kD E4 Researchgfndingss Big reductions in the protection of manufacturing What lies behind these biggains? Tariffs on manufactures imports into industrial countries were reduced from a trade-weighted average of 63 percent to 3.8 percent, a cut to be phased in over fiveyears. The reductions were not uniform, but were stantial increases in all regions. With only 1 the outcome of a series of bilateral request- percent of their manufactured imports ini- and-offer negotiations whose results were tially bound duty-free, there was scope for tar- extended to all Round participants. For indus- iff reductions on 99 percent of imports. Second offour trial countries, tariffs were reduced by an aver- Bindings involving tariff reductions were notes on what the age of 45 percent on imports from other offered on 32 percent of imports, while bind- Uruguay Round industrial countries and by only 30 percent for ings without reductions (ceiling bindings) meansfor imports from developing countries. For devel- were offered on a further 26 percent; no offers developing oping countries, the reductions in tariff rates were made on the remaining 42 percent. So, countries on manufactures averaged 28 percent on developing countries made very substantial products from industrial countries and 29 per- progress with their tariff bindings and reduc- cent on those from developing countries. tions, but clearly much remains to be done. Commitments under the General Agree- If the average tariff cut in the Round had ment on Tariffs and Trade (GATT) take the been uniform, it would have had the eco- form of bindings-commitments not to levy nomically desirable feature of implying a a duty exceeding a particular (bound) rate. larger reduction in the tariff-inclusive price The proportion of industrial countries' tariffs of more highly protected goods. But there on industrial products subject to bindings rose was only a very weak relationship between from 94 percent to 99 percent as a result of the the initial rate of protection and the price Round. With 18 percent of their imports reduction achieved (figure 1). For industrial already bound duty-free, tariff reductions countries' imports from developing coun- were feasible on only 82 percent of imports. tries, the two sectors with the highest tariffs Tariffs were, in fact, reduced on 64 percent of (textiles and clothing, and footwear) experi- imports-with the remaining 18 percent enced smaller price reductions than did divided between bindings without reduction many other sectors. and no offer. For developing countries' imports from The proportion of developing countries' industrial countries, there is no evidence of a imports of industrial products subject to bind- consistent relationship between the initial tar- ings rose from 13 percent before the Round to iff level and the reduction in the domestic 61 percent after it. This increase in the cover- prices of imported goods (figure 2). What is age of bindings was very widespread, with sub- clear, however, is that the average depth of the FROM THE DEVELOPMENT ECONOMICS VICE PRESIDENCY OF THE WORLD BANK NOr lO CMAY 19$05 Figure 1. Initial tariffs and price reductions Figure 2. Initial tariffs and price reductions for industrial countries' imports from for developing countries' imports from developing countries industrial countries (percent) (percent) [6 25 1 Inktial tariff 14 nitial tariff 20 L Price change 12 Price change 0 [5 8 6 Ia 4 5 n S [ t I i L ~~~~~~1 i L L LL Teoltes Foot- Fis Chem- Manu- Elctric Trons- Wood Non- Mineral Metals Trans- Fish Teoties Wood M1etas Chem- Foot- Noi- Electric Manu- Mi- seer cals factures mach- poeta- prod- eectric prod- po-tation prod- icas wear electr-c macn foctures eraf ines ton uction mach- uction equip- otion mach- s-es prod- equ p- nes ment ne uLction Source: Abreu 1995, Source: Abreu 1995. tariff-induced price cuts from the Round was For the United States and Canada, a typical greater in developing countries than in indus- mature industrial region, the abolition of the trial countries. While the proportional tariff MFA means that textile output will cease to cuts were smaller in developing countries, the grow, while apparel output contracts (figure 4). price cuts are larger because they apply to The ten-year phase-out under the Round higher initial tariffs. allows plenty of time to achieve an orderly Tariff escalation in industrial country mar- restructuring of these industries into more spe- The Round made kets-tariff rates increase with the stage of cialized entities and for productive factors to substantial progress processing-is a long-standing concern of find alternative uses. For South Asia, a typical developing countries because it discourages dynamic developing region, abolition implies the export of processed raw materials. Tariff a very substantial expansion in the output of sprung up to avert cuts under the Round reduced the absolute textiles and an increase in apparel output of the disciplines degree of tariff escalation on imports of man- more than 200 percent. Effecting such an imposed by GAT~T ufactures, although some escalation clearly expansion will require policy reform and infra- remains (figure 3). structure support to realize the full potential of rules and tariff these labor-intensive industries. The growth bindings rates of the heavy machinery and transport Excising some of the equipment sectors in South Asia will slow as insidious nontariff barriers resources find more profitable outlets in tex- tiles and clothing (these sectors will neverthe- A key feature of the Round was the substan- less contrive to grow quickly, at 6 percent and tial progress made in dealing with the "gray 5 percent a year, respectively). Similar patterns area measures that had sprung up to circum- of output adjustment are observed in other vent the disciplines imposed by GATT rules developing country regions undertaking liber- and tariff bindings. Voluntary export alization. restraints must be abolished within four years, As with the MFA, voluntary export and the Multifiber Arrangement (MFA) is to restraints violated the spirit of two of the most be phased out over ten. fundamental principles of the GATT-the The abolition of the MFA can be expected prohibitions against imposing quantitative to generate considerable benefits not just to restrictions and against discriminating exporting countries but also to the importing between suppliers (the most favored nation countries that imposed this peculiar and per- principle). These protection measures bought verse form of protection. the compliance of exporters by giving them Figure 3. Tariff escalation in industrial Figure 4. United States and Canada: countries remains, but at lower levels industrial restructuring (percent) (percent) 10 80 W:thout the Round *Pre-Round 60 1 Wth thc Round 8 EB Post-Round 40 6 20 -b 0~~~~~~~~~ 2~~~~~~~~~~~~~~~2 2 -40 0 Raw -60 Raw matenals Semimanufactures Fnished products Ag,i- Food Natural Tex- Apparel Light Heavy Trans- Utildles Other cuiture resources tes manu manu porta- sevices Source: GATT data. factur ng factunng tion equip- ment Soturce- Hertel and others 995. the opportunity to retain some of the artificial will be able to source imports efficiently, buy- scarcity rents they created. They were of ing the best products at the best prices, instead doubtful legality (or worse) under the GATT. of being forced to purchase imports from sup- The Uruguay Round agreement removes any pliers that happen to have sufficient MFA ambiguity, prohibiting voluntary export quotas or that have escaped the MFA quota restraints and measures with a similar effect. net. Second, they will be able to rationalize Since the protectionist pressures that gave rise their production and consumption deci- to these measures will remain strong, however, sions-substituting imports for domestic pro- outlawing them is likely to increase the pres- duction where this is appropriate, and sures for other forms of contingent protection. avoiding the distortion of consumer choices will likely delay the The agreements to abolish nontariff barri- away from apparel. Third, they will avoid hav- abolition of the ers on manufactured products will require ing to pay higher import prices to their export Multifiber careful monitoring and implementation, lest suppliers, who must currently include the these barriers be replaced by equivalent (or price of MFA quotas in their asking prices. Arrangement worse) measures under the guise of safeguards All the evidence shows that abolishing the or antidumping. Some commentators argue arrangement will generate enormous benefits that the abolition of the MFA will require par- for the importing countries-$9 billion a year ticular attention, since the quotas will be for the European Union, $10-12 billion for phased out progressively according to sched- North America, and upwards of $25 billion a ules determined by the importers, with almost year for both markets by 2005, gains that will half the quotas, and typically the quotas on the be magnified by scale economies. most sensitive items, remaining in place Whether developing country exporters (though growing at accelerated rates) until the gain or lose from the abolition of the MFA is tenth year. Strong political pressures for delay a more complex question. Since the quotas are likely. raise the prices received by exporters with access to quotas, it is possible for the quota sys- Gains and losses from tem to make some of the restricted exporters better off. But there is no guarantee that this abolishing the Multifiber will be so. Arrangement Relatively new, and tightly restricted, exporters of textiles and clothing-such as Industrial country importers, at whose insis- China, the ASEAN exporters, and the more tence the MFA was introduced, will benefit competitive South Asian exporters-seem from its abolition for three reasons. First, they most likely to gain from the abolition of the MFA. Given the restrictions on their exports, they where. Exporters in the second group are found must now divert some of their exports to non- in Latin America. MFA import markets-such as Japan, Hong A third group of countries that may be hurt Kong, Australia, the Middle East, and Sub-Saha- includes Japan in apparel and Sub-Saharan ran Africa-where import prices are low. Once the Africa in textiles. Both now gain from low-cost MFA quotas are removed, these suppliers can be exports diverted from the restricted markets, and expected to increase their total exports and to shift they will pay higher import prices when the their emphasis toward the currently MFA- restrictions are eliminated. Of course, the restricted markets. By one estimate, China could domestic textile and apparel industries will gain more than $2 billion a year, while the major become stronger and, in Sub-Saharan Africa, ASEAN exporters (Indonesia, Thailand, Malaysia, will be able to contemplate future export-led and the Philippines) could together gain around growth without the threat of restrictions on $2.8 billion a year in the long run. By another esti- sales. mate, the gains to China could be $5.4 billion a -by Will Martin and L. Alan Winters year, and those to the big four ASEAN exporters $4 billion a year. South Asia is also projected to Further reading gain by $2-$3 billion a year. Two groups of exporters are likely to suffer- The following papers are available in Will Martin and L. those whose quotas are now large relative to their Alan Winters, eds., 1995, The Uruguay RoundandtheDevel- comparative advantage and those that may have oping Economies, World Bank Discussion Paper 307. been induced by the MFA to enter the produc- Revised versions are forthcoming in a volume to be pub- tion of textiles and clothing without possessing a lished by Cambridge University Press. comparative advantage in these goods. Some of Abreu, M. "Trade in Manufactures: the Outcome of The the newly industrialized countries in Asia proba- Uruguay Round and Developing Country Interests." bly fall into the first group, but their losses in this Hertel, T., W Martin, K. Yanagishima, and B. Dimaranan. part of the Round are heavily outweighed bytheir "Liberalizing Manufactures Trade in a Changing World gains from tariff and other liberalization else- Economy." This DECnote has been prepared by Will Martin and L. Alan Winters in the International Economics Department of the World Bank. DECnotes transmit key research findings to Bank Group managers and staff. They are drawn from the work of individual Bank researchers and do not necessarily represent the views of the World Bank and its member countries-and should not therefore be attribured to the World Bank or its affiliates. DECnotes are produced by the Research Advisory Staff. We welcome your questions and comments; please e- mail them to the authors or to Evelyn Alfaro, RAD. Prepared for World Bank staff