Chapter6

TradeandDevelopmentStrategies

Thischapterexaminesthestrategiesthatdevelopingcountrieshavepursuedtoachievedevelopmentandtogainaccesstothetradegovernancesystem.BrettonWoods:Isolation

FromtheTradingOrderImportSubstitutionIntheearlyBrettonWoodsperiod,mostindependentdevelopingcountrieswereisolatedfromtradedecisionmakingandfrommanyaspectofinternationaltradeitself.TheseSouthernstatespursuedastrategyofimportssubstitution,whichwasbasedonpromotingdomesticindustrialdevelopmentbehindprotective(high

tariff)walls.InthenegotiationleadinguptotheHavanaCharter,theSoutherncountriessoughtexemptionsfromthenewrules,includingtheabilitytouseimportquotasandtarifftoprotectinfantindustry,toestablishnewpreferentialtradingsystems,andtoenterintocommodityagreementstostabilizeandensureminimumcommodityprices.TheGeneralAgreementonTariffandTrade,whichreplacedtheHavanaCharterastheconstitutionofthenewtradingorder,wasdominatedbythedevelopedNorth.Isolatedfromtheinternationaltradingregime,developingcountriesattemptedtodevelopaninternalmarketfordomesticproductionthroughhighratesofprotectionfordomesticindustry.Importssubstitutionfosteredsomeindustrialization,butoftenatahighprice.Thenewindustriesoftenwereinefficientandtheiroutputcostlyanduncompetitive.Inaddition,importsubstitutionoftencreatedabalance-of-paymentdeficit.Productionofhigh-costdomesticmanufacturescameattheexpenseofbothexport-orientedmanufacturingandtraditionalagriculturalexports.Industrializationthroughimportsubstitutionalsodamagedagriculture.Newinvestmentinagriculturewaslimited;realearningsdeclinedasindustrialprofitsrose;andincomeinequalitiesbetweenagricultureandindustrywereexacerbated.TradeExpansionandDeclining

TermofTradeBytheendofthe1950s,manySouthernstatescametobelievethatexportgrowthcombinedwithprotectionofdomesticmarketscouldmaximizeefficiencyofproductionandincreaseearningsandforeignexchangeavailablefordevelopment,muchastheliberalhadalwaysargued.First,therewasPrebischclaimed,along-termdeteriorationintheSouth’stermsoftrade.ThetermsoftradealsoturnedagainsttheSouthbecausedemandintheNorthforprimaryproductsfromtheSouthwasinelasticwithrespecttoincomeandconsequentlyanincreaseintheproductionofrawmaterialsledtoadeclineinpricesratherthantoanincreaseinconsumption.Finally,thepricesofSouthernproductstendedtofallbecauseoftheNorth’sincreasedproductionofsyntheticsandsubstitutes(forexample,polyesterfabricsreplacingcottoncloth).UnityandConfrontationsBeginningin1961,theSouthdevelopedaunitedfronttopresstheNorthforchangesintradegovernanceandintheoperationoftheinternationaltradingsystem.ConfrontedwiththeSouth’spersistenceandgrowingunityplusitsincreasingnumericalcontroloftheGeneralAssembly,theNorthagreedtoconveneaUnitedNationsConferenceonTradeandDevelopment(UNCTAD),whichwasheldin1964.TheSoutherncountriesthenfocusedonachievingtradereformthroughUNCTAD.TheyformedtheGroupofSeventy-Seven(G-77),namedforthecosponsorsoftheJointDeclarationoftheDevelopingCountriesmadetoGeneralAssemblyin1963.UNCTADalsobecameapermanentUnitedNationsorganizationin1964.Finally,thenewsectioncalledforjointactiontopromotetradenegotiationsandacceptedcommodityagreementstostabilizeandensuremoreequitableprices.Followingyearsofconflictovertheconceptofageneralizedsystemofpreference(GPS),agreementwasreachedin1968ontheprincipleofestablishingapreferentialscheme,andin1971theGATTauthorizedthepreferencescheme.Theproblemofcommoditytradearenumerous:pricefluctuationsthataffectforeignexchangeearnings;Northernprotectionismanddiscriminatorytaxpolicies;andcompetitionfromsyntheticsandsubstitutes.Insum,Southernunityandconfrontationwithoutfurtherleverageprovedtobeweakbargainingtools.TheUNCTAD“victories”ledtoonlyminorrevisionsinSoutherndependence.Theresultwasmorefrustrationandhostilityfromthedevelopingworld.Independence:StrategiestoIncreaseSouthernPowerCommodityPowerandtheNewInternationalEconomicOrderInthe1970s,theSouthdiscoveredatooltouseinitsbargainingwiththeNorth:commoditypower.TheNorthwasbecomingincreasinglydependentonavarietyofrawmaterialimportsfromtheSouth.Aneconomicboominthedevelopedcountriesattheendofthe1960sandthebeginningofthe1970sledtosurgeinNortherndemandforrawmaterialsfromthedevelopingcountries.Suddenly,intheearly1970s,OPEC’sabilitytoseizecontroloftheinternationaloilsystemsuggestedthatSouthernproducerscouldposeaseriousthreattotheNorthbywithholdingorthreateningtowithholdsuppliesofrawmaterials.SouthernstatesunitedtoaggressivelyusethecommodityweaponandothereconomicandpoliticalresourceattheirdisposaltopersuadetheNorthtorestructuretheinternationaleconomicsystem.Initially,theSouthdemonstratedasurprisingdegreeofcohesion.Overadecadeofcommonactiongavethegroupanunderstandingofhowtoconductinternationalnegotiations.Thevariouseffortsinthe1970stoestablishanNIEOrevealedthelimitsofSouthernpower.UNCTADeffortstocreateanIntegratedProgrammeonCommoditiesalsowereunsuccessful.UNCTADcalledforthenegotiationsofinternationalcommodityagreement(ICAs)forrawmaterialsexportsimportanttodevelopingcountriesandtheestablishmentofacommonfundtostabilizethepricesofdevelopingcountrycommodities.ICAsareaccordamongproducersandconsumersdesignedtostabilizeorincreasethepricesofparticularproducts.UNCTAD’seffortstoimplementinternationalcommodityagreementsfounderedonthetraditionalproblemsofICAs.DespiteUNCTADefforts,onlyafewICAs—tin,sugar,coffee,cocoa,naturalrubber,andtropicaltimber—havebeennegotiated.Mostofthesedatebacktothe1960sandarenotaresultofUNCTAD’sefforts.DuringtheGATT’sTokyoRoundofmultilateraltradenegotiations,whichtookplacefrom1975to1979,thedevelopingcountriesobtained“specialanddifferenttreatment”thatexempteddevelopingcountriesfromtheGATT’srulesonreciprocityandmost-favored-nationobligations,gavepermanentlegalauthorizationforGSPpreferencesandpreferencesintradebetweendevelopingcountries,andauthorizedspecialfavorabletreatmentfortheleast-developedcountries.Inreturn,thedevelopedcountriesinsistedontheinclusionofa“graduationclause”intheGATTarticle.Bythecloseofthe1970s,theSouth’sstrategybasedonunity,commoditypower,andtheNIEOhadreachedadeadend.Export-LedGrowthBythe1980s,commoditypowerhadprovedtobeanillusion.Despitethepredictionsofexpertsthattheworldfacedafutureofever-diminishingrawmaterials,thesoaringcommoditypricesofthemid-1970sturnedouttobeacyclicalphenomenon.Thedramaticriseinpricesinthe1970sencouragedconservation,greaterrecycling,andthesubstitutionoftraditionalmaterialsbysyntheticsorbytechnologyandenergy-intensivematerials.Thisdeclineindemandgrowthcombinedwithanewcapacitycreatedbyinvestmentduringthecommodityshortagesofthe1970sledtoexcesscapacity,oversupply,andweakeningofprices.Thisdeclineincommoditypricesseriouslyaffectedthepoorestdevelopingcountries,whostillreliedheavilyoncommodityexports.Whilemanyofthepoorestdevelopingcountrieswerecaughtinthecollapseofcommodityprices,othersweredevelopingstrongmanufacturingcapabilitiesandincreasingtheirexportsofmanufacturedproducts.TheprinciplebeneficiariesofthischangeinthestructureoftradeweretheNICs,especiallythefourAsiantigers—SouthKorea,Taiwan,Singapore,andHongKong.Inthe1950sand1960s,theEastAsianNICs,withtheexceptionofHongKong,hadfollowedsuccessfulimportsubstitutionpolicies.Domesticproductionofconsumernondurablereplacedimports,resultinginaperiodofrapidgrowth.Thefourtigersalsorealizedtheyneededtheforeignexchangeearningstoimportessentialgoodssuchasrawmaterials.Theswitchtoexport-ledgrowthpoliciesdidnotmeaneliminatingallprotection.AllthetigersexceptHongKongretainedmanyimporttariffandquantitativerestrictions.Tigersgovernmentswerecriticizedfortargetingcertainsectors,suchasheavyandchemicalindustriesinSouthKorea,thatwererelativelylesssuccessfulthanindustriesthatwere“chosen”bythemarkets.However,generalexportincentivesclearlyaidedthecompetitivenessoftheNICs.Exportsalsoincreasedthrough“offshoreassembly”or“sourcing”arrangements,wherebymultinationalcompanieswereencouragedtoinvestforexport.Thesuccessofthefourtigers,however,createdstrongpressuresforprotectionintheNorth.SouthernmanufacturedimportsposedasignificantthreattoimportantindustrialsectorswithhighconcentrationsofemploymentintheNorthandthusprovokedpowerfulpoliticalpressuresforprotection.Asaresultofthenewimportanceofmanufacturesandnewformsofprotectionism,thetradepolicyoftheLDCsfocusedmoreandmoreonaccesstothemarketsofthedevelopedcountriesingeneralandoncontrollingVRAsinparticular.TheLDCdebtcrisisdemonstratedthesignificanceofSoutherntradefortheNorth.Inanefforttogenerateforeignexchangetoservicetheirdebt,developingcountriesreducedimportsthroughausteritypolicies,rationingofforeignexchange,andimportrestrictions.ThenewpragmatismThenewrealitiesofthe1980salteredthetradestrategyofthedevelopingcountries.Thenewforcesofthe1980salsocalledintoquestiontheeffectivenessoftheSouth’spreferredforumsforgovernance,especiallyUNCTADandtheUnitedNations.AlthoughtheSouthcontinuedtousetheseforumstocallforanNIEO,theNorth-SouthdialogueintheUnitedNationssystemincreasinglybecameadialogueofthedeaf.AsthestrategyofconfrontationandtheNIEOcollapsed,developingcountriesshiftedtheirfocustotheGATT.Onereasonfortheshiftwasthepressureofthedevelopedcountries,especiallytheUnitedStates,foranewroundofmultilateralnegotiations.ThedramaticexportsuccessoftheNICswasanothermotivationbehindthedriveforanewmultilateraltraderound.TheindustrializedcountriesalsocomplainedthattheNICsengagedinunfairtradepractices,rangingfromexportsubsidiesanddumpingtorestrictionsonforeignimportsanddirectinvestment.WhilemostconcernfocusedontheNICs,developedcountriesalsoincreasedpressureonthenon-NICdevelopingcountriestoliberalizetheirdomestictradeandeconomicregimes,onthegroundsthatprotectionistpoliciesanddemandsforspecialanddifferentialtreatmentmadelittleeconomicsense.Asthesametime,thedevelopingcountieshadbecomeincreasinglydissatisfiedwithwhattheyregardedasthemeagergainsofprevioustraderounds.Bythelate1980s,however,developingcountrieshadbecomemoredependentthaneverontrade,andtheirstakeinthemaintenanceofaliberalinternationaltradingregimehadrisenproportionately.TheimportanceofactivelyparticipatingintheGATTwasunderlinedbyrisingprotectionismagainstdevelopingcountryexports.Finally,bythemid-1980sthereemergedagreaterrecognitionofthediversityofinterestsamongdevelopingcountriesandtheproblemthatposedforthetraditionalblocapproachtorelationswiththeNorth.Inthefaceofsuchdiversity,manydevelopingcountriescametobelievethattheirinterestswouldbebestservedbyapragmaticratherthanideologicalorblocapproachtonegotiationsintheGATT.Globalization:Joining

theTradeRegimeTheUruguayRoundInitially,thedevelopingcountriesresistedthecallbythedevelopedcountriesforanewtraderoundandarguedthatinsteadofdiscussingnewissues,theGATTtalksshouldfocusonold,unresolvedissues.UsingthethreatofnonparticipationintheroundtobargainforgreaterattentiontoSouthernconcerns,theLDCsachievedsomeconcessionssuchasaspecialnegotiatinggroupandacommitmenttoanearlyagreementontropicalproducts.Themostactivedevelopingcountryparticipantsinthenegotiationswerethosethatbelievedtheyhadagreatdealatstake:themiddle-incomedevelopingcountriesandtheso-calledemerginglow-incomeeconomieslikeChinaandIndia.AlthoughmanydevelopingcountrieswerereluctanttomartheappearanceofSouthernunityininternationalforums,thesecountriesfrequentlychosetopursueamorepragmaticstrategyindomestic,bilateral,andregionalpolicies.IntheUruguayRoundAgreementonAgriculture,theindustrializedcountriesagreedtoreduceagriculturesubsidiesby20percentbytheyear2000.ThisagreementwasamajorvictoryfortheSouth.ThestrategyofpragmaticengagementledtoimportantachievementsfordevelopingcountriesintheUruguayRound.Ninety-onedevelopingcountriesparticipatedinthenegotiations,farmorethaninpreviousrounds,andtheirparticipationwasmoreactiveandwide-rangingthaneverbefore.Asaresult,developingcountriesmadeimportantprogresstowardtheirgoalofmarketaccess.Developingcountriesalsobenefitedfromthedevelopmentofnewtradingrules.TheeliminationofVRAsandimportsurveillancemeasuresthroughthesafeguardscodewasasignificantachievement.AfterthesigningoftheUruguayRoundAgreement,thedevelopingcountriesbegancallingforthecompletionofunfinishedbusinessfromtheTokyoandUruguayRounds.Despitetheselimitations,UruguayRoundnegotiationswerealand-markintheroleofdevelopingcountriesintheinternationaltradingsystem.AsaresultoftheirachievementsintheUruguayRound,thedevelopingcountriesmowhadagreaterstakeinthesuccessfulimplementationoftheround.Inparticular,developingcountrieswereexpectedtobestrongadvocatesoftheuseoftheWTO’smewrulesanddisputesettlementmechanismsastoolstodefendthemselvesagainstNorthernprotectionism.RegionalismReduxInthe1990s,SoutherngovernmentsbegantoexperimentwithnewformsofregionalintegrationasawaytopromoteexportsandincreasetheinternationalcompetitivenessofregionallybasedMNCs.Untilthe1990s,regionalintegrationintheSouthhadnot,forthemostpart,resultedinmuchgrowthinintraregionaltrade,largelybecauseofimportsubstitutionpolicies.Inthe1990s,however,regionalstrategiesbecamemorepromisingasdevelopingcountriesbegantoreducetariffs,sometimesunilaterally,inanefforttoexpandexports.AsthesummitoftheAmericasinMiamiin1994,thecountriesoftheAmericas,includingtheUnitedStatesandCanada,agreedtobegindiscussionsintendedtoleadtoaFreeTradeAreaoftheAmericas(FTAA)bytheyear2005.TheFTAAnegotiationswereformallylaunchedinApril1998atthesecondSummitoftheAmericasinSantiago,Chile.AdraftoftheFTAAagreementwasmadepublicinJuly2001.ThedraftrepeatedlystatedadesiredofthenegotiatingpartiestoactwithintherulesestablishedbytheWTO,butalsotousetheFTAAasanalternativeforumforpromotingfreetradeandresolvingdisputes.Similardevelopmentswereoccurringinthepacificregion.ThemembersoftheAssociationofSoutheastAsianNations(ASEAN)agreedin1992toformtheASEANFreeTradeArea(AFTA),withthegoalofeliminatingbarriersandachievingfreetradebytheyear2008.InNovember2001,theleadersofASEANanChinaagreedtobeginnegotiationsforanASEAN-ChinaFreeTradeArea.ThiswasanaturalextensionofAFTAandrecognitionoftheheightenedimportanceofChinaintheAsianregionaleconomy.In1994,theleadersofAsia-PacificEconomicCooperation(APEC),whosemembersincludedbothdevelopinganddevelopedcountries,agreedinBogorIndonesia,toachievefreetradeandinvestmentinregion,withdevelopedcountriesachievingthatgoalby2010anddevelopingcountriesby2020.

BeyondtheUruguayRoundAttheconclusionoftheUruguayRoundinMarrakesh,themem