Trade Policy, Protectionism and the Third World

Michael Davenport

• Publisher: Taylor & Francis
• Year: 2017
• eBook ISBN: 9781351403092
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

The 1980s saw an alarming revival of protectionism among Western countries, as a result of a decade of persistent economic crises, slow growth, industrial decline and rising unemployment. The two major actors, the US and the European Community, between them bore the major responsibility for the breakdown of the liberal world trading system. Protection in the 1970s and 1980s took the form of replacing free international markets by bilateral agreements. This book, first published in 1986, examines the European Community's Generalized System of Preferences, whereby the manufactured exports of developing nations would have duty-free access to the markets of the EEC, and the consequences to this System of the new protectionism.

Chapter One

INTRODUCTION

Recent years have seen an alarming revival of protectionism among the Western industrialized countries. This has been the response to a decade of persistent economic crises, sluggish growth, industrial decline and rising unemployment. As the two major actors, the European Community and the United States, between them, bear the major responsibility for the breakdown of the liberal world trading system. Japan, which has been roundly condemned for being highly protectionist, has made some, if slow, progress in opening up markets to foreign goods.

Protection in the 1970s and early 19805 has taken the form of replacing free international markets by bilateral agreements, or sometimes unilateral fiats. Imports of “sensitive” products are controlled by non-tariff barriers, including the “orderly marketing agreements”, “voluntary export restraints” and other euphemisms for “managed” trade rather than through the escalation of tariff barriers which occurred in the inter-war years. The new protectionism has been partly a response to successive worries about rapid advances in competitiveness first in Japan, later in the newly industrialized countries (NICs), and now in the emerging economies of Asia and, in a few cases, Latin America. Today, however, concern about the displacement of domestic suppliers by other developed countries is an equally powerful force for the restraint of trade.

While the new protectionism has been emerging, the rules of the game have been interpreted more and more flexibly. The Community has been on occasion a willing accomplice, and in some instances the protagonist, in the erosion of the free trading principles which underlie the articles of the General Agreement on Tariffs and Trade (GATT). It used to be argued that the formation of the Community would give a boost to trade liberalization. In reality, probably the most significant contribution the Community has made to greater freedom of trade beyond its own common tariff wall has been through its existence as a single bargaining unit. This has made possible the multinational Kennedy and Tokyo round negotiations. Without the Community, there would have been no interlocutor of sufficient weight for the United States, which faced with such time-consuming negotiations and the attendant problems of a distrustful and often protectionist Congress, would likely have opted for a bilateral approach to trade negotiations. The trend to bilateralism in international trading relations would now be much more advanced.

Within the Western industrialized bloc the Community instituted the first Generalized System of Preferences (GSP), the Soviet Union having started their GSP some years earlier. However the original idea is associated with the economist, Raul Prebisch, who conceived of a single scheme under which all the industrialized countries as a group would give duty-free access to the manufactured exports of the developing countries. Indeed, it was largely because of the Community’s overriding commitments to the associated African, Caribbean and Pacific states (the ACPs) that there are 16 distinct and very different GSP schemes under which the Western industrialized countries independently give limited duty-free access to certain of their markets to different groupings of the developing countries. When it was established, the GSP could be interpreted either as a move towards more liberal trade or, since its very essence is discrimination, a further erosion of GATT principles. Over the 14 years of its history the Community GSP has become increasingly discriminatory, both as regards the treatment of products and of countries, while its benefits more and more resemble the sugar on the bitter pill of protectionism.

In the new more protectionist climate and under relentless pressure to spare European industry from “unfair” competition, it is hardly surprising that the Community should now be discussing how to trim back some of the trade preferences it has been giving to the non-ACP developing countries. Indeed in an ad hoc way these benefits have been substantially curtailed already. Now more radical reforms are being mooted. After all this group of GSP-beneficiaries, mainly South American and Asian countries, provides a convenient whipping boy. It includes the countries which have penetrated the European markets in manufactures most successfully. An increasing number have incomes per head greater than those in the poorer Community states, even before Spain and Portugal become Community members. Furthermore the countries granted GSP status have always been near the bottom of the Community’s “pyramid of preference”.

The Community’s attachment to its hierarchy of tariff preference existed long before the GSP was instituted. Indeed the GSP was carefully designed so as not to upset it. At the top of this hierarchy, naturally, comes trade between the member states, which is completely free of tariffs. The same is true of trade in manufactures, though not in agricultural goods, with the EFTA countries, Austria, Finland, Iceland, Norway, Portugal, Sweden and Switzerland. Thirdly come the 64 ACPs. Successive Lomé Conventions have guaranteed unlimited duty-free access for ACP exports of manufactures and (almost all) agricultural goods not covered by the Common Agricultural Policy (CAP). Fourthly come the 14 Mediterranean countries with whom the Community has signed “association” or preferential trade agreements. The next tier consists of the non-ACP developing countries who qualify for GSP treatment. Below the GSP-beneficiaries come the other GATT signatories who qualify for “most favoured nation (mfn) status” This group includes all Western developed countries outside the EEC or EFTA. Finally, at the base of the pyramid, with least favoured nation status are the members of Comecon.

The fundamental character of Community policy vis-a-vis the Third World stems from historical colonial and geopolitical ties. Despite German and Dutch arguments in favour of a global approach, France made the founding of the Community conditional on a special relationship – in effect inclusion in the customs union – for its overseas departments and territories and Algeria, which was then part of metropolitan France. In the Rome Treaty, Article 131 provides for the association of non-European countries and territories, which had “special relations” with the Community member states “to promote economic and social development”. France also demanded a special deal for Morocco, Tunisia and Algeria, while Italy wanted one for Libya, and protocols were attached to the Rome Treaty to ensure special access for the exports of these countries into the Community market, pending the signing of treaties of “association” at a later date. The other founding members acceded, believing that with greater economic leverage, they would have greater political influence over the Mediterranean countries, which appeared both alarmingly unstable and geo-strategically critical. Thus right from the beginning the developing countries were segmented into the privileged – the 18 Associated African States and Madagascar and the Maghreb states (Morocco, Algeria and Tunisia) – and the non-associated rump. Since then the Associated States have expanded to nearly 70 ACPs, while in the Mediterranean area, agreements, including some degree of preferential trade, have also been signed with all the non-Community littoral states, except Syria, as well as Spain, Portugal and Greece, now all Community members.

With the entry of Britain to the Community in 1973, the privileged 18 became the privileged 46. In the accession negotiations it was agreed that the Commonwealth countries would not all be treated alike. Only the 20 ex-British colonies with economies “comparable” to the Associated African States were “associable”. The countries of South and South-East Asia, who overnight lost their tariff preferences on the British market, had to be content with a declaration of intention annexed to the Treaty of Accession, stating that the Community wished “to extend and strengthen the trade relations with the developing independent Commonwealth countries in Asia” and “to examine with these countries such problems as may arise in the field of trade”.

It is not surprising that these developing countries should have invested great hopes in the Community’s GSP which was inaugurated in 1971. This study looks at the GSP from the points of view of the beneficiary countries, the Community itself and, also, the countries outside the scheme. It both examines the functioning of the scheme today and how that has evolved over the 14 years of its existence. It goes on to make a quantitative assessment of the economic costs and benefits of the scheme to the various parties, both at a macro-economic level, and also through the examination of how the scheme has affected trade in a number of specific products.

In this study specific attention is accorded the ASEAN countries. The ASEAN countries of Thai- land, Indonesia, Malaysia, Singapore and the Philippines – we exclude the new member, Brunei, since it was not a member during the period under study – include countries of quite different levels of development, natural resource endowments, sizes and degrees of government intervention in the economy. They have in common a successful record of economic growth in recent years. Moreover, as will become clear in this report, they have been particularly adept at exploiting the benefits of the EEC GSP.

Despite (or perhaps because of) ex-colonial ties, ASEAN-EEC relations were slow to get under way. The Community development policies and energies were absorbed in negotiating successive Yaounde and Lomé Conventions with the ACPs, and there was little effort made to develop formal links with other parts of the world. The lack of a strong centralized institution in ASEAN did not help.

In 1972 the Special Co-ordinating Committee of ASEAN Nations was established. About this time worries over the dominance of specific ASEAN countries in the production of certain commodities – rubber, palm oil, abaca fibres, hardwood, tin – were being expressed in Community trade discussions. The first ASEAN-EEC meeting at ministerial level took place in 1978, and a Cooperation Agreement between the two blocs was signed in 1980. This envisaged commercial cooperation, including the removal of trade barriers, and development cooperation in the form of EEC aid for selected ASEAN projects.

Nevertheless, ASEAN-EEC relations continue to be characterized by friction, much of which is generated by a sense of unfair treatment by the Community, particularly as regards trade, among the ASEAN countries. Indeed ASEAN, in recognition of its success in gaining EEC markets, has been rewarded with Community import restrictions on a wide range of products from Thai manioc to Singaporean calculators.

However, ASEAN negotiators have not always come out of ASEAN-EEC discussions empty-handed. For example, on their initiative, certain agricultural goods, including tobacco, have been added to the list of GSP-covered products, and the principle of ASEAN cumulative origin has been accepted, although it remains a contentious issue. On the other hand, the ASEAN countries were among those particularly hurt by the 1981 revamp of the GSP (see Stevens, forthcoming).

Table 1.1 is intended to put the trading relations between ASEAN and the EEC into a broad perspective. It shows that the importance of the EEC as a trading partner for the ASEAN countries has edged up gradually since the early 19705. It is now of roughly equal importance to trade among the ASEAN countries themselves, though intra-ASEAN trade has grown somewhat faster. However the EEC trails behind Japan in its share of ASEAN exports or imports. The results of this study show that the EEC GSP has made a small but identifiable contribution to the growth in the EEC’s share of ASEAN exports.

Table 1.1: ASEAN s Principal Trading Partners (percent. share)

	Imports		Exports
	1973/74	1981/82	1973/74	1981/82
USA	15.2	15.5	19.9	16.4
Japan	24.2	21.7	28.2	25.5
ASEAN	13.2	16.6	14.0	20.3
EEC	16.0	16.6	15.5	19.7

Source: United Nations, Foreign Trade Statistics of Asia and the Pacific (various issues)

The second chapter will be taken up by a descriptive analysis of the Community’s GSP with some discussion on how it has evolved over time. In Chapter 3 the features of the scheme which are particularly significant for the ASEAN countries will be highlighted, and the degree to which these countries have made use of the tariff preferences will be examined. Chapters 2 and 3 are in the main non-technical. Chapter 4, however, enters the esoteric realms of international trade theory, though in as straightforward a way as possible. This theoretical excursion is an introduction to the methodological discussions of Chapters 5 and 6. In particular C...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• List of Tables
• Preface
• Acknowledgements
• Introductory Notes
• 1. INTRODUCTION
• 2. DEVELOPMENT OF THE COMMUNITY’S GSP
• 3. THE EEC GSP AND THE ASEAN COUNTRIES
• 4. THEORETICAL CONSIDERATIONS
• 5. QUANTIFYING THE EFFECTS OF TARIFF PREFERENCES
• 6. THE PARAMETER ASSUMPTIONS
• 7. RESULTS: THE MACROECONOMIC ANALYSIS
• 8. RESULTS: THE MICROECONOMIC ANALYSIS
• 9. FUTURE DEVELOPMENTS IN THE EEC GSP
• Bibliography
• Index