Bela Balassa The New Protectionism and the Interrnational … · World Bank Reprint Series: Number Seventy Bela Balassa The "New Protectionism and the Interrnational Economy Reprinted

World Bank Reprint Series: Number Seventy

Bela Balassa

The "New Protectionismand theInterrnational Economy

Reprinted from Journal of World Trade Law, vol. 12, no. 5 (1978)

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The 'New Protectionism' and the

International Economy

BELA BALASSA

:1. TRADE LIBERALIZATION IN THE POSTWAR PERIOD

The Progress of Trade Liberalizalion

THE POSTWAR PERIOD saw steady progress in trade liberalization until

the oil crisis and the world recession of 1974-75. Apart from removing

quantitative import restuictions imposed during the depression of the

nineteeni-thirties and the second world war, efforts were concentrated

on lowering tariffs. Reductions in tariffs originally aimed at reversing the

increases effectuated during the depression, but they were subsequently

lowered much below pre-1930 levels.l

Tariff reductionis were undertaken in the framework of the General

Agreement on Tariffs acnd Trade (GATT) on the basis of the dual

principles of non-discrimination and reciprocity. Non-discrimination

means that, customs unions and free trade areas apart, reductions in

tariff barriers are extended to all member countries under the application

of the most-favoured-nation (MFN) clause. In turn, reciprocity means

that, in negotiating tariff concessions, an attempt is made to balance the

interests of the participating countries.

During the nineteen-fifties, trade liberalization proceeded on the

basis of item-by-item negotiations, with the participating countries

MVhile thlr ratio of tariffs to dutiable imnports does not appropriately measture the extent of

protection, it may be used to indicate general trends. 1 n the United States, this ratio averaged

38 per cent in 1922 -29; it* was 53 pcr cent in 1930-33 under the Hawley-Smoot law; and it

decreased to 25 per cent by 1957 (Sidney Ratner, The Tariff in American History, New York,

Van Nostrand, 1972, pp. .52-57). Thc ratio of U.S. tariffs to dutiable imports declined

furthcr fllkm,iig the Dillon-round (1960-611 and the Kennedy-round (1963-67) nego-

tiations anid reached 8 per ecnt ¡io 1974 (Statistical Abstrací of the United Stales, 1975, p. 22).

Bela Balassa is Professor of Political Fconon!y at the Joh/s Hopkin.s University and Consultant lo tte WorlU

Bank. The opinions expressed in the paper are those of the author and should not be interpreted .lo reflect th1

views of the ¡WVorld Bank.

The paper was presented al the Senitiar on ''Tile Role of íVorld Trade ir tihe Present Econoinic Situationt,"

sponsored by lthe l,tstititao Bancario San Paolo di Torno, and held in Milan o0 March 31, 1978. 7h

author is indebted lo participants a tihe Semninar.for helpftl¿ discuissions and to Geza Feketekuty, Nicholas

Pless, and jan ftin/lirfor &aluiable cortinentís, 1e isfirtíher indebted to Kishore Nadkarnifor preparing tíh

statistical data used in this ptiper.

- 409

410 JOURNAL OF WORLD TRADE LAWV

making offers to each other to lower t;ríiffs in exchiange for tariffreductionson items of export interest to them. After íiiitial successes, this procedurebecame increasingly cumrbrsonir and was superseded by across-the-board tariff reductionls, first in the Dillon round and subsequendly in theKennedy round of negotiations, wv%ith exc(,eptioins made for so-calledsensitive ¡tenms.

Although most developing cotuntries did not actively participate intrade negotiations in the fiamework of GATT, they enjoved the beinefitsof tariff reductions being automatically extenvded to tihem under theapplication of t.he MEN clause. Indeed, it appears that the benefits ofmtultilateral trade liberalization for thc devl(-oping countries far exceededthe benefits they have derived from the applicati>n of the General Prefer-ence Scheme w*hich, despite its name, has remained limited in scope.2And while the elimination of tariffs on intra-area trade in the frarnesorkof the European Economnic Commrinity and the European Free TradeAssociation favored imports from the partner countries over importsfrom outsiders, including the developing countries, tariffs on theseimports were reduced on the average by onc-lialf during the nineteen-sixties. At the same time, the dex,elopirug couiitries Ijeelfite d from increaseddemand for their exports that accompaniecd the acclr-Ltícln of economicgrowth in NVester-n Europe follow iiig the success ofinitcgriition efforts.3

Trade liberalization pertained largel) to raw materials and tomanuifactured goods while food ímports rena.,inecl subject to barriers. Astariffs on most raw materials were reduced to low levels by the mid-fifties, in tliis oaper emphasis will be giveri to trade in manufacturedgoods.? This choice is also warranted by reasoii of the fact that trade inmanufactuired produicts had to bear tlhe brunt of the `new protectionism`since 1973 and that prospective changes iii the internatioinal division oflabor between developed aiid developiug cútintries affect primaríly thesecomnmodities.

International Trade and Economic Growth

It has been noted that the elimination of barriers to intra-area trade(cn tui ¡litedC to the acceleratiOni of c-Omie growth iin Westernl Eutrope.More generally, the expansioni of interntimrai trade lhas favorable effectson economic growth. Apart from inprvrnents in resource allocationaccording to conlparartive advantage, these effects finid their orígin in theexploitationi of large-scale conorn ¡es tlirough thc c(ristrtrctíioll of largerplants (tlie. traclitionial forcm of en<rflies of scale), reductionS in produlct

.Jf. M. Finger, "Tariff Provisions fot (1';IiHf,< Assembly and the Exports of DevelopingCountries," Economic Journal, ¡une 1975 and '-Effeets of the Kennedy Round TarilConcessions on the Exports oflJrv lo[ing CouuIrhr," bid, Nfar. 1976.Cf. Bela Balassa, European Ecorzoinic Intcgral.in, Norih 11<illani , Amstrrdam, 1975, ch. 2.

' Manufactured goods will be defined as S.FlC eornrmdit elasses 5) to 8 less nonferrousmetais (68).

THE NEW PROTECTIONISM 411

variety in individual plants (horizontal specialization), and greaterspecialization in the production of parts, components, and accessories(vertical specialization), as well as in technological change that isstimulated by foreign competition. Rapid economic growth, in turn,contributes to increased imports, thereby extending tlic gains to otnercountries.

Ragnar Nurkse suggested that thc effects of trade on economicgrowtth are indicated not by "the average ratio of world trade to worldproduction [but by] the incremental relationship between trade andproduction ."E He noted that such a relationship was observed duringthe ninetec-nth century, when the expansion of international trade at arate much exceeding that of domestic production importantly contributedto economie growth in the industrial countries. Economic growth was, inturn, transmitted to other countries of the world as the industrial coulntries'imports of primary products rose at a substantially higher rate than theirnational income.

Nurkse clainied, however, that "the world's industrial centers nthe mid-twentieth century are not 'exporting' thcir own rate of growt' .othe primary-producing countries through a corresponding expar-.íon ofdemand for primary products" 6 and that the developing countries facedifficulties in exporting manufactured goods to the industrial countries.According to Nurkse, "Industrialization for export markets may encounter

. . difficulties on the supply side. In the scale of comparative advantagethere may be a wide gap, or at any rate a certain discontinuity, betweenthe traditional primary prcducts and the new manufactured goodswhich a country would seek to export ... Equally serious are the obstacleswhich industrialization for export is liable to encounter on the side ofexternal demand"7 due to protection in the industrial countries.

These pessimistic views, shared by writers such as Gunnar Myrdal8

and Rául Prebisch9 , were not borne out by the facts. To begin with, the"incremental relationship" between exports and production in theindustrial countries obtained also during the postwar period as theirexports rose muchi more rapidly than their gross national product.Between 1953, the first "normal" postwar year, and 1960, when theeffects of tariff reductions in the EEC and EFTA began to be felt, theexport volume of the industrial countries increased at an average annualrate of 7 0 per cent while their combined GNP rose 3 6 per cent a year.'O

' Ragnar Nurksc, "Patterns of Trade and Dcvelopment." in Equilibrium and Growth in th/World Economy, Cambridge, Mass., Harvard University Press, 1961, p. 283.

6 "Pattern of Tradc and Developtnent," op. cit., p. 289.7bid, p. 310.Gunnar Myrdal, Economic Theory and Uriderdeveloped Regioils, London, 1957.

'Rául Prebisch, "Commercial Policy in the Underdeveloped Countries," American EconomicReview Papers and Proceedings, May 1959, pp. 251-73.

o United Nations, rearbook of International Trade Statistics, 1962 and Bela Balassa, Trad¿Prospectsfor Developing Countries, Homewood, Illinois, R. D. Irwin, 1964, pp. 7, 10. Alldata have been expressed in terms of constant prices.

412 JOURNAL OF WORLD TRADE LAW

The industrial countr- s' imports of primary products from thedeveloping countries, too, increased more rapidly than their combinedGNP. These imports rose at an average annual rate of 5 1 per centbetween 1953 and 1960, exceeding tlie GNP growth of the ind. strialcountries by about one-half, with even larger increases shown in regard tomanufactured goods." At the same time, the export performance of anumber of developing countries was adversely affected by their ownpolicies: the bias against exports in countries pursuing import sub-stitution policies led to a loss in their world shares in primary exports'2

and forestalled the emergence of manufactured exports.

Developments un/il the Oil CrisisThe observed trends in trade and growth continued and even

accelerated after 1960 when trade liberalization in the framework of theDillon and the Kennedy rounds, integration ín Western Europe, and theadoption of export-oriented policies in several developing countries gaveacíded impetus to world trade. The exports of tlie developed countrieslose at an average annual rate of 8 8 per cent betwecn 1960 and 19 73,13the last year before the quadrupling of oil prices and tie world recession,exceeding the growth of their combined GNP, u stini.itedl at 4-8 per centa year, by a considerable margin.

Economic growth in the developed nations led to a rapid rise oftheir imports from the developing countries, with increases averag.-.g7 2 per cent a year bet.ween 1960 and 1973. The imports of manu-factured goods rose especially t.apidly, far exceeding carlier projections.Thus, while the United Nations foresaw an increase of only 60 per centduring the sixties, these exports increased fivefold bctween 1960 and 1970and their rate of growtlh averaged 18 3 per cent betwre n 1960 and 1973.141 ut, the imports of primary commodities from the developing countries,too, rose at an average annual rate of 7.2 per cent, notwithstandinglosses in market shares in some of those countries that continued to followpolicies biased against imports.

Policy differences were of particular importance for trade in manu-factured goods. Tbus within the developing country group, the lalÍ ,estexport increases were experiencecd in countries that adopted cxpi :;-

" Trade Prospecisfor Deceloping Countries, pp. 9-10.12 1. B. Kravis, "Trade as a Handmaidcn of Growth: Similarities between the Nineteenth a"d

the T'wentieth Centuries" Economic Journal, Dcc. 1970; pp. 850- 72; R. C. Porter, "SomneImplications of Primnary-Product Trends," .7ournal of Political Econorl May¡june 1970, pp..586-97; and Bela Balassa, Tite Siruclure of Protection in Dcceloping (¿'Pztntrier, Baltimore, Mc1.,Johns Hopkins Press, 1971, chs. 2 and 4.

13 Utíited Nations, otlolhly Bulletin of bStaisticr, Oct. 1977 ---Developed couhltries are defilledto include the industrial countries of North Arnerica, Western Europe, and Japan, as *vellas Australia, New Zcaland, Israel, and South Africa. Al1 other market economies areclassified as developing.

14 "Trade and Dcvelopment: Trends, Needs anil Policies, Part I' in United Nations, WarldEcono,nic Survey, 1963, New York, 1965, p. 31, and United Nations, Monthly Bulletin ofStatisti,',,Juune 1977.


oriented policies and liberalized their imports. Thus, Korea, Singapore,and Taiwan, which first adopted such policies, increased their share in thecombined exports of manufactured goods by developing countries from2.7 per cent in 1960 to 32.7 per cent in 1973. By contrast3 _ the share ofIndia, a country that continLled with protectionist policies througlloutthe period, fell fromn 24.6 per cent in 1960 to 6.6 per cent in 1973.'5

The rise in their foreigni exchange carnings allow ccl the developinacountries to increase their imports from the developed nations at a rapidrate. Thcse imports rose 6 2 per cent a year betwecn 1960 and 1973, withmanufactured imports growing at an annuLal average rate of 6 5 per cent.As a restilt, the manufacturing trade surplus of the developed nationswith the developing countries increased from $14 billion in 1960 to $43billion in 1973, -when the developing countries providecl niarkets for 37 -7per cent of the maiufactured exports of the developed nations, excludingtrade between tlie United States and Canada as well as within andbetween EEC and EFTA.16

II. OIL CRISIS, RECESSION, AND PROTECTIONllST PRESSURES

The Post-1 173 Situatzon

It has been shown that the rapid expansion of foreign trade contri-buted to economic growth in the deseloped countries during the postwarperiod. Growth in the developed countrics, in turn, was transmitted tothe developing countries through trade. At the same time, imports by thedeveloping countries provided an important market for the manufacturedexports of the developed countries.

These developments occurred in an atmosphere marked hy pro-gressive trade liberalization on the part of the developed nations and bythe adoption of export-oriented policies, accompanied by reducedprotection, in several developing countries. The atmosphere was marredonly by quantitative import restrictions pertaining chiefly to Japaneseexports, and by the adoption of the Internatiorial Cotton Textiles and,subsequently, the Multifibre Arrangement. Nevertheless, the MultifibreArrangemient provicled for an annual growth of 6 per cent in the exportsof textiles ancd clothing and, as a result of increases in their quota allo-cationi and the upgrading of their export products, thc developing coun-tries' exports of textiles and clothing rose substantially faster.' 7

The situation changed as the quadrupling of oil prices aggravatedthe recession that followcd the 1972-73 world economic boom. In addingto inflationary pressures, thc oil price increase lcd to stronger anti-

11 Bela Balassa, "Export Incentives and lxport Performance in Dcveloping Countries: AComparative Analysis" World Bank Stff il'nrA iig Paper No. 248 jan. 1973, App. Table 2.

6 United Nations, AMonlhly Bulletin ofStatistics, June 1977 and Feb. 1978.7D. B. Kcesing, "World Trade and Output of Manufactures: Structural Trends andDeveloping Countries' Exports" W.Vashington, D.C., World Bank, Fcb. 1978 (mimeo).


inflationary measures on the part of the developed countries that wouldhave been otherwise the case. The recession was further aggravated bypolicy reactions on the part of the developed countries to the increase intheir combined balance-of-trade deficit vis-a-vis OPEC from $17 2billion in 1973 to $66 6 billion in 1974.18 And, while the United Stateshas maintained a steady rate of expansiol1 since mid-1975 without regardto its balancc-of-payments consequences, in the other developed countriesthe desire to iower inflation rates and¡or to reduce balance-of-paymentsdefcits has not permitted economic expansion to proceed at a rateapproaching capacity growth following the recession. As a result, un-employment lhas continued to increase in Western Europe and Japan,while it has not yet declined to pre-1973 levels following the deep recessionin the Uijited States.

High unemployment and unused capacity in a number of industriesof the developed countries have contributed to the emergence of pro-tectionist pressures, which were intensified by reason of the continuedexistence of trade deficits in most developed countries. The protectionistmeasures proposed and actually applied, if not the extent of their appli-cation. have a certain resemblance to those observed during the depressionof the ninetecn-thirties.19 They may be subsumed under the heading"new protectionism" and include various forms of non-tariff restrictionson trade, government aids under the aegis of the "rationalization ofindustry," as well as attempts made at the establishment of worldwidemarket-sharing arrangements.

.Non-tariff RestrictionsAs noted above, the Multifibre Arrangement, the principal case

outside agriculture where non-tariff measures were applied prior to theoil crisis, provided for a 6 per cent annual rate of growth in the textilesand clothing exports of the individua1 .-ountries. The new agreement,pertaining to the 1978-82 period, is mc, e restrictive. While notionallysetting a 6 per cent annual rate of growth for the exporting cotntries,taken together, it leaves considerable scope for the importing countries toset lower limits throtugh bilateral negotiations.

In fact, tlhe European Common Market that forced the adoption ofthe revised rules at the behest of France anld the United Kingdom, hasrequired that the largest developing country exporters reduce their 1978exports of textiles and clothing to the EEC below the 1976 level (therelevant figures are -9 pei cent for Hong Kong, -7 per cent for Korca,and -25 per cent for Taiwan). And while better overall terms are pro-

18 UN Monthly Builletin of Statistics, Aug. 1976.19 On this point, see Jan Tumlir, "Thc Ncw Protectionism, Carteis, and thc Internadional

Order,` paper presented at thc Conference on C,. llenges to a Liberal InsernaSional FconomicOrder, sponsored by the American Enterprise Lastitute and held on 1-2 Dec. 1977 inWashington, D.C.


vided to very poor countries, the total imports of eight sensitive products,accounting for 62 per cent of EEC imports of textiles and clothing fromdeveloping countries, will decline below the 1976 level in 1978 and willincrease slowly afterwards, with growth rates in the 1978-82 periodranging from 0 3 per cent a year for cotton yarn to 4- 1 per cent a yearforr sweaters.20 Import growth rates were also set at less than 6 per cent ayear for another important group of clothing products, so that the rate ofgrowth of the imports of textiles and clothing into the EEC will remainmuch below 6 per cent.

The United States reached agreementE with Hong Kong, Korea, andTaiwan to freeze their 1978 exports of texti!es and clothing to the U.S. atthe 1977 level and to increase the exports of a number of sensitive items,accounting for about 70 per cent of exports in the case of Korea, at a ratesubstantially less than 6 per cent afterwards, Taking further account ofbilateral agreemerits negotiated with other countries, it is apparent thatthe 6 per cent annual rate of growth of the imports of textiles and clothingunder the Multifibre Arrangement will not be attained in the UnitedStates either.

In regard to steel, the European Common Market establishedguideline prices for five product groups and a mandatory minimumprice for reinforcing bars in 1976. As of January 1978, basic or referergceprices were set ffor all products based on the lowest foreign (i.e., Japanese)production costs adjusted for transport costs. Imports below the referenceprice come under anti-duniping rules, with a levy imposed in the amountof the price difference. This scheme is assumed to be temporary, to bereplaced by bilateral agreements negotiated with steel exporting counitries.The Commission has since negotiated agreements with some 20 countriesto accept the same share in the EEC market in 1978 as they had in 1976,implying an average cut in steel imports by 8 per cent from the 1977level.2 1 The cuts would be larger for the new developing country exportersthat increased their steel exports to a considerable extent between 1976and 1977.

In establishing reference prices for steel, the EEC Commission drewon the Solomon-plan in the United States that came into effect inFebruary 1978. Under the plan, the reference or trigger prices have beenset on the basis of assumed Japanese production costs and the cost ofshipping to U.S. markets. Correspondirgly, the reference prices rise, andthe chance of effective import competition declines, as one moves frornWest to East.22

The adoption of import restrictions in regard to textiles and steel isa manifestation of protectionist tendencies that have emerged in recent

30 The Economist, 24 Dec. 1977.21 The Economist, 13 May 1978." The Wall Street journal, 23 Feb. 1978.


years. In the United States, the practical application of the provisions ofthe 1974 Trade Act also points in this direc'.ion. Under the Act, the U.S.Trreasury has to reach a decision within one year after petitions are filedrequesting the imposition of countervailing cluties on exports that areallegedly subsidized by foreign countries, and countervailing action hasbeen extended to duty free imports, including those enticring under thegeneralized preference schcme. In turn, durnping has benCI redefined asselling at less than full production cost, including a niargin for profit,rather than at less than the domestic sales price as beforehand.

The Trade Act has also weakened the conditions for escape-clauseaction by requiring only that imports are "a substantial cause of seriousinjury, or the threat tliereof" while previously such action could be takenonly if imports were "the major cause" of seríous injury and the increasein imports causing or threatening the injury was the result of previoustrade concessions. Furthermore, "orderly marketing agreements,"representing negotiated restrictions on exports to the United States, havebeen introdtlced in the arsenal of protectionist measures. Finally, the twohouses of Congress can overrule the President if ,le rejects recommen-dations rmade by the International Trade Commission on ant,-dumpingand escape clause action.

While the Trade Act of 1974 has also liberalized the conditiolns forgranting adjustment assistance to assist domestic industries adverselyaffected by imports, it is the possibilities provided for the use of protectivemeasures that have come to be increasingly utilized. To begin with, therehas been a substantial increase in positive findings in countervailing dutycases; there were thirty-four positive findings in the years 1974-77 ascompared to thirteen in thc preceding 11 years. And, at least in one case,the criteria for imposing countervailing duties have been modified to thedetriment of foreign exporters. 23 The Treasury I'ans even stricter en-forcement in the future, although in many developing countries subsidymeasures only compensate for the effects of domestic protection.

The number of anti-dumping cases has also increased since 1974 andthe recent interpretation of production costs in the exporting cowAftries islikely to give impetus to further increases in the future. Thus, the Treasuryhas established a formula for steel based on the "constructed value" ofJapanese production costs plus an arbitrary markup of 10 per cent forgeneral expenses and another 8 per cent for profits, both of which aremuch aboye the industry average.24

At the same time, the Internatiowal Trade Commission has becomeactive in its investigation of complaints that imports are harmingdomestic industries-even if thís m; ¿y involve encroaching on the territory

0 Tht Treasury has countervailed the imports of bromide and bromide products from Israelthat benefit from regional aids, although only 3 per cent of total production is exported tothe U.S.

24 Business Week, 14 Nov. 1977.

THE NEWV PROTECTIONISM2 417

of othlr goverilmental organizatio¡1s.2 t It issued 42 decisions in 1976 ascompared to 15 in 1975, with the amoount of imports affected rising from$248 ni. in 1975 to $1 9 bilLion in 1976, and suirpassing $5 billion in1977.2f Finally, aitlouigh Preside i.t Carter overrulecd ITC recommen-dations íi scveral cases, some important decisions have favored pro-tectionist interests.

Apart fiom steel anci textiles, particular instances are orderlymarketing agrcements with Japan on color television sets and withKorea and Taiwan on footwear, both. in 1977. In the first case, importswere limited to 1-75 m. sets a year until 1980, representing a 40 per centreduction fromn tlie 1976 level. In tlhe second case, im.port limitationsapply until 1981 and, despite annutal increases in quotas, the 1976 levelwould not be reached by the end of .hc fouLr-vear period or the agreement.The application of protectionisc measures irn tiese well-publicized caseshas, in turn, contributed to demands for protection In industries such ascitizen-band radios, electric ovens, railroad equipment, bicycle tires andtubes, copper, and zinc, amnong which tariffs have already been increasedon citizen-band radios.

The taking of protectionist measures by tie Carter administrationhas been rationalized on the grounds that these help to forestall moredrastic action by Congress. At the same time, according to The WallStreet journal27 "the sentiment in Congress for protectionism is risingagain." This reflects increased protectionist pressures emanating largelyfrom labor,2 8 with labor and industry joining forces whenever theyperceive a common interest. 2 8 a

It should be emphasized that, whatever the outcome, protectionistdemands create uncertainty for exporters. Thus, demands for counter-

11 It has been reported, for example, that ITC( found the Japanese steel producers guilty of"<predatory pricnig" which has bcen defined in a similar wvay as dumping violations that areruled on by the '..reasury (lilashington Post, 15 Jan. 1978). Ir has also been reported that theWhite House objected to the ITC negotiating consent orders between domestic and foreigncolor TV nmakers on its own initiative (Tlie Wall Streetajournal, 25 Nov. 1977). Note furtherthat .ne Message from the Chairman, introducing thc 1976 report of the ITC, speaks of"ari innovative approach to our substantive and administratie duties and . . . considerableprogress in meeting the objectives *vhich the Commission had set as a result of its increasedrole in internationial trade."

11 The WVall St7eet Journal, 25 Nov. 1977."1 29 Dec. 1977.11 In this connectin'n, a statement madc following the December 1977 AFL-CIO Convention

may cleserve quotation-"Although organizecl labor lost its last big fight for imnport pro-tection only thre« years ago, [when the Burkc-Hartke bill went down ji defeat], AFL-CIOofficials say that much has changed since then. The steel, electronies, shoe, textile, andapparel industries liave bcen badly hurt by imports, unecnployment has soarcd, andmultinaticI¡Ial operations have suffered a black eyc ior overseas bribery. TIhe 'new reality'

says a union cconomist is that ulle public no longer perceives protcctionism as a bad thing"(BusinMes Week, 26 Dec. 1977).

"8 a In response to thesc pressures the House of Rcpreseuntatives has organised a 150-membersteel caucus ancd a 229-menmber liber caucus to defend the interests of the steel and textileindustries (The WEall Strect j3aornal, 29 Dec. 1977). More recently, in a joint appeal, businessand labor "callea on the Carler Adnminisira¡ior nald Congress to take 'strong and irnmediate'action to counteract a 'stunning íncrease' in textile, apparel ancd fibre imports" (WashingtonPost, 30June 1978).


vailing or anti-dumping action may induce foreign producers to lirnitexports to the United States for fear of a financial loss in the form of thepayment of additional duties for which they have to put up a bond.29

More generally, even if they ultimately prove unsuccessful, protectionistdemands are reportedly initiated in the expectation that foreign producerswiíll cut back their expansion plans for the U.S. market.30

Protectionist pressures have also increased in Western Europe, inparticular in Britain and France. In Britain, the Cambridge Group has7r7-vided theoretical justification for the protectionist attitude taken bythe Labour government3' while in France protectionism has politicalbacking from the right as well as from the left. Notwithstanding the gener-ally liberal attitudes in Germany and Italy,32 the position taken by thesetwo countries has apparently greatly influenced the Common MarketCommission, as evidenced by the imposition of strict limits on theimportation of textiles and clothing as well as by increased reliance oiicountervailing and anti-dumping legislation.33

At the same time, while the application of protectionist measures inthe United States is circumscribed by legíslation, in Western Europe aswell as in Japan, protectionism often takes the form of discretionarymeasures by national governments. Such "occult" measures, which donot find theír origin in legislation, present a particular danger for foreigncountries, and especially to developing countries, both because legalrecourse is lacking and because they create additional ur&crtainty.

Limiting attention to protectionist measures actually taken by theindustrial countries, one may cite an estimate by the GATT Secretariat,according to which the application of these measures over the last twoyears has led to restrictions on 3 to 5 per cent of world trade flows,amounting to $30-50 billion a year.34 Reference may further be ¡nade toa list prepared by the Taiívanese government on restrictions affectingmanufactured exports. The list includes one item for 1975, nine iteríis for1976, and 33 items for 1977, of which seven are still under investigation.

Government Aids lo Industry

Prior to the oil crisis, government aids were used in the majorEuropean countrics as well as in the United States principally in favor of

"1 A case in point is the imposition of anti-dumping duties, amounting to $46 m. in March1978 on japanese-made television sets imported in 1972 and 1973.

SO An example of apparent harassment of forcign exporters ¡s the sinultaneous initiation ofcountervailing, anti-durnping. dnc escape clause action against imports of bicylc tires andtubec fromn Korca.

81 Cf. e.g. Le Mo'd,, i Apr, 1978 anrd Tk Wall Street journal, 24 Apr. 1978.$ On the latte~r, see the favorable reactior.s in the Italian press to the author's specch on the

"Tircwr lprotcc'sonisn" on 31 Mar. 1978.$ The Econom:si (24 Dec. 1977) reports on the increasing number of anti-dumping cases in

the EEC and the ínercase in the "Coynmission's anti-dumping staii' from threc to 10 to copewith the burgeoning work load."T' The New York Times, 23 Sept. 1977.


the sliipbuilding ind.ustry. Furthermore, regional aids provided inWestern Europe benefited certain industries that are concentrated indepressed regions.

Government aids, often granted under the heading "rationalization",have come into greater use sincc the 197+L75 recession. They take avariety of forms, incltiding direct subsidies as wcll as prefercnltial tax andcredit trcatment, These aids provide indirect protection to domestieindustry by reducing its pro¿ uction or sales costs.

The Gcrman government provides 75 to 90 per cent of the differencebetween the full-time wage and the wage earned by workers who had tohb put on a part-time basis because of unfavorable business conditions.This scheme subsidizes weak industries indirectly as they are likely to haveproportionately more part-time workers. In turn, other Europeancountries have directly or indirectly subsidized employment. Thesemeasures together with the introduction of regulations making it difficultto fire workers, have contributed to labor hoarding.

A case in point is the British Temporary Erniploy,rncnt SubsidyScheme that compensates firms for keepÁng workers on the job who wouldotherwise be no longer needed. In 1977, about one-half of benefits underthis scheme accrued to textiles, clothing, anid footwear industries thatreportedly received a subsidy equivalent to about 5-10 per ccnit of theirtotal production cost. At tlhe same time, as Tite Economist3 5 notes, littleeffort has been made to put pressure on subsidized companies torationalize their operations. It would appear, then, that the subsidyprovides an additional protection to the three industries without contri-buting to adjustment.

While employment schemes are not industry-specific, they cend tobenefit labor-intensive industries which have higher than averageunemploymnent rates. In several countries, government aids have alsobeen provided to specific industries. This is the case in particular in Frn'cewhere the automobile, data-processing, pulp and paper, steel, and watchindustries have received various forms of goverri-int aids. Whatevertlteir avowed purpose, these aids will shore up, and hence protect, weakindustries that find it difficult to face foreign competition. The takeoverof insolvent firms by the government, and the financing of their deficits aswell as the deficits of other state-owned firms froiñi public funds, have hadsimilar effect in Italy.

Government aids applied by the individual Corm-ion Marketcountries discriminate against imports from members as well as fromnon-member countries. In turn, in several instances, actions have beenproposed, or have actually been taken, on the Common Market level.To begin with, the EEC steel industry has a legalized cartel, Eurofer,which ensures compliance with minimum prices and also sets quotas for

1 14Jan. 1978,


market sharing among producers. Furthermore, the Common Markethas provided financial aid to the steel industry under the Treaty establish-ing the Coal and Steel Community; the regional fund will reportedly bedoubled between 1974 and 1981, in large part to provide assistance to thesteel industry; and the EEC Commission is preparing a sectora.l policy forsteel.36

The Common Market countries have also taken, or contemplatetaking, joint action on shipbuilding and synthetic fibers. For one thing, theEEC Commission has demanded thatJapan cuts back its exports of ships3 7

and proposals have been made for establisliing a credít scheme aimed atfinancing dcomestic shipbuilding. For another thing, it has been proposedto establish :. production cartel for synthetic fibers, and "a common marketplan to ea; e the financial pain of redundancies"3 8 is reportedly inpreparatior.

Apart from shipbuilding where subsidies have long been used, underthe Soloraon-plan the United States will use a variety of measures,including loan guarantees, accelerated depreciation provisions, andsubsidies to research, to aid the domestic steel industry. Also, a variety ofexport promotion measures are reportedly under consíderation. 39

In Japan, a bíll containing special measures for aiding certainindustries in difficulties was introduced in February 1978. The bill aimsat providing assistance to the aluminum, shipbuilding, steel, and syntheticfiber industries, formalizing and extending aids that have been providedin the past. Its application may also be extended to other industries, someof which have been beneficiaries of government assistance in the past.40

International Cartels and Market-Sharing

While government aids under the guise of the rationalization ofdomestíc industries have led to moves airred at cartelization in the steel,shipbuilding, and synthietic fiber industries in the European CommonMarket, suggestions have further been made for cartelization on theworld level. In this connection, reference may be made to statements by

11 Tbie Economist, 15 Oct. and 31 Dec. 1977."7 Ibid., 31 Dcc. 1977.38 Ibid., 15 Oct. 1977.

According to the New rork Times, (2 Apr. 1978), these include "fast writeoffs when com-panics develop ncw facilities to serve export riarkets, tax credíts for those that establíshforeign sales offices, a new tax program on exports tailored principally for medium-sizedcompanies, a system of information-exchange to promote greater cxports, a Govcrnmentloan program for companies that introduce a new product line for exports, and a bcefed-upoperation (in money and personnel) for the existing Commerce State c5zport-developnientactivities."

40 It has becen reported, for example, that "when the fast-growing computer firnms in japanbegan to have difficulties with their cash flow situation, theJapanese government organizeda leasing company to buy computers and handle the ¡easing, thus providing a fast injectionof cash and reducing the ongoing capital burden.' (H. B. Malmgren, "International Orderfor Publi. Subsidies," Tham,s Essay No. 11, London, Trade Policy Rescarch Centre, 1977,p. 24.)


Raymond Barre, the French Prime Minister, "to define collective rulesfor an orderly growth of international trade . . "'41 ii the framework of"a genuine organization of international trade" and "organized liberal-ism" .42 It haG been proposed that the definition of "collectively definedand applied rules which will generate conditions for growth security anddependability in trade . . . should be one of the main objectives of theinternational negotiations to be held in the coming months; they mustnot simply repeat the negotiations of the last 20 years." 43

Negotiations on the organization of international trade would covera variety of industries, including steel and shipbuilding that have ex-perienced worldwide overcapacity; some sophisticated industries, such asaircraft and computers, where the United States is in a particularly strongposition and infant industry arguments are invoked in favour of Europeanprodiuzers;"4 as well as industries such as textiles, shoes and electronics,where competition on the part of developing countries and Japan isfeared.45

While the French government proposaLs ¡nay have aimed at takingthe wind out of the sails of the domestic opposition and have not againbeen voiced since the parliamentary election. held in March 1978, movestoward the establishment of world-wide carte1s have been made in theshipbuilding and steel industries. In the shipbuilding industry, marketsharing arrangements have been proposed in the framework of theOrganization for Economic Co-operation and Development (OECD)that would entail a division of new orders between the European countries,Japan, and the developing countries, together with increases in the pricescharged by Japanese producers.4 6 In the steel industry, earlier reportsthat a steel working-group established in the framework of the OECD is"planninlg to unveil a model for an international system to monitorprices, trade, and structural changes in steel industries in the membercountries [that] could provide the basis for 'sectoral' talks on steel . . ."47,have been given credence by meetings of United States, Common Market,

41 Statement made at the National Press Club in Washington on 16 Sept. 1977 and quoted inthe press release of the French Embassy.

"F Foreign Trade Minister André Rossi in LU Monde 27 July 1977 and Raymond Barre in thejournal de Gencue, 15 Sept. 1977.

4' journal de Gen¿ve, 15 Sept. 1977-As noted above, the negotiations of the last 20 years haveled to a considerable expansion of trade and economic growth through trade.

" According to Raymond Barre, "when a country develops a sector that is indispensablc tothe structural equilibrium of its economy but unable to mect normal competition until itreaches a sufficient size, that country may rightfully take such steps as are necessary toprotect this activity from being destroyed while it is vulnerable" (journal de Gencve, 15 Sept1977).

'1f As Raymond Barre expressed it, "France cannot allow international competition to developunder conditions that would throw its economic structures into confusion, bring about thesudden collapse of whole sections of its industry or agriculture, put thousands of workersout of work, and jeopardize its independence by eliminating essential activities" (L'Aurore,25 Mar. 1977).

4"Business Week, 5 Dec. 1977." Ibid., 28 Nov. 1977.

4


and Japanese officials allegedly aiming to establish a " world steel agree-

ment" 48

III. TIE "NEW PROTECTIONISM": AN EVALUATION

The Effects of the Measures Applied

The preceding section examined the emergence of the "new pro-

tectionism" in the dzveíoped countries since the oil crisis and the 1974-75

recession. It has been noted that the "new protectionism" is characterized

by the employment of non-tariff restrictions on trade, the granting of

government aids to domestic industries, with further attempts made at

organizing world trade. Ihis contrasts with the' "old protectionism" that

involves placing reliance primarily on tariffs. At the same time, various

considerations indicate the superiority of tariffs over the measures

employed, or proposed to be used, under the aegis of the "new

protectionism".To begin with, tariffs are instruments of the market economy.

Consumers make their choice between domestic and imported goods and

among alternative foreign suppliers on the basis of price, quality, delivery

dates, and other product characteristics, and domestic as well as foreign

producers compete in the market without government interference or

quantitative limitations. Also, tariffs do not inhibit shifts in uj ade patterns

in response to changes in comparative advantage that are reflected by

changes in relative costs.In turn, non-tariffmeasures interfere with the operation of the market

mechanism by restricting consumer choice and limiting competition

between domestic and foreign producers. The use of non-tariff measures

also involves administrative discretion that introduces arbitra.Lness in the

decision-making process, when the decisions actually taken are affected

by the relative power positiori of various growt 7ta With consumer groups

generally having less influence on decision maklng than pressure groups

representing various segments of labor and business, then, the new

protectionism involves a bias towards restrictive measures.

At the same time, limiting imports in quantitative terms increases

the market power of domestic producers, thus enabling them to raise

prices, when restrictions applied to raw materials and intermediate

products may spread forward as users seek to offset the higher prices of

their inputs.49 Also, incentives for improvements in productivity are

' The Economist, 29 Apr. 1978.4I These conclusions also apply to the use of reference prices as an instrument to limit imports,

as evidenced by the 5 5 per cent increase in trigger prices on steel as of July 1, 1978 and

the demands for the imposition of trigger prices on wire products in the United States. It

has been suggested that steel-using industries will also request increased protection, since

"distortions arising in steel affect the international competitive position of all steel

users-frorn producers of nuts and bolts to manufacturers of sophisticated machinery"

(JVew rork Times, 11 May 1978).


reduced as a result and there is a tendency to freeze production patterns,thereby obstructing changos in international specialization according toshifts in comparative advantage.

Quantitative limitations on trade interfere with the market mechan-ism in the exporting countries, too. With allowed exports falling short ofthe amount producers would like to sell at the going price, thcy maycollude or the government may apportíon among them the amount thatcan be exported. This, in turn, may entail discriminatory pricing, withhigher prices charged in export than in domestic markets. Foreign firmsmay also attempt to evade the restrictions through additional processing(e.g. steel), changing the basic material used (e.g. textiles), or shifting theplace of production to countries which enjoy preferential treatment(e.g. television sets).

Apportioning quotas among exporting countries also involves inter-ference with the market mechanism. Maintaining historical marketshares in the allocation process discriminates against new exporters whilechanging market shares is subject to discretionary decision-making. Atthe same time the decisions taken will be influenced by the bargainingpower of the importing country and the actual and potential exporters,respectively, generally favoring larger countries over smaller ones.

In cases where both parties can inflict damage, the possibility ofretaliation will arise. An example is Australia thrc ateniing to imposeembargo on uranium in retaliation to European restrictions on steelimports. A retaliatory motive is also apparent in the imposition ofantidumping duties by the Common Market on kraftliner-paper importedfrom the United States in early 1978 as the U.S. had used similar measuresagainst European steel products.

There is further the danger of a cumulative process. Thus, whileGeorge Meany, the Secretary General of tho AFL-CIO called for "fairtrade-do unto others as they do to us, barrier for barrier, closed door forclosed door,"5 0 measures taken by the United States for alleged offenses byothers are bound to elicit foreign reactions. Apart from retaliation, thismay take the form of imitative action as in the case of the imposition oftrigger prices in the framework of the so-called Davignon Plan for theCommon Market steel industry.

International trade is also affected by government aids to domesticindustry, which have come into increased use in recent ycars. Apart fromdistorting competition among firms located in different countries, theseaids represent a further increase in the role of the state in economic lifeand extend the scope of bargaining. Thus, the government may wish toobtain a quid pro quo for its aid in the form of stipulated levels of employ-ment, the regional allocation of production etc. At the same time, withinparticular industries, inducements are provided for collusive action to

'0 Business WVeek, 26 Dec. 1977.


divide up the "spoils" and to increase bargaining power vis-a-vis thegovernment.

Moreover, government aids become the subject of policy competítionin the international arena. This first occurred in the case of shipbuildingas, Japan excepted, substantia,l subsidies have been provided to theindustry in all producing countries. Policy competition has further beenextended to new technologically advanced industries, such as computersand integrated circuits and, more recently, to some "old" industries, suchas steel and textiles.

Note may further be taken of implicit subsidies provided in the formof preferential export credits where, despite the efforts made, the co-ordination of policies has not been accomplished. In fact, export pro-motion measures are coming into increasing use, as evidenced by astatement made by K. H. Beyen, State Secretary for Economic Affairs inthe Netherlands: "Rather reluctantly, we have been forced to give acertain -n,ount of assistance to our exporting industry when it is threatenedwith disto¡ tion of competition by measures taken in other count¡ies."51

The dangers of policy competition were first recognized by FichardCooper in the mid-sixties, when this existed only in an embryonic ff rm. 52

More recently, Assar Lindbeck pointed to the dangers of the trend towardsgreater government intervention and policy competition. In Lindbeck'sview, "It could be reasonably argued that future conferences on inter-national trade should perhaps concentrate on reducing various selectivesubsidies rather than cutting tariffs. That would have the additionaladvantage of perhaps stopping, or even reversing, the enormous con-centration of economic powers to central planning administration andpoliticians, whicn is perhaps the major consequence for our societies ofselective interventions."53

The international organization of trade has been proposed, in part,in order to limit policy competition. It also represents a natural outgrowthof collusive action on the national level, inasmuch as national cartelswould have limited power in an international economy characterized bystrong trade ties among the countries concerned. Orderly mar!'etingarrangements and other forms of quantitative restrictions, entailing thedivision of markets among exporting countries, too, gave an impetus tothe international organization of trade.

These developments are apparent in the European Common Market,where measures taken on the national level to provide financial aid toparticular industries and to limit imports have given rise to efforts at

bl Barron's 24 Apr. 1978."R. N. Cooper, The Economics of Interdqpendence: Economic Policy in the Atlantic Community, New

York, McGraw Hill, 1962.S Assar Linabeck, `Economic Dependence and Interdependence in the Industrialized

World," in From Marshall Plan to Global Interdependence, (ed. L. Gordon), OECD, Paris,1978, p. 82.


cartelizatiori ancl trade restrictions on the Common Mlarket level. Pro-posals foir cartelization hav,e come from the EEC Commission in the guiseof the rationalization of industry as well as frorn industries that expect tobenefit from cartelization. Apart from the shipbuilding, steel, andsynthetic fibers industries, sucli proposals have RLen put forward ini regardto aututnli)I)i(e,, chemicals, and shoes, and more recently for zinc, pulpand paper, a.nd even hosiery. 54

The Common Mfar ket experience points to the tendency of carteliza-tion to spread among- industries. This may occur along the chain ofinput-output 1cla;tiolisliips as the cartciization of an iniput-producingindustrv afl?rcts the costs of the input-ising industry, or, in the form ofimitative behavior. At the same time, cartelizatioii tends to engenderprice increases5 4 a Wllile hlindcring long-run improvements in productivitythat may have been its raison d'étre in the first place. This is because, undermarket-sharing arrangements, producers would derive little benefit fromimproving productivity as they are enjoinecl from expanding their sales,whereas higher-cost firms can continuc their operations without having tofear competition from lower-cust rivals.rt

An oft-cited example is the limitations imposed on the sales of smalland medium-scale steel producers in Italy's Brescia region, who producereinforcing rods and various other steel products in the framcwork of theEEC stecl cartel. Iii ani effort to maintain market shares, larger firms inthe EEC countries that had higher production costs objected to sales bythe Bresciani producers at low prices. The process of bargaining, in turn,has been affected by political considerations, in part because several of thehigh-cost firms are state-owned and in part because the governments ofthe individual countries wish to defend the interests of their nationalindustries.

The difficulties multiply if the organization of trade or production isattempted on the world level, where the decisions concern not only thedivision of markets amnong the producers of a single country or of theEuropean Common Market but among producers of the major developedand developing countries. Bargaining and international politics will nowincreasingly take the place of market forces, with a tendency to freezeexisting patterns, thereby discriminating against new producers, ob-structing changes in comparative advantage, and foregoing the benefitsthat may be obtained from shifts to lower-cost soulrces.

Finally, reference may be made to the cornplications introducedwhen the organizatioin of trade is undertaken in industries characterized by

1' Business Week, 27 Mar. 1978, anid Tlw E,'cotnomist, 27 May 1978.'la In this connection, note that prices actually paidl or steel as opposed to list prices, reportedly

increased by 7 to 20 per cent in the EEC betwe(rn Nov. 1977 and Apr. 1978 while there waslittle change in sales (The Economisl, 13 May 1978),

5For an excellent discussion, see ja¡¡ Tumnlir, "The New Proteceionisín, Cartels, and theInternational Economnic Order," op. cit.


product differentiation. Thius, in making comparisons with the Multi-

fibre Arrangement, the view has been expressed that for an international

agreement on steel "to be foolproof, the list of alloys and specifications

would be so vast that any deal might well sink under a sea of paper".66

The Employment ArgumentThe deficiencies of national and interniational cartels are well-

illustrated by the experience of thc depression of tite tlhrties. 57 However,

just as in tite thirties, the argulT¡ent has been put forward that there is

need for cartelization for the sake cf employment that is threatened by

foreign competition.In recent years, employment argumnents have been directed largely

to the developing countries tliat are said to be cncroaching on the markets

of the developed nations and to have contri' uted to unemployment in the

latter. This contention leaves out of account the increase in employment

that is generated in the developed natic ns' through their exports of

manufactured goods to the developing countries. In fact, since the oil

crisis, these exports have increased more tlian the imports leading to a

substantial improvement in the trade balances of the developed nations

with the non-oil producing rdeveloping couintries in manufactured goods.

The relevant figure for 1973 and 1976 are $3 0 and $5 3 billion in the

United States, $11 '3 and $1 65 billion for tlie European Common

Market, and $7 7 and $13 2 billion for Japan.5 8

It may be conjectured, then, that during the period of the 1974-75

recession and its immediate aftermath, employment in the developed

nations actually benefited from trade in manutactured goods with the

non-oil producing countries. Tlhis result reflccts the fact that the develop-

ing countries spend practically all their foreign exchange earnings and

that they have borrowed additional amounts on foreign financial markets.

Such borrowing, and the continued economic growth of the developing

countries, are in turn predicated on their success in exporting.Note further that tlie developing countries have assumed increasing

importance as markets for the manufactured exports of the developed

nations. In 1976, the share in these exports, excluding trade between the

United States and Canada, as well as within and between EEC aiid

EFTA, was 27 9 per cent for the non-oil producing developing countries

and 45 7 per cent if exports to the oil-producing developing countries are

added. 59

It appears, t}ien, that the developed nations have benefited from the

continued econorn'c growth of the developing countries during and after

56 The Econornist, 12 Feb. i977.67 Cf. e.g. C. D. Edwards, "International Cartels as Obstacles to International Trade,

American Economic Review, Mar. 1944, pp. 330-39 and B. F. Hoselitz, "International Cartel

Policy," 3oJurnal of Political Econony, Fcb. 1947, pp. 1-28.68 GATT, International Trade, 1976-77, Geneva, 1977.11 United Nations, Monthly Bulletin of Statistics, Feb. 1978.


the 1974-75 recession. As these conclusions refer to export and import-competing industries combined, one further needs to consider, however,the employment effects of trade on import-competing industries. Availabledata indicate that fears on the loss of employment in these industries, too,have been exaggerated.

Thus, the findings of various studies irndicate that the decline inem.ployment due to import competition is generall.y small compared tothat due to teclinological change. According to the resu.lts of studiessponsored by the International Labour Office, the total elimination ofbarriers to imports from developing countries would lead to a 1 5 percent decline in manufacturing employment spread over 5-1 0 years in thedeveloped countries. 60 Bvy Lo,kitrast, technological change associated withincreases in productivity entails an annuial displacement of labor of 3 to 4per cent.

These findings have been confirmed by studies of British industriesthat are particularjy sensitive to import competition. Thus, "detailedanalyses of the Lancashire cotton textile industry and Dundee jute pointto the dominant role of technical change-in the form of competitionfrom synthetics in both cases and, for cotton textiles, from labor-savinginvestment-as a cause of labor displacement." 6 1 Qn the basis of morerecent data, the conclusion is reached that "it is diicult to suggest thatany labor-intensive sector exceot men's shirts and suits suffered between1970 and 1975 from exceptionally damaging import growth" and that inthe textile yarn, fabrics, clothing, and shoe industries, taken together,"productivity growth emerges as twice as important as trade factors injob replacement", when "the job loss annually from ldc import com-petition (less exports to ldcs) is little more than 1 5-2 per cent in theworst case, clotling, 0 8 per cent annuially for cottoin textile fabrics, 0 4per cent for footwear, and negligible for textile yarn."162

Also, during the 1963-71 period in the United States, "The loss injob potential in import-competing industries due to foreign trade hasaveraged about 44,000 jobs per year-about 0 2 per cent of total manu-facturing employment and an even more minute fraction of the total U.S.labor force. The loss ofjob potential due to increased labor productivitywas about six to nine times as great as the loss due to foreign trade inimport-competing industries." 63 At the same time, onc-half of the esti-mated job loss was related to imports from developing countries.

10 C. Hsich, "Measuring the Effects of Trade Exp-insinn on Employmcnt: A Review ofSome Research," International Labotar Review, ja¡i, 1973,

'1 Cited in Vincent Cable, "British Portectionism andí Lclc. Irnports" ODI ReuieCW, 1977 (2),p. 38. The relevant references are Caroline Miles, Lancashire Textiles. A Case Sudy ofIndtustrial Changes, Cambriclge University Press, 1968 and S. McDomell, P. Draper, andA. McGuinness, "Protection, Tcehnological Change and Trade Adjustnclit: The Case ofJute in Britain," OD Review, 1976 (1), pp. 43- 57.

61 Cable, op. cit., pp. 38-41."1 Charles R. Frank, Jr. Forcign Trade and Domestic Aid, Washinigtonr, D,(:., The Brookings

Institution, 1977, p. 36.


Employment losses associated with increased imports from developingcountries are likely to have been largcí in recent years. Howcver, it

should be recognized that, with thesc coun-tries spending practically alltheir foreign exchange earniings, restrictions on ímports from the develop-ing countries only shift unemploytruent from import-competing to exportindustries in the developed nations. Now, as the former rely more onunskilled and the latter on skilled labour, the upgrading of the laborforce of the developed countries is obstructed as a result, leadinig to lossesin real incomes. As Jan Tumlir eloquently expressed it, `Unemploymentis fungible; the jobs xvhich protection couild save at the import-competingend of the industrial spectrumn wotulcl be balancecl out by thejobs foregoneat the exporting end. The latter are higher productivity jobs requiringbetter education, high skills Protection thuls restricts an economy'scapacity to provide adequate employment for the higher skilled andbetter educ-ted . . ." 64

IV. CONCLUSIONS AND PoI,IcY RECOMMENDATIONS

The Risks of Protectionism

It has been shown that considerable progress wvas made in tradeliberalization during the postwar period until the oil crisis and therecession of 1974-75. The developed couíntries eliminated quantlcativeimport restrictions imposed during the second world war and substantiallyreduced tariffs on raw materials and on manufactured goods. Further-more, an increasing number of developing countries adopted export-oriented policies, accompanied by redtuced protection.

Trade liberalization led to the rapid growth of world trade. Theexpansion of world trade, in turn, contributed to economic growth indeveloped and developing countries alike. For one thing, export ex-pansion favorably affected the growth performance of the developednations. For another thing, cconomic growth in the developed nationswas transmitted to the devcloping countries through trade and providedopportunities to these countries to successfully carry out export-orientedpolicies.

The experience of the first three postwar decades contrasts with thatof the depression in the nineteen-thirties, wlhen the imposition of non-tarifl barriers, the "rationalization" of production, and the establishmentof international cartels contributed to the decline in world trade.-i Thenon-tariff barriers employed during the depression included increasedreliance on countervailing and anti-dumping duties, as well as formal and

'Jan Tumlir, "Can the International Economnic Order be Saved?" The WVorid Economy,Oct. 1977, p. 18.

66Between 1926-29 and 1931-35 world tradc in manuractured goods fell by 28 per cent(League of Nations, Indtstrializaíion andForeign Trade, Geneva, 1945, p. 157)-As beforehanddata are expressed in constant prices.


informal (or "voluntary") quotas.66 Governments also provided aid totheir industries in the guise of rationalization and a number of inter-national cartels were formed.67

It has been estimated that 42 per cent of world trade between 1929and 1937 was cartelized or was subject to cartel-like arrangements. 68 TheLeague of Nations reports that "international cartels have actually beenestablished in all branches of industry and at practically all stages ofproduction, from industrial raw materials to different types of producers'and consumers' finished goods; minerals and metat; and their products;wood, wood-pulp and different kinds of paper; textiles; chemical andpharmaceutical products; glass, earthenware and porcelain; electricalgoods, etc. Among the products covered by international cartels, manu-factures are preponderant." 6 9

Non-tariff measures and government aids have again come intoincreased use since 1974 and efforts have also been made to establishinternational cartels and cartel-like arrangements. The employment ofthese measures has, in turn, contributed to a slowdown in world trade. Inparticular, while world trade rose by 1 1 per cent in 1976, the increase wasonly 4 per cent in 1977 when protectionist actions increased.

The comparisons with the nineteen-thirties should not be interpretedto mean that the measures applied in recent years would be comparablein magnitude. Also, there is still hope that the Tokyo-round of tariffnegotiations will succeed. But, tariffs pale in importance compared to themeasures of the "new protectionism". Moreover, the experience of thenineteei-thirties indicates the economic costs involved in the applicationof these measures and the danger that they will multiply throughretaliation and imitation.

Policies for Long- Term GrowthJust as in the nineteen-thirties, protectionist measures have been

invoked on the grounds that imports are responsible for the loss of jobs.This argument is obviously incorrect as far as trade among the developedcountries is concerned as the expansion of this trade does not lead, onbalance, to a decrease in employment opportunities in the developedworld.

Nor is the argument valid as far as trade with the developingcountries is concerned. Between 1973 and 1976, the exports of manu-factured goods from the developed nations to the developing countriesincreased substantially more than their imports of manufactured goods

1S P. W. Bidwell, The Invisible Tariff, New York, Council on Forcign Relations, 1939, chs.IV and V.

"Cf. e.g. G. W. Stocking and M. W. Watkins, Cartels in Action, New York, Twentieth CenturyFund, 1946.

"Frederick Haussman and D«niel Ahearn, "International Cartels and World Trade, anExplanatory Estimate," Thought, Fordham University Qlarterly, Sept. 1944, p. 429.

69 League of Nations, International Cartels, Lake Succeis, N.Y., 1947, p. 3.


from these countries. It would appear, then, that manufactured tradewith the developing countries is likely to have been favorable, rather thanunfavorable for employment in the developed nations. Also, availableevidence indicates that in import-competing industries the loss of jobsdue to increased imports has been relatively small compared to the effectsof technological change.

The high rate of unemployment in the developed nations, then,cannot be attributed to international trade. Rather, unemployment hasbeen the result of the policies applied by these countries, which haveunfavorably affected domestic production and investment in particular inWestern Europe and Japan.70 Nor can one expect that protection wouldreduce unemployment; it will only shift unemployment from lower-skilledlabor used in import-competing industries to higher-rikilled labor used inexport industries.

Apart from ernployment considerations, the desire on the part of theindividual countries to improve their balance-of-payments position hascreated pressures for the application of protectionist measures. We find a"fallacy of composition" here as protectionist actions taken by any onecountry can improve its position only temporarily as the OPEC surplusmust be matched by the collective deficit of the non-oil countries.

At the same time, the taking of protectionist actions by a number ofcountries simultaneously cannot fail to be detrimental to all. Nationalincomes will be lower as a result since resources are not used to bestadvantage and potential economies of scale obtainable in export industríesare not exploited. Furthermore, protection reduces the pressure forproductivity improvements in import-competing industries whereaspossible improvements in export industries are foregone.

The application of protective measures is also likely to adverselyaffect investment activity in the developed nations. While protection maynot lead to increased investment in high-cost import-competíng activitieswhich have a precarious existence, it may discourage investment in low-cost export activities which suffer discrimination under protection. Thedirect subsidization of high-cost activities from government funds willhave similar effects by syphoning offfunds that could have otherwise beenused [or investment in low-cost activities.

While protection tends to lower the rate of economic growth throughíts adverse effects on national income and investment activity, measuresaimed at accelerating economic growth would lessen pressures forprotection. Such measures, involving increased inducement to investmentand lessening the rigidities introduced through government measures andlabor legislation, would have to be carried out with special vigor in thcsurplus countries, particularly Germany and japan, both to offset the

70 Cf. Bela Balassa, "Resolving Policy Conflicts for Rapid Growth in the World Economy",Banco Nazionale del Lavoro Quarterly, Sept. 1978.


deflationary effects of the appreciation of their currencies and to reduceasymmetries in the balance-of-payments of the developed countries.71 Atthe same time, it should be recognized that the deficit vis-a-vis OPEC isnot immutable as there are possibilities for reducing t1-e imports of ener.This would require, in particular, the adoption of appropriate policies inthe United States to lower the consumption, and to increase the pro-duction, of energy.

Problems of AdjustmentIt has been conzluded that, in lcading to higher incomes and employ-

ment, growth-oriented policies would reduce j:rotectionist pressures inthe developed countries. In turn, the avoidance of protectionism wouldcontribute to economic growth that requires a continuing transformationof the industrial structure, entailing shifts from lower to higirer produc-tivity activities.72 This conclusion also applies to the developing countrieswhose economic growth depends to a considerable extent oni the avail-ability of trade opportunities in the developed countries as well as ontheir own policies for making use of these opportunities.

More generally, trade permits economic growth to proceed in theworld economy through shifts in product composition. This entails thedeveloped countries increasingly specializing in research and technologyintensive products; the semi-industrial developing countries upgradingtheir exports which are now based largely on unskilled labor; and the lessdeveloped countries proceeding to export unskilled-labor intensivemanufactures. 73

Structural transformation cannot proceed smoothly and createsproblems of adjustment in industries that declinc in absolute or in relativeterms. Adjustment problems, in turn, have often given rise to efforts toreduce the speed of adjustment. This has been the case, in particular,when adjustment in developed countries was presumed to have beentriggered by increased imports.

The objective of reducing the speed of adjustment has been pursuedby the measures of the "new protectionism" as well as by adjustmentassistance as it has been applied in practice in most developed countries.Thus, in reporting the results of a comparative stiidy, Goran Ohlinconcludes that "adjustment assistancc 3ccnis in practice often designed tobolster the defences against imports rather than to clear the ground forthem [and] public policy has sought to delay the transfer of resources."74

In this connection, several questions need to be raised, including the11 For a detailcd discussion, cf. ibid.72 On this point see R. Blackhuirst, N. Marian, and J. Tumlir, "Trade Liberalization,

Protectionlismn anid Intt rd(Iependence," GATT Siudies in International Trade No. 5, Gcneva,Nov. 1977.

73 Cf. Bela Balassa, "A 'Stag,(s' Approach to C1omparative Advantage," World Bank StaffWorking Paper No. 256, \S'ashiigton, D1C., May 1977.

7' OECD Development Rescarch Centre, Adjustmentifor Trade: Siudies on Industrial AdjustmcntProblemns and Policies, Paris, 1975, pp. 9, 11.

432 JOURNAL OF WORLD TRADE LA.W

appropriate purpose of adjustmerit policies, the choice between import

restrictions and adjustment assistance, as well as the choice of the par-

ticular measures to be employed. These questions will be taken up briefly

in the context of the industrial transformation of the developed countries.As to the first question, adjustment policies that artificially bolster

employment arid raise profitability in high cost industries by reduciitg

the cost of labor and other inputs or by increasing the price received by

prW-,ucers, run counter to the process of industrial transformation that is

necessary for continued growth. Rather, policies should aim at promoting

the movement of resources from lower to higher productivity activiRies,Nor shouid one sinmle out imports as being the cause of reduced

employment and profit¿ ._ity as, more often than not, this has been the

result of technological change. Also, it is incorrect to argue that losses

suffered by domestic nationals due to inereased imports require different

treatment than losses due te ¿echnological change on the grounds that the

beneficiaries are foreign nationals in the first case and domestic nationals

in the spcond. In fact, with higher imports leading to increased exports in

the process of adjustment, t"e beneficiaries will be domestic nationals in

tlhe first case, too.In view of these considerations, it is preferable to use adjustment

assistance rather than import restrictions to case the problems of adjust-

ment to changing conditions in domestic industry. The question remains,

however, what kind of adjustment measures, and government aids in

general, should be utilized for this purpose.It has been suggested that the measures applied should promote the

movement of resources from lower-productivity to higher-productivityindustries. This is in the interest of the developed countries as it contri-

butes to improved resource allo, tion and rapid economic growth. It is

also in the interest of the developing coullntries because of the gains they'

can obtain through international specialization. The community of

interests is further enhanced by reason of the fact that, in contributing to

the foreign exchange earnings of the developing courtries, the application

of the proposed rneasures would permit them to avoid high--ost import

substitution policies that would have adverse effects for all.The described objectives would be served if, rather than subsidizing

production and employment in high-cost industries, the developed

countries were to encourage the expansion of efficient activities and

ensure the transfer of resources to these activities. Appropriate measures

-clude reducíng governr,,ent-induced rigidities in labor rr '^kets,

retraining workers, and promotíng research and development.

Establishing an International Code of Good Conduct

It has been concluded that adjustment assistance will be preferable

to import restrictions for easing the adjustment of domestic industries.

THE NEW PROTECTIO,IISIM 433

Nevertlelcss, adjust-nent assistance may not carry thc entire burden,especially if suddcn changes in trade flows occLir, necessitating the use ofsafeguard measures to limit the groswth of imports. At the same time, theapplication of these mcasures should be madc subject to internationally-agreed rules.

Article XIX of GATT provides an interniationial code for the appli-cation of safeguard measures. Thlis article has rarely been applied, how-ever, in part because a country invoking it risks retaliation and in partbecauwP import restraints are to be imposed in a non-discriminatoryfashion. Rather, countries have invoked safeguard measures by unilateialaction or on a bilateral basis.

Article XIX would nteed -o be reinterpretecl, so that it becomescredible instrument whichi can replace presently applied national safe-guard measures. One should also avoid making it overiy restrictive.Fin Aly, safeguards should remain temporary, which is not the case underArtdcle XIX.

These objectives wotuld be served by retaining the "injury clause" inArticle XIX while leaving it to appropriately constituted institutions inthe individual countries to judge whether injury has been sustained orthreatened and to determine the measures to be employed. Decisions bynational bodies should, however, be subject to multilateral surveillancein the sense that exporting countries would have the right to retaliate ifan internatíonal committee established for this purpose finds that safe-guard action was not warranted or the measures used were excessive.

Also, while it would be desirable to maintain the non-discriminatoryapplication of safeguard measures, at the minimuni no exporter should berequired to reduce its share in the domestic market of the country con-cerned. At the same time, imports from new developing countryproducers should not be subject to limitations. Finally, the temporarynature of the safeguard measures would be expressed by their limiteddutation in time; the progressive liberalization of import restrictionsduring the time period of their application; and the exclusion of thereimposition of the safeguard measures.7 5

Export subsidies, too, are s. bject to international rulles underArticles VI and XVI of GATT. However, there would be need toestablish stricter obligations for developed countries and to introduceexceptions for developing countrics. At the same time, these exceptionswould be circumscribed so as to ensure that the subsidies applied bydeveloping couintries compensate for, hut do not create new, distortions,with progressively stricter rules applying when developing cotuntriesshowed superior competitiveness in some products. And, finally, inregard to expert subsidies other than thos: for which developing countries

'5 On the last point, thc paper follows suggestions rnade in an unpublished mnemorandum byIsaiah Frank.


are granted exceptional treatment, it would be desirable to make claims

for injury subject to internationally agreed rules, withl initernationalsurveillance of the manner in whiclh they are aJmilnistcrclcd.

It would further be desirable if, in additloni to safeguard measures

and export siibsidies, the international code of good conduict covered

adjustment assistance and governmintc aicls in general. Th-is is because

governinent aids affect foreign producers in rlomnestic anld foreign markets

and they have increasingly become sulbjcCt to interlnational policy

competition,As regards adjustment assistance, governments may agree to forego

taking measures that hinder the nmovemnent of resources from low-

productivity to high-productivity in cl ustnirs. l1 tirni, positive measuresaimed at encouraging the movemnent of resources slhould have general

incidence affecting all industries in the same way, so that the choice

among alternative activities is left to the market mechanism.There may be cases, houwev er, when the market does not fully

anticipate futulre needs and the application of measures affecting specific

industries could not be foregone. Also, assistance to depressed regions can

be considered admissible to the extent thcat suclI assistance corrects for

existing distortions or serves social goals. Finally, wlhatever its rationlale,there exist in most coutntries rtules of government procti¡eme¡nt. favoring

domestic industry.An international code of good conduct shouild provide, first of all,

for transparency in tlie matter of government aids. This wotuld take the

form of making explicit tlhe measures actually applied by incorporatingthem in public regulations, whenever this is not presently the case.

Secondly, the budgetary cost of aids provided to specific industries and

regions should be estimated as this is done in the Report on Subsidies in

Germany and in Economic Impact Statements in the United States.

Thirdly, it would be desirable to uindertake commitmrents to `freeze," the

status quo as regards government aids in thie same way as tariffs are boundin GATT. Finally, some genieral rules should be defined on the use of

government aids by individual cOuntriCs.Greater transparency, estimating the 1. utdgetary cost involved,

freezing the status quio, and establislhing gr eral rules on their applicationwould provide a basis for negotiating reductions in government aids.

Such negotiations may be initially undertaken by tite cle%elope(d countries,and patterned on actions taken in tlie framework of tlie European Ceom-mon Market. Thcy would necessitate establishing machinery, possibly in

the framework of the OECD, to provide international surveillance of tiheapplication of governnment aids as ,vell as a forum for continuing dis-

cussions and negotiations.The Tokyo Round negotiationis provide an opportunity for establish-

ing an international code of good conduct on safeguarcds, export subsidies,

THE NEW PROTECTIONISM 435and government aids. This mav take the form of an interpretation ofGATT regulations, so as to avoid the difficulties involved in changing theexisting provisions of the General Agrcement.

Parallel with thcse efforts, it would be desirable to reach agreementon across-the-board redutctions in tariffs and on lessening disparities intariffs on individual products. Furtliermore, it would be desirable toliberalize trade in agricultural commoditities, in particular in products ofexport interest to the de'.elopiiig countries.

Policies by Develop1ing Countries

Developing couintries lhave a considerable interest in establishingacceptable and credible international rules on the app<ication of measuresaffecting their exports. The exports of these countries have bLcn repeatedlycurbed by the imposition of restrictions by the developed countries; theyhave little bargaining power to forestall the applcation of new restrictionson particular commodities; and the threat of the imposition of restrictionscreates considerable uncertainty for them. Developing countries need astable environnment in whichl the sliifts in the international division oflabor necessary for their rapid economic growth can take place.

At the same time, developing coluntries wotuld be well-advised toavoid demanding unilateral concessions that would jeopardize theestablishment of international rules, since they stand to lose rniore throughthe continuation and the extension of the "new protectionism" thanwhat tlhcy may gain from any concessions. Nevertheless, while individualdeveloping cotriil-ics have little bargaining power, they coulld influencethe outcome by aclopting a joint position. The same observation appliesto tariff reclutctions in the Tokyo Round, where developing countriescould press for reductions on items of export interest to them.

In tliis connection, it should be ernphasized that developing countrieshave mucli more to gain from multilateral tariff reductions than frommaintaining piefrcn(-tial margins, on which UNCTAD efforts haveconcentratecd in recent years. Tlis is because tariff reductions do notinvolve qiantitative limitations on trade and are not reversible whileirnlp,t,s .ndr pefrntcnei are subjcct to quantitative limitations and canbe rckvuked on short notice.

Serni-indtistrial developing counltiies would also be well-advised toredkce existli¡g protection. To begin with, tlic existence of high protectionin son,ii of st cotIItics is IseCl as an argurment for protection in thecleEelúp i natiotls. Furti(,rmore, offers made to reduce trade barrierswoulcl strengtlici the Ialgainin positionI of thc developing countries inthe Tokyo Roulid of negotiations. Finally, lowerinig protective barrierswoulcl lessen the need for (explicit) export sil).silics that are threatened bycountervailing actioin. This woulcl mcan putting greater reliance on the


exchange rate since one may compensate for reductions in import tariffsand export subsidies by a devaluation.76

Semi-in dustrial cleveloping countries would also be well-aclvised to

enter into bilateral agreements ws,ith developed nations orn liberalizinigtrade as it has recently been done in U.S.-Mexico relationships. Thlis

would be of especial importance as fiar as trade with Western Euirope is

concerned. In tlis connectioni, it should be recognized that several of the

semi-industrial countries liave sufficiently large markets so that they canoffer meaningfuLl concessions.

At the same time, the chances for avoiding the imposition of

restrictions would be increased if semi-industrial d1 eclopinig countriesupgraded and diversified their exports. In particular, it would be desirable

to expand the exports of commodities where firms in developed countriescan respond by changing their product composition, which is not possiblein industries consisting largely of one-product firms, stuch as textiles,clothing, and shoes. The possibilities of expandirig exports withoutencountering restrictions would be furtlier inicr (easud by diversifyingexport markets, in paiticular by seeking export outl(ts im tlie rapidly

growing OPEC countries.Finally, it would be clesirable that semi-indtistrial (IeveIopiflg

countries gradually abanclon the exports of simple, uinskilled-laborintensive manufactures for the benefit of couLntries at lower levels of

development. The latter countries, in turni, wotuld have to follow

appropriate policies tlhat would not discriminate againlsi exports.

" For a detailedcl discussioni, see Bela Balassa, "Export Incentives ana1 Export Per-formance in

Developitig Cointries: A Comparative Analysis," 1 'cl :,irOfq/zliches Archie, Mar. 1978.

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