LIBERALISATION WOULD ALLEVIATE THIRD WORLD’S DEBT PROBLEM.

Feb 23, 1985

LIBERALISATION WOULD ALLEVIATE THIRD WORLD’S DEBT PROBLEM.

GENEVA, FEBRUARY (IFDA/CHAKRAVARTHI RAGHAVAN) – A trade liberalisation effort, focussing on key products of export interest to the Third World, would make a significant contribution to alleviating the debt problem of Third World, according to the UN Conference on Trade and Development.

In a report (TD/B/1039) to the Trade and Development board, the secretariat says that such a trade liberalisation, whether done on a most-favoured-nation (MFN) or a preferential basis for the Third World, would result in a "substantial increase in exports" from these countries.

Removal on an MFN basis of tariffs and identified non-tariff measures (NTMs) for core products of export interest to the Third World would increase their export earnings annually by over 30 billion dollars, according to UNCTAD’s estimates.

On the basis of a five percent discount rate (the commercial interest rate less the rate of inflation), UNCTAD estimates that the present value of the trade liberalisation would really represent in the future about 85 percent of the current estimate of 800 billion dollars Third World debt.

The liberalisation on a preferential basis, UNCTAD suggests, would have "only a minor impact" on the major importing countries, in terms of their economies as a whole.

But the industrial countries would gain through positive employment opportunities in their own export sectors (due to increased purchasing capacity of the Third World), while their own consumers would benefit from lower prices.

Also, industrial countries would be protected from massive banking and financial losses, should the debt crisis deteriorate further and become unmanageable.

Based on its data base, and excluding items (mostly crude materials) trade freely, the secretariat has listed some 145 four-digit sitc (international trade classification code) products which account for approximately 85 percent of all Third World exports and could be the focus for trade liberalisation.

The average level of tariff protection and the principal non-tariff restrictions facing these products in the three principal industrial markets of U.S.A., Western Europe and Japan have also been listed by the secretariat.

For 34 Third World countries with debt problems, on an average, 22 percent of their exports to the European Community encounter non-tariff measures while the corresponding shares range between 13 and 21 percent in Japan and Sweden.

But for some individual Third World countries, the significance of NTMs is considerably greater than these averages.

While for oil-exporting countries like Algeria and Venezuela, the share of their exports subject to NTMs in Japan is under three percent, for a country like Colombia, with a broader spectrum of exports, the corresponding figure of NTMs is 60 percent.

The imports covered by NTMs range in Sweden between zero for Venezuela to 90.1 percent for Colombia, and in the EEC between 1.8 percent for Panama and 73 percent for Colombia.

The figures would be significantly higher, according to UNCTAD, if account were taken of non-border NTMs such as excise taxes on petroleum and coffee.

In the three main industrial markets combined (U.S., Japan and Western Europe), almost on-fifth of Third World exports are subject to NTMs and for some countries tariffs continue to be an important barrier as well.

The U.S. Trade Representative, William Brock, has been recently quoted as saying that even if the U.S., Europe and Japan were to drop all barriers to Third World countries, such liberalisation would apply to only about four billion of their trade initially.

From its own data base and the coverage ratios of tariff and NTMs facing exports of these countries, UNCTAD however estimates that about 30 billions of Third World exports are subject to NTMs alone in the four industrial markets.

Using its trade simulation model, the UNCTAD secretariat has also attempted to quantify the effects of various trade liberalisation strategies.

Any scenario of liberalisation, UNCTAD says, must extend to a core group of products accounting for 85 percent of Third World exports.

Also, benefits of the liberalisation efforts must be extended to all Third World countries, in order to ensure that the competitive position of any one of them is not adversely affected by the liberalisation.

The trade liberalisation should also be conducted as soon as possible, in order to provide the necessary stimulus to the economies of the Third World countries.

On the basis of its simulation exercises, UNCTAD estimates that an MFN removal of tariffs and the identified NTMs facing the Third World countries for the core products would increase their exports approximately by about 31.9 billion annually.

If the liberalisation is done on a preferential basis for the Third World, the exports would increase by an additional 2.8 billion.

In both cases, the liberalisation would add approximately 12 billion dollars to the annual exports of the heavily indebted countries.

UNCTAD however says that while the figures are impressive, they in fact understate the potential for debt relief through a focussed trade liberalisation.

Firstly, many of the existing barriers are applied in a discriminatory manner, and these could not be taken note of in the simulations.

Secondly, there are some known NTMs where there is a lack of estimations of their nominal equivalents, and hence trade gains by their removal could not be quantified.

Thirdly, not all NTMs affecting exports had been covered in the simulations, and this was particularly the case regarding new border measures and standards.

A preferential liberalisation of trade, UNCTAD argues, would only have a minor impact on the economies of the industrial markets.

In the EEC and the U.S./Canada, the liberalisation would raise the ratio of imports of manufactures to domestic consumption by about one-half of a percentage point.

The corresponding change for Japan would be approximately 0.06 percent.

On a sectoral basis, the largest increases would occur in clothing in the EEC and U.S./Canada, but even here the imports only account for about one-fifth of domestic consumption requirements after liberalisation.

In the EEC, the ratio of imports from Third World to consumption in clothing would go up from the present 11.97 percent to 10.60 percent, in U.S./Canada from 10.81 to 21.35 percent, and in Japan from 5.83 to 6.62 percent.

But apart form this, such a debt-related trade liberalisation would also have a number of other positive gains for the industrial countries themselves.

Chief among these would be the generation of positive employment opportunities in these countries’ own export sectors, given the fact that higher foreign exchange earnings by the Third World countries would enable them to pursue more expansionary import policies.

There would also be major benefits to consumers if the Multifibre Arrangements (MFA) restricting textiles and clothing imports, and the trade barriers facing many other labour-intensive products were removed.

According to the U.S. Federal Trade Commission, protection against imports of footwear, clothing and sugar cost U.S. consumers approximately 7.7 billion dollars over the period 1975-1979.

The U.K. Consumers Association has reported that the MFA had increased prices of British clothing imports by between 15 to 40 percent and that it had created shortages of many lower priced items.