INTERNATIONAL ISSUESROBERT E. MARKLAND, Feature Editor, College of Business Administration, University of South Carolina RECENT DEVELOPMENTS IN WORLD TRADEby Glenn W. Harrison, University of South Carolina World trade is undergoing one of the most important liberalizations of the century as the result of the recently concluded round of multilateral negotiations. These negotiations proceeded under the auspices of the GATT, and are generally referred to as the Uruguay Round (UR) after the country in which they began several years ago. What are the main features of the round, and what do they portend for the future of world trade and the welfare of the United States? The UR is a complex agreement which includes agreements in many areas: (i) tariff reductions in manufactured products; (ii) tariffication of non-tariff barriers in agriculture and binding commitments to reduce the level of agricultural protection; (iii) the reduction of export and production subsidies in agriculture; (iv) the elimination of Voluntary Export Restraints (VERs) and the Multi-Fibre Arrangement (MFA); (v) institutional and rule changes, such as the creation of the World Trade Organization (WTO) and safeguards, antidumping and countervailing duty measures; (vi) new areas such as Trade Related Investment Measures (TRIMs), Trade Related Aspects of Intellectual Property Rights (TRIPs), General Agreement on Trade in Services (GATS); and (vii) areas receiving greater coverage, such as government procurement. At the very least, it is apparent that GATT negotiations generate more unpronounceable names than the average Russian novel! On the other hand, many features of the round are amenable to quantification using relatively standard tools of economic analysis. To provide a sense of perspective, consider the overall effect of the round on welfare. In a recent study(see footnote 1) undertaken for the World Bank, I find that the world as a whole gains substantially from the reforms of the Uruguay Round: about $53 billion annually in 1992 dollars in the short-run, and up to $188 billion annually in the long-run. However, the gains are concentrated in developed countries, especially the United States, the European Union (EU) and Japan. In the short-run the United States gains $10 billion, the EU gains $26 billion, and Japan gains $8 billion. In fact, in the short-run a number of Less Developed Countries (LDCs) are estimated to lose on balance from the Uruguay Round. The detailed short-run results are listed in Table 1, and use the definitions of regions and the level of sectoral detail listed in Table 2. The overall explanation for this outcome is intuitive: it is the industrialized countries, especially the United States and the EU, that "gave up" the most in the UR in the (misleading) mercantilist sense. In other words, these countries are reducing policies that are very costly in terms of foregone welfare to themselves, most notably MFA protection in clothing and agricultural distortions. On the other hand, LDCs reduce agricultural distortions relatively less and do not restrict imports under the MFA. The only general exception is that LDCs reduce protection in manufactures by more than OECD countries, since OECD countries have relatively lower benchmark protection on average in this area. One particularly important component of the UR is agricultural reform. First, it was agreed to "tariffy" all non-tariff barriers in agriculture, to incorporate all agricultural product lines within the GATT, and to reduce the tariffs (including the tariff equivalents of the non-tariff barriers) by an unweighted average of 36% for developed countries and by 24% for developing countries (other than the least developed countries, who committed to no reductions). Second, the UR calls for a reduction of the budgetary outlay on export subsidies in agriculture by 36% for developed countries and 24% for developing countries at the tariff line level. Third, the Aggregate Measure of Support (AMS) to agriculture, which primarily includes subsidies to domestic production, should be reduced by 20% for developed countries (except for the EU, which should reduce its AMS by only 16.8%), and developing countries are to reduce their AMS by 13%. There is some skepticism regarding whether the AMS will actually bind the contracting parties. Our estimates show the EU, United States and Japan to be the big winners from agricultural reform, for different and predictable reasons. Japan gains from reducing its high agriculture tariffs, while the European Union and the United States gain from reducing their export and production subsidies. Many nations gain relatively smaller amounts from reduction of their agriculture production subsidies. In order to obtain an understanding of the impact of the various components of agricultural reform, Table 3 decomposes the overall agricultural reform scenarios into its three major components. The results of column AGR1 show the impact of reducing export subsidies in agriculture; other components of agriculture reform are not implemented in this scenario. The estimates show that the EU should gain $8.6 billion, whereas many other regions lose (viz., JPN, CHN, MNA, EIT and EAS). This component of agricultural reform was the one feared by the "net food importing" countries, who suffer an adverse terms of trade loss. In column AGR2 we report the impact of reducing agricultural production subsidies. As mentioned above, there is some skepticism regarding whether this aspect of the UR will be binding. While we have included the reduction of agricultural production subsidies as part of the Uruguay Round reform package, our decomposition of the benefits allows the reader to evaluate the benefits of each component. With a few exceptions (HKG, MYS and ARG) the available data indicate that all countries in the model have at least some production subsidies. In some cases, such as grains in MNE and paddy rice in the KOR, the subsidy is extremely high, although often on a low volume. Thus, the reduction of this production distortion produces benefits for most countries. In column AGR3 we show the impact of reducing import protection in agricultural products. The two dominant effects in this scenario are the gains to JPN, which is not surprising given its extremely high level of agricultural protection (the protection rate on grains is initially 329%), and KOR. The other regions which gain are those with relatively high agricultural protection. CHN and the EU are the two regions that lose small but non-trivial amounts from this scenario. The EU loses because in this scenario its export and production subsidies in agriculture are maintained. Hence the additional exports they obtain from the reduction of import protection in the rest of the world aggravates their already-costly export position: the rest of the world is saying "go ahead, subsidize more of my food," and the EU is just writing blank checks with the same initial export subsidy attached to them. In the case of CHN, it suffers an adverse terms of trade effect because other countries are lowering tariffs and attracting imports, which drives up the price of agricultural products on world markets. Since protection levels in CHN are unchanged, it does gain from trade liberalization like the other countries. For the other countries, the benefits of more efficient resource allocation, dominate the adverse terms of trade effect. In column AGR the combined effects of all the components of agricultural reform are assessed jointly. The EU gains over $18 billion from the agriculture reform package, due to the reduction of its subsidies. JPN gains from the reduction of its high import protection. Although CHN and some of the aggregate developing country regions lose somewhat small amounts, there are surprisingly few losers, given the concern about losses of the "net food importing" countries. This is explained by the fact that most regions have something to gain by reducing their own production subsidies and most also export some food, even if they are net food importers. In the case of textiles and clothing reform, the UR is resulting in a removal of quota restrictions on imports into the United States and other developed countries (most notably the EU and Canada). These quotas have been provided to exporting countries to administer, so their removal results in major losses of revenue to those exporting countries. The effect on the United States and other importing countries is very simple: lower prices for textile and clothing, resulting in a major reduction in the cost of living and an increase in welfare. These gains in welfare derive largely from the effects on clothing prices, since it is here that the United States is the least competitive. The most important conclusion of our study is the finding that some developing countries will be net losers from the Uruguay Round in the short-run. The reason we find this, in contrast to previous studies, is primarily due to the greater level of country detail in our study as well as by plausible parameter choices with respect to trade elasticities that we believe are justified by econometric evidence and a priori judgement. Since the losses for LDCs derive from the reduction of agriculture subsidies in the United States, EU and EFTA, and the capture of MFA quota rents by OECD countries in the form of gains in consumer surplus, those developing countries that lose have little in the way of policy instruments to prevent the outcome. What they can do, however, is further reduce their own self-inflicted costs by reducing their trade barriers further. The post-UR environment presents a more open global trading environment in which the benefits of efficient resource allocation derived from unilateral tariff reduction will be presumably magnified. Moreover, in the long-run, our estimates suggest that higher elasticities and income levels will lift many countries that may lose in the short-run. This suggests that all countries at least have the potential to gain from the Uruguay Round. On the other hand, many would argue that the relevant basis for comparison when judging the UR should not be "business as usual" but "business without any rules." That is, if these negotiating rounds had collapsed, the world could have fallen into a protracted series of trade wars, possibly pitting one regional trading bloc against another. If one undertakes the correct comparisons in this way (see footnote 2) then virtually any agreement was a good agreement. Footnotes
GLENN W. HARRISON is the Dewey H. Johnson Professor of Economics in the Department of Economics, College of Business Administration, University of South Carolina. He completed his B.Ec.(Hons.) and M.Ec at Monash University in Melbourne in 1978 and the Ph.D. in economics at UCLA in 1982. He has held teaching appointments at the University of Western Ontario (Canada), University of Arizona, University of Melbourne, Stockholm School of Economics, University of Stockholm and University of New Mexico. Professor Harrison's current research interests include international trade policy and environmental damage assessment; he has published over 50 articles in academic journals and volumes. He has been a consultant for numerous government agencies and private bodies, including the Reserve Bank of Australia (Senior Fellow in Economic Policy), the California Energy Commission, the Atlantic Richfield Company, the World Bank, the Office of the U.S. Trade Representative, Sandia National Laboratory, the American Petroleum Institute, and the National Commission for Employment Policy. Before coming to the United States, Professor Harrison played football professionally for the Australian Rules football team Hawthorn. Dr. Robert E. Markland
mentioned in this article, contact the Managing Editor at dsihhj@gsusgi2.gsu.edu. |