Mar 22, 1990

WORLD TRADE GROWTH DECELERATES, BUT OVER $ 3 TRILLION.

GENEVA, MARCH 20 (BY CHAKRAVARTHI RAGHAVAN) -- The world merchandise trade exceeded three trillion dollars in 1989, but registered a deceleration in growth with 7-1/2 percent increase compared to the 14 percent registered in 1988, according to the GATT secretariat's first estimates.

On a volume basis trade growth in 1990 is expected to decelerate further to a five to six percent range, still exceeding the trade performance of four of the past seven years and growing at a faster pace than world output.

Trade in manufactured goods, and of exports of ICs, particularly by the U.S. and the European Communities, provided the strongest contribution to the expansion in volume of world merchandise exports in 1989. There was however a slowdown of export growth in a number of "dynamic traders" in Asia and Latin America.

Volume of Third World exports, for first time since 1935, did not exceed world average.

Exports of the Third World countries was slower in 1989 than in 1988, but the estimated slowdown (from 15% in 1988 to 12% in 1989) was modest rather than sharp thanks mainly to recovery in export earnings of the OPEC members.

Among the exporters of manufactures in Asia, there was a slowdown from the high growth rates of last two or three years, while in Latin America it fell to about one-half of worlds average. For a number of other Third World countries declining trends in non-fuel commodity prices (with cocoa and coffee prices off sharply) reinforcing the effects of weak volume growth.

The 7 -1/2 percent increase in world trade value in 1989 was matched by the estimated seven percent increase in volume - the higher petroleum prices and moderate price inflation in 1989 being offset by the deflationary "valuation effect" of the appreciation in value of the dollar against other currencies.

While no estimates are available of the value of world trade in commercial services in 1989, the GATT secretariat suggests that it would be higher than the revised estimates of 600 billion dollars for 1988.

In presenting what it calls "this generally optimistic out-lock", the GATT secretariat has noted that relatively little progress had been made in dealing with a series of problems confronting policy makers in recent years.

Beyond some further forgiveness of debt owed to governments of Industrialised Countries, there has been no tangible progress in dealing with the problems of the least developed countries.

As for the highly indebted middle-income countries, while the various initiatives to reduce their debt burden might be extended to more countries in 1990, "it is an open question whether this will be sufficient to offset the combined impact of the continued high level of interest rates and a second year of slower economic growth in their principal export markets, particularly the U.S.".

Among the other "worrisome features" of the current situation are the persistent inflation in many parts of the world, and in particular the ICs (4 to 4-1/2 percent in major ICs), with monetary restraint having an impact on consumer prices but painting more to a levelling off than decline in inflation.

If major central banks were to raise interest rates to combat inflationary pressures, it could have a negative impact not only an business investment but also on highly indebted countries, the GATT economists add.

As for trade imbalances among major economies, the continued adjustment in Japan's global surplus and U.S. overall deficits have contributed to somewhat diminished concern, but there remained "considerable unease over sustainability of present situation and prospects for further improvement".

A new challenge to policy makers in the 1990's is in the efforts of East Europeans and the Soviet Union to reform their economies and stimulate growth. Their needed investments in infrastructure and plant and equipment would need increased imports of capital equipment and business services, while the level and patterns of world trade would be affected as their trade with countries outside the CMEA increases in importance.

Other challenges to policy makers include the need to support and strengthen the ongoing globalisation of the world economy and spread of industrialisation to the Third World.

These would need policy changes to continue the process of increased scope for market forces, competition and entry of new traders in the world markets, changes which have become all the more necessary as countries which had traditionally relied on central planning endeavour to integrate themselves into the world economy.

The overall pace of adjustment of current account imbalances appears to have slowed in the FRG, U.S.A and U.K.

Only Japan reported a sharply lower current account surplus from $ 8O billion to $ 57 billion, with 13 of the 23 billion reductions due to lower merchandise trade surplus.

The FRG on the other hand posted a new record current account surplus of $ 53 billion. In the U.S. the current account deficit declined for a second year in a row to an estimated $ 115 billion, but by a smaller amount than in 1988. The UK posted a sharply higher current account deficit for 1989, though there was evidence of a reversal of the trend in the latter part of the year.

The combined savings made available by Japan and the FRG to the rest of the world declined by $ 18 billion between 1988 and 1989, while the net borrowing by the U.S. and UK declined by only four billion - the lower U.S. current account deficit being partially offset by the higher U.K. deficit.

As a result, the difference between the amount of savings borrowed by the U.S. and U.K. and the savings contributed by Japan and FRG increased by $14 billion.

Though the GATT economists have refrained from drawing the necessary conclusion, this would appear to mean that the rest of the world have contributed more to the borrowings of U.S. and U.K.

The exports of the 15 highly indebted countries grew by 8-2/2 percent, sharply down from the 17-1/2 percent of 1988, while their imports also grew by 8-1/2 percent.

The aggregate merchandise trade surplus of these countries (used mainly for debt servicing) reached $ 26 billion, up from the $ 24 billion in 1998. Brazil contributed to over half of the total surplus of the group with $ 16 billion.

Despite three years of import expansion, the value of aggregate imports into the indebted countries still remained more than $ 20 billion below the peak 1981 figure.

Higher interest rates and significant differences in export performance contributed to a shifting of their debt profile. According to ECLAC, interest due as percentage of exports of goods and services rose in Argentina, Brazil and Uruguay.

In Latin America, where 10 of the heavily indebted countries are situated, average inflation at end of 1989 had almost reached 1000 percent, except in Mexico where inflation came down from 100 percent to under 20 percent.

Preliminary figures also showed that per capita incomes declined for second year in a raw in Latin America and, among the heavily-indebted countries, per capita output in 1989 was significantly above that of 1980 only in two countries: Chile and Colombia.