Poliy Ruroh| WORKING PAPERS Intemadonal Tadl Intemational Economics Department The World Bank September 1992 WPS 974 How Minilateral Trading Arrangements May Affect the Post-Uruguay Round World C.A. Primo Braga and Alexander Yeats Fears about how the futher spread of free trade areas wil affect world trade volumes may be exaggerated - while the dangers of these blocs becoming hostile to each other may have been underesdmated. "Managed" trade is a far more likely outcome. PoeoyRerhbWcskingp P s_Xmdi flintb efwo&kinI Ve awd a=Vwuv id=Voufi ank SBaAOdand afl b odin_ devd ie. hoip u zhdbp.mduiid iby AdRsh y S ff.cznythezmof.mttb,dloe n* edXauhWsdhtdboeod Idcitds-D lyadefindi. us anop. d a,yla dweruuio.. owWd na bes al to XWodd Ba, hs Bouard Di, miu emkr y dfis mcomb e Policy Reowch Inlwnadonl ITrade WPS 974 This paper- a product of the Intemational Trade Division, International Economics Department- is part of a larger effort in the department to evaluate the influence of changes in extemal conditions on developing countries' trade and growth prospects. Copies of the paper are available free from the World Bank, 1818 H Street NW, Washington, DC 20433. Please contact Jean Jacobson, room S7-035, extension 33710 (September 1992, 31 pages). One issue dominating recent discussions on free particular, their statistics suggest that fears about trade areas and other minilateral associations how the further spread of free trade areas will (preferential trade arrangemeats) is whether such affect world trade volumes may be exaggerated arrangements will detract from furter multilat- - while the dangers of these blocs becoming eral trade liberalization on a most-favored-nation hostile to each other may have been underesti- basis. But for much of this debate empirical mated. information has been lacking on: Using data recently compiled by the United . The global importance of minilateral Nations, Braga and Yeats show that the global arrangements that have been, or are being, importance of minilateral arrangements is now concluded. far greater than is often recognized. Almost half of world trade is affected by these arangements. * The relative size of other major bilateral trade flows not affected by minilateral amngements, But major trade flows not covered by and their suitability for such amTngements. minilateral arrangements are dominated by important county-specific problems. In particu- . The global importance of Europe in this lar, problems relating to high-technology trade process. between Asian newly industrialized countries (NICs), Japan, and the United States, as well as * The possibility that other sorts of arrange- between Asian NICs, Japan, and Westem ments - such as "managed" trade initiatives Europe, are sufficiently importanm to hinder the (arrangements specifying quantitative trade formation of additional free trade areas. This targets) - are a more likely threat as far as trade suggests that fears about the spread of such flows not presently covered by free trade area arrangements may have been exaggerated. arrangements are concerned. Braga and Yeat's tabulations and analysis of Braga and Yeats argue that this lack of the "discriminatory" trade barriers applied to relevant data has led to several misconceptions these flows indicate that "managed" trade is a far about the movement toward minilateralism. In more likely outcome. ThePolicyResarchWorkgssnatefdgsPorodoedsd ie Pytemdsofwo derwayiheBank.Anobjectiveof eee seies is to get dhese fin&Wg out quilcly, eveni if presetatons are less than fully polished.'The fmdings, inepetations and conclusions in these papers do not neceaiy rpesent official Bank policy. Produced by the Policy Research D6ssatdon Center Table of Contents PM I. Introduction .................................... 1 II. Existing and Potential Arrangements ........................................5 m. The Relative Importance of Minilateral Arrangements ............................. 7 IV. The Managed Trade Alternative .......................................... 14 V. Final Comments ................................................. 20 Appendix Statistics on International Trade in High Technology ........................ 26 Products List of Tables Table No. Pa.e 1. Value and Share of Merchandise World Trade ........ .................... 9 Under Minilateral Arrangements 2. The Relative Importance of Merchandise Trade Flows ... : ................... 13 not Influenced by Regional Trade Arrangements in 1988 3. Observations on Potential FTA Arrangeme;its Between ...................... 15 Specific Trading Partners (Unaffected trade, flows over $50 billion) i 4. The Incidence of Discriminatory U.S. Trade Barriers ....................... 18 on Japan, Federal Republic of Germany, United Kingdom and French Exports, (Trade values for 1986 and trade barriers are those in place in 1990) 5. Trends in United States Exports of High-Tech ........ .................... 21 Products to Selected Markets: 1965 to 1989 Appendix Table No. 1. The Relative Importance and Major Sources of High Tech ..... ............... 27 Products in Global Trade 2. The Origin and Destination of High Tech Trade in 1988 ..................... 28 3. The Twenty-Five Largest Exporters of High Tech ....... .................. 29 Manufactured Goods 4. The Relative Importance of Individual Products in ....... .................. 30 All High Tech Global Exports 5. Revealed Comparative Advantage Indices for the ....... ................... 31 Twenty-Five Largest Exporters of High-Tech Manufactured Goods List of Boxes Box No. Pare 1. GATT Rules Concerning Free Trade Areas .............................. 4 2. 'Fortress' Europe and the Disincentive for ........... .................. 12 Global Negotiations 3. Definitions of High Technology Industries and Trade ....... ................ 19 I. Introduction Over the last few years many analysts have expressed concern over the growing dissatisfaction with multilateral trade negotiations (MTNs) as a means of achieving trade liberalization (Aho and Aronson, 1986; Patterson, 1989). One source of this dissatisfaction has been the pace of the GATT negotiations. The Tokyo Round lasted seven years, from 1973 to 1979, while the Uruguay Round started in 1986 and was scheduled for completion in 1990, but the impasse at the Brussels Ministerial Meeting in December, 1990 led to its extension - probably for two years. In contrast, the United States-Canada free trade agreement (FTA) was completed in about 18 months and the recently signed Chile-Mexico FTA was negotiated in less than one year.' Second, the GATT multilateral negotiations involve very diverse interests of a large number of participating countries - a point that greatly complicates the agenda of the MTNs (15 different negotiating groups were originally established in the Uruguay Round covering topics from services to tropical products).2 A third problem concerns the GATT's de facto consensus rule which countries have used to block progress until their individual demands are met.3 * Economists, International Trade Division, World Bank, Washington, D.C. 20433. We would like to acknowledge comments and suggestions by R. Duncan, J.M. Finger, B. Kaminski, P. Meo , and V. Nehru. The usual 'caveats' apply. I The perception that the minilateral route is quicker than the multilateral one, however, is not undisputed. It is worth remembering for instance, that the road to the single European market began to be "carved" almost four decades ago. For a discussion of this theme, see Bhagwati (1992). 2 The groups reporting to the Trade Negotiating Committee during the first four years of the Uruguay Round were the following: safeguards, dispute settlement, agriculture, tropical products, natural resource-based products, textiles and clothing, tariffs, non-tariff measures, MTN agreements and arrangements, subsidies and colmtervailing measures, GA`IT articles, functioning of the GATr system, trade related aspects of intellectual property, trade- related investment measures, and services. I For example, India and a few other developing countries blocked the adoption of recommendations on intellectual property rights in the Ministerial Declaration at the Montreal midterm review of the GATI negotiations in December 1988. According to Hufbauer and Schott (1985) the problem of such "footdraggers" has become more acute as GATT talks focus more on the negotiation of trading rules rather than on reciprocal trade liberalization. Schott (1989) argues that such problems would be far less important in bilateral or minilateral negotiations among "like-minded" countries. 2 Problems relating to the functioning of the GATr system itself have also contributed to the dissatisfaction with the MTN approach. One such set of concerns involves the nature of the GATT rules and the efficacy of its enforcement mechanisms. These criticisms often center on the deficiencies in the GATT Agreement and its numerous exceptions - most notably in textiles and clothing - while problems relating to agriculture and subsidies are not adequately addressed. The proliferation of so called 'grey area" measures like "voluntary" export volume and price restraints, orderly marketing arrangements, or intra-industry agreements - see GATT (1988) for the details on more than 200 such measures imposed by member countries - that run counter to tle spirit of GATr regulations has also caused increased dissatisfaction. Given the importance attached to these problems there has been a growing interest in "minilateral arrangements" - particularly, free trade areas - either as an alternative or as a compiement to the GATT approach.4 Proponents of FTAs cite the advantages of negotiating with a limited number of countries that are willing to liberalize trade bilaterally. The agenda in such negotiations can be geared to the specific interests of the participants and special administrative bodies can be established, as in the Israel and Canadian agreements with the United States, to provide a consultation and dispute settlement mechanism "for members only". Schott (1989) suggests that FTAs have also been considered as a way to achieve specific policy objectives such as managing trade deficits, reducing foreign barriers, e;;ninating the "free rider" problem in multilateral negotiations, balancing bilateral trade flows, or even establishing more favorable conditions for multilateral agreements. While differing I While he was US Secretary of the Treasury, James Baker stated "If possible, we hope liberalization will occur in the Uruguay Round. If not, we might be willing to explore a 'market liberalization club" approach through minilateral arrangements or a series of bilateral agreements. In this fashion, North America can build steady momentum for more open and efficient markets" (Baker 1988, p. 41). It should be noted that the U.S. emphasis has been on the establishment of free trade areas and not customs unions. The latter involves two or more countries which abolish all, or nearly all, trade restrictions among themselves and set up a common and uniform barrier against outsiders. The European Community is an example of this type of arrangement. Once the arrangement expands beyond trade in goods, encompassing trade in services and the movement of factors of production, it is referred to as a common market - e.g., the 1992 European Single Market program. In a free trade area, trade among member countries is also completely liberalized, or nearly so. But there is not a common trade barrier against nonmember countries; each country is free to impose its own trade restrictions. The European Free Trade Association EFTA is an example of this latter type of arrangement. See Box 1 for a discussion of GATT regulations concerning free trade areas. The term "minilateral arrangement" will be used in this paper as encompassing any treaty negotiated by two or more trading partners, which violates the most-favored-nation (MFN) rule. Unilateral concessions - such as the Generalized Systems of Preferences (GSP) of industrialized countries, as well as non-reciprocal contractual preferential arrangements - such as the Lome Convention -, are not considered as falling under this definition. 3 views exist on almost all these issues the last point has been particularly contentious. Specifically, many economists - see Wonnacott and Lutz (1989) or Bhagwati (1991) - apparently see recent activity pertaining to FTAs as a threat to the multilateral approach since it channels liberalization efforts along alternative - and possibly conflicting -- lines. A somowhat surprising point is that the discussion involving the relation between FTAs and GATT's multilateral process has been marked by limited empirical analyses. In this paper we tabulate and analyze the implications of statistics on the global importance of trade which now occurs under minilateral arrangements and compare this with the major trade flows which still occur outside these arrangements. Our analysis speaks to two concerns. First, that the concerns expressed about a further spread of minilateral arrangements weakening the multilateral negotiation process are at best tardy - these arrangements have already grown to the point that they are larger than is generally realized, i.e., they encompass trade flows which are equivalent to the ones that occur on a MFN basis. As such, we argue that the alarms now being raised are tantamount to locking the barn door after the horse has escaped. Second, we also tabulate the major bilateral trade flows that are not covered by FTAs in an attempt to determine if they are appropriate candidates for such agreements, or whether they are likely to be subject to some alternative arrangement like 'managed trade."5 Our paper closes with an assessment of our findings for post-Uruguay Round trade relations, highlighting the issue of 'high-tech' trade. Before proceeding to the empirical analyses, it should be stressed that this paper focuses on one of the major concerns often expressed about FTAs - that the further spread of these arrangements may detract from or deter global efforts to reduce trade barriers in GAIT multilateral negotiations. There are other related topics equally deserving of attention. For example, some developing countries have attempted to utilize rtgional arrangements to stimulate industrialization and growth - see the annex for a listing. Such arrangements may be relatively unimportant from a global prospective, but can be of key importance for the growth prospects of the FTA member developing countries since they may have a negative impact on growth if they reduce access to more economically efficient outside suppliers. 5 The term managed trade is used here to characterize arrangements that specify quantitative trade targets (either for exports or imports). 'Voluntary export restraints' (VERs), "orderly marketing agreements (OMAs), 'voluntary import expansion' agreements (VIEs) - e.g., the US-Japan Semiconductor Trade Agreement - and the "multi-fibre arrangement" (MFA) are some of the main examples in this contest. For a review of alternative definitions of managed trade see Tyson (1990) and Baldwm (1990). 4 GATT Rules Concerning Free Trade Areas The cornerstone of the General Agreement on Tariffs and Trade is the nondiscrimination or most- favored-nation (MFN) principle of GATr Article I. Trade concessions awarded to one member country are to be extended to all GATT members. FTAs conflict with this principle. In spite of this conflict, GAIT rules can accommodate the promotion of trade liberalization through "closer integration between the economies of the countries party to such agreements." GATT Article XXIV permits departures from the MFN obligation provided that the FTA or customs union meets three conditions: (1) duties and other restrictive regulations are eliminated on 'substantially all" trade between partner countries; (2) the general incidence of duties and regulations affecting third parties is no higher after than it was before the establishment of an agreement; and (3) the agreement contains a plan and schedule for its complete formation within a reasonable length of time. Although the intent of these rules is sometimes interpreted as meaning that an FTA should be trade- creating, there is no guarantee that this will be the case. Since 1948, more than 60 FTAs and preferential trade agreements have beer reviewed by the GATT under Article XXIV provisions (see Schott, 1989, Annex A for a list). Only four agreements -- the South African-Rhodesian Customs Union (1948); the Nicaragua-El Salvador Agreement (1951); Nicaraguan participation in the Central American Free Trade Area (1958); and the Caribbean Community and Common Market (1973) - were declared fully compatib!e with Article XXIV requirements. However, no agreement has been censured by a working group as being incompatible with GATT rules. As a result of these precedents, countries are perceived to be able to derogate from MFN obligations in FTAs without regard to the effects on third countries. This impression has been reinforced by the introduction of the 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (also known as the Enabling Clause). As a result of this decision, regional arrangements involving only developing countries are excluded from the requirement to meet the formal criteria of Article XXIV. Regional arrangements among these countries are permitted as long as they facilitate trade, do not create "undue difficulties" for the trade of other countries, and do not act as an impediment to the reduction or elimination of trade barriers on a most-favored-nation basis. Formal procedures have not been established to ensure that these conditions are met. 5 A further key concern is that some FTAs, like theEEC and NAFTA, may actually turn hostile to each other and impose new forms of trade barriers. H. Existing and Potential Arrangements Existing GATT regulations concerning minilateral arrangements - particularly Article XXIV whose provisions are summarized in Box 1 -- require notification and review by contracting parties of the General Agreement. Since 1948, more than 60 niinilateral arrangements have been subject to this formnal procedure. A compilation of these reviews prepared by Schott (1989, Annex A) provided the starting point for our analysib of global trade "affected" (see definition below) by these types of arrangements.f Next, an attempt was made to include other similar arrangements that had not been subject to the GATT review process (i.e., the countries involved may not have been GATT members) and Inotai (1991) provided a useful source of information on such agreements among developing countries.7 To this list we added the following potential new arrangements: the North American Free Trade Agreement (NAFTA), and FTAs between Eastern European countries (including the now "defunct' Soviet Union) and developed Europe. The US-Mexico and Canada-Mexico trade flows were considered in anticipation of an agreement being ratified in the next two years -- indeed, if it were not it would be a major blow to further FTA negotiations (and the concerns about their spread would be alleviated). Arrangements between Eastern and Western Europe, in turn, have been considered since in some cases these negotiations are at an advanced stage and some form of agreement seems likely. Indeed, Poland, Czechoslovakia, and Hungary have applied for associate EEC 6 As mentioned before, other types of arrangements, like the GSP and the Lom6 Regime, were excluded from these tabulations since they depart from the typical FTA model and only apply to one way trade, i.e., imports by the industrial countries. This exclusion will impart an upward bias to the residual amount of MFN trade in global totals. I Developing countries hav. experimented with inter-regional trade preferences from time-to-time. In the mid- 1970s, some 16 countries exchanged mutual trade preferences under the provision of GATT's Protocol for Trade Relations Among Developing Countries. In the 1980s, more than 60 developing countries exchanged trade preferences, or established an institutional framework to do so, under the aegis of UNCTAD's Global System of Trade Preferences (GSTP ) among developing countries. Several, less ambitious, attempts have also been made like the Tripartite Arrangement involving India, Egypt and Yugoslavia. Our tabulations of FTA trade excludes these arrangements, largely because of their special nature and the difficulties in getting information on the trade they affect. membership, and special deals have been approved (e.g., with Finland) or are pending with EFTA -nembers.8 Furthermore, it is worth remembering that, with reunification, the former German Democratic Republic was absorbed into the European Community -- a move that also provided duty free access for manufactured goods exported to EFTA markets. Recent developments in Latin America such as MERCOSUR and the Chile-Mexico FTA were not explicitly accounted for in our tabulations.9 The MERCOSUR process is intended to lead to the creation of a common market - encompassing Argentina, Brazil, Paraguay, and Uruguay - by the end of 1994. The Asuncion Treaty, signed in March 1991, established this ambitious target based on the progress so far achieved in the context of the Argentine-Brazilian Integration Program initiated in 1986 (for a brief description of this program see Primo Braga (1990)). The September 1991 treaty for a Chile-Mexico FTA, in turn, established a framework for the gradual reduction of tariffs affecting bilateral trade over the next four years. Accordingly, 90 percent of the goods traded between Chile and Mexico are -xpected to be exchanged under duty free status by the end of 1995. A first approximation of the impact of these arrangements can, however, be inferred from our data on LAIA 'affected" intra-regional trade (see Table 1). We utilized the 'affected' trade concept in our tabulations due to a lack of precision in some export and import statistics. According to this concept, all trade that occurs between countries which are parties to a minilateral arrangement is affected (normally in a positive direction) by the terms of the agreement. This simplified procedure does not allow for exclusions and differential treatment by type of good that typically exists under these I The estimate of 'affected' trade flows between Eastern Europe and Developed Europe should be interpreted with care (see Table 1). It assumes that all trade between the former European COMECON member and high- income European countries would be covered by preferential arrangements. Since - at least in the near future - one should not expect such a broad array of FTAs, this assumption tends to introduce an upward bias in the estimate. On the other hand, it can be argued that the use of 1988 trade flows inserts a downward bias in this figure. After all, the trade potential of Eastern European countries was significantly hampered by the maze of controls which characterized their tm.' 2 relations with the West at that time. I Other prospective minilateral agreements in Latin America and the Caribbean appear to be in a formative basis. For example, in January 1991 both Mexico and Venezuela announced their intention to negotiate bilateral free trade agreements with several Central American countries by 1996; Colombia, Mexico, and Venezuela have also signed in 1991 a trilateral framework for liberalization of trade and investment flows. There are also ongoing attempts to revitalize CARICOM, CACM, and the Andean Pact, although the proliferation of new minilateral arrangements is adding to the stress of the 'old' initiatives -- particularly, the Andean Pact. 7 agreements. For example, some products - like wood shingles exported from Canada to the United States - are excluded from the Canadian-United States FTA. Similarly, some developing country arrangements (like ASEAN or LAIA) ailow for preferential tariffs below MFN rates instead of duty free trade. Also, the degree of product coverage varies significantly among different agreements -- e.g., only 40 percent of intra-regional trade among LAIA members was conducted under preferential terms by 1988.10 Data required for measuring the imuportance of the existing arrangements were drawn from three different sources. UNCTAD (1990, Appendix Table Al) estimated total world exports for 1988 and other years (as well as trade in broad classes of goods like manufactures or energy products) and these figures formed the base for our analysis. This source also provided detailed data on major trade flows such as the intra-trade of EFTA and EEC countries, trade between Europe and Japan, Japan and North America, etc. which greatly assisted our tabulations of 'affected' and non-affected trade. Second, Inotai (1991) compiled data on intra-trade among developing countries' existing regional arrangements. In situations where required data were not available from either of these two sources (such as trade under the United States-Israel FTA) it was compiled directly by the authors from United Nations Series D Trade Tapes." III. The Relative Importance of Minilateral Arrangements Employing these three statistical sources, Table 1 tabulates information on the relative importance of exports that occur under existing minilateral arrangements. The table shows the actual total value of 1988 "affected" trade that occurs within the framework of these arrangements and each specific flow's share of world trade. Similar statistics are given for (i) all non-energy goods (i.e., excluding SITC 3) and (ii) manufactures. To '° It is worth emphasizing, however, that if MERCOSUR and other Flanned FTA initiatives - such as the Chile-Mexico FTA - evolve as planned, they will significantly increase the proportion of intra-regional trade in Latin America which is exchanged under preferential terms. " There are some inconsistencies between the data sources employed in these tabulations, but it is anticipated that their overall effects are relatively small. Inotai employed IMF (DOT) and OECD statistics for his tabulations and these data may differ from United Nations trade statistics. See Rozanski and Yeats (1992) for a detailed analysis of the importance of these differences. Data published in UNCTAD (1990) are based on United Nations trade data. 8 assist in evaluating this information, separate sub-totals are shown for arrangements involving mainly OECD countries, developing countries, and Eastem Europe. Perhaps the key point evident from the data in Table 1 concems the relative importance of European integration efforts when viewed from a global perspective. The preferential trade of developed (Western) Europe currently accounts for about $0.9 trillion which is 31 percent of world trade, or about 34 percent of global manufactures trade.'2 Another interesting point is how the established European arrangements (excluding Eastern Europe) dwarf current efforts to form a North American free trade area. At $195 billion the intra-trade of countries trying to conclude NAFTA (Mexico, Canada and the United States) is less than one-quarter that of Europe. From a global perspective, arrangements between developing countries are seen to be minuscule - they account for about three percent of world exports. Overall, the completed arrangements listed in Table 1 encompassed more than 40 percent of world exports in 1988 and if we include the potential new arrangements, the share of 'affected" world trade would be as high as 46 percent (and approximately 50 percent for trade in manufactures). As such, the clear message is that, while the further spread of regional integration efforts may threaten the multilateral negotiations process, a more imposing threat appears to be the relative size that these arrangements have already achieved and the fact that they could turn hostile to each other. A further point to consider is that these established arrangements provide an important disincentive for members to engage in multilateral negotiations which would lower the preference margins they receive in each other's markets. (see Box 2). Eastern European preferential trade arrangements, which existed until the collapse of COMECON (council for Mutual Economic Assistance) in 1991, are also reported as a memo item in Table 1. It is worth 12 A point often missed is that a special protocol between the EC and EFTA allows duty free trade in manufactured goods between members of these two blocks. Trade in some agricultural goods also occurs on a preferential basis between EC and EFTA countries. The data in Table 1 have been prepared to reflect these intra- European arrangements. It is also worth mentioning that there is currently a draft treaty proposing the establishment of an Europc an Economic Area. Under this treaty a number of single market ru!es would be extended to EFTA countries. See Box 2 for a description of some of the major dis,ncentives that preferential intra-regional trade creates for European countries to participate in multilateral negotiations. 9 TaAle 1: Value and Share of Merchandise World Trade Under Minilateral Arrangements Share of 1988 Trade (%) Value of 1988 Trade (Smnillion) All Items All Non-Oil All All Items All Non-oil All Goods Manufactures Goods Manufactures TOTAL WORLD EXPORTS 100.00 100.00 100.00 2,829,098 2,562,252 1,980,066 OECD RELATED ARRANGEMENTS 38.66 40.62 42.06 1,093,644 1,040,692 832,759 Intra/trade of Dev. Europe 30.52 32.30 34.02 863,405 827,715 673,702 United States and Canada 5.32 5.49 5.20 150,391 140,562 103,028 EEC Regional Arrangements 2.05 1.98 1.96 57,976 50,853 38,803 EFTA and Turkey (a) 0.46 0.51 0.54 12,985 12,952 10,625 United States and Israel 0.19 0.21 0.24 5,507 5,449 4,730 Australia and New Zealand 0.10 0.10 0.08 2,795 2,646 1,612 Australia and Papua New Guinea 0.02 0.02 0.01 585 515 259 DEVELOPING COUNTRY ARRANGEMENTS 2.74 3.13 3.13 77,619 80,320 61,918 Hong Kong-China 1.27 1.40 1.64 36,012 35,995 32,427 ASEAN 0.80 1.06 0.95 22,648 27,191 18,783 LAIA 0.37 0.40 0.32 10,562 10,149 6,376 Gulf Cooperation Council 0.16 0.16 0.13 4,650 4,170 2,560 Economic Community West Africa 0.05 0.04 0.03 1,513 953 650 Central American Common Market 0.02 0.02 0.02 570 567 422 SADCC 0.02 0.01 0.01 537 375 210 Mahgreb 0.02 0.02 0.01 517 440 200 CARICOM 0.02 0.01 0.01 426 320 170 UDEAC 0.01 0.01 0.01 184 160 120 TOTAL TRADE FLOWS UNDER MINILATERAL ARRANGEMENTS 41.40 43.75 45.18 1,171,263 1,121,012 894,677 POTENTIAL NEW ARRANGEMENTS 4.42 4.11 4.07 124,911 105,338 80,666 United States and Mexico 1.54 1.54 1.56 43,460 39,449 30,934 Canada and Mexico 0.05 0.05 0.05 1,439 1,388 1,002 Eastern Europe and Dev. Europe 2.83 2.52 2.46 80,012 64,501 48,730 TRADE FLOWS UNDER POTENTLkL AND EXISTING ARRANGEMENTS 45.82 47.86 49.26 1,296,174 1,226,350 975,343 Memo Item: Collapsed Arrangements 4.87 4.16 3.67 137,879 106,644 72,749 Eastem Europe Intra-Trade Eastem Europe and Cuba 4.47 3.78 3.45 126,459 96,775 68,357 0.40 0.39 0.22 11,420 9,869 4,392 Turkey and EFTA signed a free trade agreement in October 1991. This arrangement was expected to come into force in .pril 1992. Notes: Data compiled from UNCTAD (1989 and 1990) and Inotai (1991) with some statistics drawn directly form the United Nations COMTRADE data base. Developed Europe and Cuba were reporters in the COMTRADE base and are the sources for Eastem European data on these trade flows. For some of the developing country arrangements (SADCC, UJDEA, etc.) manufacturs and non-oil trade values were estimated by applying the share of the- goods in a previous year to the 1988 trade totals. The 1976 Bangkok agreement (Bangladesh, India, Republic of Korea, Sri Lanka and Laos) was not included because at present only 3 percent of the members' intra-trade is exchanged under tariffpreferences. The above tabulation consider the exchange of goods between EEC member states to constitute international trade. If the EEC were assume to be asngle unit, the global share of merchandise trade under existing and potential FrAs would be about 31 percent. 10 mentioning that several of the former socialist economies are negotiating new FTAs among themselves (e.g., Poland, Czechoslovakia and Hungary) and/or with other countries (besides those in Developed Europe)." Table 2 provides additional information relating to the point that the threat from the further spread of regional arrangements may have been exaggerated (and the actual importance of established arrangements overlooked). The table identifies major bilateral trade flows not currently affected by existing arrangements (i.e., North America-Japan, North America-Developed Western Europe, Japan-Developed Western Europe, etc.) and also indicates the 1988 value and global share of this exchange. Similar tabulations are also shown for trade in: (1) all non-energy goods and (2) manufactures. As indicated, the 13 major 'unaffected' trade flows listed in Table 2 (excluding developing countries' inter-regional trade) account for 38 percent of world trade, but the first five flows listed are of key importance as they comprise over two-thirds of this total. Clearly, if one is to examine implications of the further spread of regional arrangements for global negotiations and trading conditions these are the flows upon which one should focus attention given their importance in world trade. Our individual analysis of these bilateral flows (see Table 3) suggests that, unless there are radical and unexpected developments, it is unlikelv that FTA arrangements could be concluded among the involved countries. For example, approximately $200 billion, or almost one-sixth of global unaffected trade, occurs between North America and Western Europe. Disputes between the main trade actors (the United States and the European Community) in these regions have been the main obstacles for a successful conclusion of the Uruguay Round and it is difficult to see how the points of contention (such as those relating to agricultural trade policy issues) could be more easily resolved in an FTA as opposed to MTN negotiations (similar objections occur on other trade flows - like Australia/New Zealand and the EEC). North America Japan, and Japan-Western Europe, account for a further one-fifth of the unaffected trade flows and it is again difficult to see how bilateral FTA deals could be cut here. In both markets Japan has been the objective of important discriminatory trade barriers (like VERS or antidumping duties - see Laird and Yeats, 1991 for details) and the sense that Japan does not 'play by the rules" has produced 13 The Black Sea Economic Cooperation Zone (BSECZ), for instance, intends to eliminate intra-regional trade restrictions. Originally conceived in 1990, the BSECZ has been enlarged to accommodate several new states born from the disintegration of the Soviet Union. Its membership now includes: Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece, Moldova, Romania, Russia, Turkey, and Ukraine. 11 some rather strident calls for further protective measures. In these cases 'managed trade" appears to be a more likely outcome than a FTA arrangement (see section IV which follows for a discussion of this point). The possibility of a minilateral arrangement between Japan and other Asian countries, in turn, cannot be dismissed as easily. Actually, there have been recent proposals - e.g., the concept of an East Asia Economic Group advanced by the Malaysian Prime Minister - supporting such an idea. We believe, however, that the export orientation of the Asian economies tends to inhibit the attractiveness of any proposal which would entail explicit discrimination against outsiders -- particularly, the U.S. (see Table 3). Among the potential FTA arrangements falling below the US$ 50 billion "cut-off' used for Table 3, there is - at least at the level of political rhetoric - one that has already began to be implemented: an FTA between the United States and Latin American countries as suggested by the Enterprise for the Americas Initiative. It seems, however, that significant negotiations will only occur after the conclusion of the NAFTA negotiations and even then there are important obstacles to its implementation. The main one hinges on differences in the levels and character of protection between these countries; these differences often vary directly with levels of development. For example, Erzan and Yeats (1991) found that less than 10 percent of exports from Bolivia, Chile, Ecuador, Peru or Venezuela to he United States faced tariffs greater than 5 percent and, with the exception of the MFA and some agricultural products, few nontariff barriers were encountered.'4 In contrast, U.S. exports to Latin America face tariffs that average 15 to 50 percent in different countries and a large number of nontariff measures. This evidence suggests that there would be implementation difficulties since FTA gains from a mercantilism perspective would be skewed toward the United States - the country facing the highest trade barriers.'5 Similar conclusions apply 14 Many tariffs of less than 5 percent resulted from general across-the-board tariff cutting procedures applied in previous MTNs and it is often suggested that they have insignificant trade effects. In fact, one proposal in the current multilateral negotiations termed them "nuisance tariffs" and suggested they be dropped automatically. The relatively low tariff barriers facing Latin American exports to the U.S. are due to several factors: tariff reductions negotiated in previous MTNs; existing preference schemes like the GSP or CBI; and the concentration of some countries' exports on raw materials that have traditionally faced zero or low trade barriers. The Asian NICs would have a much higher incentive to explore PTA arrangements due to the more restrictive barriers they often face. '5 It can be argued that this danger will be minimized by the U.S. negotiating strategy for the EAT, which seems to stress the need for Latin American and Caribbean countries to implement significant structural reforms (including trade liberalization) before embarking on PTA negotiations with the U.S. In any case, an FTA in the Western Hemisphere will not be put in place in the near future. For further details on Latin American and Caribbean countries reactions to the EAI, see Primo Braga (1992). 12 Box 2 'Fortress" Europe and the Disincentive for Global Negotiations A key point that is often not adequately recognized is that FTAs create a disincentive to engage in global trade negotiations. Also, as a general rule, the more important (globally) the FTA, the stronger will be the disincentive. Since our tabulations (Table 1) show that FTAs (or related arrangements) now cover approximately one-half of global trade it is important to understand the nature of this force working against multilateral negotiations. Institutional arrangements in Europe provide a useful example. Three key arrangements influence the intra-trade of industrial Europe: 1. Under the terms of the EC convention trade between member countries is barrier free -- while nonrmember countries exporting to the Community face tariffs and, frequently, nontariff barriers. 2. Similarly, EFTA provides for duty free trade among its members. Outside exporters to EFTA face the tariff and NTBs of the individual importing country - a common tariff does not exist as in the case of the EC. 3. A special EC-EFTA protocol allows duty free trade in manufactures between the two blocks and also extends favorable terms to some agricultural goods. As a result, intra-European trade occurs under very favorable terms. Sweden can now export shoes to Denmark under a tariff preference of 25 to 30 percent. Finland has textile and clothing exports to Norway (thanks to the protective umbrella of 25 to 50 percent tariffs and NTBs on outsiders), while Greece exports wheat to Germany thanks to variable import levies that have been estimated at several hundred percent on Argentina, Canada, Australia, the United States and other 'efficient' producers. Now, what would happen to this intra-trade if the European margins of preference were eroded through trade barrier reductions negotiated in MTNs. Clearly, some trade - like Swedish shoes or Finish clothing - - would be largely eliminated as domestic producers would be placed on an equal footing with more efficient outside suppliers. In other cases, trade flows, profits, and employment in industries that now enjoy major intra-European preferences would be sharply lower due to their greater exposure to outside competition. In short, the industries, workers and politicians that would be adversely affected by such new competition probably feel they have a major stake in seeing that EC-EFTA external trade barriers are not lowered in any multilateral negotiating process. Major European losers - like consumers who pay highly inflated prices due to protection - generally are not adequately informed about the added costs they bear and are not a very effective political force for reducing trade barriers. TAble 2. Ic Relative inyouance of Merd ndis Trade Fows not nfluenced by RegonaTrade Aangemns in 1988 Share of 1988 Wodd Trade (%M Value of 1988 Trade ($milEon) Trsde Fhrv Items G;oodsb nflt Titem Ci2odb mZaim c TCOrAL WORLD EKPORTS 100.00 100.00 100.00 2,829,098 2,562,252 1,980,066 Edatine and Potenti FrA Trade Usd in Tabk 1 45.82 47.86 49.26 1.296.174 1.2263S0 97 Cokloed Arnnements 4.87 4.16 3.67 137.879 106.644 72.749 Maior Noi-PrefentialTrade FTlws 38.29 38.94 41.72 1.03.45 997 261 North America - Developed Erope 7.14 7.56 8.31 202,105 193,717 164,561 North America - Japan 4.94 5.35 5.90 139,846 137,091 116,890 North America - Deveoping South nd SE Asi 4.77 S.12 S.82 134,999 131,9 115,152 Japan- Dvelopuwg Souh Ams 3.96 3.98 4.73 112,134 102,04, 93,683 Developed Eurpc - Developing South and SE Asia 3.46 3.52 4.47 97,856 90,303 88,498 lapan- Dveloped Europe 2.84 3.12 3.92 80,206 80,040 77,712 Developed Europe- Develping We Aa 2.00 1.69 1.85 56,460 43,388 36,702 w Developed Europe - Developin Afiica 2.44 2.04 1.81 68,935 52,27t 35,795 Deveoped Eurpe- Devwlopg Amenic 1.86 1.92 1.39 52,729 49,126 27,465 Eastern Europe - Developing Countries 2.01 1.86 1.37 S6,727 47,769 27,214 North Amrika - Develping Americea 1.62 1.47 1.21 46,014 37,587 23,906 Autraia/New ealand - Developed Europe 0.61 0.64 0.52 17,216 16,510 10,238 lapan-Australa/New Zedand 0.64 0.63 0.42 18,178 16,134 8,347 bot-Regional Develocine Country 2.03 1.16 1.17 57,509 29,830 23,079 Total of Bilate Plows Lied Above 88.98 90.96 94.65 2,517,458 2,330,940 1,874,255 1 Excludes CBI(Caribbean Bes Initiative) and CRIRCAN (Canada's Preferental Trade Scheme for the Co_monwealth Caribbean). 2 Although a prefeential trade famework among developng conti exists under UNCTAD's Global System of Trade Preferences (GSTP) thi systm has, ts far, been lte utilized. Note: For convenience, regional groupg adopted we thos employed by the Statisd Office of the United Nation. See UNCTAD (1990). 14 to trade flows between other developing and industrial countries (Erzan and Svedberg (1989), for instance, show that sub-Saharan countries face few important trade barriers in industral country markets). IV. The Mansd Trade Alernative While our assesment (Table 3) of the likelihood of FTAs being negotiated for the major trade flows currently 'unaffected' was not positive, this does not suggest that multilateral disciplines are, and will continue to be, binding as far as these flows are concerned. Drawing on trade intervention data for the U.S., Table 4 shows that a high proportion of these major inter-regional trade flows 'unaffected" by minilateral trade arrangements take place under "discriminatory" trade barriers reflecting managed trade conditions (particularly VERs) and/or influenced by 'unfair trade" laws - particularly, countervailing duties and antidumping cases."6 It is also clear from Table 4, that Japan is the main target of U.S. managed trade initiatives. Specifically, some $68 billion of U.S. imports from Japan are subject to discriminatory measures - this is more than 13 times the combined imports from Germany, France and the U.K. As Table 4 suggests, managed trade has a major role in shaping current international trade relations. One should not infer from this data 'that nles do not work and more managed trade must, therefore, be the way to go' (Bhagwati (1991, p.23). But an eventual failure, or less than satisfactory outcome, of the Uruguay Round would advance the cause of those who believe that a fix-quantity trading regime is an inevitable development. This could not only impede the rollback of the large array of already existing discrminatory trade barriers, but also foster their use in areas characterized by significant trade dynamism (e.g., high-tech trade). Advocates of managed trade have used different rationales to justify govemment intervention. These "rationales," as far as motivations are concerned, can be classified as follows: macroeconomic, systemic, and 16 The NTBs Listed in Table 4 are discriminatory in that they are directed against anecific countries whereas other measures, like global quotas or variable import levies, do not differentiate among foreign suppliers. As indicated, the U.S. discriminatory measures are very heavily concentrated on Japan - particularly Japanese exports of high technology products. The authors have undertaken a separate analysis of EEC discriminatory trade barriers and also found that these restrictions are primarily directed at Japan (results available from the authors on request). With Canada, United States, and Sweden as the combined compartor group our results indicated that over 90 percent of EEC discriminatory protection was directed against Japanese exports. Laird and Yeats (1991) provide additional information on the application of NTBs by major trading nations. Table 3. Obrvations on Poential FA Arangement Between Specific Trding Pamrn (Unaffcted trade flows over $50 billion) Share of totl xpot goaing to TIsde thm d ae o (S) 1988 Vaue of Share of aFl FrA 1970 1988 co(Smni1.) unaffeced trade p North America and Debve d EAope - - 202,105 14.5 An unlikel aragemt. be current MTNs salled due North Ameica's expots to Europe 29(43) 21(33) 90,174 6.5 to diputes btween dkes paties and there s no Eupe's expots to Noth Ameica 9() 7(31) 111,931 8.0 indicaion they would be easier to addrmes biaeray. Eurp now weem preoccupied wth the single MArket Initiaive and related problem. North Ameica and Jemu - - 139.846 10.0 Wide U.S. deficits andempts to band Japn an North Awrica's expor to Japan 9(14) 10(16) 43,162 3.1 unfair' ading patner make this combinaton unEkely - Japan's export to Nordh Amenca 34 37 96,684 6.9 as do the large number of discnimin y NTBs applied to Japan. A mor libly outcome is managed trade. Nordh America and Develoing South and SE Asia - - 134, 9.7 Persistent U.S. deficits with South and SE Asia, as we1 North Amrica's expots to South Asia 7(10) 11(17) 47,446 3.4 as the ltr's concentrati of exports in 'swnitive' Developing South Asia's etpo to Japan 25(31) 29(37) 87,5S3 6.3 sectors make this aagement diiEcult. U.S. discrimtory proteci also targets SE Asian NICs. Japan and Develoing Soulh and SE Asia - - 112.134 8.0 Developing Aia's reliance on the U.S. export market Japan's exots to South Al 25 25 67,109 4.8 makes thi combinatin unlikely, not to ntion Worid Developing South Aa's expos to Japan 17(21) 15(19) 45,025 3.2 War n memories. Alo, Yeats (1991) sow that Developing South ad SE Asia countws have very simir Comparative advant profiks - a point that would make an FIA diffwcult. Devehloed Eumre and Developing Soh and SE Asia - - 97.856 7.0 South Asia's reliance on the North American market all Developed Europe's xports to Souh Asia 3(7) 4(13) 46,316 3.3 but precluds tisa ment. SE Asian NICs are oflen Developing South Asia's exports to Euope 19(24) 17 51,540 3.7 taere by discrminaty Eumpean tade bariers. Jaman and Develoged Euro e - - 80.206 5.8 Distance is a negative factor as is Japan's export Japas expos to Europe 15 21 55,736 4.0 concentration in sensiive sectors. he fict that Japan's Developed Europe's export to Japn 1(4) 2(7) 24,470 1.8 North Amercan exports are nealy twice great as those to Europe makes this arra em . Devetoed Europe and Devewoine Africa - - 68.93S 5.0 Vat differences in industrialization vels make thae Developed Europe's exports to Africa 5(14) 3(10) 37,614 2.7 combinations very nlikely. There are few setors where Deveoping Afica's expots to Eurpe 68(72) 59(63) 31,321 2.3 Aiaindury could compete with Eumope. Estern Euroe and Developing Counies - - 56.727 4.1 Major Etern European internal probleo, plu a ack of EAstem Europe's exports to Developing Countries 13(34) 17(37) 37,479 2.7 expeiience in market-oriened relation with developing Developing couni expors to Eaten Europe 6(7) 3(5) 19,248 1.4 counries, makes agremet her vey unlikel. Developed Europe and Developing West Asia - - 56,460 4.1 Industrialization level and cultural differences make major Develped Eupe's exports to Asia 2(7) 3(10) 36,631 2.6 FA ageements here unlikely. Deeloping West Ada's export to Europe 44(47) 23(27) 19,829 1.5 Develoced Europe and Develoina Americas - - 52.729 3.8 Developing Amerca's reliance on the U.S. market all but Developed Europe's expors to Amricas 4(12) 2(7) 28,337 2.0 precde these arrangements. Alo, industrialization Developing Amerca's exports to Europe 32(39) 23(27) 24,392 1.8 level differenes ae a major negative factor. Fgues in parenthes exclude the exporting region's intrratradc. 16 sectoral (or microeconomic). Although, the use of managed trade to pursue macroeconomic objectives does not find many supporters among economists, still, the deterioration of the US current account over the 1980s has led to several proposals - usually, focusing on the US-Japan bilateral imbalance - in favor of quantitative trade targets (US House of Representatives 1986; Kissinger and Vance 1988; Prestowitz 1988; Dombusch, Krugman, and Park 1989). Managed trade is presented in most of these proposals as an instument to force U.S. trade partners to open their markets. The limitations of this approach to 'correct' US current account deficits are well known, yet, supporters claim that the increase in demand for US goods would tend to ease, via a terms-of-trade effect, the impact of a fiscal-induced real income adjustment. A 'systemic" rationale in favor of managed trade, in turn, has been developed by those concerned with the sow-called Japan question' (Bhagwati 1991). According to this perspective - e.g., Fallows (1989) - Japanese policies reveal a social (cultural ...) preference for a fix-quantity trade regime instead of a rles-oriented regime. Therefore, the only way to effectively negotiate the opening of the Japaniese economy would ba by adopting managed trade practices. This rationale is based on the thesis that Japan is an outlier among trading nations - moro precisely, that Japan is a relatively closed economy. To the oxtent that the auacy of this proposition remuins open to debate, the economic relevance of the systemic argument is also questionable.11 Sectoral (or microeconomic) rationales, although equally controvesial, have provided the most popular arguments used to support managed trade initiatives. In the past, these initiatives were often framed as defensive actions to ease the adjustment of mature industries in the industrialized countries (e.g., the MPA). Accusations of unfair trade practices by dynamic exporters were also a common characteristic of defensive managed trade policies (e.g., steel VRAs negotiated by the US and the EC with Japan and several NICs). More recently, however, the demand for managed trade has become increasingly associated with the aspiration to promote 'strategic' industries in order to foster national competitiveness (Tyson 1990). This development, in par, reflects the perception that Japan has successfully targeted 'strategic' industries." This perception, reinforced by the 17 Lawrence (1987), Balassa and Noland (1988), and Dornbusch (1990), for instance, argue that Japan is - vis- a-vis other OECD countries - a closed economy. Saxonhouse (1985) and Bhagwati (1991), in turn, dispute this conclusion. For a review of the related literature see Takeuchi (1988) and Srinivasan (1991). "S There is no consensus on the precise meaning of the term 'strategic industry.' Most of the contributions in this area tend to list high sunk costs in R&D, 'positive extrnalities, large economies of scale based on learning by doing, and important upstream and downstream linkages' (Michalski 1991, p. 9) among the typical attributes of strategic industries. As Stevens (1991, p. 98) points out, however, the fiudamental issue here is 'the fact that many governments [in spite of the non-existence of an accepted working definition] are able to identify what they perceive to be 'strategic' industries and ale willing to promote them with specific policies.' 17 economic success of a few followers of the Japanese-paradigm -- e.g., Republic of Korea -- has given a new appeal to interventionist trade and industrial policies as far as policymakers are concemed. At the same time, a flurry of theoretical contributions in the context of the so-called "strategic trade theory" have seemingly given a new "respectability" to interventionist policies.'9 In this paper, we simply argue that the major "unaffected" trade flows identified in Table 2 provide fertile ground for further managed trade initiatives. Our analysis reflects the following considerations: (i) currently, high-technology industries are the preferred choice for those who support the "strategic industry" argument -- see Box 3 for a discussion of definitions for high-tech industry and trade; (ii) the relative importance of high-tech trade vis-a-vis global trade flows has increased significantly over the last three decades from about 10 percent in 1965 to 22 percent of world trade in 1989w; (iii) the United States is perceived to be losing comp'-titiveness in high-tech sectors;2" (iv) and Japan has assumed a commanding position in high-tech trade. As Table 5 shows the United States ran a $24 billion trade deficit in high technology trade with Japan in 1989 (the EEC deficit with Japan was $19 billion) and these products were often the focus of U.S. discriminatory trade restrictions against Japan. Growing U.S. trade deficits in high-tech trade vis-a-vis Japan and the Asian NICs, together with the perception that their success has been fostered by government intervention, is an additional factor eroding U.S. support for the a non-interventionist approach with respect to high-tech industries. In the EC, the search for European "champions" in high-tech sectors provides another likely source of additional mnanaged trade initiatives against not only East Asian firms, but also U.S. companies.' There is also a growing recognition that existing multilateral trade disciplines are not sufficient to avoid international trade frictions in high-tech sectors. Accordingly, there have been proposals for drafting a code for innovation policies - encompassing trade, research 19 For a review of the strategic trade theory see, for instance, Krugman (1987) and Helpman (1989). For critical analyses see, for instance, Dixit (1987), Bhagwati (1989) and Haberler (1990). 20 See the Appendix for detailed statistics on trade in high-tech products. 21 Revealed comparative advantage indices for high-tech trade do not confirm this perception for the 1968-88 period. Yet, the significant increase in competitiveness of Japan and some NICs in terms of high-tech trade in the same period - see Appendix Table 5 -- may explain the perception of relative ITS decline. 22 See, for instance, Koopmann and Scharrer (1990). 18 Tahle 4. The Incidence of Discriminacory U.S. Trade Barriers on Japan, Federal Republic of Germany, United Kingdom and French Exports, (Trade values nre for 1986 and trade barriers are those in place in 1990) Fed. Republic of Affected Trade of all Japan Germany United Kingdom France Four Countries NTB Tariff Value Tariff Value Tariff Value Tariff Value Value Japan's CoJe Description Lines ($mill.) Lines (Smill.) Lines (Smill.) Lines ($mill.) (Smill.) Share % 11 72 Retaliatory duties 3 1,429 7 30 6 4 7 6 1,496 97.3 2510 Anti-dumping duties 83 6,297 16 872 6 473 19 419 8,061 78.1 2520 Countervailing duties 2 139 1 8 4 10 3 11 168 82.7 3230 Quota allocated by country 16 70 7 32 11 10 11 40 152 46.1 3410 Voluntary export restraint 106 27,676 105 810 98 270 93 496 29,252 94.6 3500 MFA restraint agreement 489 1,163 0 0 0 0 0 0 489 100.0 4220 Impot monitoring 3 942 4 358 1 - 0 0 1,300 72.5 6310 Anti-dumping investigations 29 29,945 9 633 9 332 3 348 31,258 95.8 6400 Undertaking 2 942 1 3 1 _ I 1 946 99.6 All Above Measures? 733 68,603 150 2,746 136 1,099 137 1,321 73,122 93.9 The United States has also employed two additional discriminatory trade measures, namely, voluntary price restraints (primarily against Republic of Korea) and countervailing duty investigations. Neither of these two measures has been used against Japan, Germany, France or the United Kingdom. 2 The totals recorded in this row may involve some double counting of discriminatory barriers if two or more of these measures are applied to the same tariff line product. For this reason one should not attempt to relate the value figures shown above to total trade in order to derive an NTB 'coverage ratio'. Source: Authors' tabulations using the UNCTAD Data Base on Trade Control Measures and the World Bank SMART system. 19 Box 3 Definitions of High Technoloev Industries and Trade High-tech products are usually defined as products for which investment in the creation of knowledge are responsible for a substantial share of their production costs (Krugman 1987). As Kreinin (1987) points out, to define a high-tech sector in terms of its factor inputs -- e.g., the relative intensity of research and development (R & D) investments, or the proportion of scientists and engineers in the labor force -- does not allow one to discriminate between industries characterized by different rates of technological diffusion. These indicators, by being static in nature, reflect the prevailing situation at a given point in time and may provide a distorted picture as time goes by as some industries become less active in technological terms, while new high-tech sectors evolve. Most of the relevant literature, however, uses some variation of the input criteria in defining high- tech industries. The better known high-tech definitions are reviewed in Hatter (1985). We adopted the definition proposed by Davis (1982), which estimates the technology intensity for any given industry in the United States in terms of the R&D expenditures required to produce a certain manufactured good. This methodology takes into account not only the direct R&D investments made by final producers, but also the indirect R&D expenditures made by suppliers of intermediate goods used in the production of the final good. The "indirect' R&D contribution was estimated by Davis using input-output techniques. Based on the United States Standard Industrial Classification (SIC), industries were ranked according to their R&D intensity and the first ten SIC groups (3-digit classification ) were designated as high-tech industries. The industry ranked as number ten had an R&D index 30 percent greater than the industry in eleventh place and more than 100 percent above the average for the manufacturing sector as a whole. In other words, Davis' methodology imposes a much higher standard in terms of R&D intensity than the 'above average level' criteria often adopted in the literature. In order to translate Davis' industry classification into a definition of high-tech trade, we used the concordance between the SIC grouping and the SITC Revision 1 classification proposed by Hatter (1985). Given the imperfect match between SIC and SITC codes, Hatter estimated high-tech weights (the proportion of US high- tech imports and exports in each given SITC group, based on 1975-1977 US trade data ) as a way to highlight the relative importance of high-tech products in any given SITC grouping. In preparing our data on high-tech trade, we considered only those SITC groups (at 4-digit level) which presented a high-tech weight greater or equal to 50 percent. Annex tables in this report identify individual hi-tech products and also provide statistics on their trade. It is worth mentioning that the appropriateness of this methodology relies on the assumption that the use of United States input-output relations and trade patterns for high-tech production does not introduce a perverse bias in the classification. 20 and development, competition, and foreign direct investment policies, as well as financial market regulation -- at OECD level as a means to promote policy-convergence over the long-run (Ostry 1990; 1991). Such an initiative clearly reflects a desire to create a fix-rule multilateral regime for high-tech industries in order to avoid the proliferation of managed trade initiatives, but the prospects of such a code being implemented in the near future seem dim at best.2? V. Final Comments Managed trade initiatives seems to pose a larger threat to the multilateral trade system in a post- Uruguay Round world than new preferential trading blocs. High-tech trade will probably provide the main points of conflict between OECD countries. Accordingly, a growing resort to managed trade solutions appears likely. Such a development, in turn, may increase the danger of trading blocs turning hostile to each other. If events proceed along these lines, developing countries may have to deal with some unpleasant realities in the 1990s. It is doubtful that minilateralism will be rolled back from its current high profile as far as trade flows are concerned. On the other hand, a further major expansion of minilateral arrangements among industrialized countries - beyond the arrangements identified in Table 1 - does not seem to be an immediate threat. Managed trade practices, however, will continue to add strain to the frail multilateral trade system built around the GATT, fostering a power-based system of international economic relations. It is improbable, to say the least, that developing countries could benefit from such development. 23 It is also worth remembering that a much more immediate threat to the multilateral system remains at large in thl context of an eventual 'failure' or unsatisfactory conclusion of the Uruguay Round negotiations (Primo Braga 1991). Against this background, the proliferation of country specific discriminatory trade-management initiatives (i.e, VERS, etc.) for high-tech trade seems even more probable. Table 5. Trends in United States Expotts of High-Tech Products to Selected Markets: 1965 to 1989 High Technolory Expon Facts 1965 1975 1985 1987 1989 Destination of U.S. Exports (Smillion) Argentina/Brazil/Chile 139 971 1,601 2,459 2,976 European Comnunity' 1,434 5,888 18,544 23,481 36,163 Developing South and SE Asia 338 2,063 10,191 13,008 20,083 Japan 324 1,406 6,114 8,019 12,378 World 4,778 21,951 63,368 78,384 110,367 U.S. Hiuh-Tech Trade Balance (Smillion) ArgentinatBraziUChile 135 883 720 1,295 1,723 European Community 844 3,452 5,968 7,986 17,199 Developing South and SE Asia 300 597 -2,714 -6,878 -8,096 Japan -101 -1,219 -18,668 -22,186 -24,313 World 3,182 12,059 -2,707 -5,258 -,444 Hi-Tech Trade Balance As a Share of U.S. High-Tech Exports (%) Argentina/BraziUChile 97 91 45 53 58 European Commnunity 58 59 32 34 47 Developing South and SE Asia 89 29 -27 -53 -40 Japan -31 -87 -305 -276 -196 World 66 55 4 -7 2 Hi-Tech Goods as a Share of All U.S. Exports (%) Argentina/BrazilUChile 17 24 36 43 43 European Conmmunity 21 26 43 44 47 Developing South and SE Asia 13 21 38 39 37 Japan 16 15 28 29 29 World MEMO rTEM: EEC Hi- Tech Trade Performnance Hi-Tech Exportsto Japan (Smillion) 108 612 1,678 3,112 3,926 Hi-Tech Trade Balance with Japan ($million) 22 -1,024 -8,064 -14,615 -18,88S Hi-Tech Balan^e as a Share of Hi-Tech Exports -20 -196 480 -470 -476 Hi-Tech Goods as a Share of All Exports 21 22 22 20 18 The 13 percentage point increase over 1987-89 is largely due to a $5 billion upsurge in United States aircraft cxports. 22 Annex List of Major Regional Integration Arrangements Andean Pact Bolivia, Colombia, Ecuador, Peru, Venezuela. ASEAN Association of South East Asian Nations (Brunei, Indonesia, Malaysia, Philippines, Singapore, Thailand). CACM Central American Common Market (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua). CARICOM Caribbean Common Market (Antigua and Barbuda, Barbados, Belize, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts and Nevis, St. Lucia, St. Vincent, Trinidad and Tobago). EC European Conmmunities (Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, United Kingdom). ECOWAS Economic Community of West African States (Benin, Burkina Faso, Cape Verde, Gambia, Ghana, Guinea, Guinea-Bissau, Ivory Coast, Liberia, Mali, Mauritania, Niger, Nigeria, Senegal, Sierra Leone, Togo). EFTA European Free Trade Association (Austria, Finland, Iceland, Norway, Sweden, Switzerland). EC-EFTA A protocol allows for free trade in manufactured goods between these two trading blocks. An agreement for the creation of an European Economic Area (EEA) is being negotiated. GCC Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, United Arab Emirates). LAIA Latin American Integration Association (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, Venezuela). Maghreb Arab Maghreb Union (Algeria, Libya, Mauritania, Morocco, Tunisia). MERCOSUR South Cone's Common Market (Argeuitina, Brazil, Paraguay, Uruguay) SADCC-PTA South African Development Coordination Conference (Angola, Botswana, Lesotho, Mali, Mozambique, Swaziland, Tanzania, Zambia, Zimbabwe) and Preferential Trade Area of Eastern and Southerm African States (members of SADCC, minus Angola, plus Burundi, Comoros, Ethiopia, Kenya, Mauritius, Rwanda, Somalia). UDEAC Central African Customs and Economic Union (Cameroon, Central African Republic, Chad, Congo, Equatorial Guinea, Gabon). 23 References Aho, C. Michael and J.D. Aronson (1986). 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The Relative Importance and Major Sources of High-Tech Products in Global Trade Hi-Tech Goods Originating in: of which: Share of Hi-Tech in All Hi-Tech Industrial Other Year world trade (%) good Countries USA japEC(0E EFTA Countries (Value of exports in terms of $US million) 1965 10 17 17 5 1 9 2 - 1970 14 38 36 10 4 18 2 2 1975 12 94 88 22 10 45 6 6 1980 13 233 211 51 30 106 13 22 1985 19 296 269 63 53 114 15 27 1987 20 432 372 78 76 175 25 60 - 1989 22 557 479 110 97 218 31 78 (Share of Hi-tech trade originating in different regions - (%) 1965 - 100 100 29 6 53 6 - 1970 - 100 95 26 10 47 5 8 1975 - 100 94 23 11 48 6 6 1980 - 100 91 22 13 45 6 9 1985 - 100 88 21 18 38 5 9 1987 - 100 86 18 18 40 6 14 1989 - 100 86 20 18 39 6 14 Source: Based on data derived from the UNSO Comtrade Data Base. The failure of some countries to report trade statistics to the United Nations may cause the value of trade in hi-tech products to be misstated. 28 Aovendix Tablo 2. The Origin and Destination of High Tech Trade in 1988 of,di of Wh __O_ au M Soth EDst EasteS Not 2WEd b*AW Eg U12) EFfA Amui *b 1MecIA A is AIa Otb- E- (valm of ad etin W. of tuY mIlt) Wodd 507.5 372.6 204.9 32.4 103.2 18.4 114.7 18.8 5.5 64.6 25S 8.8 20.2 ldtigla Coald" 445.4 334.0 192.7 31.2 825 15.3 93.9 17.1 4.1 49.1 23.6 6.8 17.5 EEC(12) 210.7 171.7 120.8 21.3 21.2 4.0 27.7 3.3 1.8 8.1 14.5 4.5 11.3 EFIA 30.0 24.3 16.4 3.8 2.7 0.8 3.8 0.6 0.2 1.0 1.9 1.3 1.9 Nath A I I 110.5 73.6 32.8 3.6 22.3 10.4 33.7 11.1 1.2 16.4 5.0 0.2 3.2 l1 928 63.6 22.3 2.5 36.0 0.0 28.2 2.0 0.9 23.1 2.2 0.8 1.0 DswkIf Ctb 60.8 38.3 12.0 1.1 20.6 3.1 20.6 1.7 1.3 15.4 2.2 1.2 1.9 Laa1 Azind ad Cuibbosn 4.8 3.1 0.8 0.1 1.9 0.1 1.7 1.2 - 0.3 0.1 - 0.0 S S As 0.9 0.3 0.2 - 0.1 - 0.3 - - 0.1 0.1 0.3 0.0 Eat Ads 49.3 32.3 9.4 0.8 17.8 2.9 16.8 0.3 0.8 14.6 1.0 0.2 0.2 Odta 5.7 2.8 1.6 0.1 0.9 0.1 1.9 0.2 0.5 0.3 0.9 0.6 1.0 (&mem of Uast to dilffma dkallmc * pterm) Wosd IOD 73 40 6 20 4 23 4 1 13 5 2 4 h lhm1 Cawudl 100 75 43 7 19 3 21 4 1 11 5 2 4 EC(12) 100 81 57 10 10 2 13 2 1 4 7 2 6 DFA IOD 81 55 13 9 3 13 2 1 3 6 4 6 Noth Anisso 100 67 30 3 20 9 30 10 I IS 5 - 3 jlp 100 69 24 3 39 0 31 2 1 25 2 1 1 Dbilog Ceairb 100 03 20 2 34 5 34 3 2 25 4 2 3 LatI Amead C&rIm 100 65 17 2 40 2 35 25 - 6 2 - 0 ScAbAa 100 34 22 - 11 - 33 - - II I 1 33 0 Ent Ask 10 66 19 2 36 6 34 1 2 30 2 - - Odom IOD 49 28 2 16 2 33 4 9 5 16 11 18 S;: UNSO Cumtab Date Bas. 29 Appendix Table 3. The Twenty-Five Largest Exporters of High Tech Manufactured Goods Trade balance (Smillion) Share of world exports (%) Value of exnorto (Smillion) Exrter 1968 1978 1988 1968 1978 1988 1968 1978 1988 United States 3,891 12,130 8,716 29.2 21.2 18.5 7,413 31,882 94,734 Japan 1,417 16,454 71,315 8.5 13.7 17.5 2,173 20,607 89,694 Germany, Fed. 1,969 6,752 9,170 14.9 14.0 10.8 3,768 21,017 55,499 France 46 -124 -1,296 6.6 6.9 6.6 1,684 10,458 34,009 United Kingdom 1,132 2,812 -5,669 9.5 7.8 6.3 2,415 11,736 32,007 Netherlands 38 -110 -2,861 5.1 4.7 3.9 1,287 7,090 19,827 Taiwan, (China) -104 873 7,623 0.4 1.7 3.2 99 2,563 16,595 Italy 161 -307 -6,803 4.5 3.7 3.2 1,148 5,609 16,247 Rep. of Korea -176 -584 4,263 0.1 1.0 2.9 17 1,544 14,682 Belgium-Luxembourg -55 -221 -1,209 2.9 3.5 2.7 730 5,219 13,954 Canada -610 -1,453 -3,437 4.3 2.9 2.7 1,087 4,423 13,717 Singapore -103 -570 1,697 0.1 0.9 2.4 16 1,380 12,531 Switzerland -27 847 -70 2.8 2.7 1.9 704 4,018 9,692 Hong Kong -151 -698 -5,004 0.6 0.9 1.6 148 1,392 8,369 Sweden -273 -405 -1,027 1.9 1.7 1.5 480 2,581 7,589 Mexico -355 -443 804 0.4 0.9 1.4 96 1,339 7,112 Malaysia -51 -293 770 - 0.6 1.2 3 885 6,044 Austria -591 -1,354 -5,566 0.7 1.1 1.1 170 1,585 5,874 Ireland -75 -140 1,477 0.3 0.6 1.1 67 844 5,618 China 45 -262 -2,570 0.2 0.2 1.1 41 262 5,394 Spain -310 -1,039 -7,041 0.4 0.7 0.8 100 1,034 4,020 Denmark -203 -845 -1,420 0.8 0.7 0.7 194 1,119 3,486 Brazil -389 -1,318 -1,001 0.1 0.5 0.6 26 728 3,106 Australia -592 -1,355 -5,566 0.5 0.8 0.6 123 1,218 2,978 Thailand -152 -598 -1,330 - 0.1 0.,4 2 214 1,941 All above countries 4,482 27,749 56,533 94.6 93.5 94.7 23,991 140,747 484,719 World -- - - 100.0 100.0 100.0 25,349 150,569 511,886 Source: UNSO Comtrade Data Base. A*ienix Table 4. The Relative Inporance of Individual Products in All High Tech Global Exports Share in All Hi-Tech Product Exports (%) Value of exports in $ million SITC Descriotion 1968 1988 1968 1973 1978 1983 1987 1988 714 Office Machinery 8.6 18.4 2,279 7,235 15,071 34,408 77,857 93,168 724 Telecommunications Apparatus 12.3 1 1.5 3,246 9,568 22,741 30,972 53,094 58,363 861 Scientific Instruments 9.0 9.4 2,393 6,112 14,754 20,773 35,859 47,673 729.3 Transistors, Photocell, etc. 3.1 8.7 819 3,987 8,458 17,838 33,997 44,288 734 Aircraft 13.5 7.9 3,558 6,298 14,079 24,831 32,633 39,967 581.2 Productsof Polymerization 5.9 7.6 1,549 4,814 10,706 16,594 20,600 38,742 711.5 Internal CombustionEngines 7.4 5.6 1,963 4,661 11,367 15,119 24,028 28,425 541 Medicinal Products Excluding Phamnaceuticals 7.1 5.5 1,888 4,698 10,526 15,030 24,950 27,993 729.9 Electrical Machinery and Apparatus 3.2 3.5 847 2,590 6,421 8,323 15,165 17,836 891.1 Tape Recorders 2.8 3.1 743 1,983 3,843 9,995 16,742 15,768 581.1 Plastics and Products of Condensation 3.2 2.4 840 2,210 4,710 7,063 13,549 12,303 513 Inorganic Elements 3.8 2.3 1,000 2,585 5,823 8,596 10,435 11,468 711.4 Aircraft Engines 4.1 2.2 1,082 1,898 3,036 4,912 9,603 11,226 862 PhotographicSupplies 2.4 2.1 625 1,532 3,840 5,933 9,600 10,516 891.2 Recorders of Sound 0.8 1.9 206 642 1,756 4,168 8,716 9,794 651.6 Synthetic Fibers 4.7 1.7 1,231 3,559 4,884 5,973 9,387 8,800 514 Other Inorganic Chemicals 2.5 1.3 649 1,324 3,014 4,249 6,043 6,730 515 Radioactive Materials 0.3 1.0 85 489 3,005 3,971 5,348 5,192 711.6 Gas Turbines 0.5 0.5 139 417 2,240 3,805 4,307 5,002 533.1 Coloring Materials 0.6 0.5 162 387 742 1,016 2,265 2,620 541.9 Pharmaceutical Goods 0.3 0.4 85 215 564 884 1,754 2,268 651.7 Yarnand Artificial Fibers 1.0 0.4 258 607 941 1,113 1,706 2,238 899.6 Orthopedic Appliances 0.2 0.4 43 148 532 811 1,349 1,998 561.3 Potassic Fertilizers 1.1 0.3 292 432 861 1,204 1,220 1,647 711.8 Engines, nes 0.4 0.3 113 274 540 815 1,198 1,468 711.3 Steam Engines 0.9 0.2 231 486 1,206 1,267 1,229 1,201 894.3 Nonmilitary Arms 0.2 0.1 61 158 239 241 323 333 571.4 Hunting and Sporting Ammunition 0.1 - 32 74 155 145 358 237 571.2 Fuses and Detonators - - 18 34 95 88 151 153 729.7 Electron Accelerators _ - 12 15 37 52 77 84 Memo Item Hi-Tech as a Share of All Manufactures Exports (%) 21.0 21.4 21.5 25.6 27.2 28.6 31 Appendix Table 5. Revealed Comparative Advantage Indices for the Twenty-Five Largest Exporters of High-Tech Manufactured Goods Exporter 1968 1978 1988 United States 1.56 1.56 1.59 Japan 1.05 1.16 1.33 Germany, Fed. 0.91 0.89 0.76 France 0.96 0.91 1.03 United Kingdom 1.00 1.10 1.19 Netherlands 1.37 1.27 1.15 Taiwan, (China) 0.98 1.05 1.01 Italy 0.74 0.59 0.55 Rep. of Korea 0.30 0.74 1.00 Belgium-Luxembourg 0.62 0.77 0.69 Canada 0.87 0.84 0.75 Singapore 0.49 2.07 2.23 Switzerland 1.05 0.86 0.75 Hong Kong 0.48 0.67 0.75 Sweden 0.70 0.75 0.69 Mexico' 1.53 1.73 1.34 Malaysia 0.37 2.35 1.98 Austria 0.63 0.82 0.84 Ireland 0.92 1.40 1.64 China 0.28 0.28 0.48 Spain 0.72 0.51 0.53 Denmark 0.84 0.82 0.78 Brazit 0.70 0.96 0.65 Australia 1.05 1.99 1.56 Thailand 0.27 0.98 0.85 Note: The Revealed Comparative Advantage (RCA) index is defined as follows: RCA.. = (xi /X )/(x.w/X. where the w subscripts indicate world totals, t represents all manufactured goods, x. denotes a certain category of manufactured exports (in this case high-tech goods), and j is a country. Values above unity are taken to indicate that the country has a comparative advantage in high-tech products. The figures presented in this table were calculated by the authors based on the UNSO Comtrade Data Base. (a) The data for Mexico includes the exports from the 'maquila' plants. Policy Research Working Paper Series Contact lhh1 Author Date for paper WPS948 Factors Affecting Private Financial Mohua Mukherjee July 1992 R. Lynn Flows to Eastern Europe, 1989-91 32169 WPS949 The Impact of Formal Finance on the Hans Binswanger August 1992 H. Binswanger Rural Economy of India Shahidur Khandker 31871 WPS950 Service: The New Focus Ir. Hans JOrgen Peters August 1992 A. Elcock International Manufacturing and Trade 33743 WPS951 Piecemeal Trade Reform in Partially Glenn W. Harrison August 1992 D. Ballantyne Uberalized Economies: Thomas F. Rutherford 38004 An Evaluation for Turkey David G. Tarr WPS952 Unit Costs, Cost-Effectiveness, and Susan Horton August 1992 0. Nadora Financing of Nutriton Interventions 31091 WPS953 The "Pedigree of IEC Conversion Michael Hee August 1992 E. Zamora Factors for Per Capita GNP Computations 33706 for the World Bank's Operational Guidelines and Atas WPS954 How OECD Policies Affected Latin Chris Allen August 1992 T. G. Srinivasan Anerica in the 1980s David Currie 31288 T. G. Srinivasan David Vines WPS955 OECD Fical Polides and the George Alogoskoufis August 1992 D. Gustafson Relative Pries of Primary Panos Varangis 33714 Commodities WPS956 Regression Estimates of Per Capita Sultan Ahmad August 1992 E. O'Reilly-Campbell GDP Based on Purchasing Power Parities 33707 WPS957 Carbon Taxes, the Greenhouse Anwar Shah August 1992 WDR Offie Effect, and Developing Countries Bjom Larsen 31393 WPS958 EC Bananarama 1992: The Sequel Brent Borrell August 1992 A. Kitson-Waiters -The EC Commission Proposal Maw-Cheng Yang 33712 WPS959 Waterbome Diseases in Peru Sheila Webb and August 1992 WDR Office Associates 31393 WPS960 Agricukural Pridng and Edward B. Barbier August 1992 WDR Offrce Environmental Degradation Joanne C. Burgess 31393 WPS961 Economic Devebpment and the Wilfred Beckerman August 1992 WDR Office Environment: Conflict or Complementariy? 31393 WPSF92 Do Markets Underprice Natural- Margaret E. Slade August 1992 WDR Ofrice Resource Commodites? 31393 Policy Research Working Paper Sories Contact Title Author Date for paper WPS963 Growth and Welfare Losses from Charles R. Bltzer August 1992 WDR Office Carbon Emissions Restrictons: R. S. Eckaus 31393 A General Equilibrium Analysis Supriya Lahiri for Egypt Alexander Meeraus WPS964 Toxic Releases by Manufacturing: Robert E. B. Lucas August 1992 WDR Office World Pattems and Trade Policies 31393 WPS965 Coping with the Disappointing Rates William Ascher August 1992 WDR Office of Retum on Development Projects 31393 That Affect the Environment WPS966 Trade and the Environment: A Survey Judith M. Dean August 1992 WDR Office of the Literature 31393 WPS967 Transiton Problems in Economic Santiago Levy August 1992 M. Stroude Reform: Agricuiture In the Mexico- Sweder van Wijnbergen 38831 U.S. Free Trade Agreement WPS968 Biomass David 0. Hall August 1992 WDR Office 31393 WPS969 Imports, Exports, and Industrial M. Ataman Aksoy August 1992 M. Shore Performance in India, 1970-88 Helena Tang 31129 WPS970 Poiitical Models of Macroeconomic Alberto Alesina August 1992 E. Khine Policy and Fscal Reform 39361 WPS971 The Effets of Democratic Milan Vodopivec August 1992 CECiM Determination of Wages: Theory and 37188 Evidence from Self-Managed Firms WPS972 Commercial Energy Efficiency and Robin W. Bates September 1992 WDR Office the Environment Edwin A. Moore 31393 WPS973 How Changes in the Former CMEA Refik Erzan September 1992 G.liogon Area May Affect Intemational Christopher Holmes 33732 Trade in Manufactures WPS974 How Minitateral Trading Arrngements C. A. Purmo Braga September 1992 J. Jacobson May Affect the Post-Uruguay Round Alexander Yeats 33710 World