LIBERALISATION FOR THIRD WORLD, ALSO CREATES JOBS IN NORTH.

Feb 15, 1986

LIBERALISATION FOR THIRD WORLD, ALSO CREATES JOBS IN NORTH.

GENEVA, FEBRUARY 13 (IFDA/CHAKRAVARTHI RAGHAVAN)— Trade liberalisation to benefit the third world must focus on key sectors like agriculture and textiles and clothing, and cover tariff and non-tariff measures according to the UN Conference on Trade and Employment.

UNCTAD says that its own simulations show that such trade liberalisation measures favouring the third world also have a net trade creation effect of benefit to the industrial countries, jobs t and could create as much as one million new in the OECD economies.

However, UNCTAD notes, declines in employment due to imports and increase in output and employment due to exports, may not occur in the same products within each industry, and thus might require movement of labour out of certain lines of production, creating some adjustment problems, requiring positive adjustment measures.

In a report, the UNCTAD secretariat suggests that the sectors in which trade liberalisation would be of greatest benefit to the third world are: fishing, crude petroleum, food products, textiles, wearing apparel, petroleum refineries, rubber products, iron and steel, and electrical machinery.

With the exception of crude petroleum and petroleum refinery products, non-tariff distortions are relatively important in all these sectors, and trade liberalisation would also have to address the non-tariff measures that distort the trade.

In the case of crude petroleum and petroleum refinery products, the gains from tariff liberalisation are quite small in percentage terms. Only the large amount of this trade accounts for the inclusion of these industries in the list of key industrial sectors for liberalisation, UNCTAD adds.

The UNCTAD projections and policy options are based on 1983 trade data and UNCTAD’s trade-policy simulation model - a partial equilibrium model, being increasingly made use of by institutions like the World Bank and UNIDO, as well as UNCTAD itself for providing advice to third world countries on request.

The UNCTAD projections show that if the 20 major OECD countries simultaneously reduce their tariffs on all products to a zero rate on a Most-Favoured-Nation (MFN) basis (i.e. applicable to imports from all GATT members), there would be an initial increase in imports by the OECD countries from the preference-receiving (under GSP or other schemes) third world countries of the order of 14 billion dollars, or a 5.3 percent increase over that of 1983.

If the zero rate tariff were to be applied only to imports from the preference-receiving countries, the increase in imports would be five billions more to 19.3 billion or a 7.2 percent increase.

In some sectors, in the case of an MFN liberalisation, preference-receiving countries would face a net loss because of trade diversion to the non-preference-receiving countries (because of erosion of the preference margins). This net loss would exceed the trade creation effect.

On the basis of its projections and simulations, UNCTAD concludes that the residual tariffs facing the third world in OECD markets are still "substantial", and there would be considerable trade gains to the third world countries if these tariffs are reduced to zero.

Also, there is considerable scope for improving the position of the third world countries through full extension of GSP treatment.

The UNCTAD simulations show that in the three principal OECD markets (those of the U.S., EEC and Japan), increase in imports from the preference-receiving countries, under an MFN zero tariff liberalisation, is of the order of 12.7 billions, while it will be 16.5 billions if the liberalisation is through zero tariff preferential rates.

But when these tariff reductions are supplemented by elimination of Non-Tariff Trade- Distortions (NTDS), the increases in imports are projected to be of the order of 29.5 billion and 37.6 billion respectively.

The debt problems of the third world countries, and the linkages between finance and trade, have focussed renewed attention on trade liberalisation measures favouring the third world.

But efforts at trade liberalisation (in goods) in GATT, and through a new round, have however got subsumed in the efforts of the United States and some other industrial. countries to involve GATT in new theme like "services".

The argument has been that trade liberalisation in goods would only benefit the third world, and without some action in services to benefit the industrial world, it cannot be sold to their domestic audiences.

The UNCTAD report focuses on the effects of trade liberalisation measures by the OECD countries on exports of goods from the third world, and the secondary benefits of trade creation and increased imports (of goods) by the third world countries on the OECD countries, and the benefits to the financial system through amelioration of the debt situation.

The UNCTAD simulations have also identified some 50 key items of export interest to the third world which would benefit by trade liberalisation by EEC and Japan, and of some 80 items imported by the U.S.

The items identified by UNCTAD mainly consist of raw and processed primary products, as well as textiles and clothing items.

UNCTAD notes that while this selective liberalisation in a few products in the agricultural sector and in textiles and clothing sector would no doubt result in "very substantial benefits" to the third world countries, there are some questions about its "realistic" possibilities.

In analysing the impact of the liberalisation changes in the importing countries, UNCTAD suggests that as a result of full MFN tariff liberalisation (by all the 20 major OECD countries) the EEC' s imports would increase by 10.3 percent while its exports would increase by 10.4 percent.

There will thus be a net export gain through trade creation.

The UNCTAD simulations for EEC show that for almost all industries there is a net expansion in output and employment as a result of general liberalisation among the OECD countries.

The only industries with a net decline in employment are tobacco (down 1. 46 percent and petroleum refining (down 0. 06 percent).

The major industries where the EEC benefits by expansion are electrical machinery and transport, where employment gains are estimated at 300.000 jobs.

In the case of Japan, the only industries expected to have a net decline in employment are tobacco (down 0.48 percent), footwear (down 1.56 percent), and petroleum refineries (down 0.01 percent).

Major gains in employment for Japan are in rubber products (up 3.61 percent), pottery and china, etc., (up 9.32 percent), and substantial gains in absolute terms, some 65.000 jobs, in machinery and transport sectors.

In the case of the U.S. the overall net change in imports is an increase of 8.2 percent, while the U.S. itself gains some 7.6 percent in exports.

The only industries where there will be a net decline in employment are in wearing apparel (clothing), down 3.38 percent, pottery and China, etc., down 1.53 percent, and non-metal products, down 0.003 percent.

The major U.S. industry in which expansion is predicted is in transport equipment, where employment is projected to expand by 1.16 percent.

In all three major markets, UNCTAD projects that as a result of general liberalisation, the expansion in imports does not directly replace domestic output, while exports are assumed to directly increase output.

The strength of export gain is such that for almost all industries there is a net expansion in output, and hence in employment, as a consequence of general liberalisation among the OECD countries.

In these three major economies, UNCTAD projects an expansion of employment opportunities of the order of one million jobs with the major benefit to the EEC of some 800.000 jobs, of 100.000 to Japan, and slightly less to the U.S.

"However", UNCTAD underlines, "the simultaneous decline in employment due to increased imports and increase due to exports will not necessarily involve the same products within each industry and there would inevitably be some movement of labour out of certain lines of production and into other lines. Thus there will be some adjustment problems for certain employers and employees".

In the U.S. particularly, the changes in clothing industry would cause some problems, and liberalisation measures would have to be complemented by appropriate positive adjustment policies in that country.

UNCTAD underlines that any trade liberalisation of tariff, to produce a net trade expansion, must also involve simultaneously a sufficient relaxation of non-tariff distortions (NTDS), to enable the expansions to take place.

Without this, there may be no change in volume of imports, and in the case of negotiated concessions, the expectations of the trade partner may be frustrated.

In areas where there are import quotas and other such measures, a tariff liberalisation without removal of quotas, would in all likelihood result in a price increase in which importers would cream off the economic rent associated with the NTD, and would not pass on potential benefits to the exporters.

UNCTAD suggests that the kind of liberalisation scenarios advocated by it could have some prospects of success, though, given the history of intervention in these sectors, there would be "considerable opposition".

This is because sectoral interventions have been used for a number of other purposes than simple industrial policy.

For example, protection to the textile sectors have been provided on grounds of regional considerations.

Hence liberalisation measures would have to be accompanied by positive adjustment measures.

But whether there is a political will for trade liberalisation seems problematic.

UNCTAD notes that the EEC council of Ministers, in calling for a new round of trade negotiations in march 1985 and reaffirming their commitments to standstill and progressive rollback, had also declared their "determination" that the fundamental mechanisms of the common agricultural policy "shall not be placed in question".

Even important industrial country agricultural exporters who call for freer trade in agriculture have a tendency to protect their own markets - the U.S. has substantial barriers against imports of sugar, wool, tobacco and cheese, while australia maintains restrictions against imported sugar.

Other OECD countries also view agriculture as a special sector, and non-negotiable because of domestic political considerations, as in the case of Japan.

In the textiles and clothing sector, there are significant political constraints, UNCTAD notes.

On trade negotiation techniques itself, UNCTAD notes that trade liberalisation negotiations often involve negotiators seeking concessions from the other side while minimising his own.

Any new international initiative has hence to be directed towards making visible the domestic benefits to be achieved through trade liberalisation.