When should developing countries use bilateral state trading?

WorldDevelopment, Vol. 12, Nos. 11/12, Printed in Great Britain

pp. 1077-1086,

0305-750X/84 $3.00 + 0.00 Pergamon Press Ltd

1984

When Should Developing Countries Use Bilateral State Trading? MARTIN SPECHLER University of Iowa, Iowa City and Hebrew

ALFRED TOVIAS University of Jerusalem, Israel

Summary. - Less developed countries can sometimes benefit by preferential trade agreements if they exercise market power. But partial preferential tariffs or quotas are illegal under GATT. We suggest three types of bilateral trade agreements which may profitably be used as legal substitutes. The most likely partners for such agreements are the East European planned economies. Terms of trade and trade structure can be improved without risking domination and dependence. Suggested negotiating strategy and tactics are outlined. Literature on experience with bilateral and state trading is considered favourable to this policy, though LDCs have up to now traded little with the smaller Soviet-type economies.

1. INTRODUCTION A foreign trade monopoly has been instituted in every communist country as a means to promote socialist development. Many developing countries have adopted a less comprehensive institution, state trading agencies (STA’s), as a way of regulating trade, of collecting revenue, or of redistributing incomes.’ Yet Western economists, whose stated concern is world welfare, have been skeptical of all state trading, as well as other proposed elements of a new international economic order. Are such dismissals merely a defence of a favourable status quo? In this article we use the theory of customs unions and preferential trading to point out situations in which a less-developed country (LDC) might use state trading for its own benefit. A crucial condition calling for state trading is the existence of national monopoly or monopsony power abroad. Where an LDC’s enterprises collectively have such power, it may be worthwhile to follow a policy of discrimination, even without tariffs, to turn that power to national ends.* Economic analysis of the case for discrimination in service of national economic development shows that the STA should invoke its powers selectively with respect to certain goods and certain customers only.3 Admini1077

strative supervision is always costly, and new opportunities for foreign trading ought not to be stifled by universal trade control. Therefore, the STA should concentrate on those goods for which preferential trade will improve the terms of trade with the rest of the world and, if possible, also with the partner(s). In this paper we apply Caves’ criteria (1973, pp. 24-27) for selectivity in discrimination to show that exchange of primary products against the capital-intensive manufactures of the communist block offers a likely target for such tactics.

2. WKY DISCRIMINATION? As is generally recognized, geographical discrimination is beneficial to the country exercising it if its terms of trade can be favourably altered by selling less in a market with particularly inelastic demand or buying less in a country whose suppliers are inelastically available. Such discrimination requires insulation of different foreign markets by natural or artificial barriers.4 To give an extreme example, a neutral country may sell guns to two belligerents at different prices with the assurance that no arbitrage will occur between them. Even if limited to one partner, mutual tariff

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reduction can be beneficial, provided the trade diversion from other sources is not too serious. As always when trade is freed, home country A’s tariff reduction frees resources from uneconomic domestic industry; partner B is encouraged to demand more goods from A so that those resources are employed in a more efficient way. This is ‘trade creation’. But, as is well understood, tariff cuts only on partner’s exports threaten diversion of trade from cheaper sources in the rest of the world (C). Trade diversion is injurious to country A as a whole if its terms of trade with C do not improve concurrently. While attractive in such cases, discrimination in tariffs, particularly if they apply only to a few goods, is outlawed under Article 1 of the General Agreement on Tariffs and Trade. There the most-favoured-nation tariff is mandated as the least restrictive of all barriers to international trade. Most LDCs adhere to GATT. One honourable exception to GATT’s prohibition on discriminatory trade restrictions is a formation of a customs union or free trade area. Such an arrangement may, however, be impossible or clearly disadvantageous to a developing country in its dealings with the outside world. A customs union or free trade area with other specialized primary exporters would make little immediate sense, since their two-way trade would be minimal. In dealing with communist countries, where tariffs are meaningless in determining the volume of foreign trade, no reciprocity is assured by a union (Hewett, 1978). Concluding a union with an advanced capitalist country forsakes of infant-industry the valued prerogative protection. In any case, theory indicates that jX preferential tariff liberalization is not generally best for the trade partners. If all the facts are known, partial preferential tariff reductions usually bring the greatest benefits (Kemp, 1969, Chapter 4). However, such partial preferences are forbidden by GATT if they are permanent arrangements. 3. WHY BILATERAL AGREEMENTS?

TRADE

Most LDCs would want to observe these GATT prohibitions. Can they obtain the benefits of discrimination without the onus of a discriminatory tariff schedule? Yes. Bilateral trade agreements can provide these benefits and more besides, if correctly implemented. The apparent objectives of BTAs during the

post-colonial period in most LDCs have been various. Bilateral agreements have been attractive when neither side had adequate hardcurrency reserves or where one side had surplus production which could not be sold profitably in hard-currency markets. COMECON negotiators call these latter ‘soft goods’. Ex-colonial countries have wanted to secure ties with other European or communist states, particularly when they offered development assistance. India, Sri Lanka and Nepal set up STAs to implement such aid agreements. Recent empirical findings indicate that barter trade among LDCs or between LDCs and Eastern Europe has achieved the stated aim of shifting some trade away from the former colonial power (Outters-Jaeger, 1977, pp. 59-64). The communist partner sometimes accepted delayed repayment in kind - jute, cotton, coffee ~ at favourable terms. Furthermore, once STAs are established somewhere, prospective trade partners, even advanced capitalist countries (ACCs), have to set up like agencies to negotiate with them. This has occurred principally among the LDCs themselves. Capitalist concerns have been dragged into buy-back agreements with less advanced countries for fear of total exclusion from their markets. Multinational corporations can be obliged to market lower-quality goods in Western markets. While compensated by low prices, these supplies can easily disrupt oligopolistic understandings in the ACCs ~ to the benefit of the LDC (East-West Countertrade, 1978, p. 18). Furthermore, STAs can press to extend joint manufacturing beyond the bounds of military hardware and automobiles. Diversifying markets may make political sense. It can also permit a long-run gain by opening up markets which will later prove profitable to exploit. In the short-run, though, diversification is almost certainly costly. It disrupts markets. Similar in this respect is the objective of putting foreign trade into the hands of indigenous traders at the expense of ‘foreign’ trading groups. Long experience has shown that ‘nativization’, too, disrupts trade for some time. Occasionally the possibility of bulk purchasing and noncompetitive selling has been the public objective for STAs, although we have found little or no evidence that these tactics have been successfully tested.’ We should note that all these stated and apparent objectives of state trading invoke the possibility of improving the country’s trade structure. But they do not provide a strategy for doing so.

WHEN SHOULD

4. BTAs -. WITH WHOM? Richard Caves (1973, pp. 32-33) has considered the hypothesis that BTAs have been signed by LDCs to exploit price discrimination either by charging higher prices to partners with more intense demand or ‘chiseling’ on covertly agreements in commodity price cartel partners. Referring to underselling model, Caves general-equilibrium Kemp’s identifies characteristics which should be sought in partners of BTAs if an LDC wants to take advantage of monopolistic price discrimination: (i) Compared to third countries, a prospective partner should have a high incomeelasticity of demand for the LDC’s export product in terms of its own export-product offer. (ii) A partner should have a high priceelasticity of import demand for the LDC’s product compared to that of third countries. (iii) The LDC’s own demand for the import good should be income-inelastic. These desiderata can be exhibited in Figure 1, which shows the reciprocal offer curves of prospective trade partners B and C. Our country A quotes a different price to B than to C, according to marginal revenue’ from the different levels of sales. Consequently, it faces the OJ aggregate offer curve. This is obtained by replotting OC from points like B’ which give the deal struck with partner B. D is on the envelope offer curve if the marginal real revenue from sales to C (the slope at D, in this example) equals that from B, shown here by the slope at B’. OB’D will generally be a broken line -

meaning two real prices charged. The envelope offer curve facing the simple discriminating monopolist is generally south-east of that facing the non-discriminating monopolist (not shown) and hence it contains preferred points, such as D, which cannot be achieved with a single export-import price. As we see in Figure 1, A will receive 00’ in importable goods from B in exchange for O’B’ and O’F from C in exchange for DD’. The advantage to A comes from the willingness of B to absorb more of A’s export at a modest discount while C is compelled to pay much more than B by the reduced supplies left for him. To achieve such gains, B and C should both be large customers, but with different intensities or ‘elasticities’ of demand in the relevant range. Here, C exhibited the lower ‘elasticity’ and hence suffers from more unfavourable terms of trade than B. Which economic background conditions would create these propritious offer curves facing an LDC with market power? A prospective partner B should have high elasticity of its offer curve, as we have noted. This can come from:

(1) a price

(2)

(3)

(4)

(5)

elasticity of consumer demand higher in B than among consumers in the rest of the world for A’s exportable product; a large terms-of-trade effect on incomes in B, together with high income elasticities of demand, in comparison to the outside world; unfulfilled domestic demand at prevailing market prices for A’s export good in the markets of B so that additional exports could be absorbed there if B had the means of buying them from A; an ability on B’s part to switch readily to A from domestic or other sources of supply (high elasticity of alternative supply); on the supply side, economies of scale in producing A’s import good;

Furthermore, (6)

I. Reciprocal demand for exports of country A by countries Band Cunder discrimination.

Figure

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LDCs USE BILATERAL STATE TRADING?

there should

income-inelastic exportable good.

be

demand

in

A

for

B’s

to capital goods would Limiting imports avoid the consumer durables likely to violate principle (3) in LDCs. On the other hand, country C should be chosen - that is, to be left out of the BTA - if its domestic demand conditions are relatively inelastic for A’s export good, if its economies of scale or positive and if externalities have been exhausted,

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alternative suppliers of A’s export good and/or customers of A’s import good are lacking. There are several reasons to think that East European countries fit the ideal pattern for prospective partners. The communist countries of Eastern Europe have been willing to barter for jute, cocoa, sugar, cotton, and the like. They seem to fulfill most of the conditions above. As concerns condition (2), East European customers show higher income elasticity for the raw materials they import from LDCs than Western countries do, since Eastern Europe is considerably poorer. Primary products form a higher share of their middle-income budgets than they do in serviceand technology-intensive ACCs. Studies on Soviet budgets indicate a cross-sectional income elasticity for food and clothing far beyond that in the Western ACCs (Vinokur et al., 1976). Owing to over-industrialization and neglect of agriculture as well as natural conditions, semi-tropical food products are chronically short in centrally planned economies (CPE), where food prices are kept below domestic or import costs for political reasons. Their manufactures have a high content of primary inputs, since the planning system has encouraged maximizing ‘gross’ output, not valueadded (condition 3). Furthermore, the smaller CPEs have imported relatively little up to now from LDCs, suggesting an untapped market (Holzman, 1976, Chapter 7). Rather, they trade abnormally much among themselves and might now want to reduce this diversion (Bergson, 1979). LDCs which can export substitute goods may thus enjoy a propitious conjuncture in the smaller CPEs. As specified in condition (4), the centralized state trading organs of most CPEs allow rapid switching of suppliers and encourage rapid development of single export markets, infer alia to pay preferred suppliers. Poor marketing and sales facilities encourage communist countries to concentrate on a few export markets, as do political considerations. Success in selling on the Finnish market shows that. Priority investment leads to tradeable surpluses in relatively few manufactured goods (Spechler, 1975). For capital intensive goods, particularly simple machine-tools and vehicles, industrial chemicals, and metalworking equipment needed by LDCs, the Soviet-type economies have stressed long production runs with minimal variation (condition 5). Not only are these relatively cheap, but also they are appropriate for use in capital-poor LDCs. Lately, with the

Soviet Union more reluctant to supply raw materials in exchange for ordinary East European machine-tools and consumer goods, the LDCs have an unusual opportunity to replace the USSR on Czechoslovak, East German and Hungarian markets. Oddly, the LDCs have traded more with the USSR than with East Europe, even though the latter might be expected to be less domineering and to display more unexploited economies of scale than the Soviets. The West’s best guesses about East European foreign exchange positions (Central Intelligence Agency) show greater net foreign debt than for the USSR - hence greater likelihood to trade bilaterally for primary products6 Finally, aside from canned foods, watches, some automobiles and cameras, the Eastern bloc does not conspicuously export consumer goods; hence it fulfills condition (6). Up to now we have been discussing the choice of partners as if only two goods are to be traded. In fact gains are likely to be greater if A varies the kind of good accepted in compensation for its primary export. We have already touched on reasons for this. The ACC’s comparative advantage is often in relatively specialized high-technology equipment or consumer luxuries which the LDC may need in small quantities. These goods are sold throughout the world, so any one LDC usually faces fixed prices. Occasionally some items such as ships or automobiles - may be purchasable at knock-down prices. On the other hand, CPEs offer large consignments of capitalintensive (relative to the LDC factor intensities) goods suitable to spur industrialization and absorb labour. Examples are lathes, metalworking equipment, and tractors. Some, but not all, of the CPE goods are acceptable in basic quality (Spechler, 1975), and large purchases through official, on-going channels should help assure adequate service and spare parts - if only by cannibalization! Western goods can be too fancy for LDC needs. Accordingly, the costs of diverting trade for the ACCs to the CPEs may be smaller than would seem at first. It is cumbersome to represent the reciprocal offer surface equivalent to OJ in Figure 1 in the three dimensions of A, B and C’s respective export goods. If we were to do so here, we would see that our LDC must concern itself with the terms of trade for ‘rich man’s goods’ from C and for simpler capital-intensive manufactures from B. By diverting primary products from ACC markets to CPE markets, it improves the former with minimal damage to the terms received in the latter.

WHEN SHOULD

5. WHAT KIND OF BILATERAL AGREEMENT?

LDCs USE BILATERAL

STATE

TRADING?

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TRADE

Bilateral trade agreements may be of four distinct types. The first is a simple expression of interest in types of goods to be traded with some specification of commercial conditions and other non-price details. We shall not discuss such agreements, including mere they doubtless have ‘shopping lists’, though their purposes. Usually Soviet aid and trade agreements authorize an amount of trade, with details to follow. A second type of BTA specifies a quantity of certain goods to be traded: sometimes a fixed or minimum commitment, on some occasions a maximum not requiring complete fulfillment by the partner (Outters-Jaeger, 1977, p. 38). In either case, the bilateral agreement may be said to have been binding when the stated amount is just achieved. A third type of BTA specifies the net barter terms of trade for pairs of goods or their money price, but not quantities. This type may be assimilated to a discriminatory tariff agreement, which is illicit under GATT. Finally, one may consider a fourth type of BTA in which quantities of goods to be traded are given on both sides. (Unlike the second, this type of agreement fixes the gross barter terms of trade.) An extreme example is the all-or-nothing offer, whereby failure to fulfill delivery obligations cancels the whole deal. Each of these types can achieve objectives identical to those of the preferential tariffs or quotas illicit under GATT. With the help of a partial equilibrium model it can further be shown that quantitative BTAs (type two) are generally no worse than price or tariff-equivalent (type three) BTAs overall. Both can improve terms of trade with the rest of the world. While creating trade, preferential BTAs can divert it from third parties. A bilateral trade agreement can simulate a price- or tariff-preference. Along the horizontal axis of Figure 2 we give the quantities traded between A and its two suppliers, B and C. Sh represents the export supply curve of B; S,, that of C. DA is the import demand curve of A. Before signing of the BTA with B, a non-discriminating tariff of LN per unit had been imposed by A. Here, for simplicity, A’s imports (the amount PQ) before any preferential treatment originate only in C. PQSR is the tariff income collected by A’s treasury. Now suppose that A intends to buy B’s exportable good at marginal cost - equivalent to 100% tariff preference. The relevant

Figure 2. Preferential

tariff reduction or equivalent BTA between country A and partner country B.

export-supply curve as perceived by A’s negotiators is given by the broken line TUV - i.e. Sh + S,‘. It has been obtained by adding up for each domestic real price the export supply of B together with that of C (i.e. the cumtariff Sk). Now A should import a total amount of JV, of which JI stems from C, while IV originates in B. As trade is diverted from C to B, A is able to improve its terms of trade with C by RM. The gain in terms of A’s export good is exhibited by the horizontally-striped area in the diagram. Area QVK represents the conventional trade creation gains, while rectangle IKSY shows the trade diversion loss. A quantitative BTA (type two) can be made equivalent to the tariff preference just shown. With a well-defined, upward-sloping supply schedule for C, the STA can replicate any price result by naming an appropriate quantity to be imported (duty-free, in effect) from B and accepting the supply forthcoming. Orders from C will be restricted by price or by means of a quota (JI). Such seemingly abnormal quotas may, of course, arouse the indignation of C to the point of retaliation. It is important to point out that buying from B at cost, while leaving the tariff on C as it was, will not be the optimal policy. In general the tariff on C should be adjusted, possibly over the objections of C, and the price negotiated with B should take into consideration the rising marginal costs of supplies from that source. In Figure 3, A’s STA divides its purchases such that the MC from each source is equal. In the case drawn the tariff on C must be raised from lm to

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,

,

,

DEVELOPMENT

MC,

/

S:

Quantity

of A’s

Importable

Ouonttty

good

of

A’s

imported

good

Figure 3. The effects of optimum quantitative and price BTAs upon trade with partner B and the outside world (C).

Figure

4. Effect of type-two or type-three B with quota on C in force.

BTA

with

In, so that C’s exporters will supply OC. B is allowed a maximum quota of OB. It would be quite equivalent to say: B is offered a real price of Bz within the BTA, while C now receives Cl net of tariff, instead of the previous uniform market price (not shown). Thus, an optimal type-two BTA with B would be equivalent to the optimal type-three BTA which specifies barter terms of trade. Either way, A and B would gain; in general, C would lose. Total imports to A would be different from that under the non-discriminatory tariff arrangement. Now one of the advantages of type-three BTA’s over the usual preferential tariff agreements is that the latter are usually not acceptable to third parties unless they are total - in effect, a customs union. But a 100% tariff preference is generally sub-optimal for A, as mentioned above, at least on a market-bymarket analysis. Therefore, some quantitative BTA’s might be better than a 100% tariff preference or free trade area. We note in passing that if C originally faced a quota, not a tariff, its national interest need not be harmed by the granting of an exclusive quota to B. Distribution of trade profits in A will change. In Figure 4, C sells PQ, as before (Figure 2), and the area RSQP rents. On concluding represents importers’ a type ~ two BTA with B, importers in A are given permission to import as much as K’H. Thus the supply curve to be considered by the STA becomes the broken line MSU’WHL’, since the export supply of B (just potential before) has been added to supplies from C. At

the new equilibrium P’Q’ will be imported, of which P’Z(=PQ) will still come from C. No trade diversion from C will occur and no terms of trade gain for A. The only change is the trade creation benefit of lower prices to A’s consumers, at the expense of importers’ rents. The value to A’s importers of the quota on C has been cut. A similar result is obtained if B is given the right to import without quota: C’s market amount remains at JK’(=PQ), though the price in A falls further. Coming again to the comparison of types of BTA with perfect information, one can show that an all-or-nothing offer (type-four BTA) to B could simultaneously improve terms of trade with both partners. By specifying a somewhat larger supply from B (at lower real prices for A’s importable), A clearly can gain as against even the best offers of price or quantity alone. For example, with fixed export of its primary product, A would receive more goods from B and also from C.7 But there are considerations against type-four BTAs. The main difficulty would seem to be practical: two can play the game. What is more, A’s primary products have widely quoted prices, while both ACC high-technology goods and CPE’s exports ~ especially simple manufactured items produced only there - do not. With a formally overvalued exchange rate in the East, a low dollar price proposed in the agreement for CPE machinery translates into very few rubles (forints, zlotys, etc.) at home.8 This could easily stiffen the back of CPE trade negotiators if they are evaluated according to the proceeds in their own currency.

WHENSHOULDLDCsUSEBILATERALSTATETRADING? 6. NEGOTIATING WITH COMMUNIST COUNTRIES Suppose BTA of type-four is to be negotiated with a small CPE. One promising negotiating ploy with CPEs would be for the LDC to avoid value summaries of trade and to emphasize the large quantities of manufactured goods to be accepted. Given Marxist prejudices for developing manufacturing and bad conscience in receiving primary goods, concessions may be won. A more tested strategy (Montias, 1969) is to require the CPE partner to accept nonprimary exports as well as the raw materials it wants and needs. Under the flag of ‘balanced trade’ -Romania and probably Bulgaria have been able to improve their gains from trade with their more developed communist neighbours and in effect to impose part of the development costs on them. Such ‘tying’ is a familiar tactic of industrial monopolies when for some reason the price of the main, highly desired, good cannot be raised. LDCs may likewise improve their overall terms of trade in this way. One example is tying merchandise trade to the developing of LDC shipping. The CPE must use LDC-operated ships for half the load. A usual claim is this: only ‘cargo-generating’ countries shall participate in the shipping of exports. Third countries have no right to equal access to cargoes, but have only a subsidiary function. In the view of most LDCs, nowadays including those that do not base their foreign trade on the conclusion of BTAs, ‘shipping is a matter essentially of bilateral relations’ (Bohme, p. 44). This constitutes an undoubted violation of the most-favoured nation clause. even if all third countries are put on the same footing. State trading organizations play a big role in day-to-day ‘flag discrimination’ towards third countries, since they are instrumental in determining the terms of shipment. We suggest that this precedent be extended. LDCs are always looking for high-technology products to sell or ones which will create many jobs. Examples would be consumer electronics, household gadgets or clothing. They are deterred by high start-up and learning costs. Let such items be offered to East European markets at cost and tied to primary exports as an incentive. Merchandising, service, and other marketing problems are typically less in these markets and ‘trade cycle goods’ provide a way to ‘mask’ price discrimination on ‘hard’ goods when exchange for the ‘soft’ goods Eastern Europe has to offer. Hence, the effect of a type-four

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BTA is to expand trade for just those goods the LDC wishes to develop while importing the (embodied) capital to do it and not expending foreign exchange. Compensation agreements are in fact favoured by CMEA countries. For example, India has recently received Soviet glove-making equipment in return for gloves in the future from India. We predict such examples could be multiplied with Poland, Romania, East Germany and Czechoslovakia.

7. A DANGER

IN DEPENDENCE?

Why is the proportion of bilateral trade of leading LDCs with the communist bloc so surprisingly low, in view of the commercial potential and credits offered? This may be due to a perceived threat of political domination as a result of trading too much with the East. Gains from improved terms of trade may not offset this broader risk. Publicly, one of the aims of BTAs for LDCs was to secure better terms of trade with Sovietbloc countries than those with Western countries. Some evidence shows that in practice this has been the case in the majority of bilateral dealings signed.g Why did the CPE partner, which had more leverage and was less dep.endent on foreign trade, forego the possibility of exploiting the other partner, as the theory of discriminatory pricing tells us it should have done? It seems that non-commercial considerations must be taken into account. A power like the USSR, by promoting trade dependence on it, increases its influence on partner countries. For this to take place, however, the larger country must artificially develop trade with the partner by offering favours. It may forego profit-maximizing and discriminatory behaviour. Quantitative commitments for imports can be made exclusive. As Albert Hirschman put it (1969, p. 20), based on Nazi hegemonic policy in south-east Europe, the aim maximizing national income can contradict a policy aimed at maximizing national power. Germany’s proclaimed generosity is open to question, of course, because payment was blocked or delayed (Brend and Ranki, 1974, p. 26 ff.; Kaiser, 1980, pp. 136, 139, 150). Thus a state wanting to increase its influence over others must be prepared, if necessary, to bear a terms-of-trade deterioration in its trade with its partner. In general, big powers do not tend to exploit their bargaining position by imposing terms of trade on partners that are worse than the latter could have obtained in

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multilateral markets. Quite the contrary. Big powers may be rather inclined to make a loss on account of trade diverted away from third countries in order to increase trade dependence of the smaller partner (Schroder, 1975, pp. 75-76 ff.). When world markets revived in 1937, Germany had to pay more for grain and metals (Kaiser, 1980, p. 164). Similarly, the USSR apparently has conceded favourable terms of trade to Eastern Europe (Bergson, 1979). Specific provisions in favour of the large country, like cooperation in air transport, port facilities or the tying of foreign aid, are sometimes included in bilateral trade agreements with LDCs or in other legal arrangements concluded at the same time. When you buy a major power’s machinery, you become committed to its standards and spare parts, as Egypt found in dealing with the USSR. into account all the non-tangible Taking costs for the LDC, one might find that the ‘terms’ of the contract ~ a wider concept than the one of the ‘terms of trade’ - would not appear so favourable to the small and poorer partner.

8. WOULD BTAs VIOLATE

GATT?

We stated earlier that a major appeal of BTAs is the possibility of achieving the benefits of preferences without running afoul of GATT and risking retaliation. But wouldn’t inherently preferential BTAs of any type violate GATT? The closest reference in the General Agreement to this issue may be found in Article XVII (Paragraph la). There, State Trading Enterprises are apparently precluded from treating third contracting parties to GATT in a discriminatory fashion: Each contracting party undertakes that if it establishes or maintains a State enterprise . ., such enterprise shall in its purchases or sales involving either imports or exports, act in a manner consistent with the general principles of nondiscriminatory treatment prescribed in this Agreement for governmental measures affecting imports or exports by private traders. In addition, quantitative import or export restrictions prescribed include those ‘effective through the state trading’ (Kostecki, 1979, pp. 43-45, 52). Thus it would seem that any discrimination by LDCs in favour of CPEs would violate But paragraph

the letter and spirit of GATT. 2 of the same article says:

The provisions of paragraph 1 of this Article shall not apply to imports and exports for

consumption in governmental use and not otherwise for resale or use in the production of goods for sale. With respect to such imports, each contracting party shall accord to the trade of the other contracting parties fair and equitable treatment.

Since LDC exports to communist countries are for ‘governmental use’ and imports of capital equipment might be intended for nationalized industries within the LDC, one might argue that such BTAs need be only ‘fair and equitable’, though in reality also preferential. Furthermore, Article XVIII:C explicitly allows lowincome economies to use quotas to assist the establishment of particular industries. Practically speaking, proving a BTA gives unfair preference would be hard for an outsider wishing to claim compensation.

9. CONCLUSION we have found a strong In conclusion, terms-of-trade justification for the proliferation of bilateral trade agreements between LDCs and Soviet-bloc countries. These must be viewed as peculiar preferential arrangements, since they involve an exchange or preferential concessions, some of them invisible, but all of them implying a discrimination towards excluded countries. Such agreements must be selective, but there is reason to consider package deals of two or three goods in which both price and quantity are specified. We have shown that BTAs can be measurably better than blanket tariff preferences or indiscriminate trade promotion. Moreover, these BTA’s can be ranked in order of benefit to the home country. Type-one TBAs (‘shopping lists’) have mostly informational value. Quantitative BTAs (type two) would be better because terms-of-trade improvements could be achieved with the outside world, and trade creation would probably occur if preferred and nonpreferred partners’ production is complementary. prices are

Type-three BTAs, in stated, would generally

which

only

be no better than the more common quantitative type two, and could be worse if not well-designed. But a two-way quantitative barter deal (type four) could be best of all. The smaller CPEs would be suitable candidates for LDCs to approach about such BTAs, because their untapped potential for absorbing primary and consumer goods in exchange for simple capital goods appears to be great. The smaller CPEs are less dominating as well. With

WHEN SHOULD

LDCs USE BILATERAL STATE TRADING?

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primary terms of trade and LDC markets for manufactures threatened by world stagflation, we may expect renewed interest in such tactics by smart LDCs. In the 1976 ‘Manila Declaration’ of the ‘Group of 77’ - actually more than a hundred LDCs - the CMEA countries were criticized

and consumption of LDCs products; (3) use of world prices and other capitalist methods and (4) not granting preferential tariffs on LDC exports (Shlaim and Yannopoulos, 1978, p. 242n). This paper has demonstrated that it is both feasible and beneficial to seek redress of these grievances against the CPEs through

for: (1) bilateral

bilateral

insufficient aid granted basis; (2) not promoting

mostly on the marketing

a

trade.

NOTES

1. A state trading agency (STA) is taken to have a monopoly/monopsony by law in the trade of its own economy with any and all foreigners in at least some goods. STAs may or may not act according to guidelines set down by the government, pursuant to bilateral trade agreements (BTAs) with other countries. Thus the communist foreign trade monopoly is an extreme case of state trading which excludes direct contracts between foreigners and domestic enterprises. In recent years, Hungary and Yugoslavia have departed from the classic pattern and have permitted some large enterprises to trade directly with foreign firms. 2. Here we give little attention to the possibility of appropriating private monopoly or monopsony gains through the use of state trading directed inwards. The STA may only organize the marketing (or purchasing) monopoly; it need not appropriate the gains. 3. According to research papers prepared by the Committee on Economic Cooperation among Developing Countries of UNCTAD, state trading agencies are often instructed to buy or sell to particular countries because of bilateral trade or credit agreements. Dharam Ghai (1972, p. 9) has asserted that such agencies are better able to fulfill trade commitments than uncoordinated private traders would be. In India furthermore, STAs have been assigned guidelines for evaluation and negotiation of such bilateral deals. The STA can also arrange a bilateral balance with trade partners or other desired features of trade, such as shipping (Bohme, n.d., p. 44). Features of a typical bilateral agreement between an LDC and a communist country are presented in the reports (Cooper&ion andMeasures). 4. Bilateral trade agreements often forbid resale, thus testifying to the commercial attraction of further transactions between customers. Resale prohibitions

have been effective in India’s agreements with its bilateral partners, according to some empirical studies (Nayyar, 1976; Baneji, 1977). The USSR has resold Cuban sugar to cut the costs of its aid ~ to the indignation of the Cubans. Similarly, the USSR resold Egyptian cotton. But the re-exports of a small Communist country ought to be easier to police from the ‘mirror’ trade statistics of the potential importer countries. 5. Israel’s state sales monopoly justified as preventing ‘competing

6. In the past the USSR has traded multilaterally for some primary products such as rubber (Wiles, 1968, Chapter 11) and its ability to do so has not (yet) been reduced by oil imports, as has occurred to the west of the Soviet border. 7. In Figure 1, the feasible envelope would move rightwards since it is formed by the union of C’s offer curve and B’s original (lowest possible) trade indifference curve. 8. On the other hand, low rental and capital charges make Soviet export of capital intensive goods lopk cheap to them (Rosefielde, 1974). The Soviets have shown themselves willing to offer discounts on manufactures as they once did on oil (Tanzer, 1969, Ch. 7). 9. Except for disposal of agricultural surpluses (cf. Data, 1972). The evidence is clouded because machinery countertrade is arbitrarily valued in trade with CPE countries, and their prices are probably overstated relative to free-market values for equivalent quality (cf. Caves, 1978, p. 34). On the other hand, several studies of machinery prices do indicate that Eastern Europe and the USSR sell machinery and spare parts dearly (Chandra and Carter, cited in Clawson, 1981, p. 79).

GLOSSARY BTA: CPE:

bilateral trade agreement centrally planned economy

for flowers has been against oneself.

LDC: STA:

less developed country state trading agency

1086

WORLD

DEVELOPMENT

REFERENCES Amacher, Ryan C., Yugoslavia’s Foreign Trade: A Study, of State Trade Discrimination (New York: Praeger, 1976), Chapter 5. Baldwin, R., Non-tariff Distortions of International Dade (Washington: Brookings Institution, 1970). Bancji, Ranadev, L’incidence du trot sur l’economie des pa~‘s en voie de development (Paris: OECD, 1977). Berend, Ivan and Gyorgy, Ranki, Economic Development in East-Central Europe in the 19th and 20th Centuries (New York: Columbia, 1974). Bergson, Abram, ‘The geometry of Comecon trade’, Harvard Institute of Economic Research Paper, No. 693 (1979). Bohme, Hans, Restraints on Competition in World Shippitzg (London: Trade Policy Research Centre, n.d.). Carter, James, The Net Cost of Soviet Foreign Aid (New York: Pracger, 1969). Caves, Richard, ‘The economics of reciprocity: theory and evidence on bilateral trading arrangements’, in Willy Sellekaerts (cd.), Essays in Honour of Jan Tinbergen (London: Macmillan, 1973). Central Intelligence Agency, Estimating Soviet and East European Hard Curveno Debt (Washinrton. D.C.: 198b), 1:R 80-10327. . Chaudhuri, Pramit, ‘tast I
Kaiser, David, Economic Diplomacy and the Origins at the Second World War (Princeton: 1980). Kemp, Murray, A Contribution to the General Equilibrium Theory of Preferential Trading (Amsterdam: North Holland, 1969), Chap. 4. Kostecki, M. M., East- West Trade and the GATT System (London: Macmillan, 1979). Measures and Arrangements for the Promotion of i?ade in Commodities and Other Agricultural Products within a Global System of Trade Preferences among Developing Countries, Document TD/B/C.7/20 (Geneva: UNCTAD, 1978). Montias, J. M., ‘Obstacles to the economic integration of Eastern Europe’, Studies in Comparative Cornmunism, Vol. 2, Nos. 3-4 (July/October, 1969), pp. 38-60. Nayyar, Dcepak, India’s Exports and Export Policies in the 1960s (Cambridge University Press, 1976). Outters-Jaeger, Ingelies, E_ypert Meeting on the Development Impact of Barter in Developing Countries (Paris: OECD, 1977), Part III. Portes, Richard, ‘East, West and South: The role of the centrally planned economies in the international economy’, Harvard Institute for Economic Research Paper, No. 530 (June 1978). Rosefielde, Steven, ‘I.‘actor proportions and economic rationality in Soviet international trade. 1955-68’, American Economic Review, Vol. 64, No. 4 (September 1974), pp. 670-681). SchrBdcr, H. J., ‘Sudosteuropa als “Informal Empire” Dcutschlands 1933-39 &s Bcispiel Jugoslawien’, Jahrbucker fiir Geschichte Osteuropas, Vol. XXIII (1975), pp. 70-96. Shlaim, Avi and G. N. Yannopoulos (cds.), The EEC and Eastern Europe (Cambridge University Press, 1978). Spechler, Martin C., ‘The pattern of technological achievement in the Soviet enterprise’, The Association for Comparative Economics Studies Bulletin, Vol. 17, No. 1 (Summer 1975), pp. 63-88. Spcchler, Martin C., ‘Soviet policy towards technological change since 1975’, in John Hardt (ed.), The Soviet Economy in the 1980s. Problems and Prospects (Washington, D.C.: Joint Economic Committee 1982). Spechler, Martin C., ‘Brezhnev’s will -- A “Plan of Quality”?’ Paper prcscntcd to the Second World Congress for Soviet and Ilast Luropean Studies, Garmisch, West Germany (October 1980). Tanzer, Michael, 7?te Political Econom]) of Interrzational Oil and the Underdeveloped Cotrrltries (Boston: Beacon, 1969). Vinokur, Arron, Gur Ofer, and Yehiel Bar-Hayim, ‘Family budget survey of Soviet emigrants in the Soviet Union’, Discussion Paper No. 32 of the Soviet and East European Research Ccntcr, The Hebrew University of Jerusalem (1978). Wilts, P. J. D., Communist hlternational Economics (Oxford: Basil Blackwcll. 1968).