INTERNATIONAL BANK POR RECONSTRUCTION AND DEVELOPMENT Bank Staff Working Paper No. 193 POSSIBLE EFFECTS OF TRADE LIBERALIZATION ON TRADE IN PRIMARY COMMODITIES January 1975 This paper suggests that the removal of tariff and nontariff barriers to trade in primary commodities by the developed countries, would offer developing countries an opportunity for significantly improving their export earnings. LDC export earnings from the shipments of nine primary commodities to OECD countries would rise to 15 percent per year through 1980 under conditions of liberalized trade, compared to projections of 12 percent without the removal of trade barriers. In f.o.b. value terms, LDC export earnings from these commodities would increase by $7.1 billion in 1980 in constant terms (1974). In order to take advantage of such Liberalisation of trade, the developing countries would need to invest around $15.5 billion (in constant 1973 terms) to expand production of these commodities. EFFECTS OF TRADE LIBERALIZATION ON TRADE IN PRIMARY COMMODITIES Summary and Conclusions 1. With the growth of world trade, increasing attention has been focused on the participation of developing countries. It is generally recognized that these countries must increase their exports substantially if they are to finance the import requirements of their development programs and service their ever growing debt. The most rapidly growing component of developing countries' exports has been manufactured goods and they must continue to receive emphasis in developing countries in terms of production and sales capacity and in industrialized countries in terms of shifts in comparative advantage and the associated structural adjustments. These products often face a variety of tariff and non-tariff barriers. The reduction of these barriers has been discussed extensively as a way of supporting the economic growth of developing countries, 2. This paper deals with a related subject which has received relatively less attention in recent times namely, the barriers facing primary exports from developing countries, including such processed items as sugar and plywood. Not only is the scope for increasing exports very great for these commodities too, but the beneficiaries are likely to include more of the relatively lower income countries. The structural adjustment problems in the importing countries can be more difficult for primary commodities than for manufactured goods and often affect politically more powerful groups, such as the farmers. The paper recognizes that liberalization of restrictions on the imports of primary commodities can only came about gradually, though it does not seek to expound on the political process which must underlie such liberalization. Its purpose is to define the total expansion of primary products trade and, within that, the extent of the benefits to the developing countries by 1980 if a program of gradual liberalization were started. (a) LDC exports to OECD countries of nine primary commodities particularly affected by trade barriers would grow at a rate of 12.5 percent per year on an f.o.b. basis in constant (1974) terms through 1980 without liberalization. (b) with liberalization, the annual growth rate of primary (c) In f.o.b. value terms there would be an increase of $7.1 (d) To be able to take advantage of such import liberalization will require investments in the developing countries of around $15.5 billion in constant (1974) terms. Introduction1/ 1. The exports of primary commodities from developing countries are hampered by a variety of trade barriers. Tariffs and similar tax measures have for a long time been the most common type of trade barriers, but over the years a large variety of other measures, generally grouped together under the heading "non-tariff barriers" have had an influence on trade. Quantitative restrictions by way of quotas are widely used and, in addition, mumerous subsidy arrangements on competing domestic production in the developed countries have tended to change the marketability of primary products originating in developing countries. 2. It is generally assumed that the removal of trade barriers could increase exports of developing countries. As long-term development is served better by accelerated growth of their exports than by long-term dependence on external lending, the issue has been debated for many years and numerous studies and estimates have been made in order to assess the potential benefits in terms of additional export earnings which developing countries could derive from trade liberalisation measures. 3. An earlier estimate was given in the Bank's study of the development problems of primary exporters presented to the Board in January 1973;2/ this study suggested a figure of about $4 billion in current terms as the possible additional exports arising from trade liberalisation by 1980. This estimate was of a preliminary nature and has since been revised, taking into account a broadening of the definition and coverage of products and a revision of commodity price forecasts; some technical coafficients such as elasticity estimates have also been updated. A similar estimate on the basis of a world equilibrium model was made at about the same time by the FAO staff and resulted in a figure of the same order of magnitude as given in the original Bank study. 4. In what follows here, the results are presented of an effort to provide a more comprehensive and detailed assessment of the effects of trade liberalization. Notwithstanding considerable effort devoted to the analysis of trade, consumption and production patterns at present and projected for the remainder of the current decade, the inherent margin of variation in such estimates is quite large. Not only does one need to know the structure of present trade barriers, specified by importing countries, but one needs also an assessment of the impact of nontariff barriers on the domestic prices of each of the commodities included in the analysis. Although a detailed inventory of existing trade barriers is available from the files of GATT, their translation into price effects and their aggregation to commodity groups, which lend themselves to analysis, pose major difficulties. Moreover, any structural changes in supply and/or demand relationships resulting from the impact of the energy crisis are not captured in the present analysis. 1/ This study was undertaken by the staff of the Commodities and Export Projections Division. The author gratefully acknowledges their contributions to the study which made up the body of the paper. 2/ "Development Policy for Countries Highly Dependent on Exports of 77-764 0-76-9 Scope of the Study 5. The analysis of the effects of trade liberalization relates to the total expansion of primary product trade and within that, the magnitude of the benefits to the developing countries by 1980 resulting from a program of gradual liberalization. Trade liberalization is taken to mean the removal of tariffs and similar charges and the dismantling of "non-tariff barriers" such as quantitative restrictions, internal taxes and aids to competing domestic production. The estimates of the effects on developing countries' exports should be considered as indicating only broad orders of magnitude since complete analysis of the impact of trade liberalisation could not be undertaken. 6. The study was confined to the hypothetical removal of barriers to agricultural imports of OECD countries because there exist only very few barriers to trade in minerals and metals. The nine agricultural comodities 2/ selected for this analysis represented about one-fifth of total LDC export earnings in the 1967-69 period and nearly one-half of their earnings from agricultural comodities. For purposes of analysis the importing countries were divided into six areas, as follows: 7. Barriers to trade in agricultural products in each of these importing regions were analyzed on a commodity by commodity basis and quantified in terms of their effects on the price of these commodities in the importing markets. The Approach Taken 8. The analysis of the effects of trade liberalisation focuses essentially on the effects on the prices of primary comodities paid by the finalconsumer. In the case of tariffs and similar charges their removal was assumed to translate into a reduction in the consumer prices of the commodities. In the case of non-tariff barriers, judgements had to be made on the basis of detailed knowledge of markets and prices as to what effects the removing of barriers would have on domestic prices. Australia and New Zealand were not included because they were not in the data for the base period, 1967-69, as they joined the OECD in 1971 and 1973 respectively. The selected comodities consist of fresh-chilled and frozen beef, lint, wood products and citrus. sugar, cotton |