Mar 9, 1990

INTERNATIONAL MARKETS INCREASINGLY CLOSED TO COMPETITION

GENEVA, MARCH 8 (BY CHAKRAVARTHI RAGHAVAN) -- International markets are being increasingly closed to the more competitive emerging exporters and the techniques to close markets fall increasingly into the "grey" area of international disciplines, according to a study prepared for the UN Conference on Trade and Development.

The study, "Export restraints and the Developing Countries", is by Tracy Murray, Distinguished Professor of International Economics and Business at the University of Arkansas, U.S.A.

Instruments for restraining competition involve arrangements between an exporting and importing country, and with varying degrees of government involvement.

The study advocates international agreements for "transparency", multilateral participation in negotiations, and for time-bound limitations as measures that could be used by the international community to "moderate" these trends.

The trends towards use of such instruments, the study suggests, is due to two elements: firstly, evolution of cooperation between government and industry with catalyst for action shifting from government to industry. This implies that the trend will continue and international trade will become increasingly, regulated by ever tighter voluntary exports restraint agreements (VERs).

The second element is the pro-trade bias in the political economy of protectionism: fear of legislative response induces free-trade oriented executive branch to pre-empt legislation by the more flexible types of protectionism of VERs. This would imply that protection via VERs is the "least worse".

But whatever the motivation, the trend is unmistakable.

Bilateral export restraints, the study notes, are playing an increasingly important role in the total picture of protectionism. From about 50 in 1978, they have now grown to 263 in 1989.

They have been introduced by the ICs, primarily by the U.S. and the EEC, and applied mainly against the Third World countries.

In 1989, for e.g., Third World exports were restrained by 150 VERs, while 49 VERs affected exports of the ICs.

In the vast majority of cases, VERs imposed against exports from the Third World countries involve textiles and apparel, and are negotiated under the MFA under GATT auspices.

But exports of other products of the more advanced Third World countries also are restrained by VERs.

The study points out that while VERs cover textiles and steel-products mostly, there are also VERs limiting trade in less significant sectors like footwear, cutlery, machine tools, colour TVs, videotape recorders, radios, microwave ovens, meat, dairy products and fish. While the list is not endless, and not specifically aimed at Third World countries, it has a tendency to grow.

The restrained products are heavily concentrated in the steel sector. The U.S. has imposed VERs against Argentina, Brazil, Korea, Mexico, Venezuela and Yugoslavia; the EEC has imposed VERs against Brazil and Korea. The EEC has also imposed VERs on footwear from Korea and cassava from Thailand while the U.S. has imposed VERs on machine tools from Taiwan.

A study of Korea's experience, Gibbs says, has shown that in 1987 twenty-nine percent of Korean exports to ICs were subject to some type of non-tariff restrictions - on 27 percent of exports to the U.S. and 40 percent to EEC. Roughly one half of these were textiles and apparel exports under MFA.

The Korean experience also shows that VERs are contagious. The fear of trade diversion results in importing countries imposing VERs in two directions: VERs are expanded to cover imports from the unrestrained exporters (as when U.S. extended the VERs against Japan in colour TV sets to Korea and Taiwan), while other importing countries impose VERs to prevent diversion of exports from the restrained country (as when the U.S. imposed VERs on footwear imports from Korea was followed by similar VERs by UK and Ireland.

VERs, being restraints imposed under discretionary powers of administrations rather than legislative, can be terminated also by executive action: of the 20 VERs against Korea in the 1930’s, eight have been terminated. But VERs initiated by industrial associations becomes a more permanent feature of the trading environment.

In the importing country, VERs increase import prices and decrease import volumes, benefiting the domestic industry and harming consumers who lose more than is gained by producers. Consumers lose through higher prices both on imported and domestic goods, while producers gain only from higher prices on domestic goods.

In the exporting countries, consumers gain and producers lose, the latter losing more than is gained by consumers.

VERs result in directly diverting trade from the VER importing country to the rest of the world and divert income or quota rent from consumers in the VER importing country to producers in the VER exporting country.

But there are also some indirect effects. Exporters subject to restraint have an incentive to alter items exported to increase total revenue effect - by reducing share of low unit volume exports and increase share of high unit value exports.

This happened in case of U.S. VERs on Japanese automobiles.

In the beginning imports from Japan were dominated by low-price vehicles, whereas now it is predominantly larger, upscale vehicles.

A second indirect effect of VERs is the substitution effect trade being substituted by direct investments - as of Japanese automobile manufacturers setting up plants for manufacture in U.S. and European Community.

A third indirect effect is on downstream producers using the VER product as input for their production process. These firms become less competitive vis-a-vis imports of the downstream product, and they lose sales at home and exports abroad.

This has been seen in the U.S. where steel imports have been under restraint for roughly two decades, and as a result U.S. product sectors like automobiles, fork-lift trucks, heavy construction machinery etc have been facing difficulties with competing imports.

VERs, discriminating as they do between sources of supplies, certainly conflict with the spirit of GATT, the study notes.

But if GATT is looked at more critically, and seen to be more a document of procedures for resolution of conflicts between trading partners than a document of rules, and if the importing country does not complain against the export restraints by the exporting country, GATT does not seem to have any role.

While third countries could initiate actions by notification and showing nullification or impairment under Article XVIII, there have been few GATT challenges by third countries.

Hence, while VERs are against the spirit of GATT, so long as GATT is only a procedure-based system to resolve conflicts, VERs "will fall through the cracks of enforcement" and will be a "grey area" under GATT.

The importing countries also have found the alternatives to such measures in GATT less attractive. The safeguard actions under the escape clause in Article XIX have to be applied against all sources and trading partners have to be consulted and compensated. The use of antidumping and countervailing duty actions, being actions against unfair trade, have also been found unattractive.

Governments facing domestic pressures for protection thus find themselves reluctant to use GATT sanctioned measures. But if pressures are strong enough the administrations find them difficult to resist and fearing legislative actions and end to their discretionary powers have recourse to VERs.

With international markets increasingly being closed to more competitive emerging exporters, and "grey" areas of international discipline used to close the markets, the international community has to moderate this trend, the study suggests.

The first step would be to ensure transparency.

An international agency should be created to record all measures restricting or limiting access to any country's market. The UNCTAD data base on non-tariff measures is a good start.

Countries negotiating VERs should be obliged to provide copies of all agreements, products covered and administrative details to the data base for dissemination to all member-governments and private entities in all member states.

When there is transparency, and since trade diversion is a likely outcome of VERs, other producing and consuming countries will be concerned. If they are aware of a VER their concerns can be communicated to the importing and exporting countries. Sufficient expressions of concerns from other trading partners could provide a significant voice against excesses in use of VERs.

VERs also raise prices in the importing country, and imposes costs to consumers which, if informed, could be a counter-lobby to the introduction of a VER.

There should be international monitoring and dissemination of information in products subject to VERs, with periodic economic impact studies for each VERs, which should be widely disseminated in all countries to governments and private entities including the press.

VERs are also the result of bilateral negotiations and pressures of a stronger trading partner against the weak who are at a negotiating disadvantage in bilateral negotiations. Multilateralism would provide support for the weaker partner, and also forces to take positions and thus provide pressure on the initiating country.

Above all, there should also be provisions to ensure that VERs are not made permanent but time-bound.

Some of these arguments are currently being used by the ICs and some of the GATT secretariat in the Uruguay Round negotiations in their efforts to persuade Third World countries to agree some of the demands of ICs like "selective" safeguards, arguing that the "grey area" measures could best be dealt with this way and brought under multilateral scrutiny and discipline - a remedy which Third World participants compare to the idea that the best way to end a crime is to make the act legal.

Same observers of the GATT system, and its functioning, and many Third World participants therefore argue that while transparency and multilateral scrutiny have their place, the way to deal with such "grey area" measures is to make them GATT-illegal, in letter and spirit, thus enabling anyone to bring it up without having to show that it is nullifying their benefits.