**Polley Research|**

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# **am_Rl**

### **Trade Polley**

## WPS 1098

This paper is a product of the Geneva Office. Copies of the<sup>paper are available free from the World Bank,</sup> 1818 H StreetNW, Washington, DC20433. Please contactMona<sup>St. Leger, room R8-063, extension 37148</sup> (February 1993, 40 pages).

Developing countries sometimes still resist free trade because of the alleged protectionism of industrial countries - a myth belied by facts, says Baneth.

Import growth in the industrial countries aiccelerate **d** uring the 1980s, while income growth slowed. Outside of agriculture (only about 2 percent of GDP) and with the possible exception of Japan, free trade - not - protectionism is the reality.

Despite the march toward a frontier-less Europe, EC manufactures imports from nonmembers rose faster than intra-EC trade, and imports from developing countries rose fastest. Similar tendencies prevailed in North America. This pattem of imports contradicts the myth of widespread, effective, and growing bariers to manufactures imports. Protectionist rhetoric is up because imports are irncreasing, not because trade barriers are rising. The rising share of developing countries, despite their often weak bargaining positions, shows that multilateral rules, rather than bargaining, threats, and ccueater-threat **s** , till drive the system.

In the 1980s, manufactures imports rose to 40 percent of manufacturing production in the United States and to 25 percent in the European Community (not including imports from EC members; including those, manufactures imports rose to 87 percent of manufactures production in the United Kingdom, 67 percent in France, and 53 percent in West Germany). But in Japan, manufactures imports in 1990 were less than 12 percent of manufacturing production, and their dollar value was smaller than Italy's.

Granted, some protectionism persists everywhere, but it is an irritant rather than a true obstacle to trade. For that reason, further trade liberalization can bring the industrial countries little additional benefit in tenns of faster growth, though retreat from free trade holds huge potential losses. Only improved domestic policies - structural and macroeconomic - can raise investment, accelerate growth, reduce u.nemployment, and consolidate support for free trade.

Developing countries should view the United States and the European Community as open markets for their manufactures exports. Even in agriculture, policy reform over the present decade should reduce inefficiencies. Meanwhile, analysts should be careful to disaggregate: industrial countries' agricultural policies that have truly harmed food exporters, like Thailand, should not be blamed for the ills of food importers, like most African countries.

Selective trade restraints may have blunted but not countered the dynamism of newly industrialized countries and accelerated their shift toward more sophisticated exports. As their barriers to manufactures imports are generally low, the preferences industrial countries grant to developing countries carry similarly low benefits. They help nascent exporters benefit from good policies, but they do not overcome the handicap of bad policies.

The Policy ResearchWorking Paper Series disseminates the<sup>findings ofworkunder way in the Bank. Anobjectiveof the series</sup> is to get these findings out quickly, even if presentations are<sup>less than fully polished. The findings, interpretations, and</sup> conclusions in these papers do not necessarily represent official **Bank**<sup>policy.</sup> Produced by the Policy Research Dissemination Center