Removing constraints on the international flow of goods and services.
This strategy features in the framework of Agenda 21 as formulated at UNCED (Rio de Janeiro, 1992), now coordinated by the United Nations Commission on Sustainable Development and implemented through national and local authorities.
All countries can halt and reverse protectionism and further expand market access, particularly in areas of interest to developing countries. This improvement of market access will be facilitated by appropriate structural adjustment in developed countries.
Four broad approaches are recognized as offering promise in liberalizing trade. (1) International restraints must be imposed on the freedom of action of individual governments, particularly as regards the use of various protectionist measures and their effective surveillance. (2) Since juridical restraints are insufficient in themselves to prevent action by sovereign governments in what is considered a crisis, it is equally useful and necessary to mobilize domestic interests against protection and to educate the public that imports from abroad are not the cause of unemployment problems. (3) It is even more important to promote a return to full employment and better overall economic performance in the industrialized world. (4) Micro-economic adjustment policies must be developed to lower and redistribute the social costs of transition, thus improving the overall functioning of the economy and reducing resistance to trade-induced change.
Previous attempts at trade liberalization have involved large shifts of resources but have not always raised unemployment by as much as is commonly supposed. Strong and decisive reforms have carried greater credibility and have been better sustained than those which were less bold. A useful first stage has proved to be the replacing of quantitative restrictions with tariffs. For the successful introduction of trade reform, the provision of a realistic real exchange rate is considered vital – and this must be kept stable if the reform is to be sustained. Thus a macroeconomic policy that manages inflation and the nominal exchange rate so as to keep domestic costs in line with world prices is required.
The scope for trade liberalization depends on complementary reforms in the domestic economy, especially in the financial and labour markets. Trade strategies that are inward-oriented tend to protect capital-intensive industries at the expense of those that are labour-intensive; this increases the demand for capital relative to labour and raises the rental on capital relative to the price of labour. But these trade strategies may have effects that work the other way For example, overvaluation of the exchange rate, common in inward-oriented economies, reduces the cost of imported capital goods and therefore raises wages in relation to the rental on capital. Interest rate controls, tax holidays, tax discounts and accelerated depreciation cut the cost of capital to some firms while minimum wage legislation, payroll taxation and high public sector pay-scales raise the cost of labour. Thus, policies on finance, labour and taxes tend to work in the same direction – they raise wages relative to the cost of capital and therefore depress employment.
The functioning of labour markets also has reciprocal implications for trade liberalization. Trade liberalization involves a reallocation of resources from the non-tradables to the tradables sector and an efficient labour market can help in two ways. (1) Devaluation of the exchange rate – this will only shift incentives in favour of tradables if real wage rates are flexible downward. (2) Production of tradables can expand only if labour moves out of the non-tradables sector as real wages fall.
Whether or not changes in trade policies towards greater openness are likely to produce positive effects in a relatively short period of time depends upon such initial conditions as country size and the extent of prior investment in infrastructure, diversification and industrialization. Poor countries exporting a narrow range of primary commodities are thus unlikely to experience immediately all the benefits from the adoption of such policies, since it is only over the medium term that a diversified export sector can be developed. Thus it is important that developing countries must be free to choose their own policies to suit their own circumstances, changing them in accordance with their own perception of needs and according to their own timing.
Changes in trade policies towards a more liberal regime must be considered in the context of the macro-economic environment and the prevailing overall structure of incentives. Trade liberalization must be accompanied by appropriate macro-economic policies, including, in particular, the maintenance of realistic exchange rates if they are to be fully effective and durable. Indeed, an appropriate exchange rate is the most important single element in "successful" trade policy. Beyond the exchange rate, the key steps in the process of trade liberalization, in rough order of difficulty, are as follows: (a) removal of redundant trade barriers; (b) replacement of administrative controls by relevant market-based policies; (c) achievement of greater uniformity in incentive structures; (d) uniform reductions in the levels of import duties and export subsidies. Unchecked inflation and/or over-valued exchange rates increase the demand for imported goods, reduce competitiveness, and may in turn lead to balance-of-payments crises and recourse to quantitative restrictions on imports or other import-restraining measures.
Reduction of anti-export bias requires, at a minimum, the provision to exporters of access to inputs at international prices. This could mean, for example, compensating exporters for differences between national and international prices of inputs which may arise from protecting domestic import-substituting industries. It may also require review of regulatory regimes and credit policies. An appropriate degree of domestic industrial policy liberalization is a necessary corollary of a successful policy of trade liberalization.
Generally speaking, the timing of import liberalization measures has often been critical to their success. The presence of such factors as good weather, a favourable balance-of-payments position, the availability of external capital flows, and moderate-to-strong growth prior to the implementation of trade policy measures can greatly ease the problem of public acceptance of the reforms.
Many developing countries benefited from export-oriented policies in the 1970s and 1980s. Countries pursued outward-oriented policies in many different ways. For some import liberalization was a dominant feature but most considered active efforts to promote exports relatively more important. Some countries also attempted to integrate domestic financial markets with international capital markets. However, countries which sought to implement more open trade policies and to deregulate domestic capital markets without simultaneously implementing appropriate fiscal and monetary policies experienced problems of capital flight, declining domestic savings and a rapid further buildup of external debt.
Through the General Agreement on Tariffs and Trade (GATT), supplanted by the World Trade Organization (WTO) in 1995, the UN has supported trade liberalization that will increase economic development opportunities in developing countries. The International Trade Centre was established by GATT in 1964 at the request of the developing countries to help them promote their exports. It is jointly operated by the WTO and UN Conference on Trade and Development (UNCTAD).
It is estimated that the Uruguay Round liberalization of trade in goods would result in an increase in world trade, production and income of between US$109,000 to $510,000 million a year by the year 2005. A large proportion of these gains are assumed from the reduction of barriers to imports and the income gained from lowered prices for consumers.
Business lobbies which trade negotiators have traditionally suspected of being mainly interested in preserving protection are becoming more active as proponents of free trade. Strong support from industry leaders on both sides of the Atlantic played a big role in WTO agreements last year to eliminate information technology tariffs and open global financial services markets to more competition.
Major changes in trade regimes generate potentially large costs and benefits for different economic groups in developing countries, requiring considerable political skill in reconciling divergent interests. Incautious advocacy of strong liberalization measures by international institutions may be counter-productive. These institutions should therefore support liberalizing change where it is possible, rather than prescribing it immediately for all.
The rules of the game for international economic transactions, are asymmetrical in terms of construct and inequitable in terms of outcome.