The growth of trade among developed countries has been encouraged by steadily dropping the tariffs and other barriers which they impose on each other's goods. However, the barriers they impose on the manufactured goods of developing countries have not been dropped to the same extent. In fact new barriers have been created in recent years to limit these imports, as developed countries move to protect their economies from foreign competition. This is a major obstacle to the efforts of the developing countries to expand their exports of manufactures. Relatively high and escalating tariff rates tend to discourage the establishment of export-oriented industries.
Although negotiations have significantly reduced the overall level of tariff protection by developed countries, the benefits of the tariff concessions, on average, have been far greater for the industrialized countries themselves than for the developing countries. Substantial tariff cuts have been made on those products in which industrialized countries dominate world trade (chemicals, machinery, transport equipment, etc), while in general only small tariff cuts have been made on products of current export interest to developing countries (foods, textiles, leather and leather goods and other labour intensive products).
Protection imposes economic losses on both industrialized and developing countries. In the industrialized countries, resources are used in protected activities in which they have a comparative disadvantage in relation to alternative uses. As a result, total real product is lower than it would otherwise be (there may, however, be an offsetting gain, though probably a relatively small one, to the extent that import restrictions turn the terms of trade in favour of the industrialized countries). At the same time, the developing countries concerned suffer a real income loss by having to channel their resources into less economic activities in the primary sector. For those countries which continue to export the commodities in question, there will also be a terms-of-trade loss arising from the industrialized countries' import restrictions.
The commodity trade problems giving rise to the greatest difficulty, and hence to the greatest need of being placed in international perspective, are those involving commodities which are produced in the industrialized importing countries as well as in the developing exporting countries. Modifications of import policy in respect of commodities which are not domestically produced are likely to be achieved with much less difficulty. Whatever the domestic justification for measures tailored to the importing nation's needs, the restraint they exercise on consumption and imports is much less defensible in the context of the development needs of the exporting countries.
For the industrialized countries a reduction in protection would allow the deployment of resources in more economic activities and, to this extent, would result in a gain in real income. For the developing countries, easier access to the markets of industrialized countries, resulting from a reduction in protection of commodities of particular interest to developing countries, would allow them to expand their export earnings. Moreover, in so far as the reduction in protection led to a reduction in world supply of particular commodities, prices could also tend to rise, thus adding to the expansion in export earnings resulting from the increased volume of exports to the industrialized countries. For certain primary products, the insulation of national markets in the industrialized countries has reduced the size of the residual world market. Since, for these commodities, it is the residual market which bears the burden of adjustment to changes in world supply and demand, the insulation of national markets tends to accentuate fluctuations in the world price, as measured in the residual market. To the extent that the reduction in protection results in a more unified market, operating on a wider base of transactions, fluctuations in world supplies will tend to result in smaller price fluctuations than under the present system and, for many commodities, in greater stability in the export earnings of the developing countries concerned.
For most industrialized countries, reduction of protection would conflict with the policy aim of ensuring a desired level of income for domestic producers of primary commodities.