metadata: authors: 0: author: Braga, C.A. Primo
1: author: Yeats, Alexander
docna: 0: docna: How minilateral trading agreements may
            affect the post-Uruguay Round world
docty: Policy Research Working Paper
subtopic: International Trade and Trade Rules,Trade and Services,Free Trade,Trade Liberalization,Energy Demand,Energy and Environment,Energy and Mining,Trade and Multilateral Issues
teratopic: International Economics and Trade
abstracts: cdata!: One issue dominating recent discussions
            on free trade areas and other minilateral associations
            (preferential trade arrangements) is whether such
            arrangements will detract from further multilateral trade
            liberalization on a most-favored-nation basis. But for much
            of this debate empirical information has been lacking on:
            the global importance of minilateral arrangements that have
            been, or are being, concluded; the relative size of other
            major bilateral trade flows not affected by minilateral
            arrangements, and their suitability for such arrangements;
            the global importance of Europe in this process; the
            possibility that other sorts of arrangements - such as
            managed trade initiatives (arrangements specifying
            quantitative trade targets) - are a more likely threat as
            far as trade flows not presently covered by free trade area
            arrangements are concerned. The authors argue that this lack
            of relevant data has led to several misconceptions about the
            movement toward minilateralism. In particular, their
            statistics suggest that fears about how the further spread
            of free trade areas will affect world trade volumes may be
            exaggerated - while the dangers of these blocks becoming
            hostile to each other may have been underestimated. Using
            data recently compiled by the United Nations, the authors
            show that the global importance of minilateral arrangements
            is now far greater than is often recognized. Almost half of
            world trade is affected by these arrangements. But major
            trade flows not covered by minilateral arrangements are
            dominated by important country-specific problems. In
            particular, problems relating to high-technology trade
            between Asian newly industrialized countries (NICs), Japan,
            and the United States, as well as between Asian NICs, Japan,
            and Western Europe, are sufficiently important to hinder the
            formation of additional free trade areas. This suggests that
            fears about the spread of such arrangements may have been
            exaggerated. The authors' tabulations and analysis of
            the discriminatory trade barriers applied to these flows
            indicate that managed trade is a far more likely outcome.
repnme: repnme: How minilateral trading agreements may
            affect the post-Uruguay Round world
display_title: How minilateral trading agreements
            may affect the post-Uruguay Round world
listing_relative_url: /research/1992/09/699583/minilateral-trading-agreements-may-affect-post-uruguay-round-world
topicv3: Intraregional Trade m1326248 1175,Energy and Extractives m1326595 507,Trade m1326924 698,Trade in Services m1326928 780,Free Trade Areas m1504279 2577
publishtoextweb_dt: 2010-07-01T00:00:00Z
historic_topic: International Economics and Trade
origu: International Economics Department
no_of_pages: 38
model_extractions: <!-- Start of picture text --> Policy Reowch<br>Inlwnadonl ITrade<br><!-- End of picture text --> WPS 974 This paper- a product of the Intemational Trade Division, International Economics Department- is part of a larger effort in the departmen **t** o 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 trade areas and other minilateral associations (preferential trade arrangemeats) is whether such arrangements will detract from furter multilateral trade liberalization on a most-favored-nation basis. But for much of this debate empirical information has been lacking on: . The global importance of minilateral arrangements that have been, or are being, concluded.

* The relative size of other major bilateral trade flows _not_ affected by minilateral amngements, and their suitability for such amTngements.

. The global importance of Europe in this process.

* The possibility that other sorts of arrangements - such as "managed" trade initiatives (arrangements specifying quantitative trade - targets) are a more likely threat as far as trade flows not presently covered by free trade area arrangements are concerned.

Braga and Yeats argue that this lack of relevant data has led to several misconceptions about the movement toward minilateralism. In particular, their statistics suggest that fears about how the further spread of free trade areas will affect world trade volumes may be exaggerated - while the dangers of these blocs becoming hostile to each other may have been underestimated.

Using data recently compiled by the United Nations, Braga and Yeats show that the global importance of minilateral arrangements is now far greater than is often recognized. Almost half of world trade is affected by these arangements.

But major trade flows not covered by minilateral arrangements are dominated by important county-specific problems. In particular, problems relating to high-technology trade between Asian newly industrialized countries (NICs), Japan, and the United States, as well as between Asian NICs, Japan, and Westem Europe, are sufficiently importanm to hinder the formation of additional free trade areas. This suggests that fears about the spread of such arrangements may have been exaggerated.

Braga and Yeat's tabulations and analysis of the "discriminatory" trade barriers applied to these flows indicate that "managed" trade is a far more likely outcome.

ThePolicyResarchWorkgssnatefdgsPorodoedsd **ie** Pytemdsofwo **eee** derwayiheBank.Anobjectiveof 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|
|Appe|ndix<br>Statistics on International Trade in High Technology ........................<br>Products|26|
# List of Tables

|Table No.||Pa.e|
|---|---|---|
|1.|Value and Share of Merchandise World Trade ........<br>............<br>Under Minilateral Arrangements|........<br>9|
|2.|The Relative Importance of Merchandise Trade Flows ...<br>: ...................<br>not Influenced by Regional Trade Arrangements in 1988|<br>13|
|3.|Observations on Potential FTA Arrangeme;its Between ......................<br>Specific Trading Partners (Unaffected trade, flows over<br>$50 billion)<br>i|15|
|4.|The Incidence of Discriminatory U.S. Trade Barriers .......................<br>on Japan, Federal Republic of Germany, United Kingdom<br>and French Exports, (Trade values for 1986 and trade<br>barriers are those in place in 1990)|18|
|_5._|Trends in United States Exports of High-Tech ........<br>..............<br>Products to Selected Markets: 1965 to 1989|......<br>21|
|Appendix Tab|le No.||
|1.|The Relative Importance and Major Sources of High Tech .....<br>.<br>Products in Global Trade|..............<br>27|
|2.|The Origin and Destination of High Tech Trade in 1988 .....................|28|
|3.|The Twenty-Five Largest Exporters of High Tech .......<br>.........<br>Manufactured Goods|.........<br>29|
|4.|The Relative Importance of Individual Products in .......<br>.........<br>All High Tech Global Exports|.........<br>30|
|_5._|Revealed Comparative Advantage Indices for the .......<br>............<br>Twenty-Five Largest Exporters of High-Tech<br>Manufactured Goods|.......<br>31|
# List of Boxes

|Box No.||Pare|
|---|---|---|
|1.|GATT Rules Concerning Free Trade Areas ..............................|4|
|2.|'Fortress' Europe and the Disincentive for ...........<br>........<br>Global Negotiations|..........<br>12|
|3.|Definitions of High Technology Industries and Trade .......<br>.|...............<br>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).<sup>2</sup> A third problem concerns the GATT's de facto consensus rule which countries have used to block progress until their individual demands are met.<sup>3</sup>

* 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, traderelated 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.<sup>4</sup> 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."<sup>5</sup> 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 mostfavored-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 tradecreating, 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.<sup>7</sup> 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 mid1970s, 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.<sup>9</sup> 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 highincome 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<sup>involving mainly OECD</sup> 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<sup>(Western)</sup> Europe currently accounts for about $0.9 trillion which is 31 percent of world trade, or about 34<sup>percent of global</sup> manufactures trade.'<sup>2</sup> 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<sup>of countries</sup> 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<sup>clear message is that,</sup> 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<sup>and the fact that they</sup> could turn hostile to each other. A further point to consider is that these established arrangements<sup>provide an</sup> important disincentive for members to engage in multilateral negotiations which would lower the preference<sup>margins</sup> 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<sup>on a</sup> preferential basis between EC and EFTA countries. The data in Table 1 have been prepared<sup>to reflect these intra-</sup> 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<sup>ru!es would be extended to EFTA</sup> countries. See Box 2 for a description of some of the major dis,ncentives that preferential<sup>intra-regional trade creates</sup> for European countries to participate in multilateral negotiations.
9 TaAle 1: Value and Share of Merchandise World Trade Under Minilateral Arrangements

||Sh|are of 1988 Trad|e_(%)_|Value|of 1988 Trade|(Smnillion)|
|---|---|---|---|---|---|---|
||All Items|All Non-Oil<br>Goods|All<br>Manufactures|All Items<br>|All Non-oil<br>Goods|All<br>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|
|<br>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|<br>1,439|<br>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|<br>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|||||||
|<br>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<sup>developing</sup> 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.'<sup>4</sup> 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.'<sup>5</sup> 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 insignifican **t** rade 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<sup>for Global Negotiations</sup> A key point that is often not adequately<sup>recognized is that FTAs create a disincentive to engage</sup> in global trade negotiations. Also,<sup>as a general rule, the more important (globally) the FTA, the stronger will be</sup> the disincentive. Since our tabulations<sup>(Table 1) show that FTAs (or related arrangements) now cover approximately</sup> one-half of global trade it is<sup>important to understand the nature of this force working against multilateral</sup> negotiations. Institutional arrangements<sup>in Europe provide a useful example.</sup> Three key arrangements influence the<sup>intra-trade of industrial Europe:</sup>

1. Under the terms of the EC convention<sup>trade between member countries is barrier free -- while</sup> nonrmember countries exporting to<sup>the Community face tariffs and, frequently, nontariff barriers.</sup>

2. Similarly, EFTA provides for duty<sup>free trade among its members. Outside exporters to EFTA</sup> face the tariff and NTBs of the individual<sup>importing country-a common tariff does not exist as</sup> in the case of the EC.

3. A special EC-EFTA protocol allows<sup>duty free trade in manufactures between the two blocks and</sup> also extends favorable terms to some<sup>agricultural goods.</sup> As a result, intra-European trade occurs<sup>under very favorable terms. Sweden can now export</sup> shoes to Denmark under a tariff preference<sup>of 25 to 30 percent. Finland has textile and clothing exports to Norway</sup> (thanks to the protective umbrella of<sup>25 to 50 percent tariffs and NTBs on outsiders), while Greece exports wheat</sup> to Germany thanks to variable import<sup>levies that have been estimated at several hundred percent on Argentina,</sup> Canada, Australia, the United States and<sup>other 'efficient' producers.</sup> Now, what would happen to this intra-trade<sup>if the European margins of preference were eroded</sup> through trade barrier reductions negotiated<sup>in MTNs. Clearly, some trade -like Swedish shoes or Finish clothing -</sup> - would be largely eliminated as domestic<sup>producers would be placed on an equal footing with more efficient outside</sup> suppliers. In other cases, trade flows,<sup>profits, and employment in industries that now enjoy major intra-European</sup> preferences would be sharply lower<sup>due to their greater exposure to outside competition. In short, the industries,</sup> workers and politicians that would be<sup>adversely affected by such new competition probably feel they have a major</sup> stake in seeing that EC-EFTA external<sup>trade barriers are not lowered in any multilateral negotiating process. Major</sup> European losers - like consumers who<sup>pay highly inflated prices due to protection -generally are not adequately</sup> informed about the added costs they bear<sup>and are not a very effective political force for reducing trade barriers.</sup>
w 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_<br>|7.14<br>|7.56<br>|8.31|202,105|193,717|164,561|
|North America-Japan<br>|4.94|5.35|5.90|139,846|137,091|116,890|
|North America- Deveoping South nd SE Asi<br>|4.77|S.12|S.82|134,999|131,9|115,152|
|Japan- Dvelopuwg Souh Ams<br>|3.96|3.98|4.73|112,134|102,04,|93,683|
|Developed Eurpc - Developing South and SE Asia<br>|3.46|3.52|4.47|97,856|90,303|88,498|
|lapan- Dveloped Europe<br>|2.84|3.12|3.92|80,206|80,040|77,712|
|Developed Europe- Develping We Aa<br>|2.00|1.69|1.85|56,460|43,388|36,702|
|Developed Europe - Developin Afiica<br>|2.44<br>|2.04<br>|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<br>|2.01|1.86|1.37|S6,727|47,769|27,214|
|North Amrika - Develping Americea<br>|1.62|1.47|1.21|46,014|37,587|23,906|
|Autraia/New ealand - Developed Europe<br>|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."<sup>6</sup> 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<sup>(1991) provide</sup> 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)

|TIsde|Share o<br>xpot goa<br>thm<br>d<br>ae<br>o<br>1970|f totl<br>ing to<br> <br>(S)<br>1988|1988 Vaue of<br>Si1|Share of aFl FrA<br>ffd|
|---|---|---|---|---|
||||co(mn.)|unaece trade|
|North America and Debve d EAope<br>North Ameica's exots to Euroe|-<br>2943|-<br>2133|202,105<br>|14.5<br>|
|p p<br>Eupe's expots to Noth Ameica|()<br>9()|()<br>7(31)|90,174<br>111931|_6.5_<br>|
||||,|8.0|
|North Ameica and_Jemu_<br>North Awrica's exor to Jaan|-<br>914|-<br>1016|139.846<br>|10.0<br>|
|p p<br>Japan's export to Nordh Amenca|()<br>34|()<br>37|43,162<br>96684|3.1<br>|
||||,|6.9|
|Nordh America and Develoing South_and_SE Asia<br>North Amrica's exots t Sth Ai|-<br>|-<br>|134,<br>|9.7<br>|
|p o ou sa<br>Developing South Asia's etpo<br>to Japan|7(10)<br>25(31)|11(17)<br>29(37)|47,446<br>875S3|3.4<br>|
|<br>|||,|6.3|
|Japan and Develoing Soulh and SE Asia<br>Jaan's exots t Sth Al|-<br>|-<br>|112.134<br>|8.0<br>|
|p o ou<br>Developing South Aa's exos to Jaan|25<br>17(21)|25<br>1519|67,109<br>45025|4.8<br>|
|p p||()|,|3.2|
|Devehloed Eumre and Developing Soh and SE Asia<br>Develoed Euroe's<br>**t**Sh Ai|-<br>|-<br>|97.856<br>|7.0<br>|
|p p<br>xpors oou sa<br>Developing South Asia's exorts to Euoe|3(7)<br>1924|4(13)<br>17|46,316<br>|3.3<br>|
|p p<br>|()||51,540|3.7|
|Jaman and Develoged Euro e<br>Jaas exos to Euroe|-<br>|-<br>|80.206<br>|5.8<br>|
|p p p<br>Developed Europe's export to Japn|15<br>1(4)|21<br>2(7)|55,736<br>24470|4.0<br>|
||||,|1.8|
|Devetoed Europe and Devewoine Africa<br>Develoed Euroe's exorts t Afi|-<br>|-<br>|68.93S<br>|5.0<br>|
|p p p o rca<br>Deveoin Afica's exots to E|5(14)<br>6872|3(10)<br>|37,614<br>|2.7<br>|
|pg p urpe<br>|()|59(63)|31,321|2.3|
|Estern Euroe and Developing Counies<br>EAstem Europe's exports to Develoin Countries|-<br>1334|-<br>1737|56.727<br>4|4.1<br>|
|pg<br>Deeloin i<br>E|()<br>|()<br>|37,79<br>|2.7<br>|
|vpg coun<br>expors to aten Europe<br>|6(7)|3(5)|19,248|1.4|
|Developed Europe and Developing West Asia<br>Dld E'|-<br>|-<br>|56,460<br>|4.1<br>|
|evepe upes exports to Asia<br>Dli Wt Ad'|2(7)<br>|3(10)<br>|36,631<br>|2.6<br>|
|eeopng es as export to Europe<br>|44(47)|23(27)|19,829|1.5|
|Develoced Europe and Develoina Americas<br>Develoed Euroe's exors to Amri|-<br>412|-<br>|52.729<br>|3.8<br>|
|p p p cas<br>Developing Amerca's exports to Europe|()<br>32(39)|2(7)<br>23(27)|28,337<br>24,392|2.0<br>1.8|

p An unlikel aragemt. _be_ current MTNs salled due to diputes btween dkes paties and there s no indicaion they would be easier to addrmes biaeray. Eurp _now_ weem preoccupied wth the single MArket Initiaive and related problem.

Wide U.S. deficits andempts to band Japn an - unfair' ading patner make this combinaton unEkely as do the large number of discnimin y NTBs applied to Japan. A mor libly outcome is managed trade.

Persistent U.S. deficits with South and SE Asia, as we1 as the ltr's concentrati of exports in 'swnitive' sectors make this aagement diiEcult. U.S. discrimtory proteci also targets SE Asian NICs.

Developing Aia's reliance on the U.S. export market makes thi combinatin unlikely, not to ntion Worid 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.

South Asia's reliance on the North American market all but precluds tisa ment. SE Asian NICs are oflen _taere_ by discrminaty Eumpean tade bariers.

Distance is a negative factor as is _Japan's_ export concentration in sensiive sectors. he fict that Japan's North Amercan exports are nealy twice great as those to Europe makes this arra em . Vat differences in industrialization vels make thae combinations very nlikely. There are few setors where Aiaindury could compete with Eumope.

Major Etern European internal probleo, plu a ack of expeiience in market-oriened relation with developing counries, makes agremet her vey unlikel.

Industrialization level and cultural differences make major FA ageements here unlikely.

Developing Amerca's reliance on the U.S. market all but precde these arrangements. Alo, industrialization 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 Japanies **e** conomy 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 - visa-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.'<sup>9</sup> 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;<sup>2</sup> " (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)

|||Ja|pan|Fed.Re<br>Ger|public of<br>many|United|Kingdom|Fra|nce|Affected<br>Four C|Trade of all<br>ountries|
|---|---|---|---|---|---|---|---|---|---|---|---|
|NTB<br>CoJe|Description|Tariff<br>Lines|Value<br>($mill.)|Tariff<br>Lines|Value<br>(Smill.)|Tariff<br>Lines|Value<br>(Smill.)|Tariff<br>Lines|Value<br>($mill.)|Value<br>(Smill.)|Japan's<br>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|Quotaallocated by country|16|70|7|32|11|10|11|40|152|46.1|
|3410|Voluntaryexportrestraint|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 hightech 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 hightech 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 postUruguay 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<br>|1965|1975|1985|1987|1989|
|---|---|---|---|---|---|
|Destination of U.S. Exports (Smillion)<br>Argentina/Brazil/Chile||||||
|<br>European Comnunity'|139<br>|971<br>|1,601<br>|2,459|2,976|
|<br>Developing South and SE Asia|1,434<br>|5,888<br>|18,544<br>|23,481|36,163|
|<br>Japan|338<br>324|2,063<br>|10,191<br>|13,008<br>|20,083|
|<br>World|<br>4778|1,406<br>|6,114<br>|8,019<br>|12,378|
||,|21,951|63,368|78,384|110,367|
|U.S. Hiuh-Tech Trade Balance (Smillion)<br>ArgentinatBraziUChile|135|||||
|<br>European Community|<br>|883<br>|720<br>|1,295|1,723|
|<br>Developing South and SE Asia|844<br>|3,452<br>|5,968<br>|7,986|17,199|
|<br>Japan|300<br>|597<br>|-2,714<br>|-6,878|-8,096|
|<br>World|-101<br>|-1,219<br>|-18,668<br>|-22,186|-24,313|
|<br>|3,182|12,059|-2,707|-5,258|-,444|
|Hi-Tech Trade Balance As a Share of U.S. High-Tech Exports (%)<br>Argentina/BraziUChile||||||
|<br>European Commnunit|97<br>|91<br>|45|53|58|
|y<br>Developing South and SE Ai|58<br>|59<br>|32|34|47|
|sa<br>Japan|89<br>|29<br>|-27<br>|-53|-40|
|<br>World|-31<br>66|-87<br>|-305<br>|-276<br>|-196|
|||55|4|-7|2|
|Hi-Tech Goods as a Share of All U.S. Exports (%)<br>Argentina/BrazilUChile||||||
|<br>European Conmmunity|17<br>|24<br>|36<br>|43|43|
|<br>Developing South and SE Asia|21<br>|26<br>|43<br>|44|47|
|<br>Japan|13<br>|21<br>|38<br>|39|37|
|<br>World<br>|16|15|28|29|29|
|MEMO rTEM: EEC Hi- Tech Trade Performnance<br>Hi-Tech Exportsto Jaan (Smillion)||||||
|p<br>Hi-Tech Trade Balance with J $illi|108<br>|612<br>|1,678|3,112|3,926|
|apan (mon)<br>Hi-Tech Balan^e as a Share of Hi-Tech Exorts|22<br>2|-1,024<br>|-8,064<br>|-14,615<br>|-18,88S|
|p<br>Hi-Tech Gd Sh f|-0<br>|-196|480|-470|-476|
|oos as a are o 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.