MULTILATERAL TRADE LIBERALISATION AND THE INTER TS OF DEVELOPED AND DEVELOPING COUNTRIES

Trade liberalization in developing countries and developed country in gauging the interests of the developed countries in trade liberalization by the developing countries, it is necessary to assess how liberalization would affect the volume and the pattern of developed country exports. This question will be considered in regard to trade with the newly-industrializing countries (NU) which account for the overwhelming share of the developed countries' manufactured imports from the developing countries, which provide the largest markets for their manufacturing industries, and which have been exhorted by the developed countries to liberalize their trade. The NlCs protect their manufacturing industries by the use of tariffs and inactive import restrictions. Quantitative restrictions came into greater use after in conjunction with the increased inward orientation of a number of the NlCs and, again, after 1979 in attempting to cope with their increased debt burden. Import restrictions are applied even in outward-oriented NICs, with the exception of Hong Kong and Singapore, although these have much more limited scope and are administered in a more liberal fashion that in inward-oriented NICs. Several years ago, an OECD report expressed the fear that a newly industrializing country "may find itself moving into surplus on current account when in fact the availability of external capital and the possibilities for its profitable use would have permitted higher levels of domestic activity and consumption." (OECD, 1979, p.57). This fear has not been realised and no newly-industrializing country has accumulated excessive foreign exchange reserves. These countries have few possibilities, therefore, to draw on their foreign exchange reserves while, under present conditions, most NlCs may not increase their foreign debt. It follows that reductions in trade barriers by the NlCs could not give rise to higher imports unless their exports are simultaneously increased. Excluding such a possibility for the time being, the relevant issue is how the composition of imports would be affected. This will be considered first for manufactured goods alone. The NlCs use import restrictions to save foreign exchange as well as to protect their domestic industry. They limit the imports of non-durable consumer goods that are produced locally, but demand for variety and for luxury goods creates demand for imports. The NlCs also protect their incipient industries producing intermediate goods (iron and steel, chemicals, and other semi manufactures) and relatively simple engineering products (electrical and non-electrical machinery and transport equipment). As a result of the application of protectionist measures, the share of consumer goods and intermediate products in the imports of the developing countries from the developed countries declined in recent years whereas the share of machinery and machine tools used in their manufacture, which dominate the engineering goods category, increased to a considerable extent. Correspondingly, the liberalization of trade by the NlCs would lead to increases in the imports of nondurable consumer goods, intermediate products, and simple engineering goods and to a decline in the imports of sophisticated machinery and machine tools necessary for their domestic production.

 This conclusion needs to be qualified by reference to cases where NlCs have made a push into technologically-advanced products. Examples are personal aircraft and simple computers in Brazil. It is such instances that have evoked the ire of U.S. exporters who have seen markets closing to them. But the vociferous complaints should not mask the fact that these commodities are few in number, so that their existence does not introduce a major modification in the argument. One needs to consider, however, possible changes in the importation of primary commodities. Since these commodities are rarely protected by the NICs, their imports would decline, and the importation of manufactured goods - largely from the developed countries - correspondingly increase, following reductions in protection. 

Reductions in primary product imports by the NlCs would adversely affect the developed countries as well as the less developed countries (LDCs), since some of these commodities are exported by developed countries and others by LDCs. But, in the latter case, too, there would be a decline in the export earnings of the developed countries,, owing to reduced purchases of their products by the adversely-affected LDCs. Thus, ultimately, any increases in the manufactured exports of the developed countries to the NlCs would be offset by reductions elsewhere, so long as the export receipts of the NlCs remained unchanged. 

Next, consider the case where the NlCs expand their exports, so as to obtain foreign exchange for increasing their imports upon the liberalization of trade. This is indeed the expected consequence of trade liberalization that reduces the bias of the system of incentives against exports. For one thing, the cost of domestically produced inputs will decline; for another thing, the exchange rate will tend to depreciate in order to equilibrate the balance of payments following the liberalization of imports. 

Part of the increase in the exports of a particular newly-industrializing country would find markets in other NlCs as they liberalize their own trade. This will not improve, however, the net foreign exchange position of the developing countries, taken together. At the same time, increased imports from the developed countries will have to be paid for by higher exports to them. Thus, while trade liberalization will change the pattern of the NlCs imports from the developed countries, increases in these imports would necessitate a corresponding rise in exports.