On the potential contribution of trade policy initiatives for alleviating the international debt crisis

J ECO BUSN 1987; 39:209-224

209

On the Potential Contribution of Trade Policy Initiatives for Alleviating the International Debt Crisis Samuel Laird and Alexander Yeats

Previous analyses of the international debt crisis generally acknowledge the need for trade liberalization to allow developing countries to increase export earnings. However, little empirical information exists concerning the magnitude of the potential gains. This paper attempts to fill the information gap by analyzing the extent that barriers are applied to indebted developing country exports and simulating the effects of their removal. The results indicate that $35 billion of developing country exports to major industrial markets encounter "hard core" nontariff barriers and that their removal could produce an export expansion whose present value is approximately one-half of these nations' debts.

I. Introduction Concerns about the international debt crisis center on the debt-related trade and financial problems of developing countries. In a decade, developing countries' external debt rose eightfold, to more than $900 billion in 1985. For some nations, the situation appears to have become unmanageable. As an example, for Argentina, Brazil, and Mexico, interest alone equals half of merchandise export earnings while the ratio of total debt outstanding to annual export earnings averages approximately 365% for ten of the most heavily-indebted developing countries (measured in terms of the absolute value of debt carried), reaching 600% for Egypt. For countries like the Congo, Egypt, Jordan, Panama, Senegal, and Zah're external debt exceeds gross domestic product. Most previous analyses that have considered ways to alleviate the debt crisis acknowledged the need for trade liberalization as well as efforts to curb protectionist pressures. Removal of tariff and nontariff barriers would allow indebted developing countries to increase their export earnings and facilitate debt repayment. While such arguments have been advanced in international fora like GATT or the IMF, there is little empirical information relating to the

Samuel Laird is Economist, The World Bank. Alexander Yeats is Senior Economic Affairs Officer, United Nations Conference on Trade and Development (UNCTAD), Palais des Nations, Geneva, Switzerland. The views expressed in this paper are those of the authors and do not necessarily reflect those of the United Nations Secretariat or the World Bank. Address reprint requests to Alexander Yeats, United Nations Conference on Trade and Development, Geneva, Switzerland.

Journal of Economics and Business © 1987 Temple University

0148-6195/87/$03.50

210

S a m u e l Laird and A l e x a n d e r Yeats

probable contribution of trade liberalization to resolve the crisis, t This study attempts to fill the information gap by developing estimates of the effects of liberalizing trade barriers facing indebted developing countries. The following approach is utilized in this study. First, we use comprehensive records compiled by the UNCTAD secretariat to assess the extent to which tariff and nontariff barriers (NTBs) apply to the exports of indebted developing countries. 2 Given the high debt of Latin American countries, we conduct a similar analysis for some of the major debtors of the region. 3 Next, we use a partial equilibrium trade projection model in connection with tariffs and nominal equivalents for nontariff barriers in order to assess the magnitude of debt relief associated with alternative trade liberalization policies. We also address three other issues: the identification of key products that would need to be the focus of the liberalization effort, an assessment of the relative importance of tariff and nontariff barriers facing these products, and how the trade effects of their removal would differ for individual developing countries.

II. Profiles of Protection Against Developing Countries To provide a basis for evaluating the influence of tariff and nontariff barriers on developing countries' exports, Table 1 presents aggregate statistics relating to the imposition of these trade control measures. Shown here are average post-Tokyo Round tariffs facing exports to Australia, Austria, the European Economic Community (EEC), Finland, Japan, Norway, Switzerland, and the United States as well as the share of exports which encounter common forms of nontariff trade measures. 4 For comparison, Table 1 presents the latter statistics for all developed and developing countries and for a subgroup of the most heavily-indebted developing countries. Table 1 suggests that average tariffs are now low, due to the effects of the multilateral trade negotiations and the Generalized System of Preferences. For example, in Norway and the European Community, exports from developing countries face an average post-Tokyo Round tariff of less than 2%, with the Japanese and Austrian tariffs averaging about 4%. Hence, tariff liberalization has a limited potential for alleviating developing countries' debt burdens.

The furthest that the GATT has gone along these lines of analysis is to tabulate the value of developing countries' trade which falls in "sensitive" sectors like textiles and clothing which are acknowledged to have major structural adjustment problems. See General Agreement on Tariffs and Trade (1983). z This data source is the product of an extensive three-year effort by the UNCTAD secretariat to compile detailed (tariff line) records on nontariff barriers and tariffs applied by 45 developed and developing countries. The data contained in these computerized files have been tabulated in a manner that they can be used to determine the incidence or coverage of the trade restraints on any individual country or group of countries' exports. For a discussion of the procedures used in constructing the inventory as well as examples of possible policy applications, see UNCTAD (1983; 1985). 3 For a discussion and analysis relating to this point see Kuczynski (1983). Kuczynski estimates (p. 19) that approximately one-half of the developing country debt is concentrated in Latin America and that only the Phillipines among major debtor countries has a debt burden comparable to those of Latin American countries. 4 The following are included in the NTB coverage ratios: "voluntary" export restraints, total and conditional prohibitions, quotas, import authorization systems, restrictions under the Multifibre Arrangement (MFA), tariff quotas, variable import levies, antidumping and countervailing investigations and duties, minimum import price systems, and import surveillance systems. The list includes only a small fraction (roughly one-twentieth) of the different types of measures that are recorded in the UNCTAD Data Base. Other measures, such as marketing and packaging regulations, standard requirements, health and sanitary regulations, etc., have been excluded since they may not have a differential adverse impact on foreign suppliers. Whether or not these types of trade measures are having restrictive trade effects could only be determined on a case-by-case basis.

211

Alleviating the International Debt Crisis Table 1. Tariff and Nontariff Barriers Facing Imports of Major Developed Countries' Markets

Post-Tokyo Weighted Average Tariff Rate"

Import Market European Community c Belgium Denmark France West Germany Greece Ireland Italy Netherlands United Kingdom Australia Austria Finland Japan Norway Switzerland United States All Above Countries

1981 Share of Imports Subject to NTBs ~ Developing Countries

Developed Countries

Developing Countries

Developed Countries

Total

Major Indebted

3.4

1.9

13.1 11.6 6.2 4.1 4.9 3.4 3.1 3.3

7.7 3.9 6.0 3.8 1. I 2.5 2.2 2.4

18.6 25.7 9.5 31.3 13.7 26.1 13.4 11.0 25.8 15,4 23,6 4.5 10.9 21.4 4.3 27.2 26,0 21.0

32,8 61.7 37.4 30.2 29.4 18.7 21.8 13.3 45.3 36.0 39.6 17.9 35.2 21.3 26.8 36.7 21.3 34.3

25.3 33.1 32.7 43.0 25.9 4,9 25.5 8.6 37.1 26.4 61 1 24,4 27.6 I 1.3 14.4 39.9 56.6 37.4

Source: All statistics computed from the UNCTAD Data Base on Trade Measures. The NTB coverage ratios are taken from Julio Nogues et. al. (1985),

u Trade weighted average of the statutory and preferential tariff rates. b Estimates are based on: (1) 1983 tariff line information on selected NTBs (i.e., "'voluntary" export restraints, total and conditional prohibitions, quotas, discretionary import authorizations, licensing, Multifibre Arrangement, tariff quotas, variable levies, antidnmping and countervailing investigations and duties, minimum price systems and import surveillance); and (2) tariff line import data for 1981. c Given the fact that the European Community applies a common external tariff figures are not shown separately for the member states.

Table 1 also accents the importance of NTBs; these restrictions bear disproportionately on developing countries in general and the most heavily-indebted developing countries in particular. Specifically, over 40% (by value) of the heavily-indebted countries' exports to France, Australia, and the United States, as well as over 30% of these nations' shipments to Belgium, Denmark, the Netherlands, and Switzerland, are subject to nontariff barriers. Furthermore, in Denmark, Austria, and Norway, the share of the indebted countries' exports subject to NTBs is more than three times higher than the corresponding ratio for the developed market economy countries. Thus, the evidence of Table 1 is that nontariff barriers bear disproportionately on the exports of developing countries, and especially on the most heavily-indebted countries. We then used the data underlying Table 1 to calculate the total value of the developing countries' trade affected by nontariff barriers. Applying, for example, the "hard core" NTB coverage ratios to trade values indicate that $19.9 billion of developing countries' exports to the European Economic Community face these types of restrictions, the corresponding figures

212

Samuel Laird and Alexander Yeats for the United States and Japan are $7.4 and $4.7 billion, respectively. 5 For the eight industrial markets combined, over $35 billion of developing countries' exports encounter the direct "hard core" fo~-xr~of barriers. For several reasons the trade covet'age estimate is downward biased. First, the UNCTAD Data Base, upon which the estimate of nontanff barrier coverage is based, draws only on official government publications in tabulating the use of such measures. Some restrictions, particularly those of a "voluntary" nature, are not included in these documents. Hence the true NTB coverage ratios are higher than those shown in Table 1. Second, it should be recalled that the ratios only relate to specific forms of "hard core" trade barriers whose intent is normally the restriction of trade. As such, the calculations exclude other measures like health requirements that can be differentially applied to domestic and foreign producers so as to have restrictive trade effects. Finally, the $35 billion coverage figure relates to actual trade which occurs under "hard core" NTBs. A more useful measure would be based on the value of potential trade subject to these restraints. To indicate how tariff and nontariff trade barriers affect individual exporters, we compiled more detailed statistics for eight Latin American countries that carry external debts of over five billion dollars (i.e., Argentina, Brazil, Columbia, Chile, Ecuador, Mexico, Peru, and Venezuela), as well as for eight other heavily-indebted countries outside the region. In making this selection we attempted to include countries with diverse export profiles in order to compare results for nations which trade different baskets of goods. Table 2 summarizes relevant information on trade barriers by showing the average post-Tokyo Round tariff these developing countries face in the seven industrial markets as well as the total value of exports and the share of this trade which is subject to nontariff measures. 6 With respect to average post-Tokyo Round tariffs, Table 2 shows more diversified results than might be expected from the previous aggregate analysis (Table 1). For example, exports from Mexico and Ecuador to Japan encounter tariffs of 12 and 15%, respectively, while Korea's exports to the EEC, Sweden, and the United States face tariffs that average over 8%. However, Turkey and Yugoslavia, which export high volumes of tobacco products to Japan, face statutory tariffs that average over 50%. As a group, the tariff averages for these 16 heavily-indebted developing countries are generally higher in each industrial market than for the corresponding rates shown in Table 1 for all developing countries. These results are due to the fact that many of these heavily-indebted developing countries, like Korea, Turkey, and Pakistan, export a relatively high share of textiles and other labour-intensive products which face high tariffs in industrial countries. As was the case with tariffs, Table 2 shows considerable variation in the importance of nontariff barriers on the exports of individual indebted countries, with the NTB coverage ratios ranging from zero (exports'of Venezuela to Austria) to over 95% for Colombia's exports to Sweden or Ecuador's exports to Switzerland. The latter result reflects the extensive

5 In making these tabulations, we have only included coverage ratios for NTBs that are recognized to have clear trade-diverting effects (i.e., "hard core" measures like quotas, variable import levies, the Multifibre Arrangement, prohibitions, etc.). The data in Table 1 include additional restrictions like licensing requirements, standards, import surveillance systems, etc.. If all of these different types of measures were included, close to $80 billion in developing countries trade would be affected. 6 In order to have the potential to regulate energy imports, the United States established a licensing and import surveillance system for these products in the late 1970s. However, since we have no evidence that the system has been used in a way so as to distort trade, it has been excluded from the coverage ratios shown in Table 2.

Austria

2,435 5,705 1,498 1,818 250 1,463 707 2,276

293 1,558 175 650 247 934 480 683

EEC(9) Japan

11 4

152 29 31 40 87

38 21 14 7 16

54 257 150 67 36 42 34 396

Sweden

1 2

25 141 54 3 1 6 2 56

Norway

68 28 18 68 104

40 43

70 157 69 7 9 50 27 9

4~428 41 1,910 186 448

6,881 487

739 3,969 1,326 536 850 12,715 1,425 5,547

Switzerland U.S.A.

13.4 2.0 3.7 3.9 6.7

2.7 1.2

3.4 1.2 0.5 0.8 0.1 3.5 0.8 0.0

Austria

8.9 1.3 1.3 1.6 5.5

0.0 1.2

4.2 2.3 5.2 0.4 6.9 3.8 0.7 2.2

7.4 1.2 14.8 69.3 53.0

1.9 0.3

3.2 6.5 2.6 1. I 14.6 11.9 1.0 2.1

EEC(9) Japan

2.9 0.2 3.6 0.7 5.6

0.0 3.9

1.8 0.5 1.3 I. 1 0.0 1.8 0.9 0.0

Norway

8.6 0.1 1.6 1.7 5.8

0.0 3.7

0.8 0.6 1.0 0. I 0.1 2.6 1.2 0.0

Sweden

Average Tariff Rate

5.0 2.5 7.9 1.6 4.6

1.3 1.9

1.7 4.2 5.2 1.2 6.2 2.4 0.7 0.3

10.6 4.1 3.7 7.5 2.7

0.8 1.1

4.2 2.6 1.8 1. I 0.4 3.7 0.4 0.6

Switzerland U.S.A.

0.3 25.5 0.0 1.3 22.9

0.0 3.5

16.2 40.7 75.8 11.9 34.4 15.4 4.2 0.0

Austria

32.7 40.1 30.1 28.2 39.9

8.9 22.4

34.0 27.7 73.3 12.7 2.8 8.1 15.2 7.5

27.5 49.9 21.1 I.I 1.2

7.1 0.2

21.1 6.3 2.0 12.6 5.0 8.6 1.5 0.7

EEC(9) Japan

25.1 1.3 3.2 2.8 20.9

0.0 2.0

71.3 6.5 5.1 36.5 2.6 2.1 0.4 0.0

Norway

40.4 2.0 37.0 4.3 41.6

0.0 17.8

33.3 69.8 98.7 7. I 15.0 4.3 1.5 0.0

Sweden

I9.1 39.3 9.4 41.0 35.2

99.9 27.6

82.4 45.3 37.6 50.6 95.8 41.8 18.1 71.0

33.6 1.0 71.1 2.l 19.8

0.0 7.0

0.6 10.2 5.5 8.3 3.6 5.8 1.9 0.1

Switzerland U.S.A.

Share of Imports Subject to NTBs

Note." The tariff rates shown are the averages of tariffs actually applied to each individual exporting country (i,e., the average of the M F N or preferential import duty). The NTB coverage ratios include the following types of nontariff measures: voluntary export restraints, prohibitions, quantitative restrictions, import authorization systems, restrictions under the Multifibre Arrangement, tariff quotas, variab'c import levies, antidumping and countervailing investigations and duties, minimum import price regulations, and import surveillance systems.

II. Other lndebted Countries Algeria 143 5,579 451 Egypt 29 2,806 142 Republic of Korea 69 2,993 2,744 Morocco 3 1,641 85 Pakistan 28 1,145 1,951 Turkey 61 1,337 39 Yugoslavia 199 3,540 41

I. Latin America Argentina 24 Brazil 153 Colombia 41 Chile 22 Ecuador 19 Mexico 19 Peru 17 Venezuela 38

Exporter

1980 Value of Imports (U.S. $ million)

Table 2. Tariff and Nontariff Barriers Facing Imports from Selected Heavily-Indebted Developing Countries in Major Developed Countries' Markets

t~

214

Samuel Laird and Alexander Yeats application of import licensing requirements for many Swiss agricultural imports as well as internationally-applied restrictions on coffee. The table also indicates considerable variation in the application of nontariff measures in the seven industrial markets, with the average NTB ratio for the United States' and Japan's imports from indebted countries standing at 11%, as opposed to 26 % in the EEC and 48 % in Switzerland. Finally, as was the case with tariffs, countries like Korea and Argentina that export a relatively high share of labour-intensive manufactured or temperate zone agricultural goods encounter a higher frequency of NTBs than the other indebted developing countries.

III. Effects of Trade Liberalization: The Simulation Approach While the previous analysis examined average tariff levels and indices of nontariff barrier coverage for selected heavily-indebted countries' exports, we tabulated nominal equivalents for these measures with the intention of using these data in a trade simulation model for assessing the magnitude of debt relief connected with various trade liberalization initiatives. This model projected the value of trade creation resulting from a liberalization of barriers through the use of

TCijx =

Mijkemp

dtok 1 1 + to~ 1 - (emp/exp)

,

( 1)

where Mijk represents the initial level of country j ' s imports of product i from country k, t is the initial tariff or ad valorem equivalent of a nontariff barrier, while emp and ew represent import demand and export supply elasticities. Following standard practice, trade diversion is also estimated given the tendency of importers to substitute goods from preference-receiving countries at the expense of other exporters. For an individual preference-receiving country k, we project the (positive) value of trade diversion (TD) through the use of

TDok =

TCijk

Mn U - ,

(2)

where Mnij is the initial level of imports from nonbeneficiaries and V0 is the initial level of domestic output in the preference-giving country. 7 Our policy simulations account for a third effect, that of trade erosion or the loss of previously-obtained trade diversion due to a reduction in preference margins. It is always a negative effect and in the policy simulations of this study occurs where most-favoured-nation (MFN) rates are reduced to zero at the same time as a preferential rate. Trade erosion is

7 For a derivation of this equation see Baldwin and Murray (1983). The statistics concerning the ratios of imports to production were supplied by the World Bank which conducted a detailed study of changing patterns of market penetration in major developed market economy countries. These internal World Bank records contained sufficient detail to estimate import-consumption ratios at the four-digit ISIC level. All of the simulations involving the trade creation term are based on demand elasticities published in Stern (1975).

Alleviating the International Debt Crisis

215

measured by the same formula as Equation (2) except that countries losing existing preferences incur a negative trade effect. 8 Before examining the results, we note several qualifications with regard to our partial equilibrium approach. First, the projections do not account for any increase in developing countries' imports that might occur in connection with an export expansion. Thus, if the import content of a developing country's exports is high, the foreign exchange gains (and potential for debt relief) would be smaller than indicated by our estimates. While the lack of required information precluded attempts to quantify the magnitude of such leakages, low levels of capacity utilization in many developing countries should be one factor limiting the demand for some imported production inputs. Second, our projections do not account for exchange rate effects, such as currency appreciation for countries that experienced expanded exports. Such a development would also cause foreign exchange gains and the potential for debt relief to be less than indicated by our projections. However, if additional foreign exchange gained through expanded exports were used primarily to repay existing debts, there would be reason to believe that the exchange rate effects would be small. Specifically, while export expansion would generate a surplus on the developing countries' current account, there would be offsetting effects on the overall balance-of-payments position (and exchange rates) since the increased foreign exchange earnings would be used to amortize international debts. It seems likely that if there were guarantees that increased export earnings be used in this manner it would be an important quid pro quo for developed countries to undertake the liberalization effort. It should also be recognized that monetary and fiscal authorities may have a range of options for controlling exchange rates for a sufficient time interval for the beneficial effects of the trade liberalization to reduce their existing debt burdens. While import leakages and exchange rate effects may bias our trade policy simulation upwards, there are also downward biases. Specifically, some of the estimates for nontariff barrier ad valorem equivalents used in our simulations reflect the general or average level of protection against all exporters and do not properly indicate existing differential adverse effects on developing countries. Thus, in sectors like textiles and clothing where goods originating in developing countries are subject to clear discrimination under the Multifibre Arrangement, the estimated nominal equivalents (and our projections) are downward biased. Another downward bias occurs where NTBs such as "voluntary" export restraints were known to face developing countries' exporters, but no estimates of their ad valorem equivalents were available for making our projections.

8 In our sensitivity tests involving projections with noninfinitely elastic supply parameters, price effects for exports were computed using: dt~jk dP, kj/Pikj = (emp/(emp - exu)) 1 + tijk

(3)

in which case the revenue effects for individual countries were derived from:

dRikj/Rikj=e,,p dt,~ik (1 + 1 ) t +t,j------S ~ •

(4)

A full technical derivation and description of the UNCTAD Trade Policy Simulation Model, as well as a tabulation of sources employed in compiling NTB tariff equivalents, will be supplied by the authors on request.

216

Samuel Laird and Alexander Yeats

IV. The Trade Policy Simulations Employing the trade projection equations, the effects of the following six policy options for liberalizing trade barriers were simulated for the EEC, Japan, and the United States. 1. A removal of tariffs on an MFN basis (i.e., equally for developed and developing countries); 9 2. A removal of nontariff barriers on an MFN basis; 3. An MFN removal of both tariff and nontariff barriers; 4. A preferential removal of tariffs in favour of developing countries; 5. A preferential removal of nontariff barriers; 10 and 6. A preferential removal of tariff and non-tariff barriers. Table 3 summarizes the simulation results by showing the projected annual trade changes (in dollars and percentages) for all developed and developing countries. ]1 For comparison, the actual 1980 values of imports from these countries by EEC, Japan, and the United States are also given. 12 Overall, Table 5 shows that an MFN liberalization of tariffs and NTBs could increase the developing countries's exports by an order of magnitude of some $32 billion annually, while a preferential trade liberalization would increase these countries' exports by approximately $35 billion. However, while the differences in the developing countries' response to these two alternative liberalization initiatives is relatively small ($3 billion), a major difference exists in the total increase in imports from all suppliers. Specifically, Table 3 shows that an MFN reduction of the existing tariff and nontariff barriers could result in a total import expansion of $67.8 billion in the three industrial markets while a preferential trade liberalization would increase total imports by less than half this figure ($32.3 billion). The differences in magnitude would work in favour of the preferential liberalization approach since the lower import expansion figure implies a lesser degree of displacement of domestic production. ~3 Given this empirical finding, we concentrate on the practical implications of the preferential trade liberalization approach to alleviating debt burdens in the analysis that follows. As far as individual markets are concerned, Table 3 indicates that major developing countries' trade gains could occur in the European Economic Community where a preferential liberalization of tariff and nontariff barriers could increase the developing countries' trade by

9 In this case, as well as that involvinga preferentialremoval of tariffs, it is assumed that existingNTBs will be modifiedto an extent that allows the full trade effect of the tariff cut to be realized. That is, measures like quota ceilings will be increased to permit the tariff-inducedtrade expansionto occur. ~0For more detailed concrete proposals as to how such a preferentialremoval of nontariff barriers might be implemented, see Murray and Walter (1977). H These simulationshave been run under the assumptionof infinitelyelastic supply elasticities. However, sensitivitytests for the results were also conductedusing general supply elasticitiesthat ranged from 0.5 to a value of ten. While these simulations produced considerable variation in prices and quantities, the overall projected export revenuegains fluctuatedin a relativelylimitedband. This is an importantpolicy findingsince it indicates that any failure to misspecifysupplyconditionsin our model should not influencegreatly conclusions concerning the potential contributionof trade liberalizationpolicies for alleviatingthe debt crisis. 12The statistics in Table 3 are expressed in annual incrementsand it is assumed that these incrementaltrade gains will be experiencedevery year after the liberalizationpolicy is enacted. As such, the present value of this increased export earnings stream is computed in Table 4 of this study. J3 According to UNCTAD (1984) the ratio of manufacturedimports from developingcountries to apparent consumptionstood at 2.27% in 1982 and 2.04% in the United States. Our data indicate that the preferential trade liberalizationraise these ratios to 2.93 and 2.52%, respectively.In Japan, the results would be even more modest with the import-consumptionratio increasingfrom 1.47 to 1.53%.

Alleviating the International Debt Crisis

217

11.4% or some $19 billion annually. This figure is more than $7 billion greater than the projected rise for the United States, although the percentage increase in this market (17.7%) exceeds that of the EEC due generally to higher U.S. import demand elasticities. In Japan, where the response to a preferential liberalization of tariffs exceeds that of NTBs by close to $2 billion annually, the potential gains for developing countries are about $4 billion annually. While this analysis is useful for assessing the potential contribution of a debt-related trade liberalization in the aggregate, the impact of the policy approach on the exports of individual developing countries should also be assessed. Specifically, if the benefits are concentrated in a few developing countries, trade liberalization would be less attractive as a means of dealing with the debt crisis than if the gains were more widely dispersed. In recognition of this point, Table 4 examines the influence of a preferential liberalization of tariffs and NTBs on the exports of individual indebted developing countries. The table compares the current value of each nation's external debt with the annual value of increased trade that would result from a preferential trade liberalization and also provides information on the present value of the increased export earnings stream. 14 The latter figure is offered as a rough gauge as to the relief associated with trade liberalization measures, although the reader should bear in mind the potential biases (previously discussed) associated with the resource cost of exports and exchange rate effects of increased exports. While the increases in export earnings vary between countries, Table 4 shows that trade liberalization could make an important contribution towards alleviating each nation's debt problems. For the Republic of Korea, the Philippines, Turkey, and Yugoslavia, the present value of the projected export expansion would exceed the current value of these countries' debt, while in the case of Morocco the trade gains equal about 70 % of existing debt. For Brazil, the developing country with the highest debts ($82 billion), we project a trade expansion of approximately one-half of this nation's debt; the corresponding ratio is between 50 to 75 % for Colombia and Pakistan. For developing countries as a whole, the simulation results reported in Table 4 show that the value of the increased export earnings stream (before the resource cost of exports or exchange rate effects are accounted for) would be about $700 billion. Even though these results vary under different assumptions concerning the discount rate, sensitivity tests show that trade expansion would still be of a magnitude which would (in each case) make a major contribution towards alleviating these nations' debt burdens. For example, assuming that the current spread between interest and inflation rates dropped to 4 %, the present value of the increased trade would be $870 billion, while at 6% the figure would be $577 billion. Given that previous analysis established that a preferential trade liberalization could make a major contribution towards alleviating the international debt crisis, an important question concerns the product groups that would have to be the focus of the initiative for it is to achieve maximum beneficial results. Information relevant to this question is presented in Table 5 which tabulates the trade expansion projections in terms of one-digit SITC (Standard International Trade Classification) product groups. The table indicates the actual value of

~4These calculations are based on a discount rate of 5% which approximates the current spread between internationally-competitive interest rates and rates of inflation in the OECD countries. We have -chosen this figure under the assumption that the future value of increased exports will rise in line with the general rate of inflation. As noted, the present value is influenced by biases associated with exchange rate effects or resource costs of additional exports, yet it is more useful than annual figures as a gauge of debt relief associated with trade policy initiatives since it corresponds to the (stock) measure of the level of current existing external debt. Our rationale for selecting the spread between interest and inflation rates is that the latter would be a factor working to increase the value of future developing countries' exports.

Most-favoured-nation Preferential

Nontariff Barrier Reductions

Most-favoured-nation Preferential

Tariff Reductions

products ($ billion)

1980 value of imports of core

Value of Imports~Trade Policy Action

11.1 11.9

6.4 7.2

167,7

76.8

39.8

116.6

All Developing Developed Countries

JAPAN

18.7 11.1

7.6

14.1 6.5

1.0

1.0

2,7 2.9

0.0

2.5

1.8 -0.2

1.0

3.5

4.5 2.7

U.S.A.

67.2

7.4

6.8

4.0 4.5

-0.6

8.8

7.3 -0.5

150.8

6.8

15.6

11.3 4.0

218.0

All Developing Developed Countries

(Projected annual trade change in terms of $ billion)

287.5

All Countries

-0.8

7.7 0.7

119.8

Developing Developed

E.E.C.

20.2

18,9

13.1 14.5

311.7

-1.3

18,9

16.8 -I.2

310.4

Developing Developed

Total

Table 3. Estimated Effects of Alternative Trade Liberalization Policies on Developed Market Economy Imports of Products of Major Export Interest

37.8 18.9

13.3

29.9

622.1

All Countries

~"

t~

t-

e-.

Most-favoured-nation Preferential

6.6 7. I

3,8 4.4

17,4 19.0

10.4 11.4

Tariff and Nontariff Barrier Reductions

Most-favoured nation Preferential

Nontariff Barrier Reductions

Most-favoured-nation Preferential

Tariff Reductions

Most-favoured-nation Preferential

Tariff and Nontariff Barrier Reductions

-

12,9 1.2

11.4 6.1

6.5 3.9

2.3

6.3 -0,7

4.9

6.4

I7.6

-0.6

32.9

15.5 - 1.4

3.7

4.2 -0.2

3.7

7.9

4.8 5.0

1.3 1.3

3.7

3.3

10.5 -0.5

6.2 0.0

-0.5

4.5

6.7 3.1

3.0 0.8

2.3

3.8

(Projected annual trade change--%)

3.9

10.8

16.0 17.7

I0.1 11.0

6.6

5.9

11,9

10.7 -0.6

5.8 -0.3

-0.3

4,8

1.0

16.2

12.3 5,0

7.1 3.1

1.8

5.1

10.9

27,0

11.1

10.2

6~0 6.4

4.6

4.2

34.8

31,9

35,9

-0.8

11.5

6,0 -0.4

-0,3

5.4

- 2.6

67,8

10.8 5.1

6.0 3.0

2.1

4.8

32.2

167,652.1

1,906.4 5,693.6 1,528.8 1,435.0 256.3 1,613.0 1,427.9 2,904.2

812,900

30,000 81,918 12,288 12,934 6,923 75,697 10,950 24,522

19,824 26,494 35,414 I 1,850 12,639 18,374 18,836 12,090

All Developing Countries Selected Latin American Countries Argentina Brazil Colombia Chile Ecuador Mexico Peru Venezuela

Other Selected Developing Countries Algeria Egypt Republic of Korea Morocco Pakistan Philippines Turkey Yugoslavia

5.376.9 2,577.0 1,906.7 1,253.4 1,237.7 1,830.9 1,619.6 7,823.9

E.E.C.

1983 Estimated Debt

Developing Countries

448.3 122.3 1,967.9 37.7 197.8 771.3 36.2 27.9

240.7 1,426.8 167.6 411.1 255.0 505.8 475.2 684.4

76,777.1

Japan

1980 Value of Imports

6,548.6 441.0 3,509.1 20.8 99.3 1,648.5 189.3 423.9

719.4 3,401.7 1,476.8 514.4 927.1 10,992.0 707.1 5,171.3

67,203.4

U.S.A.

80.3 70.9 390.4 118.4 99.6 90.4 138.9 701.3

96.8 284.0 124.7 20.6 24.1 74.9 12.6 119.9

7,150.8

Tariffs

102.8 209.2 916.1 332.3 320.0 806.3 508.5 1,484.0

419.0 1,377.9 203.6 87.2 28.8 198.7 18.7 304.2

19,013.2

Tariffs & NTBs

E.E.C.

11.6 1.2 208.7 2.6 5.7 79.7 4.2 7.6

12.0 39.6 6.4 9.4 3~=0 14.5 11.2 31.8

2,880.0

Tariffs

11.6 1.3 359.4 13.5 28.5 136.5 4.2 7.6

36.0 70.8 8.4 20.8 41.1 40.1 15.2 32.7

3,881.2

Tariffs & NTBs

Japan

29.6 4.7 787.5 1.7 10.5 188.6 6.1 33.4

10.8 293.8 27.1 3.7 2.4 421.0 8.0 65.6

4,492.6

Tariffs

29.6 16.9 2,148.0 4.8 68.9 462.9 15.4 86.4

108.8 626.3 97.5 20.9 6.2 955.0 10.6 84.0

11,869.1

Tariffs & NTBs

U.S.A.

Annual Export Increase from a Preferential Trade Liberalization

2,430 1,536 27,732 2,454 2,316 7,174 2,984 14,846

2,394 12,350 3,164 674 1,290 10,208 636 4,346

290,468

Tariffs

2,880 4,520 68,470 7,010 8,348 28,114 10,562 31,560

11,276 41,500 6,190 2,578 1,522 23,876 890 8,418

695,270

Tariffs & NTBs

Present Value of Increased Exports due to Preferential Liberalization

Table 4. Analysis of the Influence of a Debt-Related Trade ($ million) Liberalization on the Export of All and Selected Developing Countries

t~

.<

e~

t"

Crude Materials except Fuels

Mineral Fuels Crude petroleum Natural Gas

Animal and Vegetable Oils Coconut Oil

Chemicals

Manufactures Classified by Material Other Printing Paper Carpets Other Ferro-Alloys Fabrics of Synthetic Fibre Textile Articles, n.e.s. Iron and Steel Coils Cotton Yarn and Thread

3 3310 3411

4 4223

5

6

7

Machinery and Transport Equipment

Beverages and Tobacco

1

2

6412 6575 6715 6535 6569 6727 6513

Food and Live Animals Vegetable oil-seed & cake Crustacea and Molluscs Fresh or Frozen Fish Preserved Fish Meat of Sheep and Goats Prepared Fruits and Nuts

Description

0 0813 0313 0311 0320 0112 0539

SITC

1q~871 7

32,936.5 7,846.4 1,093.3 944.6 818.7 701.4 471.3 782.2

3,684.1

1,726.8 1,298.8

184,958.7 139,877.2 8,857.6

13,744.9

1,072.7

32,395.3 1,733.6 1,790.7 1,657.4 1,594.4 1,799.1 838.1

0.2 0.1 0.0 1.3 6.6 6.9 4.9

0.3 0.3 0.3 0.0 0.1 0.0 4.7

4.2

7.4

5.6 5.6 7.2 4.4 8.5 9.5 3.2 4.5

0.0

11.5

4.8 0.0 5.3 1.1 19.3 6.0 4.2 6.5

5.2 0.0 9.5 10.2 13.5 2.9 20.2

1.8 3.2 2.1 0.0 0.7 1.8 1.9

2.9

4.4 4.3 7.3 3.2 7.2 8.3 3.0 3.4

3.1

6.0 6.1

1.1 1.1 2.3

0.2

355.0

5.6 0.0 4.7 4.8 12.6 4.9 27.1

Japan

(%) U.S.A.E.E.C.

Average Applied Tariff

GQ, V, L, TQ, ID, OM, SR L, V, ID GQ, L TQ, L, OM, SR TQ, L, OM TQ, L, V, ID, GQ, OM GQ, V, L, TQ, ID

SV, L, GQ

BQ, TQ, MFA, L, SV, OM TQ MFA L, TQ, SV, OM TQ, MFA, L L, MFA SV, OM TQ, MFA

GQ, S, Q

HS, V, L, ID HS, V, L, ID

TQ, S TQ, S TQ, S

MFA, HS, SR, GQ, L, S

HS, ST

HS HS, HS, HS, HS, HS, HS,

Types of NTBS applied

2,091.0

5,994.1 592.3 490.2 480.2 368.4 306.6 290.4 289.7

358.7

644.5 574.6

3,044.3 1,377.5 346.1

200.3

37.6

6,197.1 761.5 610.7 561.0 556.2 551.2 334.7

Value ($ million)

Project

10.5

18.2 7.5 44.8 50.8 45.0 43.7 61.6 37.0

9.7

37.3 44.2

1.6 1.0 3.9

1.5

3.5

19.1 43.9 34.1 33.9 34.9 30.9 39.9

Increase (%)

Export

E x p o r t E a r n i n g s in T e r m s o f M a j o r S I T C P r o d u c t G r o u p s

1980 Imports from Developed Countries ($ million)

Countries'

E.E.C., Japan & U.S.

T a b l e 5 . A n a l y s i s o f t h e S i m u l a t e d I n c r e a s e in D e v e l o p i n g

6.0

17.2 1.7 1.4 1.4 1.1 0.9 0.8 0.8

1.0

1.9 1.7

8.8 4.0 1.0

0.6

0.1

17.8 2.2 1.8 2.6 1.6 1.6 1.0

Percentage of Total

Expansion

-t

t~

8"

g

,...., .<

Travel Goods

Toys and Games Fur Clothing

8310

8942 8420

311,632.2

1,801.7 605.0

956.5

2,027.6 1,732.3

21,241.6 8,632.9

4,025.5 1,176.8

3.6

3.8 4.2

17.0

10.0 1.9

9.0 18.0

4.4 2.5

2.0

5.6 4.5

4.2

8.7 4.2

7.8 10.3

8.4 8.4

4. l

4.6 14.3

8.8

9.1 3.2

8.5 10.8

2.5 3.0

(See above)

HS

SV

SV, GQ

S, MFA, SV, GQ, BQ MFA

SV SV

PHS, HS = prohibitions due to health and sanitary reasons or health and sanitary regulations; Q = quotas (method unspecified) or bilateral quotas; TQ = tariff quotas; GQ = global quotas; Old = other price distorting measures; SV = surveillance; S = standards; ID = import deposits; MFA = Multifibre Arrangement; SR = seasonal restrictions; BQ = bilaterial quota; DL, L = import licensing (method unspecified); V, MP = variable levy or minimum import price restriction; R = restrictions (method unspecified) or special seasonal restrictions; PLR = special labelling requirements; ST = state trading.

Restrictions applied in whole or part to the SITC group. The key to symbols applied is as follows:

0 to 8 ALL CORE PRODUCTS

Footwear Furniture

85 l0 8210

8411

Miscellaneous Manufactured Article Clothing of Textiles

Equipment Lorries and Trucks

7323

8

Telecommunications

7249

Table 5. (Continued).

76.2 124.6 85.0 59.5 60.6 27.2 57.6 11.2

10,752.4 1,744.5 1,030.1 580.0 489.4 348.3 34,726.6

20.6 22.7

16,195.0

829.4 266.8

100.0

1.7 1.4 1.0

30.9 5.0 3.0

46.6

2.4 0.8

,-<

e'~ >

Alleviating the InternationalDebit Crisis

223

imports into the EEC, Japan, and the United States and shows the simulated increase for each group. In addition, it shows the average post-Tokyo Round tariff in each industrial market and indicates the types of NTBs applied. For more detailed analysis, similar information is also given for four-digit SITC products which register the largest trade gains in our simulations. Perhaps the key message from Table 5 relates to the importance of the clothing group (SITC 8411) in a debt-related trade liberalization. According to our projections, over 30% of the estimated total increase in developing countries' export earnings would occur in this sector (a gain of about $10.8 billion), while footwear (SITC 8510) adds another 5%, or $1.7 billion. Table 5 also shows that close to 18% of the total estimated increase would occur for the food and live animals group, with vegetable oilseeds and cake (SITC 0813) accounting for about 2 % of the increase. Although iron and steel products (SITC 67) have been an industry sector of considerable tension between the developed countries, our simulations indicate that these items have a relatively minor role to play (under 10% of the total) in any aggregate developing country trade expansion.

V. Summary and Conclusions While most previous analyses relating to the debt crisis acknowledge that trade liberalization policies could alleviate the debt burden of developing countries, little empirical evidence is available concerning the extent that tariffs and NTBs are applied to the major exports of indebted developing countries or on the potential contribution that trade policy measures could make. Employing a partial equilibrium trade projection model in connection with tariffs and nominal equivalents of NTBs, this study shows that a preferential removal of these restrictions could result in annual trade gains of about $32 billion and that the present value of this increased export earnings stream ranged between $500 to $800 billion, depending on the discount rate applied. In either case, the results establish that trade policy initiatives could play a major role in alleviating the current debt crisis and deserve immediate attention. Concerning implementation of the needed policies, we recognize that various approaches are available to provide debt relief through trade liberalization. For example, governments can liberalize trade unilaterally, such as Japan's recent adoption of numerous "temporary" import tariffs which are below legally-bound MFN rates. Furthermore, schemes of the Lom6 Convention or the Generalized System of Preferences could be improved through the elimination of ceilings and quotas, broadening of product coverage, or the extension of preferences to include nontariff barriers. Developed countries could also make a major contribution by honoring international commitments. Specifically, at UNCTAD VI and the 1982 Ministerial Meeting of the GATT, these nations agreed to the full implementation of a standstill on the introduction of new trade restrictions and rollback or elimination of quantitative restrictions and measures having a similar effect on the exports of developing countries. Developing countries might also offer a potential quid pro quo for developed market economy countries to liberalize by agreeing to reduce their own trade barriers at some point in the future when the constraints associated with their present financial problems were reduced. The fact that approximately one-third of the developing countries' trade gains occurs within the textile and clothing group has important policy implications for both importing and exporting countries. Specifically, recent investigations concerning the effects of protectionism in this sector show that it raises consumers' costs significantly and has also led to misallocation of productive resources. Since our results also indicate that liberalization in these sectors would offset the negative effects and make an important contribution towards

224

Samuel Laird and Alexander Yeats alleviating the debt crisis, they accent the pressing need for major reforms in, or the elimination of, the existing Mulfifibre Arrangement. Given the severity of the debt crisis, a case can be made for new institutional arrangements to implement needed trade policy measures. One approach would be for institutions such as the World Bank, GATT, and UNCTAD to sponsor multilateral consultations among countries to ensure that the needed liberalization programs are quickly established. Under such an arrangement, the institutions might be charged with the responsibilities of identifying products which have the potential for the greatest developing country export expansion, determining the trade liberalization approach needed for each product, and negotiating a time schedule for phasing in such measures. A monitoring function might also be assigned to ensure that the agreed trade measures were implemented and that excessive disruption does not occur in the liberalizing countries.

References Baldwin, R., and Murray, T. 1983. India and the Tokyo Round. World Development 11:565574. General Agreement on Tariffs and Trade. !9~3. The Relatton Between Trade Policy and the International Financial System (CG. 18/W/74), Geneva: GATT. Kuczynski, P. 1983. The Latin American Debt: Act Two, Foreign Affairs Fall: 17-38. Murray, T., and Walter, I. 1977. Quantitative restrictions, developing countries and GATT. Journal of Worm Trade Law 11:391-424. Nogues, J., Winters, A., and Olechowski, A. 1985. The Extent of Nontariff Barriers to Industrial Countries' Imports. Washington: World Bank. Stern, R. 1975. Price Elasticities in International Trade. London: Macmillan Press. United Nations Conference on Trade and Development. 1983. Nontariff Barriers Affecting the Trade of Developing Countries (TD/B/940). Geneva: UNCTAD. United Nations Conference on Trade and Development. 1984. Handbook of International Trade and Development Statistics: Supplement 1984 (E/F.84.II.D. 12). New York: United Nations. United Nations Conference on Trade and Development. 1985. Considerations of the Questions of Definitions and Methodology Employed in the UNCTAD Data Base on Trade Measures (TD/B/AC.42/2). Geneva: UNCTAD.