accounted for about 60 percent of all developing country exports of manufactures in the late 1970s. In a second category are the three large Latin American economies: Brazil, Mexico and Argentina. While they account for five times as much production of manufactures as the four key Asian NICS, their exports of manufactures were less than a fifth as much in 1979. India and Pakistan belong in a related category. A fourth grouping includes other, and smaller, countries that have experienced rapid growth of exports of manufactures in the last decade such as Malaysia, Thailand, the Philippines, the Ivory Coast, Tunisia, Morocco, Colombia, Chile, and Uruguay. While none individually accounts for a very large percentage of total trade, these exporters are evidence of the diffusion of the new pro-trade perspective in the developing world, and of the dispersion of industrial capacity as well. Over the longer term, the question of manufactured exports from the South is not just a matter of a handful of countries, the NICS. The developed countries are better advised to recognize and adapt to changes in industrial capacity and potential exports of manufactures in the developing world as a whole.

Developing countries, despite their recent impressive growth in exports of manufactures, remain much larger buyers than sellers. In 1979 imports of manufactures from industrialized countries by all developing countries (including OPEC countries) exceeded exports of manufactures to industrialized countries by a factor of 3.5. Although that ratio will probably fall in the future, developing countries are a much more rapidly growing market for the industrial countries than the OECD bloc itself. Exports of manufactures from the industrial countries to the developing countries have been as specialized sectorally as the opposite flow. Northern exports are skill- and technology-intensive in contrast to the labor-intensive consumer goods imported from developing countries. Comparative advantage, and relatively large gains from trade, are evident from this disparate product composition of trade.

Comparing the Trilateral regions as exporters, Western Europe (EEC and EFRA) exports the most manufactures to the South, including or excluding the oil exporters. Europe also enjoys the largest absolute surplus with developing countries, including or excluding the oil exporters. Japan has the largest surplus relative to corresponding imports. Japan's export-import ratio in trade in manufactures with the South was 7 to I in 1979, far greater than Europe's 4 to 1 or North America's 2 to 1.

The aggregate employment effect of this trade in the North appears to be positive on balance. Such a result is obtained because the absolute size of the industrialized country trade surplus offsets the larger relative labor content of imports of manufactures from developing countries. Jobs created by exports to the developing countries are more likely to be in skilled occupations that lead to higher incomes than the jobs displaced by imports. The consequent upgrading of employment in the developed countries is one of the benefits from specialization. It is also a potential serious cost, however, to those who lose their jobs and have difficulty finding others. The more heterogeneous the labor force in individual Trilateral countries, the more disparity there is likely to be between the qualifications of those losing jobs and the requirements of new ones. Adequate policies must confront the reality and human dimension of this problem.

With regard to future production and trade in manufactures, projections indicate that, first, total productive capacity in developing countries will grow more rapidly than in the industrialized countries, and second, the margin of advantage enjoyed by the North in its industrial trade with the South will narrow (with exports only about twice as large as imports by the year 2000), although the absolute surplus will continue to increase. There are some divergences among four recent projections on the rapidity and pattern of trade growth that can be reasonably expected in the 1980s and 1990s.

The consequences of different styles of North-South interaction over the next two decades are brought out more dramatically in various scenarios developed by the OECD Interfutures Project. The greatest economic costs unfold in the North-South "de-linking" scenario. The costs for the North are even greater than for the South most dramatically for Japan. Another scenario sketches the implications of fragmentation into North-South regional associations: North America allies with Latin America; the EEC with Africa: and Japan with South-East Asia. Such regionalism, though less costly than "de-linking" in economic terms, is not an attractive alternative to effective North-South cooperation on a global scale.

Policy Responses (Chapter IV)

The dominant theme of industrial country commercial policy in the postwar era has been a commitment to freer trade. GATT's creation early after the Second World War was motivated by such a liberal ideology. It has presided over seven rounds of multilateral trade negotiations. through the Tokyo Round completed in 1979. During this time the initial average tariff level of about 50 percent on industrial products has been successively cut. After completion of the reductions negotiated in the Tokyo Round, the weighted average tariffs of the industrial countries will be less than 7 percent on finished manufactures, 4 percent on semifinished products, and virtually zero on raw materials.

Liberalism has come increasingly under attack since the 1970s, though protectionism has not yet won the day. Growing protectionist practice has had its counterpart in closer scrutiny of the liberal model. Part of the challenge has come from the South. Few developing countries participated actively in the early rounds of multilateral tariff negotiations. They directed their energy and limited political weight elsewhere principally to argue for greater economic assistance and for increased and more certain foreign exchange earnings from primary commodity trade. The eventual establishment of UNCTAD in 1964 gave new impetus to the elaboration and persistent advocacy of an agenda that evolved in the 1970s into the formal call for a New International Economic Order. Even while arguing only for equal opportunity, some supporters of the New International Economic Order seemed to call into question the underlying principles of liberalism under which the old order had prospered. This apparent attack on liberalism from the South was matched by evidence of flagging enthusiasm in the North. Greater economic interdependence and rising imports of manufactures have led to an increasing number of proposals to reduce and manage trade flows.

The "new protectionism" that gathered strength in the 1970s has three characteristics that differentiate it from the old. Rather than generally limiting trade, it tends, first, to be sector specific and, second, to involve bilateral negotiation. Third, it tends to use new instruments of quantitative restriction that evade GATT rules and supervision. One common form of restriction has been orderly marketing arrangements formally negotiated among governments. In this category, an examination of the evolution of the Long-Term Arrangement on Cotton Textiles and the later Multi-Fiber Arrangement is instructive in several ways. Restrictions have taken a number of other forms as well.

An estimate of the pervasiveness of the new protectionism does not come easily by the very nature of its intent to evade surveillance. A recent inventory of restrictive practices indicates that for manufactures, 22 percent of EEC tariff categories, 21.3 percent of United States categories, and 5.2 percent of Japanese categories were subject to quantitative restrictions in 1976. An IMF survey found that Taiwan was subject to over 30 restrictive actions in 1976 and 1977 alone; South Korea confronted more than 70 measures by industrial countries between 1971 and 1977.

Importing countries have chosen the new protectionism because, paradoxically, the liberalization of trade has made tariff barriers a less usable instrument. Quantitative restrictions can more effectively satisfy domestic political pressures while avoiding the international consequences of retreat from GATT obligations. They also permit the industrial countries an edge in bilateral negotiations with smaller and more vulnerable developing country suppliers.

The Tokyo Round of multilateral trade negotiations, launched in 1973 and completed in 1979, broke new ground in explicitly confronting the issue of nontariff barriers. Not much progress was made on the core problem of safeguard actions, but there were some considerable successes on other fronts. Agreements were reached on six major codes to govern the conduct of international trade. Of the six, the Government Procurement Code relates to perhaps the single largest new market created by the negotiations. The SubsidiesICountervailing Duties Code is perhaps the most relevant to the interests of the developing countries. It seeks to restrict the use of subsidies, on the one hand, while limiting the application of countervailing duties on the other.

In view of the scope of these agreements and the magnitude of tariff cuts and the explicit recognition of special status for developing countries the Tokyo Round is a significant forward step in dealing with North-South trade issues. That it evoked a decidedly lukewarm response from developing countries, however, is also true. Although 99 countries participated in the talks, Argentina was the only developing country that signed the entire package. Subsequently, because the codes apply only to signatories, an exception to most-favored-nation treatment, others have found it in their interest to subscribe to some of them. Developing country dissatisfaction has a factual basis in the failure to deliver a promised, favored treatment. Even as developing countries accept and abide by the Tokyo Round results, their reserve is disturbing. These countries promise to emerge as larger factors in world trade over the next two decades, and the rapidity of their growth and structural change poses a challenge. The Tokyo Round did not entirely succeed in integrating these countries more fully into a rule-oriented world trading system, and persuading them of benefits equivalent to the responsibilities evident in such a system.

The results of the Tokyo Round, despite their limitations and ambiguities, demonstrate continuing commitment by the industrialized countries to trying to make an open trading system work. That task is a continuing one, and one in which the developing countries retain a basic interest.

Policy Priorities (Chapter V)

Doubts have been raised about the capacity of a liberal market regime to prevail in the absence of a single, economically dominant leader the role played by an indisputedly dominant United States in the earlier decades after World War II. A multipolar power structure and economic power is now undeniably more diffuse weakens definition and pursuit of the general interest. NorthSouth trade in manufactures poses a direct test to the adequacy of economic cooperation on a global scale.

Some see in the dynamics of North-South trade factors which will lessen protectionist pressures over time. One argument is that export diversification within the South will lessen the concentrated pressure in certain labor-intensive sectors that characterized the first wave of NIC exports. Such diversification, however, will not prevent new sectors from coming under added import competition from developing countries if high export growth continues; and other lower income countries will eventually replace the more advanced as suppliers of textiles and clothing. Another argument is that expanding intra-industry trade will diminish protectionist sentiments of domestic manufacturers and workers, and make free trade policies more feasible. Even within industries, however, developing countries will still specialize in "standard" goods. Interpenetration of investment, important among the developed countries, is unlikely to play the same role. Helleiner transforms the intra-industry perspective into an intra-firm emphasis, which he sees as the likely wave of the international trading future and as offering "more room for optimism with respect to the capacity of firms and industries in developed countries to adapt to increasing LDC competition." This argument also has limits, however. Intra-firm activities represented only about one-third of United States imports from developing countries in 1977; and intra-firm and intra-industry linkages are not absent in some of the most highly protected sectors. All in all, it is uncautious to presume that a liberal posture will easily prevail.

The appeal of a "managed" response to absorption of developing country imports is considerable. It holds out the prospect of satisfying domestic producers as well as guaranteeing growing exports from the South. And it promises to accomplish these objectives without wasteful and costly unutilized capacity and unemployment in the industrialized countries or damaged development prospects for developing countries. For all its apparent attractiveness, however, the planned or managed approach is subject to the basic limitation of trying to reconcile the irreconcilable. Expanded trade and accelerated adjustment do not go hand in hand with greater protection and sheltered employment. At some point, one of the objectives must yield, and it inevitably seems to be the trend growth in imports of manufactures. It is ultimately resistance to apparent national interest that makes a liberal regime best for all, if not necessarily best for each. Such abnegation is absent in a restrictive setting, and exposes the constant danger of a destructive cycle of retaliation.

The new order which the majority of developing countries advocates to govern North-South trade in manufactures is adherence to the liberal principles of the old. Such an emphasis is a measure of the practical gains developing countries have achieved through this trading system in recent years, and the advantages anticipated through its continuation. Exports of manufactures have become more important, and ideological contention and confrontation have diminished. Developing countries still remain to be convinced that the industrial countries are prepared to accommodate the shifts in comparative advantage that are underway. For now, the attitude is one of watchful waiting. A new surge of protectionism would undoubtedly evoke a more militant and different response.

The general directions of policy required on the part of Trilateral countries are rather clear. They require cooperative efforts, among Trilateral countries themselves principally but sometimes in tandem with developing countries, to:

* restore and sustain high rates of growth in the North.

Sustained recovery from the slower real growth of the last several years in many of the industrialized countries will make perhaps the most significant contribution to averting potential trade conflicts with the South. Protectionist measures will not contribute to a satisfactory way out of the vicious circle of inflation and recession that still grips many countries.

* relate national strategies of industrial growth to international trading opportunities and desist from protectionist policies.

Policies that promote adequate adjustment are the centerpiece of any program to encourage vigorous industrial trade between North and South. They must comprehend not only compensation to losers by virtue of import competition but also measures to hasten the transition to a more viable and efficient economic structure. The market supplementation of effective adjustment policies is the meaningful alternative to the market intervention of protection in a world of rapid shifts in productive capacity. These policies should be a matter of continuing discussion and exchange of information within GATT.

* build upon advances made in the Tokyo Round and repair some of its deficiencies.

The importance of a safeguards code to North-South trade cannot be overemphasized. Developing countries are the weaker party in bilateral negotiations conducted without regard to an accepted set of rules. On occasion, some may benefit by reason of special geopolitical considerations, but even the exceptions further weaken the liberal trade regime. With regard to extension and binding of the Generalized System of Preferences, there are dangers in the permanence of such a system. Yet, unless more serious efforts are made to reduce tariff escalation and to accommodate differential treatment to the competitive capabilities of many of the developing countries, preferences remain a proven source of opportunity for expanded exports. This is no time to phase the system out, before the poorest will have had a chance to benefit, and in a climate of uncertainty concerning the expansion of trade.

* assure a continuing flow of capital to developing countries to finance continuing development.

In the wake of another round of oil price increases in 1979, there is even more reason to re-examine arrangements for meeting the continuing financial requirements of developing countries. North-South trade issues arise in a context including both capital and merchandise flows. Dealing with one without attention to the other will not suffice. This is why exclusive attention to specific trade policies risks an inadequate response.

* encourage expansion of industrial trade within the South.

In 1979, 32 percent of industrial exports stayed within the South, compared to 28 percent in 1973. It is in the interest of the North to encourage more intensive trade within the South. The resulting more diversified composition of developing country exports would take some of the pressure off specialized import penetration of the industrialized countries. Widening ties weaken dependence upon the industrialized countries, and reduce the vulnerability of international openness. In practical terms, this interest can be translated into more enthusiastic acceptance of discriminatory, preferential practices that favor developing countries, and more generous contributions to enhance the credit capability of developing country exporters.

Authors

Albert Fishlow, Professor of Economics, Yale University
Jean Carrière, Chairman, French National Tobacco Company, Paris
Sueo Sekiguchi, Professor of Economics, Osaka University

Table of Contents

Summary of the Report
I. Introduction
II. Trade as an Engine of Growth

A. Postwar Development until the First "Oil Shock"
- Early Postwar Trade Expansion Concentrated among OECD Countries
- Transition for Developing Countries in the 1960s
- Floating Exchange Rates, Trade Conflicts, Inflation
B. The Post-1973 Situation
III. The Dimensions of North-South Trade Interdependence
A. Developing Country Exports of Manufactures
B. Developing Country Imports of Manufactures
C. Employment Effects in Industrialized Countries
D. Projecting the Future
- Projections of Production and Trade in Manufactures
- Alternative Scenarios
E. Conclusion
IV. Policy Responses
A. Challenges to Liberalism
B. The New Protectionism
C. The Tokyo Round Results
D. Conclusion
V. Policy Priorities
A. Three Policy Perspectives
- An Optimistic View of Market Processes
- A "Managed" Trade Solution?
- Developing Country Concerns
B. Policy Priorities for Trilateral Countries
- Restoration of Sustained Economic Growth in the North
- Positive Adjustment Policies
- Specific Trade Measures
- Maintenance of Resource Flow to the South
- Expanded Trade among Developing Countries
C. Conclusion

  • Topics: Economics, Trade
  • Region:  North America, Europe, Middle East, Africa, Pacific Asia
  • Publisher:  The Trilateral Commission
  • Publication Date:  © 1981
  • ISBN:  0-930503-29-5
  • Pages:  85
  • Complete Text: Click here to download
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