GLOBAL PROTECTIONISM: TRENDS AND IMPLICATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00303R000300440001-2
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 53
• Document Creation Date: December 22, 2016
• Document Release Date: March 29, 2011
• Sequence Number: 1
• Publication Date: April 1, 1983
• Content Type: MEMO

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Global Protectionism:
Trends and Implications
National Intelligence Council-
Directorate of Intelligence
Joint Memorandum
This Memorandum was prepared jointly by the
National Intelligence Council (Major Issues) and the
Directorate of Intelligence (Country Annexes).
Comments are welcome and should be addressed to
]Analytic Group, National
Intelligence Council
Directorate of Intelligence,
558
NIC M 83-10007
DIM 83-10016
April 1983
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Global Protectionism:
Trends and Implications
Scope Note The prolonged global economic recession has given a boost to protectionist
Information available sentiment. Record unemployment in all major industrial countries has
as of 29 March 1983
was used in the preparat prompted calls to insulate national markets from foreign products and to
i on
of this Memorandum. promote exports. The issue of protectionism is a dynamic one that
generates a wide range of concerns and questions-it is constantly debated
at the abstract level of free trade versus protection; it is fiercely contested
at the practical level where many parties vie to protect their interests; and
it raises fears of a trade war reminiscent of the 1930s.
This Memorandum first addresses the changing nature of trade problems
over the past decade and dangers for the future. This is done in a question-
and-answer format to highlight the most policy-relevant aspects of this
highly complex issue. Second, it examines current protectionist pressures
and trends in major industrial countries and in key less developed
countries.
The paper draws heavily on the judgments of CIA analysts. Sources
include open literature, embassy reporting, and UN, International Mone-
tary Fund, Organization for Economic Cooperation and Development
(OECD), and country statistical publications.
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Global Protectionism:
Trends and Implications
Key Judgments ? During the past decade the trading environment has changed in many
ways that make the issue of protectionism more difficult for policymakers
to deal with:
Economic growth has slowed considerably, making adjustments to
trade problems more socially painful and politically sensitive.
Foreign trade has become more important to the health of all the in-
dustrial-country economies. As a result, imports are more disruptive
to the industrial adjustment process, and exports are more important
to ensuring economic growth.
Multilateral trade liberalization agreements have lost their force as a
tool in the battle against protectionism.
The introduction of flexible exchange rates has meant that currency
movements play a much greater role in determining relative trade
performance. Because exchange rates are influenced by factors other
than trade flows and thus often move contrary to changes in
competitiveness, their movements have greatly stimulated protection-
ist pressures.
? Despite the changed environment and the increased protectionist senti-
ment and trade frictions spawned by the lengthy global recession, the
relatively open global trading system that emerged in the 1950s and
1960s remains essentially intact. A trade war reminiscent of the 1930s
seems highly unlikely despite the constant rhetoric raising fears of such
an event:
- Post-1973 protective actions have not significantly affected the
growth of overall world trade volume, which since 1973 has contin-
ued to outpace economic expansion by the same rate it did during the
previous two decades.
- The relatively large drop in international trade in the second half of
1982 did not reflect the effects of protectionism but rather large cuts
in imports by financially strapped less developed countries (LDCs)
and generally reduced economic activity.
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New protective actions have not exceeded by much-if at all-the
trade-boosting impact of such liberalization moves as continually
reduced tariffs.
? Indeed, considering the intense protectionist pressure arising from the
highest unemployment levels since the 1930s, actions taken so far by
industrial-country governments have been relatively limited.
- The United States and the European Community countries have
taken some highly publicized steps to limit selected imports; the EC
moves are aimed at Japan and the more advanced LDCs.
France is the most vocal advocate of a more restrictive trade policy,
although President Mitterrand recently removed from his Cabinet
the most outspoken proponents of protectionism.
West Germany and the United Kingdom retain their strong commit-
ment to free trade but have increased protectionism somewhat in the
face of mounting unemployment and to achieve a common EC front.
? In the next five years, the most serious protectionist danger we see is that
efforts by industrial countries to inhibit import surges in basic manufac-
tures will spread to high-technology products:
If that happens, competition would be curtailed in the crucial early
phase of the product cycle, slowing economic efficiency and limiting
the most dynamic sector of economic growth.
- The recent EC-Japanese trade accord provides an early warning of
this protectionist tendency.
- Strong economic growth offers the best means of alleviating these
protectionist pressures.
? Future international trade negotiations are more likely to emphasize
harmonizing national laws than further liberalizing trade restrictions:
- The reduction of trade barriers and the increase in trade interdepend-
ence occurring in the past few decades have reduced to the politically
acceptable minimum the ability of industrial countries to protect their
domestic industries.
Confidential vi
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- Mutual economic dependence, however, will probably increase even
more as companies turn to direct foreign investment to overcome
remaining national trade barriers.
This, combined with new factors making the market access issue
more complex (for example, the rising trade in services), suggests that
pressure will grow on industrial countries to negotiate international
accords that permit the entry of foreign goods, services, and invest-
ment into national markets under relatively equal conditions or at
least under restrictions that other countries accept as relatively
equitable.
- The major danger will be that the compromise standards will end up
close to the most restrictive set of industrial country regulations.
? The United States will be at a growing disadvantage in dealing with
foreign protectionist practices:
- As tariffs have been reduced, the West European countries have
increasingly relied on more subtle means of protecting their indus-
tries. The Japanese have always done so. These measures have proved
very difficult to negotiate away.
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Contents
Scope Note
Key Judgments
Major Issues I
Nature of the Problem I
Changing Nature of Trade Issues 3
Protectionism in This Recession 7
The Dangers in the Longer Term 11
Some Policy Implications
Country Annexes
European Community 17
West Germany
United Kingdom
Japan
Canada
Less Developed Countries
41
45
51
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Global Protectionism:
Trends and Implications
Major Issues
1. How can the protectionist issue best be viewed? No
easy answer can be provided especially since as a
practical policy matter protectionism is a rather
murky, highly subjective issue and is viewed from
many perspectives.
Type of action. From a theoretical point of view,
protectionism is any action taken by governments or
private groups that distorts trade patterns away from
what would have occurred under free market condi-
tions. In practice, however, almost every government
economic, social, or financial move has an impact on
international trade flows and relative competitive-
ness-whether intended or not:
? Macroeconomic policies in the short-to-medium run
most often have a greater impact on trade than such
clear-cut trade actions as changes in tariffs and
quantitative restrictions. For example, although
monetary policies are directed at stimulating or
slowing domestic economic activity, they also sub-
stantially influence import demand and alter the
price competitiveness of a country's goods and serv-
ices by their effect on exchange rates. Such trade
differences can be eliminated only through a
convergence of macroeconomic policies among in-
dustrial countries, a goal that still seems a long way
off.
financial assistance to industry and to allow (or not
to interfere with) companies to pursue cartel-like or
other practices that protect domestic markets from
foreign competition. In some cases, especially Ja-
pan, the government lacks the ability or willingness
to alter (and sometimes encourages) those protec-
tionist practices that have become a normal part of
the social-cultural environment. The inherently
strong cooperation between the Japanese Govern-
ment and private industry also leads to "targeting"
the development of new product lines and export
surges in these products.
? Government actions designed to restrain trade, how-
ever, are not always considered by other countries as
an attempt to tilt trading relations "unfairly" in the
initiating country's favor. For example, the recent
moves by debt-laden less developed countries
(LDCs) to cut imports and boost exports are regard-
ed by others as a necessary move in dealing with a
financial crisis.
? Finally, the private sector alone can thwart trade
competition; for example, when multinational com-
panies try to use their supranational power to
establish international export cartels (such as dia-
monds, steel, and oil) or to set prices in an artificial
manner in intracorporate transactions. Some 15 to
25 percent of trade in manufactures involves intra-
firm shipments.
? Government regulations often provide a country
with a competitive edge (or disadvantage), even
when the laws treat domestic and foreign traders in
the same fashion. Differences in tax laws or safety
regulations among countries, for example, make one
country's market more or less accessible than those
of others.
? Differences in the manner governments work with
their private sector also result in unequal trade
opportunities. Some governments (Tokyo and Paris,
for example) are more inclined than others to grant
Areas of interest. Until recent years, protectionist
issues centered mainly on trade problems related to
declining or slow-growth industries and agriculture.
Now there is a growing interest in high-technology
products and services as well. Greater attention also is
being focused on trade distortions caused by impedi-
ments to foreign direct investment. In all, these new
areas of interest have made trade issues more complex
and, as such, more difficult to come to grips with in
policy discussions.
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Protectionism is most often perceived as foreign
practices that:
? Allow "too much "protection against foreign goods
and services.
? Disrupt domestic markets in a "highly adverse"
manner.
? Result in "unfair" competition.
Major forms of "unfair" competition include:
? Direct:
- Tax subsidies on exports and export financing.
- "Dumping" goods in foreign markets at prices
far below those charged domestically.
- "Buy national" purchasing policies.
- Favoritism toward nationals in investment in-
centives and regulations.
- Local content laws.
- Tied economic assistance.
? Indirect:
- Tax concessions or subsidies for private- or
state-owned industries and for high-technology
growth or "senile" industries.
- Special fiscal benefits for "depressed" regions.
Price controls on major industrial inputs--oil,
gas, and so forth.
- Commodity cartels; among major producing
countries and those sanctioned by the govern-
ment for depressed industries-EC and Japan.
Impact. It seems most useful to view the impact of
trade distortions at two levels:
o Jockeying among groups to protect their interests.
The unrelenting process of economic change creates
constant gainers and losers among power groups, a
continuous stream of trade frictions among coun-
tries, some new trade barriers, and losses in eco-
nomic efficiency, but its impact normally falls far
short of seriously disrupting overall trade (see box).
? Overall trade. The possibility exists that protection-
ist actions will reach. a threshold whereby they are
seriously crimping trade flows and substantially
slowing expected adjustments to the industrial
structure. Such a circumstance existed during the
1930s.
Changing Nature of Trade Issues
2. Has the trade environment changed significantly
since the early 1970s? Clearly, the answer is yes as a
result of:
? The end of the period (1950-73) when economic
growth was extraordinarily rapid. This has meant
that adjustments to changing trade patterns have
become more socially painful and politically
upsetting.
? The end of the period (1945-70) when the United
States was able and willing to encourage imports,
permit discrimination against its exports, and allow
the dollar to remain "overvalued." As the West
Europeans and the Japanese regained their eco-
nomic strength and trade competitiveness, trade
frictions increased.
? The growing importance cf foreign trade to each
industrial country's economy during the past 30
years and especially in the 1970s (see figure 1). This
has meant that imports have become a more disrup-
tive element in the industrial adjustment process
and that exports have become a more important
factor in ensuring economic growth. In balancing
these two influences, governments have become
increasingly circumspect and subtle in applying
protectionist actions because they fear retaliation.
? The loss of potency of multilateral trade liberaliza-
tion agreements as a tool in the battle against .
protectionism. Most of the highly visible unilateral
restrictions-tariffs--have been reduced to the
point (among industrial countries) at which they no
longer significantly restrain trade. The remaining
barriers are considerably more difficult to remove.
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Figure 1
Growing Interdependence
1950
1960 10
1970 12
1980
Japan
1950
1960
1970
1980
1950
1960
1970
1980
1950
1960
1970
1980
1950
1960
1970
1980
1950
1960
1970
1980
Italy
1950
1960
1970
1980
a Value added in agriculture and industry.
b Excluding intra-EC trade.
? The introduction of a flexible foreign exchange
regime in the early 1970s. Currency movements
now play a much increased role in determining
relative trade performance among industrial coun-
tries. Because these fluctuations are influenced by
capital as well as trade flows, exchange rate changes
often run contrary to changes in trade competitive-
ness. This situation has greatly stimulated protec-
tionist pressures, most notably in regard to trends in
yen-dollar rates.
? The rapid rise of efficient and aggressive new trade
competitors since the mid-1960s. Japan is now
challenging the United States and Western Europe
in high-technology goods and industrial manage-
ment know-how, while South Korea, Taiwan, Hong
Kong, and Singapore are quickly moving up the
economic ladder to more sophisticated goods.
? The powerful and dynamic technological changes,
especially in microelectronics, that are accelerating
ongoing shifts in industrial structures. With much
more competition at the sophisticated end of the
product range, many of the trade frictions are
coming and going quickly, and market domination
in many product lines is lasting for only a short
period.
3. Has international trade become increasingly
constrained by protectionist actions since the early
1970s? In the aggregate, probably not. To answer this
question, it is necessary to gauge the level of protec-
tionism in the early 1970s and the changes since then.
Most observers consider the world trading system of
the early 1970s to have been rather open, especially
when compared with what existed in the intrawar
years. The major achievements between World War
II and the early 1970s include a sharp reduction in
industrial-country tariffs (see figure 2) and the estab-
lishment of the European Common Market and the
US-Canadian free trade region for motor vehicles.
The fact that industrial-country trade grew much
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Figure 2
Tariff Trends
1890
1913
1922
1933
1940
1950
1960
1970
1981
13.3
United States
1951
1960
1972 18
1979 16
1987 a 14
Japan
1951 N. A.
1960
1972
1979 r72
1987a
ECb
1951
1060
1972
1979
1987"
1951 -,- -
1960 ?.~
1972 10
1951
1960
1972
1979
1987a
a Rates agreed to under Tokyo Round trade negotiations.
b Before 1972, tariffs are based on the average of the six member states
weighted by imports; thereafter, community-wide tariffs are used.
faster than output clearly supports the perception of
openness. Between 1960 and 1973 the volume of
industrial-country exports increased about 70 percent
faster than the group's real GNP.
Since the early 1970s the record on trade practices
has been mixed. Increased emphasis has been placed
on regulating sudden surges of imports and on provid-
ing financial and other incentives to exporters, prac-
tices widely referred to as "new protectionism" or
"neomercantilism." The most striking protectionist
tendency has been the attempted reduction of import
surges in manufactures through quantitative restric-
tions under the guise of "orderly marketing agree-
ments", "voluntary" export restraints, and similar
arrangements. Color television sets and automobiles
were the major new product lines restrained in such a
manner while controls on textiles, apparel, shoes, and
steel were broadened and tightened. The National
Institute of Economic and Social Research in London
estimates that 21 percent of world trade in manufac-
tures was covered by nontariff restrictions in 1979
compared to 13 percent in 1974. New barriers since
1979, especially on automobiles, have probably
pushed that estimate to near 30 percent. Although
this indicator provides a sense of how much trade is
covered by nontariff barriers, it does not measure
changes in the overall impact of protectionism.
Some increase may also have taken place in export
subsidies, although such trends are hard to measure.
Much of the assistance is indirect and difficult to
trace; for example, central banks sometimes guaran-
tee export loans, thereby allowing sellers to provide
loans at below-market interest rates. Another means
by which governments indirectly improve private in-
dustry competitiveness is through subsidies to indus-
try. The European, Japanese, and Canadian Govern-
ments provide relatively more subsidies than does the
United States (see figure 3). The more visible form of
export assistance, the direct provision of suppliers
credits at less-than-market rates, has fluctuated with
interest rate trends. The subsidy element of loans
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Figure 3
Government Subsidies to Industrya
United States
1960-62 10.4
1970-72 r~ 0.5
1977-79 0.4
Canada
1960-62 ?0.8
1977-79
1980
Japan
1960-62
1970-72
1977-79
1980
1960-62
1970-72
1977-79
1980
France
1960-62
1970-72
1977-79
1980
1960-62
1970-72
1977-79
1980
Italy
1960-62
1970-72
1977-79
1980
1960-62
1970-72
1977-79
Belgium
1960-62
1970-72
1977-79
1980
aOECD estimates: subsidies defined as all grants on current account made
by government to private industries and public corporations; grants
made by the public authorities to government enterprises in compensation
for operating losses when these losses are clearly the consequence of the
policy of the government to maintain prices at a level below costs of
production,
declined with real interest rates throughout much of
the 1970s and rose again after 1979. According to one
estimate prepared for the National Bureau of Eco-
nomic Research, the total volume of export credit
subsidies of the seven leading industrial countries rose
from $330 million in 1976 to $3.5 billion in 1980.
At the same time new trade distortion measures were
being put in place, other trade restrictions were being
eased:
? Tariffs were cut under the Kennedy and Nixon
(Tokyo) rounds of multinational trade negotiations
(MTN).
? Japan continued to gradually open its market.
? Competition in the mineral trade grew because the
vertically integrated structure of production and
marketing was being reduced substantially.
? The United States eliminated its low-priced oil
advantage.
On balance, these countertrends seem to offset each
other in terms of the relative growth of world trade.
Between the peaks of the business cycle in 1973 and
1979, the volume of industrial-country exports rose
about 70 percent faster than the group's real GNP,
the same relationship that held between 1960 and
1973 (see figure 4). In addition, the volume of non-
OPEC LDC exports accelerated significantly mainly
because of increased sales of manufactures by the
newly industrializing countries (NICs). In fact, LDCs
continued to increase their share of industrial-country
markets for manufactures despite rising nontariff
protection.
4. What costs have resulted from protectionist actions
taken since the early 1970s? This often-asked question
cannot be answered with any precision, and, in fact, it
tends to focus attention on the wrong issue. In
economic terms, the various neomercantilist moves
clearly have been costly. Consumers must pay higher
prices for protected goods, and capital is directed to
the protected industries because profits are propped
up. Without protection, additional capital would have
been invested in the more efficient industries. How-
ever, in practical political terms, government officials
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Figure 4
Trends in Output and Exports
Annual percent change
0 Export volume
Real GNP
1913-48
1960-73 rE
1973-79 E
Non-OPEC LDCs
1960-73
1973-79
OPEC countries
1960-73
1973-79 1
5.1
] 4.8
have felt compelled to respond to industries and
groups hurt by sudden and large shifts in trade trends.
The dilemma facing policymakers is how to allow the
needed industrial adjustments to occur while minimiz-
ing the disruption to domestic business and workers.
That balancing act often requires accepting some
higher economic costs in order to achieve a less
disruptive adjustment process.
Although industrial countries have responded to this
balancing act in an ad hoc and certainly far from
perfect manner, the overall results to date have been
more satisfactory than not and indeed have been the
most that could be expected considering the difficult
and uncertain post-1973 circumstances. Protectionist
1960-73
1973-79
1960-73
1973-79
1960-73
actions, although slowing industrial adjustments, have
fallen far short of halting them. Output of textiles,
steel, and ships have continued to shift to more
efficient and lower cost producers. Despite the tight
restrictions on textiles, for example, LDCs have con-
tinued to make deep inroads into industrial-country
markets. Those LDCs that were restrained have
upgraded their product lines in those items being
controlled and moved into other and often more
sophisticated products. Sale of the controlled products
have shifted to nonrestrained LDC exporters, thereby
spreading the benefits of trade to more countries.
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5. Has the increased tendency of foreign governments
to employ nontariff trade barriers affected the US
trade bargaining position in any important way? Yes.
It has created a distinct negotiating disadvantage.
The United States, more than most industrial coun-
tries, emphasizes the rule of law over discretionary
acts. Thus, while US protectionist actions are highly
transparent, other countries, to one degree or another,
depend more heavily on behind-the-scenes arrange-
ments. For example, European Community (EC) pro-
ducers have negotiated numerous informal quantita-
tive restrictions with Japanese exporters with the tacit
approval of their governments. EC mechanisms for
resolving "dumping" and foreign subsidy cases are
handled by the EC Commission in a discretionary
manner and without written record. In contrast, the
US process is highly judicial, open, and recorded. The
Japanese protection system is by far the most opaque
in that it is based mainly on verbal and nonpublicized
agreements among interested parties. Moreover, most
Japanese protectionist practices arise from strong
social-cultural traditions and independent bureaucrat-
ic actions. Given this difference in protective means,
the United States is at a disadvantage in trade
bargaining, especially now that protectionist devices
such as tariffs have been largely eliminated.
6. Has protectionist sentiment increased in this reces-
sion? Clearly yes. Recessions always increase protec-
tionist pressures, although this time the rising senti-
ment probably is greater than usual. Such an outcome
seems natural with unemployment at record post-
depression levels (see box). Governments also seem to
be showing an increased protectionist inclination be-
cause of the significant limits they face in applying
such traditional antirecessionary tools as fiscal and
monetary policy.
7. Will strong protectionist sentiment persist into
1984? Most likely yes, no matter how the global
economy fares. Unemployment throughout the indus-
trial world will remain painfully high. Even with a
robust economic recovery, most private forecasters
expect US unemployment to remain near 10 percent
this year, while European joblessness, currently aver-
aging about 11 percent, may continue to rise well into
1984.
Although a recovery would greatly ease pessimism
concerning future unemployment rates, the impact on
trade balances will create another source of protec-
tionist sentiment, principally in the United States. US
exports of goods and services will not begin to move
up significantly for many months because of slow
economic growth in foreign markets and the continu-
ing influence of a strong dollar. The US market share
among industrial countries by mid-1982 had already
dipped to the lowest level since 1977 (see figure 5).
Imports meanwhile would soar to feed the US eco-
nomic upturn.
Toward the end of 1983 currency shifts could fuel
West European protectionism. Massive US trade
deficits could cause the dollar to weaken against other
major currencies. In fact, the dollar already has
weakened somewhat partly in anticipation of an in-
creasing US trade deficit. While a further dollar slide
could be delayed for many months by capital inflows
related to global financial and other uncertainties or
by high US interest rates, the growing deficits would
eventually weaken the dollar. Indeed, the longer
capital movements keep up the dollar, the larger will
be the US trade deficit and the steeper will be the
dollar's eventual slide. Whenever the US dollar does
weaken, other countries would soon find that their
export markets were being lost to more price competi-
tive US goods. Plagued by continued high unemploy-
ment, many foreign government and business leaders
(especially in Western Europe) might charge that the
United States is undertaking a competitive devalua-
tion to boost exports and might be tempted to do the
same.
Two long festering issues are likely to continue to
receive the most attention:
? Japan's trade practices. Pressure against Tokyo will
remain high especially because we expect Japan's
trade and current account surplus to reach $30-35
billion and $15-20 billion, respectively, in 1983.
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Protectionist Sentiment in the Six Leading Non-US
Industrial Countries
The following questions were asked in public opinion
surveys sponsored by the US Information Agency
from 1974 to 1982:
- Since 1976 an increasing number of Japanese
surveyed see their country supporting
protectionism.
Some countries favor free trade-that is, fewer re-
strictions on the freedom of countries to buy from
and sell to each other. Other countries favor restric-
tions on free trade to protect their own products
against foreign competition.
1. Which view do you think your country supports-
free trade or protectionism?
2. And which view do you personally support- free
trade or protectionism?
Trends
Personal view of respondents as to protectionism
versus free trade:
Those surveyed in Canada, France, Japan, and
the United Kingdom displayed a decreasing
emphasis on protectionism between 1974 and
1979 and increased support from 1979 and
1982.
- Views changed little in West Germany and Italy
between 1974 and 1982.
Respondents' view as to their country's support for
protectionism or free trade.
- Views changed little in Canada, France, West
Germany, and Italy between 1974 and 1982.
- From 1974 through 1979 UK views changed
little, but between 1979 and 1982 those sur-
veyed believed there was a reduced emphasis on
protectionism, probably reflecting attitudes of
the Thatcher government.
Situation in 1982
e Percent of respondents favoring protectionism:
Personal
View
View of
Country
Italy
23
15
West Germany
26
24
France
37
32
United Kingdom
42
30
Japan
44
61
Canada
51
41
- A wide range of views exists on protectionism
among the six industrial countries, especially in
the case of the respondents' view of their coun-
try's trade practices. By far, Japan is considered
to be the most protectionist by its citizens.
- Respondents perceive their country (government)
as being less protectionist than themselves, ex-
cept in Japan where clearly the opposite case
holds.
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Figure 5
US Share of OECD Exports
Constant 1975 US $
? US-EC differences on agricultural matters. Al-
though the highly protective nature of the EC's
Common Agricultural Policy (CAP) has long been a
sore point in Atlantic relations, these differences
have grown sharper in recent years because the EC
has been increasing its export subsidies on agricul-
tural products and expanding exports and because
US agricultural surpluses have been rising. The
current low world prices for farm goods have further
aggravated the quarrel.
Close behind these will probably be the relatively new
issue of liberalizing trade in services. With exports
of services becoming increasingly important to the
United States, pressure will grow to knock down
existing barriers and see that new ones do not arise.
8. In what country is protectionist sentiment likely to
be the strongest? Except for European moves to
contain Japanese export drives, the United States now
seems the most likely source of such actions. 'Its
market is the most open for foreign goods, and it
provides fewer subsidies to exporters than other coun-
tries. As a consequence, the United States might react
to the Japanese failure to open its markets sufficient-
ly, to EC intransigence on the agricultural subsidy
issue, or to the expected burgeoning of its trade
deficits. Japan is unlikely to initiate new barriers and
thereby create even greater animosity toward its trade
practices. Significant new intra-:European barriers
seem unlikely, mainly because each European country
relies on other countries of the region for two-thirds of
its trade. LDCs are unlikely to play much of a role.
Most already impose highly restrictive import barri-
ers, and developed countries probably would not
oppose tighter LDC import controls because they
realize such actions are needed to overcome severe
financial difficulties.
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Figure 6
OECD: Cyclical Trends of Real GNP and
Export Volume
I I I I I I I I 1 1
-15 I II III IV 1 II 111 IV I II
1974
9. To what degree is this recession's strong protection-
ist sentiment being translated into action? So far we
believe protectionist sentiment has been largely con-
tained. "Beggar-thy-neighbor" moves have been lim-
ited, especially considering the duration of the down-
turn, the high level of unused capacity, and the record
post-World War II rates of unemployment. Some
additional nontariff import restraints have been put in
place in Western Europe and North America mainly
to protect basic industries such as steel and automo-
biles. They have been primarily aimed at Japan and
the Far Eastern NICs. At the same time, the liberal-
ization of trade has persisted. Tariffs are being cut as
planned under the MTN accord, Japan has continued
to open its market gradually, an accord has been
reached among Organization for Economic Coopera-
tion and Development (OECD) members to further
harmonize government-subsidized interest rates on
export contracts, and poor economic conditions have
increased competition in such markets as oil.
5
0
I I I I I I I I I
-15 I II III IV I 11 III IV I II III IV
1980 1981 1982
So far, there is no discernible evidence that recent
protectionist actions by industrial countries are hin-
dering overall trade flows. Like the 1974-75 recession
and previous business cycles, changes in the volume of
OECD exports have far exceeded and somewhat
lagged real GNP trends in the dual economic down-
turns of the post 1979 recessionary period (see figure
6). As a result of an especially sharp trade downturn
in the last quarter of 1982, the decline in OECD
exports relative to the changes in real GNP is turning
out to be greater in 1982 than was the case in 1975.
Such an outcome, however, is to be expected. The
volume of OECD exports to LDCs, oil-exporting
countries, and East European countries rose through-
out the 1974-75 period but fell this time around. The
reduced demand of the non-OECD countries reflects
the change in their foreign financial position.
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The Dangers in the Longer Term
10. What are the chances of a protectionist trade war
reminiscent of the one in the 1930s? We believe they
are very low despite the constant public warnings of
such a possibility. A devastating trade war would
more likely follow a severe economic slide than cause
it. The high tariffs and other trade barriers of the
1920s probably accelerated the post-1929 economic
decline, but it was the economic desperation of the
early 1930s that led nations to impose almost insur-
mountable barriers, devalue their currencies, and
engage heavily in bilateral trade arrangements. Thus,
with economic depression a very low probability, the
chances of a trade war are equally low. Indeed, the
reminiscences of the 1930s continue to provide a
positive feedback in guarding against such a disaster.
Under less dire global economic circumstances, it is
difficult to envisage a plausible sequence of events
whereby strong protectionist activity by a major
industrial country would trigger widespread counter-
measures. In general, the cost of disentangling eco-
nomic relations among most industrial countries is too
high. It would be particularly self-defeating for a
West European country to become involved in intrare-
gional trade wars because of the highly integrated
nature of the region. In addition, the need for unani-
mous EC trade decisions and the political desire to
maintain the EC structure place great restraints on
EC moves against members and outsiders alike. The
Japanese are likely to try to avoid a spiraling trade
war because of the heavy reliance of their largest and
most dynamic industries on export markets. The
possibility exists that an industrial country would
initiate drastic protectionist moves (when there is no
depression) as a consequence of severe economic trou-
bles at home made worse by political factors; France,
for example, continues to present such a danger,
although the recent Cabinet shuffle points toward
continued relative moderation.
11. Will the level of trade frictions occurring since the
early 1970s persist? Clearly yes. Anything like the
1950-73 era, when trade liberalization rather easily
overcame protectionist tendencies, is not likely to be
repeated. As we have seen, these years resulted from a
unique set of fortuitous circumstances, including the
benevolent use of US economic power. The more
normal post-1973 level of frictions created by the
jockeying among interest groups will continue to be
heightened by the deepening of global economic inte-
gration and the disruptive effects of dynamic export-
ers such as Japan in high-technology goods and those
LDCs that are quickly moving up the economic ladder
to more sophisticated export items. The most that can
be expected in the next few years is an easing of some
key aspects of the protectionist problem as a result of
the lower unemployment that will accompany strong
economic growth.
The occasional flareup in long-lasting trade differ-
ences, moreover, should not entirely be thought of in a
negative context. These highly publicized bouts are
needed from time to time to reinvigorate the forces
against protectionism and to place restraints on coun-
tries that are taking advantage of "accepted" protec-
tionist practices to bolster their own trade position.
For example, the current US-EC agricultural squab-
ble may well end, at least temporarily, in explicit or
implicit arrangements that, at a minimum, will help
slow the rise in EC output of exportable farm goods.
12. Will the recent and expected increase in barter or
countertrade do much damage to the free trade re-
gime? Probably not much. Countertrade-selling a
plant (or a pipeline) in exchange for a portion of the
output of the facility-and barter arrangements-the
swapping of goods-are symptoms rather than causes
of deep-seated problems. Much of such trade is East-
West and reflects the inability of the East to compete
effectively on world markets and their hard currency
stringencies. Within the Western world, there have
also been temporary surges in these arrangements; for
example, when oil-consuming countries scrambled to
secure supplies in the 1970s and when times have been
bad economically. With goods difficult to sell on
world markets and foreign exchange reserves nearing
depletion, countries view barter trade as the only way
to sustain exports (and therefore employment) and to
obtain needed goods. For example, the Jamaican
Government recently exchanged alumina for US
trucks, and Iran and Indonesia are now bartering oil
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for industrial goods. Because such trading arrange-
ments are a means of last resort, however, their use
diminishes rapidly once economic conditions begin to
improve.
Barter trade arrangements would spread rapidly in
the unlikely event of a world depression or a break-
down of the international financial system. Under
these exceptional circumstances, barter trade would
be better than nothing. During the early 1930s, the
proliferation of bilateral barter arrangements by con-
tinental European countries mainly reflected efforts
to revive international commerce that had been stifled
by trade and exchange controls.
13. What are the chances that industrial countries will
use currency devaluations in attempting to improve
their competitive trade positions? Probably slight,
barring an economic depression. A competitive deval-
uation by an industrial country would be hard to
sustain unless the government made its currency
internationally inconvertible by fully regulating capi-
tal movements in and out of the country. Otherwise,
market forces would soon overcome an artificially
established exchange rate. Imposition of such drastic
controls would be wrenching because of the highly
integrated nature of global financial markets and
therefore are thought of as a means of last resort.
Industrial-country governments could force a cur-
rency devaluation through expansionary monetary
policies, but most leaders are well aware that t:he
resulting rise in domestic inflation would soon negate
the competitive price gains, require another devalua-
tion, and create a vicious circle.
The suspicion that some governments are manipulat-
ing their currencies to gain a competitive edge none-
theless will remain because currency rates are often
out of sync with fundamental competitive trends. In
addition, the idea expressed in some quarters that
some European countries are deliberately devaluing
their currencies is growing out of the debate that such
a move is the most politically feasible means of
reducing high real wages. Devaluation without com-
pensating workers for increased domestic prices is
viewed by some as a politically easier means of
Figure 7
Estimated Costs to Consumers and Taxpayers
of Agricultural Support Programsa, 1978-80
As a percent of the value of products at world prices
Japanb
ECc
United Statesd
aExcludes budget outlays on income maintainance, research,
infrastructure, and foreign food aid.
b Rice accounts for two-thirds.
cDistributed widely.
d Dairy products and sugar account for most.
reducing real wages than cutting nominal wages. To
one degree or another, the United Kingdom, France,
and especially Sweden in the past year or so have been
accused of such exchange rate manipulation.
14. Will the US-EC agricultural wrangle continue as a
major irritant in bilateral trade relations? Yes. The
issue will persist for a while, although it will probably
ease temporarily as the global economy recovers. As
long as the EC continues to support its high-cost
producers at prices that far exceed those of the United
States (for example, more than twice the price in the
case of wheat), the dispute will remain. The chances
are small that the Europeans will bring their price
support program in line with world prices because
such a move would mean the elimination of most of
the region's grain farmers. As in other countries, EC
farmers have political clout that goes well beyond
their numbers. The only major influences limiting EC
agricultural subsidies are constant US pressure and
the enormity of the related budget outlays (see figure
7). Although consumers provide a large portion of the
subsidies through high prices, they have not voiced
strenuous objections because they are used to the high
prices.
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Once world grain stocks are reduced and prices rise,
the difference between internal EC and world prices is
likely to narrow. This factor, when combined with
better conditions for US farmers, will tend to reduce,
for the moment, the longstanding US-EC agricultural
dispute.
15. What is the most significant protectionist danger
in the next few years? A creeping cartelization of
world markets for manufactures under the guise of
safeguarding industry from sudden surges in imports.
The pattern for this kind of market division is well
established after 10 years of increasing constraints on
basic industries such as textiles, apparel, steel, auto-
mobiles, ships, and consumer electronics. Much expe-
rience has been gained in negotiating and operating
quantitative restrictions. The EC has established a
bureaucracy to monitor imports that are rising rapid-
ly, and the Japanese have been doing the same thing
on a less formal basis for some time. Moreover, EC
and Japanese private firms, often with implicit gov-
ernment encouragement, have agreed to arrange-
ments that reduce competition. Steel is the most
striking case. EC and Japanese steel producers, for
instance, have been working together for several years
to establish global market shares and minimum
prices. In these and other cases, the Japanese have
agreed to informal limitations on their exports be-
cause they realize the alternative would be less flexi-
ble official controls. EC producers view the arrange-
ments as providing market shares and profits that are
higher than would have been available under free
competition. In all, these agreements accommodate
the sense of "orderly markets" preferred by many
private firms in Japan and Western Europe, especially
in France.
The key problem for the future is that these arrange-
ments could spread to the dynamic high-technology
fields that provide the cutting edge of economic
advancement. Such a possibility seems most likely in
Western Europe. Europeans openly admit they are far
behind the United States and Japan in high-technol-
ogy products and argue they need quantitative restric-
tions to catch up. The recent EC-Japanese agreement
that restrains Japanese exports of video cassette tape
recorders (VTRs) and television tubes and adjusts the
export prices of these goods to the Community level is
a manifestation of this current European pessimism.
The agreement also created serious protectionist dan-
gers for the near term in that it called for joint
monitoring of Japanese exports of such products as
numerically controlled machine tools, forklift trucks,
and quartz watches. Such import monitoring efforts
could develop into a systematic apparatus whereby
pressure is brought to bear on the European Commu-
nity to request that other countries moderate their
sales drive. Under these circumstances, foreign firms
or even countries would begin to scrutinize carefully
their exports to avoid the possibility of pressure for
additional restraints, thus making the monitoring
effort an export deterrence system. Many high-tech-
nology products from Japan could be caught in this
bureaucratic web. The United States and some other
developed countries might then be compelled to em-
ploy similar procedures to stop Japan from diverting
products to their markets. The Japanese meanwhile
would probably respond by agreeing to the best
orderly marketing agreements they could obtain and
by investing in plants abroad to produce the re-
strained goods. The situation could then drift toward
agreements that essentially divide up world markets,
where much of the competition for the markets is
restrained because it takes place behind national trade
barriers and where some of the dynamic aspects of
international trade in high technology are lost.
16. Will trade continue to grow faster than GNP
during this decade? Probably yes, although the gap
may narrow somewhat. For the next five years or so,
rising foreign direct investment in manufacturing
facilities will provide a major boost to trade. Bouts
with protectionist pressures in recent years have been
tilting corporate strategies toward establishing plants
abroad and away from exporting directly from domes-
tic plants. As in the past, a large portion of the
manufactured components feeding foreign assembly
lines will come from plants in the investor's country.
This pattern of trade following investment was clearly
evident in the large US investments in West European
manufacturing facilities in the 1960s. For the next
few years, it will probably be spurred by EC and
Japanese investment in the United States and Japa-
nese investments in the European Community, trends
that are already well established.
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At the same time, international trade will be slowed
by the falloff in the pace of industrial country exports
to oil-exporting countries and to financially strapped
non-oil-exporting LDCs. The trade impact of EC
integration also will probably slow because much of
the initial gains have been attained. The pace of
intraregional trade might not slacken too much, if
Spain joins the common market and, more important,
if European efforts to merge companies from several
countries into entities large enough to compete effec-
tively on world markets are successful.
The future pace of LDC exports is the most difficult
to gauge. The NICs will probably continue to make
significant inroads into industrial-country markets as
they expand output of more sophisticated manufac-
tures. Few other LDCs, however, are likely to become
as important traders as the NICs. Although some oil
exporters will be able to expand their sales of petro-
chemicals, most LDCs lack the human skills, disci-
pline, and management capabilities to emulate the
record of the NICs.
Some Policy Implications
17. Are major new trade bargaining tendencies likely
to evolve? Yes. Greater emphasis will be placed on
"harmonizing" national laws, preventing export
surges, and handling issues on a bilateral level, The
era of international trade liberalization characterized
by a series of multilateral tariff-cutting rounds proba-
bly has ended. The industrial countries have achieved
about the most open trading system possible through
the removal of transparent barriers such as tariffs.
Many interest groups are now feeling unusually naked
in terms of protection from foreign competition. Al-
though these groups will probably be stymied in their
efforts to enact much higher trade barriers because of
their country's significant reliance on exports, they
probably will have sufficient political clout to prevent
a significant further dismantling of trade barriers and
export incentives. European governments are likely to
be especially reluctant to press for substantial liberal-
ization given the real and imagined lack of global
competitiveness of their countries.
been discussed for many years and sometimes acted
on, the notion will probably receive much more
attention this decade. Such standardization efforts do
not require trade liberalization, even though they can
sometimes have that effect, as for example in the case
of the recent change in Japanese customs inspection
procedures. "Harmonization" is especially important
in the growing service trade-for example, finance,
transportation, insurance-which tends to be more
regulated by governments than trade in goods.
Achieving "harmonization" agreements, however, will
involve more complex and time-consuming efforts
than was the case in tariff-cutting rounds. Many of
the laws to be standardized were designed to meet
domestic economic and social objectives and often
were an outgrowth of discussions that took little
cognizance of foreign trade (for example, statutes
aimed at boosting economic activity of depressed
regions). The diverse nature of the areas that could be
harmonized will mean many separate negotiating
tracks. Solutions will mainly take the form of govern-
ment commitments to codes of behavior, which lack
the precision that can be achieved in tariff bargains.
Finally, "harmonization" efforts often will require
tackling trade and investment issues simultaneously
because the two topics are so intertwined.
Much of the "harmonization" discussion will proba-
bly be in areas where a common measuring rod can be
devised:
? Export credit subsidies; a subject where consider-
able progress has already been made.
? Direct subsidies for exports; for example, in EC
agriculture.
u Direct government budget support for companies
deeply involved in international trade-aircraft,
steel, and so forth.
u Investment incentives and local content laws.
u Antitrust laws especially in regard to market shar-
ing arrangements between private enterprises that
take place with or without government involvement.
A key problem in all these cases will be preventing
negotiated compromises that tilt the new standards
toward the most restrictive set of country regulations.
Although the idea of "harmonizing" national laws so
that no country has an "unfair" trade advantage has
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Preventing the spread of governmental efforts to
dampen import surges will be particularly difficult
because of the social and political costs of adjusting to
rapidly changing competitive factors. In the case of
maturing industries, the emphasis will continue to be
placed on finding means that help reduce the social
pains without slowing the adjustment process; for
example, generous redundancy payments and on-the-
job retraining programs.
To prevent quantitative restrictions from creeping into
high-technology products and thus serving as an
"infant industry," protection will be especially diffi-
cult. Industrial countries that think they are well
behind in high-technology competition, as Europe now
does, will contend they have no choice but to impose
import restrictions until they catch up. Perhaps the
most that can be achieved under these circumstances
is limiting the damage by applying "moral suasion"
constantly and by attempting to make restrictions as
temporary as possible. Because the competitive nature
of high technology can change rapidly, especially
compared with the enduring problems of mature
industries such as steel, it may be easier to negotiate
arrangements with time limitations.
Greater emphasis, meanwhile, will probably be placed
on bilateral approaches or exchanges among small
groups of countries, with the multilateral trade rounds
losing favor. Reaching "harmonization" agreements
will be easier to achieve on a bilateral basis or among
major industrial countries because of the difficulties
in equating the widely different national laws and
practices. In any case, meetings encompassing most
nations have become unwieldy and highly polemic.
This tilt toward bilateral exchanges does not mean
that multilateral conclaves will not be called or be
useful. Such larger meetings will be needed to limit
the damage to the international trading system caused
by constant protectionist pressures. Bringing countries
together and having them repledge their allegiance to
free trade does help stiffen the backbone of national
governments. Multilateral agreements will also be
helpful in setting general guidelines under which, for
example, "harmonization" agreements can be negoti-
ated on a bilateral basis.
18. How serious a problem will trade issues be for US
policymakers? They will be particularly vexing. Do-
mestic pressure remains strong for other countries to
open their markets more fully and to reduce their
"unfair" competition. Frustrations will continue at a
high level because of the difficult problems in reach-
ing "harmonization" agreements. As a result, the
United States may find it necessary to use its substan-
tial leverage-partially closing domestic markets or
providing export subsidies-to spur a compromise.
Such actions, however, would be fraught with danger
since there is no way to tell in advance if they would
lead to countermoves or to a hardening of attitudes.
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Country Annexes
European Community
Double-digit unemployment and growing import com-
petition in both declining traditional industries and
developing high-technology industries are prompting
the EC to increase protectionist measures. The Com-
munity is relying primarily on export restraint agree-
ments to limit imports. In addition, it appears to be
making increasing use of antidumping and counter-
vailing duties. With real economic growth likely to
remain sluggish in 1983 and the unemployment rate
expected to reach 12 percent later this year, strong
protectionist pressures will persist
The EC has concentrated its protective efforts against
Japan and the newly industrializing countries (NICs).
Little pressure exists to add new restrictions on US
industrial access to the Community because the dol-
lar's appreciation has reduced the competitiveness of
US products. Nevertheless, pressure for limiting im-
ports of US agricultural goods is certain to grow if the
United States continues to sell subsidized agricultural
commodities to third-country markets that the EC
considers its traditional domain.
conclusion of the 1975 Lome Convention, the EC
agreed to grant duty-free access to most industrial
exports from 63 African, Caribbean, and Pacific
countries and during the 1970s concluded preferential
trade agreements with most countries bordering the
Mediterranean
The EC has promoted trade liberalization efforts
because trade is the life blood of the Community. As
the world's largest trading block, the EC accounts for
more than one-third of world exports, considerably
more than the United States and Japan put together.
Manufactured goods account for nearly 80 percent of
the Community's total exports and almost 45 percent
of the world's exports of manufactured goods. More
than half of member states' trade is with one another
while about 20 percent is with EFTA countries.
Despite its general free-trade orientation, the Com-
munity has protected certain domestic industries. For
example, the EC's Common Agricultural Policy
(CAP) with its variable import levy system has been a
major barrier to foreign agricultural goods. While the
average CCT level may be relatively low, the EC
maintains relatively high tariff rates on many "sensi-
tive" products such as semiconductors (17 percent)
In general, the EC has been an advocate of free trade.
In previous multilateral trade negotiations the EC
agreed to reduce its Common Customs Tariff (CCT)
by 7 percent in the Dillon Round (1960-62) and by
another 37.5 percent in the Kennedy Round (1964-
67). When the cuts agreed to during the Tokyo Round
(1973-79) are fully implemented in 1987, the average
tariff on dutiable industrial products in the Communi-
ty will drop to about 7 percent compared to approxi-
mately 5 percent for Japan and 6 percent for the
United States. In addition, the EC introduced the
generalized system of preferences (GSP) in 1971-the
first major trading power to do so. In 1977 it signed
an industrial free-trade accord with the six members
of the European Free Trade Association (EFTA), thus
eliminating tariffs on domestically produced industri-
al goods within most of Western Europe. With the
and automobiles (10 percent).
The EC and its individual members also have utilized
nontariff barriers (NTBs) to restrict imports. At the
Community level, the Multifiber Arrangement
(MFA), originally formulated in 1973 with GATT
approval, has been increasingly relied upon to protect
the Community's textile industry. In 1978 the EC
negotiated voluntary export restraint agreements
(VERB) with 15 of its principal steel suppliers. I 25X1
Since 1955 Italy has limited imports of Japanese
automobiles to 2,200 vehicles per year, and successive
French governments have unilaterally limited the
Japanese share of the French automobile market to no
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European Community: The Players in
Trade Policy Development
The development of EC trade policy is a complex
process that involves the interaction of member coun-
try representatives among themselves as well as with
the Community's own bureaucracy. This entire proc-
ess takes place at various levels and may even include
meetings of the EC heads of government.
The Commission serves as the executive arm of the
Community. It is composed of EC civil servants who,
at least in theory, are working for the best interests of
the Community as a whole, not their national govern-
ments. The Commission initiates policy proposals
and carries out agreed EC policies. At international
meetings it acts as the official EC spokesman and
negotiates on behalf of the Ten.
The Council of Ministers is the primary decisionmak-
ing organ of the EC; it approves Commission propos-
als, as well as proposals of its own, usually by
consensus. It is composed of ministerial level repre-
sentatives of the national governments.
The 113 Committee--named after Article 113 of the
Treaty of Rome-acts as the go-between for the
Council and the Commission. It is composed of
member country representatives and helps interpret
Council decisions so that the Commission can accu-
rately implement EC policies. The Committee assists
the Commission in negotiations on trade and tariff
matters with third countries.
more than 3 percent. British manufacturers have
negotiated "prudent market agreements" with their
Japanese counterparts since 1975; the auto agreement
limits Japan to no more than 11 percent of the British
market. In mid-1981 West Germany gained Japanese
agreement to limit growth in auto sales to 10 percent
per year
With EC industrial production down 3.7 percent in
1982 compared to 1980 and the unemployment rate
now more than 10 percent, the EC Commission is
under increasing pressure from industry and member
governments to further limit foreign access to EC
markets. The hardest hit industries-steel, textiles,
and automobiles-are crying the loudest. Last year,
employment in the steel industry was down more than
30 percent from the peak 1974 level and production
was off 29 percent for the same period. In the textile
industry nearly one-third of the work force has been
percent from the boom year of 1979.
Within the EC, France is the most vocal advocate of a
more restrictive trade policy and wants to use in-
creased restrictions to improve its deteriorating trade
balance. The French trade deficit grew to nearly $14
billion in 1982-compared to $9.3 billion in 1981-
while the balances of most other EC countries showed
modest improvement.
Although the most aggressive, France is not alone in
advocating EC protectionism. The British and Belgian
Governments have strongly advocated limits on steel
imports, and the Dutch are calling for higher tariffs
on electronic products. Although Bonn has not active-
ly supported efforts to restrict access to the EC
market, neither has it strenuously opposed new meas-
ures
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1 1 1 1 1 1 1 1 1 1 1 1 1 1
1970 72 74 76 78 80 82 83`'
in the duties on covered products only if the Commu-
nity grants its trading partners corresponding com-
pensatory concessions. VERs, however, are not ex-
pressly banned by the GATT.
The EC has directed its recent protectionist measures
primarily against those countries, namely Japan and
the NICs, that it believes pose the greatest competi-
tive threat to domestic producers. In mid-February,
Commission officials secured from Tokyo a three-year
VER covering a number of "sensitive" products.
Many of these products are produced by the indus-
tries the Community is counting on to provide the new
jobs necessary to reduce unemployment. The restraint
agreement covers color television sets, color television
picture tubes, numerically controlled machine tools,
quartz watches, video tape recorders (VTRs), passen-
ger cars, light commercial vehicles, motorcycles, and
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EC: Agricultural Exports EC: Unemployment Trends
I I I I I I I I I I I I_
0 1970 72 74 76 78 80 82a 0
EC trade policy has become increasingly protectionist
in the past six months. At the November GATT
ministerial the EC refused to endorse a pledge pro-
posed by the United States not to introduce any new
barriers to trade. The Community instead agreed only
to refrain from taking or maintaining any measures
inconsistent with GATT. Moreover, at the EC heads
of government meeting in December, the Ten effec-
tively endorsed a more protectionist stance. Although
no specific measures were announced, the leaders
apparently gave the go-ahead to an earlier French
proposal to seek export restraints on selected Japanese
products.
EC protectionism is increasingly in the form of new
NTBs-particularly VERs. The CCT cannot be
raised arbitrarily to fit the trade policy objectives of
the Community because all Ten members are signato-
ries to the GATT. The GATT allows for an increase
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European Community:
World and Regional Trade Balances
World
-3.9
--3.5
-57.8
-27.5
-24.0
Developed countries
1.3
2.8
-19.0
-10.4
-6.7
United States
-3.0
--8.4
-23.6
-13.8
-10.6
Japan
-0.3
--3.1
-11.0
-11.6
-11.1
Other
4.6
14.3
15.7
15.1
15.0
-14.1
-43.5
-20.4
-14.1
-5.5
-15.7
-39.7
-21.6
-12.4
-0.5
1.6
-3.8
1.2
-1.7
0.3
5.3
-3.5
-4.9
Other
2.5
8.1
a Estimated.
In general, the agreement does not include specific
quantitative limitations but only calls for Japan to
moderate its export shipments. The Community inter-
prets this to mean Japan will not attempt to increase
its market share in these products above that of 1982.
Specific quantitative limits only exist for color televi-
sion tubes and VTRs. Japanese exports of large color
picture tubes will be restricted to 900,000 units
because of existing excess capacity in the EC indus-
try. Small picture tubes are not covered by the
agreement since the EC does not produce this size
tube.
On VTRs, the agreement calls for a guaranteed
market of 1.2 million units for EC producers and
limits Japanese exports to 4.6 million units per year.
If the EC market exceeds 5.8 million sets, the excess
will go to domestic producers. This arrangement
should halt the rapid rise in Japanese penetration of
the EC VTR market-last year Japanese exports of
VTRs to the Community jumped about 80 percent,
giving Japan over 80 percent of the EC market.
Last October, France introduced customs procedures
requiring all imported VTRs to be cleared through a
single location, the town of Poitiers in west central
France. The measure was obviously aimed at slowing
down imports from Japan, but it also raised com-
plaints from its EC partners. Not only were Dutch
and West German VTR exports likewise required to
take this circuitous route, but the potential diversion
of Japanese imports to other EC entry points raised
fears of additional Japanese penetration in other
domestic markets.
The Community is also concentrating protectionist
efforts against LDCs, particularly the NICs. Through
use of the MFA, the Community is further tightening
import quotas on textiles. The EC is seeking 10-
percent quota reductions from Hong Kong and South
Korea; it is not planning to increase quotas for poorer
countries as an offset. Despite Turkey's association
agreement with the EC, which gives it preferential
trade treatment, the Community also is pressing
Ankara to limit its cotton textile exports to the EC.
In return for Japanese export restraints, the EC has
agreed to bring pressure on France to abolish its
unique customs clearance requirements for VTRs.
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Partially in response to US demands for EC limits on
steel exports, the Community is attempting to further
limit steel imports. Through VERs with 14 of its 15
major supplier countries the Commission is seeking to
restrict steel imports to 87.5 percent of the 1980 level
of 11.5 million tons; last year imports were held to
90.5 percent of the base year. Although some devel-
oped countries are included on this list of countries,
the EC appears particularly intent on cutting back
imports from the LDCs. To this end, the Community
is actively pursuing antidumping investigations
against Argentina and Brazil.
With the EC-wide unemployment rate likely to reach
12 percent later in 1983, protectionist pressures with-
in the Community are certain to remain strong.
Nevertheless, we do not believe the Community is
likely to adopt significant new trade restrictions in the
near term. The conclusion of the VER agreement
with Japan has appeased, at least temporarily, those
EC members most vociferously calling for Communi-
ty-wide import restrictions. Moreover, development of
a common EC trade policy has never been easy. Now
that the generally agreed problems of Japan, steel,
and textiles have been addressed, the EC members
probably will return to their usual fractious approach
to trade policy development.
Individual EC countries, however, may well adopt
new restrictive measures. Paris, for one, seems intent
on more widely applying its French language require-
ment on the labeling of imports. This independent
approach also is reflected in continued French resist-
ance to EC pressure to revise its customs requirements
on imported VTRs. Italian, British, French, and West
German restrictions on Japanese autos also will not be
superseded by the recent EC-Japan trade accord. E
Despite increasing protectionist sentiment among the
EC countries, the Community as a group has not yet
attempted to restrict US access to the EC market and
we believe it is unlikely to do so any time soon, at least
not with regard to industrial products. Although the
EC's trade deficit with the United States in 1982 was
roughly as large as that with Japan-about $11
billion-the deficit with the United States has been
cut in half since 1980, largely because of a strong
dollar. EC industries such as steel and autos are not
seriously threatened by US exports, and textiles are
already regulated by the MFA.
The Community, however, may move to limit imports
of US agricultural products if the US-EC dispute over
agricultural export subsidies intensifies. EC members,
particularly France, have been infuriated by recent
sales of subsidized US agricultural goods to third
markets that the EC considers its traditional domain.
US sales of subsidized wheat flour to Egypt have
effectively blocked EC sales there. Last year, the
Community supplied two-thirds of Egypt's wheat
flour imports.
Should the United States make additional subsidized
sales of agricultural products, EC talk of a head-to-
head subsidy war would certainly be revived. Such an
effort could, in our judgment, only be waged for a
short time because of the Community's limited re-
sources. Already more than 40 percent of the EC
budget goes to agricultural export subsidies. As an
alternative, the French appear to be pushing for
restrictions on imports of US agricultural goods-last
year the United States had an agricultural trade
surplus of $6.6 billion with the EC. Specifically,
French Agriculture Minister Cresson has warned that
the EC may restrict imports of soybeans and corn
gluten. At present, France is receiving little support
for such proposals, but further subsidized sales by the
United States could cause the other members to come
around.
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West Germany
The West German Government, traditionally a vocal
advocate of free trade, is being pressured by some
labor unions and employer groups to adopt protec-
tionist measures. Rising import penetration, record
unemployment, and Bonn's perception of growing
isolation within the EC on trade policy are working
to sap government resistance. The new Kohl govern-
ment is hoping that the growing economic optimism,
especially in the United States and West Germany,
will reduce the calls to erect import barriers. If
the recovery falters, however, we believe Bonn will
follow-although not lead-protectionist moves
Longtime Advocates of Free Trade
West German Government and business leaders have
consistently spoken out for free trade; according to a
GATT official, the West German market is the most
open among the major trading nations. The West
German Trade Union Confederation (DGB) also offi-
cially endorses free trade. West Germany's position
arises in part from the belief that free trade benefits
the economy, but it primarily is a result of necessity-
exports account for nearly half of West German
production of goods, and nearly one-fourth of West
German workers depend on exports for their liveli-
hoods. Some sectors depend greatly on exports-for
example, autos for about 50 percent and machine
tools for over 70 percent of sales. West Germans
realize how vulnerable they are to retaliation should
they erect trade barriers. Finally, as a country that
has registered large trade surpluses year after year
and that until recently enjoyed steady economic
growth and low unemployment, West Germany has
had little motivation to resort to trade restrictions.F_
stressed that increased world trade is essential for
lasting economic recovery. This view is shared by the
government-sponsored Council of Economic Experts
and by the five major economic research institutes.F__25X1
West German business leaders, representing the en-
tire spectrum of private industry, traditionally have
been strong proponents of free trade. Rolf Roden-
stock, President of the Association of West German
Industries (BDI), believes the fight against both open
and hidden forms of protectionism, the elimination of
competitive distortions introduced by subsidies, and
strict compliance with both the spirit and the letter of
GATT regulations are essential. Otto Wolf von
Amerongen, President of the West German chamber
of commerce (DIHT), echoes Rodenstock as do lead-
ers of the retail trade association and the wholesale
and foreign trade associations.
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The government of West German Chancellor Helmut
Kohl, reelected in March, has not wavered on free
trade. Kohl has stated that West Germany will oppose
"all protectionist trading tendencies" from within the
EC; he also has promised to speak out against these
trends at the Williamsburg Summit in May. Bonn has
Obstacles to Penetrating
the West German Market
With the exceptions of EC actions and an auto
restraint agreement with Japan, West Germany has
no blatant import limitation agreements. Neverthe-
less, West Germany has received some criticism for
its trade practices. In particular, the exacting West
German technical norms and testing procedures
(DIN)-considered by many experts to be among the
most detailed in the world-have been criticized
sharply by the French, who term the standards a form
of hidden protectionism. The United States is working
with the West Germans to smooth standards-related
problems, especially in areas where US manufactur-
ers are encountering problems in selling their prod-
ucts.
West German Government procurement, according to
Embassy reporting, generally is conducted in accord-
ance with, and in many areas even goes beyond, the
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provisions of the MTN (multilateral trade negotia-
tions) government procurement code. Exceptions, ac-
cording to press reporting, are in telecommunications,
where "open" tenders always go to the West German
firm Siemens. In addition, government tenders for
vehicles are rarely advertised, and the national air-
line--Lufthansa-favors purchases from Airbus over
Boeing or McDonnell Douglas
Government subsidies to domestic industry act to
distort trade. West Germany subsidizes its high-cost
domestic coal industry; aerospace, agriculture, and. a
gamut of industries in West Berlin also receive gov-
ernment funds. Most recently, Bonn has interceded in
the steel industry to keep tottering Arbed Saarstahl
afloat with loan guarantees. The move was justified
on the grounds that employment in the locality was
heavily dependent on this industry; another steel
company, Korf, was allowed to go bankrupt.F__1
According to the OECD, less than 1 percent of West
Germany's 1980 exports were financed on preferential
terms. This financing came through the Kreditanstalt
fuer Wiederaufbau-used as the official executive
agency for West Germany's capital aid to LDCs--
and through Ausfuhrkredit GmbH (AKA). AKA is a
consortium of some 60 commercial banks that refi-
nances some West German supplier credits through a
special rediscount facility at the Bundesbank.
Bonn's principal trade promotion device is the private
Hermes AG that provides export credit insurance
acting as Bonn's agent; the government bears the
ultimate risk. Hermes fees are set for the most part
according to commercial criteria, without any direct
element of subsidy. Controversy over the role of
Hermes, which arose in the context of East-West
trade, centered on whether the existence of quasi-
government backing for export guarantees encour-
aged banks and suppliers to go ahead with credits that
would not be justified if the risk had to be borne
privately. The West Germans vigorously defend Her-
mes, asserting that although private enterprise should
provide such guarantees, it cannot because West
Germany's foreign trade is so large relative to the size
of the banking system. (West German banks have an
aggregate reserve for losses on the order of $9 billion,
equal to only about on.e-sixth of the Hermes guaran-
tees outstanding.) Bonn officials also note that since
1949 the government has mad' a net profit of about
$750 million from the credit insurance operations, and
they point out that self-financing guarantee systems
are not considered export subsidies according to
GATT definitions.
Despite Bonn's opposition to the use of formal trade
barriers, the government has been feeling increasing
presssure to compromise. For example, Bonn feels
increasingly isolated as a bastion of free trade within
the EC. A senior West German Economics Ministry
official stated that his ministry doubts
that sufficient support can be mustered during the
West German EC presidency to overcome French
protectionist inclinations. At best, he said, West Ger-
many hopes to hold the line against French and other
member state pressures. France is West Germany's
second-largest export market after the Netherlands,
and French protectionism-both real and potential-
has been a major source of concern of recent West
German governments. The West Germans believe
they can count on the support of Denmark, the
Netherlands, and sometimes the United Kingdom in
fending off protectionism.
The most recent example of EC protectionist pressure
on Bonn occurred during the GATT ministerial in
November 1982. The West German delegation, for
the sake of EC unity, caved in on a final communique
far short of the ringing condemnation of protectionism
for which the West German delegation had striven. In
1981 West Germany was drawn into the emergency
European steel cartel to limit production and make
possible higher prices although the West German
steel industry is the most competitive in Europe and
has done the most to rationalize its production facili-
ties.
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Dealing With Japan
There has been wide publicity given to Japan's large
surplus in trade with West Germany-$3 billion last
year-and to Japanese penetration of the automobile,
electronics, and photographic equipment markets. In
mid-1981 West German Economics Minister Lambs-
dorff announced in Tokyo that a voluntary export
restraint agreement had been reached with the Japa-
nese Government and auto industry to limit the
growth of auto sales to West Germany to 10 percent
per year. Until then, Tokyo's sales in West Germany
had been doubling annually, rising from a 2-percent
share of the market in 1978 to a 10-percent share in
1980. We believe that Bonn was convinced that the
Japanese export drive, having been halted elsewhere,
would be directed at West Germany; Bonn therefore
moved before the Japanese achieved too great a
Internal Pressure Building
West Germany is in its longest economic slump since
World War II. Bankruptcies are averaging well over
1,000 per month, and the unemployment rate has
moved above 10 percent. Coupled with EC pressures,
calls for protection are increasingly coming from
employer and labor organizations alike in the most
affected industrial sectors. The West German Iron
and Steel Association is pleading for government aid.
Beyond citing the well-known plight of the West's
steel industry generally, the Association claims its
members face an unequal battle against their subsi-
dized competitors in the Community and that EC
regulations covering steel quotas, price levels, and
imports have been unfairly and insufficiently en-
forced. The Association is calling on Bonn to pressure
the EC Commission to stop subsidies, which it claims
redistribute sales at the expense of West German
plants.
The unions whose workers have been most affected by
imports have been the most outspoken in seeking
protection-the textile workers, the metalworkers
(who represent the automotive and consumer electron-
ics sectors) and the leather workers. As in other West
European countries, the West German textile industry
has suffered steady losses in employment while import
penetration has increased. The textile union was upset
when Bonn announced in 1981 that it would not seek
a more restrictive multifiber agreement (MFA) in the 25X1
upcoming negotiations. When the head of the union
was unsuccessful in persuading either Chancellor
Schmidt or Economics Minister Lambsdorff that the
industry needed more protection, the union organized
a series of rallies to publicize its cause. The West
German union also joined with other EC textile
unions, held joint press conferences, and met with key
EC officials just before the opening of the MFA
negotiations. In the end, West Germany changed its
position and joined other EC countries in setting lower
import growth rates for textiles. The West German
union chief claimed that without these extraordinary 25X1
efforts the Bonn government would have remained
adamant in resisting tighter controls. F___1 25X1
The 2.6-million-member metalworkers' union, West
Germany's largest, was instrumental in having
Lambsdorff sent to Tokyo in 1981 to work out the
voluntary restraint agreement on autos. The metal-
workers in the consumer electronics end of the indus-
try, where job losses and plant closings have sparked a
great deal of press interest, have held a series of
seminars to dramatize the plight of their industry.
The union worked out a common statement with the
consumer electronics manufacturers association call-
ing for a three-year limit on imports. The West
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German Government has thus far resisted the calls for
protection, although the industry has regular consul-
tations with the Japanese manufacturers on the level
of imports in this sector.
The leatherworkers' union, whose members have been
hard hit by import competition, has similarly sought
publicity to try to influence the government. The
union president also has lobbied top Economics Minis-
try officials. On the international front, the union has
been talking with its European and US counterparts.
Jointly, they have launched a campaign for a world
shoe agreement, similar to the MFA
Actions by Bonn in the last few years indicate that its
traditional support of free trade has weakened slightly
in the face of high unemployment at home and signs
of increasing protectionism within the EC and else-
where. Nonetheless, the Kohl government, the bulk of
the West German bureaucracy-especially the con-
servative Economics Ministry-the business commu-
nity, and the great majority of academics still see
West German industry benefiting from free trade.
Although some doubts have crept in during the
recession, West Germans believe that their low infla-
tion, reliable labor force, and the quality of their
products will allow them to beat the competition-
especially in Europe. Judging from articles in their
press, the West Germans have greater doubts about
keeping up with the United States and Japan, espe-
cially in the technology race. Even in this regard,
suggestions for overcoming any disparities are largely
in the direction of making West German management
more dynamic and willing to adopt new production
methods rather than calling for import barriers.
The drop in oil prices .and signs that the US economy
is gaining momentum give Bonn greater optimism
that the West German. economy will turn up later this
year. These economic trends also brighten the outlook
for the growth in world trade, which will further
encourage Bonn to hold the line on protectionism.
Only if the recovery stumbles might Bonn be forced to
compromise its position and occasionally yield to
protectionist pressure, but largely as countermeasures.
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The Mitterrand government's current aggressiveness
on trade issues-which is unlikely to change signifi-
cantly following the recent Cabinet shuffle-and the
apparent ease with which Paris opts for protectionist
solutions offer additional evidence, if such were need-
ed, that the French are not committed free traders.
The protectionist flurry demonstrates that they are
still trying to reconcile an old hankering for autarky
and controlled markets with new obligations they
accepted with something less than full conviction.
Their protectionist bent is strengthened by a feeling
that the odds are stacked against them in internation-
al competition. A reversion to autarkic patterns of the
past, however, is highly unlikely because of France's
EC ties and the realization of most producers that
they cannot depend solely on the national market.
The French are inclined by tradition and experience
to view trade through mercantilist and protectionist
lenses. Until the postwar era, the national economy
was substantially closed. Imports of manufactures,
discouraged by quotas and high customs duties, were
relatively insignificant. Exports were directed as
much toward captive markets in the colonies and
other less developed areas as toward the industrialized
countries. Within the country and in the colonial
trade, French business enjoyed comfortable arrange-
ments whereby markets were shared and competitive
risks minimized
The mercantilist tradition continues to influence the
formation of trade policy. In addition to the "normal"
tendency of a French government to want to direct
events, we believe several other factors are at work:
Concorde, the Airbus, the nuclear industry, and
various att,;mpts to promote a fully competitive
electronics industry. The state has assisted both
development and external marketing efforts, provid-
ing capital, procurement preferences, operating
grants, the underwriting of research and develop-
ment costs, subsidized export credits, and Treasury
loans at concessional rates to accompany commer-
cial financing arrangements.
? Uncertainty-the French remain unsure about their
ability to compete in international markets. French
leaders believe that French exporters are handi-
capped by being relative latecomers to international
trade. They are concerned, for example, by their
exporters' lack of adequate distribution networks 25X1
and service followthrough in industrialized markets. 25X1
Thus, policymakers involved in these projects justify
the government's role by contrasting its ability to
take a longer view and greater risks with a private
sector they still find shy of venture capital and an
entrepreneurial spirit.
Government officials on both left and right publicly
acknowledge that they see other dangers in open
competition. For them, complete acceptance of an
"international division of labor" could leave France
caught in a vise, with more powerful competitors-
such as the United States, Japan, and West Germa-
ny-in command of high-technology markets and the
newly industrializing countries, with lower labor costs
and newer facilities, in control of basic industries such
as steel and textiles. The French fear that the result 25X1
could be to relegate France to the position of a
"subcontractor" unable to control its trading destiny.
Growing inroads in the domestic market by a broad
spectrum of foreign goods have served to reinforce
this concern.
? National pride-a French presence on the industrial
heights is seen as essential to French political
stature. This has been one of the impulses behind
state support for highly visible projects such as the
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France:
Selected Trade Deficits
(Billion US $,
customs basis)
could not be saved. By the late 1970s, for example, the
government's stake in the steel industry became so
significant as to amount to de facto nationalization.
West Germany
2.6
4.0
4.2
5.8
Netherlands
1.2
1.9
2.5
2.1
Other OECD
3.2
4.6
5.3
6.6
Of which:
-0.8
1.1
1.5
1.4-
The mercantilist inclinations of French policy have
become stronger since the energy crisis of 1974. Faced
with a persistent deficit in energy trade, French.
governments have not been willing to put their confi-
dence in market forces. Confronted also by the lack of
competitiveness of French goods, reflected in an in-
creasing trade deficit with OECD countries, Paris has
sought government-to-government deals with oil pro-
ducers that assured quantities of oil for French refin-
ers in return for exports of aircraft, armaments, and
nuclear technology from state-supported industries.
Paris has also pursued large government-sponsored
public works contracts and turnkey projects in t:he oil-
producing countries and the Soviet Bloc. Paris has
complemented its selling effort by monitoring bilater-
al trade flows and, when confronted by a deficit,
arguing loudly that the seller must take measures to
redress it
For political and economic reasons, French govern-
ments have become increasingly reluctant to permit
mounting job losses in industries such as textiles,
steel, and shipbuilding to run their course. Measures
designed to preserve jobs have included loans at
preferential rates and direct financial participation to
assist in restructuring as well as subsidies to induce
viable industries to relocate and replace firms that
The protectionist efforts of French governments have
encountered little serious political opposition. To the
contrary, they have often been criticized for not doing
enough. For example, the US Embassy in Paris
reported before crucial legislative elections in 1978
that the Giscard-Barre government was under pres-
sure by its Gaullist allies to adopt more aggressive
export promotion programs and more effective protec-
tionist measures. Similarly, the influential Employers
Association (CNPF) called for the "reconquest of the
domestic market" in an open letter to Giscard in early
1980. The CNPF urged that France "adopt an atti-
tude closer to that of our large partners who, general-
ly speaking, know better than we how to defend their
national markets beyond appeals to the regulations."
In particular, the CNPF recommended that French
firms give preference to French goods and asked
Giscard to give his personal attention to the purchas-
ing practices of government agencies. In fact, the
government has never hesitated to accord preferences
to French suppliers in important sectors such as
electronics and telecommunications
French protectionist and mercantilist inclinations
have taken on new vigor under the Socialists. In part,
this is attributable to the persistence of economic hard
times. The Socialists' predilection for planning and
their support for an active role for the state reinforce
such inclinations.
On the export side, the Mitterrand government is
continuing to try to identify markets, especially in
high-technology areas, in which an effective French
presence may be secured. Going beyond their pred-
ecessors, the Socialists are using the expanded nation-
alized industrial-and banking sectors and substantial-
ly increased levels of government funding to achieve
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Speaking of Protectionism ...
"France cannot allow international competition to
develop under conditions that would throw its
economic structure into confusion, bring about the
sudden collapse of whole sections of its industry or
agriculture, put thousands of workers out of work,
and jeopardize its independence by eliminating
essential activities."
Raymond Barre
Prime Minister under Giscard
"I cannot accept that France should suffer from
insidious protectionism practiced throughout the
world, especially in the EC. Protectionism will be
met with protectionism and a half. "
Francois Mitterrand
"There are no outmoded industries, only outmoded
technologies. "
Jean-Pierre Chevenement
Mitterrand 's former industry
Minister
"We have to create a generation of exporters in
France. That's why I propose the creation of a
'Superior School of Exportation.' That's the way
we do things in France. When we needed engineers,
we created the Polytechnic. Later on, to modernize
and strengthen public administration, we created
the Superior School for Administration. If the
conquest of foreign markets becomes-as I believe
it must-an absolute priority, then we must give
ourselves the tools. "
Laurent Fabius
Mitterrand 's new Industry
Minister
`Beware of those who set up or consolidate com-
mercialfiefdoms in the name of free trade. Does
the massive subsidization of agricultural exports,
such as practiced by the United States, really come
from free trade convictions? It's easy to be an
evangelist when one has a position of strength. "
Michel Jobert
Mitterrand's former
Foreign Trade. Minister
success. Government funding of R&D, a preferential
procurement policy, subsidized credits, and the use of
the state's good offices are all seen as essential tools in
the struggle for export markets.
On the protectionist side, the Socialists have em-
braced the earlier proposals to "reconquer" the do-
mestic market. For the Socialists, previous govern-
ments erred in being too halfhearted. They reason
that French basic industries-vital for national secu-
rity and jobs-can be saved if the task of reorganizing
and modernizing is carried out systematically and
thoroughly. According to Embassy reporting, plans
have already been developed to :rescue a number of
sectors-among them machine tools, shoes, textiles,
and toys-and others are on the drawing board. These
feature, in varying combinations, government as-
sistance for investment through grants and loans at
preferred rates, partial assumption of labor costs by
the government, agreements to favor domestic su li-
ers, and preferential marketing arrangements. 125X1
The Socialists, no less than their predecessors, are
mindful that the French market is too small to permit
the development of a fully efficient and competitive
manufacturing sector, and they emphasize that their
plans for the "reconquest" must necessarily be taken
within the context of the European Community. They
have attempted to carry out this strategy both by
encouraging major French firms to make offers for
cooperation with, or the purchase of, competitors in
other countries and by taking a more aggressive line
in Community councils on trade policy vis-a-vis out-
siders. Paris has complained for years about the
reluctance of the EC Commission, backed by Bonn, to
retaliate against those who take advantage of the
Community's "openness." Whatever the rhetoric,
however, French prospects for implementing French
plans at the Community level are uncertain. Other
EC governments may be skeptical about takeovers by
French nationalized firms and do not fully support
French views on dealing with third countriesF__1 25X1
A Question of Timing
Socialist plans for strengthening French export capa-
bilities and for reducing import penetration depend on
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investment, retooling, and the development of new
top-of-the-line products through increased R&I)
spending and, if required, purchasing foreign technol-
ogy. This will take time, and more than one official
has concluded that the gap between the anticipated
result and France's current weak trading position will
have to be bridged by greater recourse to protectionist
tactics. The worsening trade deficit, brought about by
an ill-advised stimulus package in 1981 and by the
burden of mounting wage and social insurance costs
on business, probably only had the effect of accelerat-
ing the implementation of protectionist measures
In line with this approach and in keeping with their
insistence on looking at bilateral balances, the French
have recently made highly visible gestures against
Japan and the USSR. Japanese products were the
target of a ruling that video tape recorders would have
to clear customs at Poitiers, a city in west-central
France with only a small customs post. Last fall,
French imports of Soviet petroleum products were
temporarily halted in advance of a major bilateral
meeting between trade officials of the two countries.
These gestures were intended to serve, as the irascible
former Foreign Trade Minister, Michel Jobert, put it,
as "shots across the bow." Somewhat more ominously,
the French recently circulated a memorandum detail-
ing the protectionist devices used by other EC mem-
bers
We think the French will continue to prod the
Community to take steps to limit outside access to the
Common Market. For industrial products, the targets
are principally Japan, the newly industrializing coun-
tries, and the East Europeans. For agricultural prod-
ucts, it is primarily the United States. If necessary,
Paris will simply block Commission measures aimed
at liberalization, but France's political weight and the
threat that Paris might resort to unilateral measures,
will put pressure on the Commission. It is probable
also: lat other EC members, beset with economic
proD1~ ns of their own, will find it convenient to let the
French take the lead in advocating more restrictive
trade measures, as they sometimes have in the past.
The French are most unlikely to abandon either their
penchant for viewing trade in mercantilist terms or
their willingness to resort to protectionism if circum-
stances dictate. The French course toward making
good on their commitment to more open trade is likely
to be erratic, with periods of heightened protection-
ism-as now-alternating with periods when relative
success in international markets-as before 1974-
makes a more liberal approach possible.
A reversion to the autarkic patterns of the past,
however, is out of the question. Very few, other than
the Communists, any longer seriously argue that
France should try to go it alone. This is attributable in
part to the country's inescapable dependence on ener-
gy and raw materials imports and in part to awareness
of the limitations of relying solely on the national
market. The possibility of retaliation against French
exports thus acts as a. brake on excesses of protection-
ist zeal.
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United Kingdom
Trade protectionism is increasing in the United King-
dom despite Prime Minister Thatcher's vocal public
support for and philosophical commitment to free
market economic policies. Rising unemployment, in-
creased import penetration, a considerable contraction
of the UK's industrial base, and a deteriorating trade
surplus have boosted public pressure for the govern-
ment to take a more interventionist stand on trade. In
the 1970s-before Thatcher took office-nontariff
barriers became the main impediment to trade. While
Thatcher has been less willing to impose restrictions
on foreign goods and services, she has recently been
forced by a still sluggish economy and a fast-ap-
proaching national election to take measures aimed at
"preserving British jobs." We believe some additional
measures are likely even should Thatcher win-as
expected-because high unemployment will continue.
Thatcher's government has been an outspoken advo-
cate of free trade since it took office in May 1979. It
has pledged to reduce subsidies to industry and return
publicly owned firms to private control as part of its
effort to promote competition and efficiency. Chan-
cellor of the Exchequer Howe and Trade Minister
Peter Rees have, for the most part, resisted labor
union, business, and opposition party calls for signifi-
cant increases in trade restrictions. In elaborating the
UK's position on GATT, Trade Minister Rees has
stated that London supports:
? A consensus on reducing protectionism that-al-
though stopping short of the US proposal for an
immediate standstill-would significantly liberalize
trade in manufactures.
? A study on reducing trade barriers in the newly
industrializing countries (NICs).
? Limited and selective safeguard measures and in-
creased transparency of voluntary restraint and
industry-to-industry arrangements.
? Negotiations on agriculture including proposals to
bring the Common Agricultural Policy of the Euro-
pean Community under GATT.
? New efforts at liberalizing trade in services. F_~ 25X1
restrictions in 1980 versus 0.2 percent in 1974
Despite the Thatcher government's public stance,
there are a large number of trade-distorting policies
used by the United Kingdom. According to a recent
report by the quasi-official National Institute of
Economic and Social Research, 48 percent of total
trade was subject to some form of government man-
agement in 1980 versus 36 percent in 1974. The 1980
average for the EC was 45 percent, and only Italy,
with 52 percent of its trade subject to some form of
management, was higher than the United Kingdom.
Perhaps most significant, the study found that over 17
percent of British manufactured goods were subject to
In our judgment, nontariff controls on trade were an
inevitable result of the increased role of the govern-
ment in economic and industrial management which
took place in the years before Thatcher came to
power. They were also a response to the decline in
domestic and foreign sales of traditional industries as
tariff walls were reduced under successive rounds of
the GATT. The recession and rising unemployment
have slowed Thatcher's effort to reduce subsidies,
especially for many nationalized firms in traditional
industries, keeping the level of managed trade high
despite her philosophical commitment to free trade.
However, she has thus far resisted the more extreme
protectionist measures demanded by the opposition. 2X1
The United Kingdom draws a substantial degree of
protection from its membership in the European
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United Kingdom: Key Sectors Subject to Protectionism
Sector
Target
Employment
(Percent Change
May 79-Sep 82)
Output (Percent
Change May 79-
Dec 82)
Percent Change in
Imports as a Share
of the Domestic
Market May 79-
Sep 82
Japan
Eastern Europe
European Com-
munity
-53
--38
25
Coal
Eastern Europe
United States
- 10
0
-6
Shipbuilding
Japan
NICs
-33
-8
-54 a
Aircraft, aerospace
United States
-7
-7
19
Autos
Japan
Spain
-52
--36
15
Textiles, clothing,
footwear
Japan
NICs
United States
-13
--32
28
-11
10
Agriculture
United States
European Com-
munity
-7
0
-6
Examples of Protectionist
Measures
Government ownership, $720 mil-
lion subsidy in FY 1982, licensing-
marketing agreements.
Government ownership, govern-
ment purchasing policies, $1.5 bil-
lion subsidy in FY 1982.
Government ownership, govern-
ment purchasing policies, $140 mil-
lion subsidy in FY 1982.
Government ownership, govern-
ment procurement policy, $900 mil-
lion subsidy.
Government ownership, $540 mil-
lion subsidy in FY 1982, Japan
limited to 11 percent of the market,
voluntary export restraints (quota).
Multifiber arrangement, quotas.
High government participation, li-
censing and labeling restrictions.
Health and safety standards,
labeling requirements, marketing
board, buy national campaign, CAP
(EC) tariffs and quotas.
Machine tools
Japan
NICs
United States
-28
--16
15
Legal, financial
services
European
Community
United States
-8
NA
NA
Engineering
consulting
services
NA
a Change is the result of replacement of ships lost during the
Falklands crisis.
Large subsidies, buy national,
VERs on TVs and VTRs.
Growing subsidies, VER, buy na-
tional campaign.
Licensing restrictions on banking,
insurance, and legal services.
Subsidy to domestic design and
engineering firms.
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Community. Community tariffs on some sensitive
products, such as autos (10 percent) and semiconduc-
tors (17 percent), are relatively high. Variable import
levies on agricultural products under the Common
Agricultural Policy, however, are less beneficial to the
United Kingdom as a small food producer than they
are to other member states. The United Kingdom also
looks to the Community for protection against imports
of foreign steel, textiles, coal, and electronic goods
(TVs, VTRs, stereos)-commodities coming principal-
ly from Japan and the NICs. British automakers have
led the fight for more stringent EC controls on
Japanese cars and trucks and on autos from Spain.
London is also pushing for a producer agreement on
aircraft with the European Community)
The United Kingdom's most important trade protec-
tion measures are not formal barriers to foreign
imports, however; rather, they are business subsidies,
to both private and state firms. Tax subsidy rates on
British manufactures, as a percent of asset prices, rose
from an average 7.3 percent in 1973 to 10.9 percent in
1980 and 13.1 percent in 1981. Industrial subsidies
and grants, including those to nationalized industries,
accounted for 41.6 percent of government spending
and 17.8 percent of GNP in FY 1982/83. Direct
subsidies to private industry alone accounted for
4 percent of GNP last year.
London also provides subsidized export financing
through the Export Credits Guarantee Department
(ECGD). Under this plan, British banks provide ex-
port credits in exchange for unconditional repayment
guarantees, interest rate subsidies, and limited port-
folio refinancing by the government. Between 80
percent and 100 percent of long-term contract values
are supported under the program. A recent British
Treasury report questions the cost-effectiveness of
official subsidies to capital goods exports (10 percent
of total exports) and suggests they be discontinued.
According to Embassy reporting, Trade Secretary
Lord Cockfield, however, opposes the Treasury posi-
tion as well as US proposals for a flexible system on
export credit interest rates.
Nationalized firms enjoy virtual domestic monopolies
in the steel, coal, shipbuilding, aerospace, and auto
industries. The government also has a large stake in
the chemical, computer, telecommunications, and pet-
rochemical sectors. State firms generally are not
subject to constraints on expenditure, research, devel-
opment, or expansion and are often guaranteed sales
to other government-owned firms regardless of price.
Government-owned electrical plants, for example, are
forced to buy coal from government-owned National
Coal Board mines even though subsidized domestic
prices are higher than import prices; the costs are
passed on to consumers.
Government policies on purchasing, licensing, label-
ing, and standards also act to restrict entry of foreign
goods. British state companies do most of their pur-
chasing in the United Kingdom; three domestic com-
panies, for example, supply 60 percent of British
telecommunications purchases. Local governments
were encouraged to "buy national" on computer
purchases in 1982 from the 25-percent government-
owned computer manufacturer ICL. The United
Kingdom has also expanded the domestic and export
powers of its agricultural marketing organization. .
Health, safety, and labeling standards have been used
to keep out milk, poultry, and some alcoholic bever-
ages from the EC. Licensing practices have been used
to restrict or ban imports of foreign services such as
banking and insurance. The French claim that the
United Kingdom uses customs regulations and re-
duced customs entry points to slow imports.
Quantitative restrictions are increasingly being used
to reduce import penetration by Japan and the NICs.
Japanese auto imports are held to 11 percent of the
British market under a voluntary agreement. Color
television sets, picture tubes, video tape recorders,
machine tools, motorcycles, and forklift trucks are
also covered by voluntary export agreements (VERB)
between the British and the Japanese.
We believe the key factor behind the rise in protec-
tionist pressures is the decline in manufacturing em-
ployment. A protracted recession, tight monetary
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policies, loss of export market shares, and import
penetration contributed to a loss of 2.7 million jobs in
industry between 1974 and 1982; of these, nearly 2
million were lost after Thatcher took office. Unem-
ployment now stands at 3 million adult workers or 13
percent of the labor force.
Some industries have been hit even harder. Employ-
ment in the steel and auto sectors is half the 1979
level, and one-third of the workers in the shipbuilding
industries have been laid off over the period. Sales of
British machine tools are now 55 percent below their
1975 level, and imports now account for 40 percent of
domestic sales compared with 28 percent in 1975.
Japan has increased its share of the UK market more
than 8 percentage points. Meanwhile, jobs in the
industry are down nearly 30 percent.
Unions and trade associations like the Confederation
of British Industry, which represents 300,000 British
employers, want the government to increase aid to
industries and take action to keep out foreign goods.
Automakers and the unions want a quota on auto
imports from Spain, and shipbuilding unions are
pushing for more government aid, a scrap-and-build
program, and financial incentives for purchasers of
British-built ships. Steel and coal workers are de-
manding new subsidies to keep open plants and mines
that are no longer competitive.
Thatcher's political opponents-with an eye to an
election some time between June 1983 and May
1984-have made protectionism a key part of their
programs. Most radical has been the proposal by
Labor's shadow Chancellor of the Exchequer Peter
Shore which calls for a mixture of devaluation and
protectionism to reinforce a major reflationary pro-
gram. The plan includes a 30-percent devaluation
over two years, renationalization of British industry,
and strict planning of production and trade. The
Social Democratic-Liberal Alliance has stated a pref-
erence for a less radical plan calling for increased
subsidies and trade constraints only in especially
hard-hit sectors.
Thatcher in our opinion has been forced to take a
more pragmatic approach toward protectionism with
an early election possible and unemployment still at
record levels. Some of the government's most recent
actions on trade clearly have been taken to show its
concern about unemployment and thus attract votes.
The most notable instance is the subsidy that accom-
panied London's December 1982 order to British
Steel Corporation to continue production at all five of
its plants, even though there is sufficient demand to
support only four integrated steel plants
Major financial commitments have also been an-
nounced to support British production of high-tech-
nology goods. A $25 million grant went to British
microchip manufacturer Inmos International, and
London has reiterated its support for computer maker
ICL by pressing local governments to boost spending
on British computer and office equipment. The gov-
ernment has also told British Leyland-the national-
ized auto company--to hold off its plans to shift to
foreign suppliers. Another plan under study would
subsidize British suppliers in order to match prices
offered by foreign companies. In an effort to slow
layoffs in the mines, London also is applying new
pressures on electricity producers to buy more expen-
sive domestic coal. This new pragmatism represents a
substantial shift from Thatcher's earlier policies.
One result of the increased pressure against Japanese
goods has been a substantial increase in Japanese
investment in the United Kingdom. Britain has al-
lowed Japan to increase its direct investment in order
to promote new employment even though it will
eventually mean additional cash flow to Japan. Ten
Japanese plants designed to produce color TVs,
VTRs, or stereos (creating several thousand new jobs)
have opened in the United Kingdom at an increasing
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rate since the mid-1970s. Joint ventures between
British and Japanese auto and machine toolmakers
are also being explored.
Outlook and Impact on the United States
Pressures for protection are likely to rise because
current levels of unemployment are expected to con-
tinue through the mid-1980s. A Thatcher victory at
the polls, however, would probably result in substan-
tially lower levels of British protectionism than under
any other government. Under the Tories, subsidies
and government ownership of industry would proba-
bly continue to be gradually reduced and some prog-
ress toward trade liberalization would be likely. A
Labor government, on the other hand, would sharply
increase both protectionism and government control
of industry. The Social Democratic-Liberal Alliance
would be in the middle, probably applying new non-
tariff barriers only in specific areas where import
penetration is highest. Most of the protectionism
contemplated would be directed against imports from
Japan and the NICs.
We expect only minor pressure on US exports will
come directly from the United Kingdom. Most actions
against US goods will be carried out in the context of
the EC. Agricultural exports will be a prime area of
contention, although London believes the EC has
room to compromise.
Chemicals and high-technology goods are areas of I
potential bilateral US-UK trade conflict. The
United Kingdom is intent on developing its domestic 25X1
industry and has already demonstrated its willingness
to increase financial support and employ purchasing
policies to aid in further expanding its computer
industry. Thatcher views high-technology industries
as important for developing the UK service sector and
providing long-term employment growth as well as
export earnings. To that end she can be expected to
argue for the protection of an "infant industry." We
believe she will, however, join the United States in
pushing for liberalization of trade in services because
she believes Britain has a competitive advantage in
that area and will benefit from increased trade flows.
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Italy
Italy, which is highly dependent on foreign trade, has
contributed relatively little to rising EC protectionist
pressures. Rome, however, makes substantial use of
nontariff barriers, including quotas and import sur-
veillance schemes, directed in large part against Ja-
pan. Industrial support policies also tend to inhibit
imports, although claims of anticompetitive effects
are probably exaggerated. Although there is some
increase in domestic protectionist pressures, we doubt
Rome will change its policies significantly. US ex-
ports are likely to remain little affected by Italian
has sided with West Germany in resisting stronger
protectionist proposals. At last year's GATT Ministe-
trade policy.
Both industry and government generally consider
relatively free world trade essential to the devel-
opment of the Italian economy. The General Confed-
eration of Italian Industries-the organization that
represents most private industrial concerns-is a
strong supporter of free trade. All the major political
parties-the Christian Democrats, the Socialists, and
the Communists-maintain an antiprotectionist pos-
ture. In the preparatory documents for this month's
Communist Party Congress, for example, the Com-
munists called for "surmounting protectionist tempta-
tions and national egoism." Only an insignificant
segment of the Socialist left looks favorably on protec-
tionism
Under the umbrella of EC restrictions, Italy has
developed a moderate number of import restraints
directed, in large part, at complementing Commu-
nity protection. Italy's own contribution to rising
protectionist sentiments within the EC has, in our
judgment, been modest. Aside from initiatives on
chemical fibers, Rome has not actively sponsored
protective EC policies. Indeed, more often than not it
rial, Rome took an antiprotectionist stance.
As a member of the EC, Italy subscribes to the
Common Customs Tariff and the Common Agricul-
tural Policy (CAP). As a result of the last MTN tariff-
cutting exercise, Italy's average tariff will drop from
about 18 percent in the early 1960s to about 5 percent
at the end of 1987.
With declines in tariffs, nontariff barriers-including
quotas, import surveillance schemes, voluntary export
restraints, import deposit programs, and border tax
adjustments-have become more important. Quotas
on products such as chemicals, textiles, clothing,
machinery, and transportation equipment are aimed
mostly at Japan and the Communist Bloc countries.
Japan alone has 38 products subject to quotas, includ-
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E
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ing passenger cars, motorcycles, and mopeds. I 25X1
Rome has frequently resorted to slowing import entry
as a means of protectionism. National surveillance
programs, in addition to EC-wide schemes, are one
such tool. Products subject to import surveillance tend
to be the same as those under quota, and Japan is
once again most affected. The primary purpose of
monitoring schemes is to send a warning to exporting
countries. In addition, products under surveillance can
be delayed by the graduated application of time-
consuming administrative requirements for documen-
tation. In the sensitive textile sector, for example,
required documentation has ranged from a simple
import declaration to a license application accompa-
nied by technical information and product samples.
Rome has also made use of import deposit schemes to
correct trade and balance-of-payments deficits. The
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most recent program was introduced in May 1981 and
phased out in February 1982. It required a mandatory
90-day, noninterest-bearing deposit or bank guarantee
equal to 30 percent of the value of the import order.
Future trade and balance-of-payments problems
could result in a new program despite EC opposition.
In addition, Italy sometimes has tried to slow imports
by limiting ports of entry. This has been the case for
steel and textiles. In 1978, for example, steel entry
points were cut from 29 to four while those for textiles
were cut from 12 to six. Contrived disagreements over
local content ratios and country of origin, as in the
case of passenger cars and color televisions, also have
been used to delay entry of EC products.
Italy has recently come under attack for its govern-
ment procurement practices. Some exporters, includ-
ing US firms, have openly charged Rome with favor-
ing local suppliers over foreign competitors. Foreign
complaints about this type of discrimination, however,
are probably exaggerated. "Domestic suppliers"' are
defined by Rome to include foreign subsidiaries and
foreign merchandise distributed by domestic firms. A
study by Brookings estimated that the magnitude of
imports affected by discriminatory government pro-
curement practices was inconsequential.
Italy's relative moderation in resorting to trade barri-
ers has been offset by a strong bent toward industrial
support policies. The aid, which consists mainly of
interest subsidies and direct financial support, rose
sharply in the mid-1970s, from an estimated $1.5
billion in 1974 to $5.7 billion in 1978. As a percentage
of GNP, funding increased from 0.9 percent to 2.2
percent. The programs have been directed largely at
the industrialization of Italy's underdeveloped south-
ern regions, in support of failing firms, or at state-
owned or -controlled enterprises.
A major share of government transfers to industry has
gone to finance the three main state industrial holding
companies-IRI (heavy industry), ENI (energy), and
EFIM (light industry). Rome has provided billions of
dollars to operate the firms, which are a maze of
about 1,000 companies employing over 700,000 peo-
ple. Last year IRI, whose profit position has deterio-
rated since 1974, received about $3 billion from
Rome
Rome also provides aid to revitalize firms through the
Industrial Participations and Management Company
(GEPI), an autonomous state agency created in 1971.
GEPI was established to take over ailing but basically
sound private companies, turn them into profit mak-
ers, and resell them to private owners. Through the
end of 1981 GEPI had cost the Italian taxpayer
nearly $1.6 billion. The agency has reorganized and
disposed of about 80 firms and now has nearly 80
operating firms completely under its control. Another
100 are being operated as joint ventures with private
sector firms.
In addition to direct capital infusion, Rome provides
interest subsidies, amounting to about $1 billion in
1980. Other investment incentives include tax exemp-
tions and deductions, local infrastructure cost exemp-
tions, and temporary suspensions of mandatory pen-
sion contributions. Most of the investment incentives
are designed to stimulate economic growth in the
Mezzogiorno, Italy's poor southern region.
The impact on trade of Italian industrial aid is
difficult to measure. Complaints that government
funding provides Italian firms with an unfair competi-
tive edge are, however, probably exaggerated because
Rome's policies are generally not very effective:
? State firms frequently retain redundant labor for
political reasons, and management is riddled with
patronage and featherbedding.
? Bailouts are frequently economically irrational and
are based on political considerations.
? Budgeted funds are frequently not disbursed. For
example, a much publicized industrial reconstruc-
tion and reconversion plan was budgeted at about $2
billion for 1980-82, but no funds were ever
distributed.
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In short, we believe Italian Government policies con-
tribute little to rationalization and focus more on
managing crises rather than solving them. At the
same time, however, Rome has been fairly successful
in avoiding alliances between labor and management
in support of increased protection against imports. F-
Moreover, Rome's current announced intent is to
reduce the dimensions of industrial aid programs,
partly in response to concern over an expanding
budget deficit:
? GEPI has come under increased parliamentary
pressure to divest itself more rapidly of financially
sound firms.
? Some government funds, such as a fund for promot-
ing investment and employment, have been given
tougher disbursement guidelines. According to Em-
bassy reporting, Rome is also considering slashing
the funds' resources by about $1.4 billion during the
latest round of budget cutting.
In our judgment, no substantial changes in Italian
trade policy are likely in the near future, even though
some domestic pressures for protectionism are in-
creasing. Industries such as textiles, autos, footwear,
and major household appliances have begun to clamor
for more protection as competition from East Europe-
an and Third World countries has increased. Rome
has thus far dealt with the complaints without ex-
panding protectionist policies. Complaints from the
automobile industry, for example, have been handled
by maintaining, rather than tightening, existing quo-
tas on Japanese automobiles.
US exports to Italy, about 2 percent of total US
exports, have thus far been little affected by Italian
policies. Any further government concessions to do-
mestic pressure groups are likely to have little impact
on US exports. Italy may, however, support measures
within the EC that could have a more important 25X1
impact, but we do not expect Rome to take the lead in 25X1
sponsoring more protectionist moves within the EC. 0
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Japan
Mainly in response to US pressure over the mounting
bilateral trade surplus, the Japanese Government has
gradually taken steps to ease trade restrictions. While
Tokyo has removed most formal barriers to foreign
penetration, it still maintains a wide array of informal
trade barriers, many of which are beyond the govern-
ment's control. We do not expect Tokyo to take
additional action such as easing agricultural quotas
before national elections scheduled for this summer.
Moreover, Japanese policies aimed at helping both
depressed and dynamic new industries have resulted
in legislation or other actions that inhibit imports.
Negotiations with Tokyo are likely to get more diffi-
cult because those barriers are hard to identify and
even harder to quantify
Japan has greatly reduced most formal import barri-
ers-especially tariffs and quantitative restrictions-
during the past 20 years. The number of goods
covered by import quotas fell from more than 250 in
the mid-1960s to only 27 this year. Of these, 22 are
agricultural and fisheries products, with beef and
citrus being the most important to the United States.
According to GATT, the average Japanese tariff on
dutiable industrial imports is now 7 percent. Tokyo
has agreed to lower the average to 5 percent on 1
April 1987; US and EC tariffs will then average 6 and
7 percent.
One US study estimates that the removal of remain-
ing tariff and quota restrictions would add, at most,
$2-3 billion to Japan's import bill, with half of the
gain accruing to the United States. Our own estimates
show similar results. For example, we project that if
all agricultural quotas were eliminated, imports would
increase by only $500-700 million.
Tokyo has moved relatively slowly, however, to liber-
alize other formal restrictions. In the case of govern-
ment procurement procedures, Japan finally agreed in
December 1980 to include Nippon Telephone and
Telegraph (NTT) among the public corporations cov-
ered by the MTN code on government procurement.
As of September 1982, however, foreign sales still
accounted for less than 1 percent of total NTT
purchases. Similar results hold true in other areas of
government procurement.
Until recently Tokyo has also been reluctant to
liberalize its standards and approval procedures. Ap-
proval problems, such as unequal inspection systems,
have inhibited US sales of consumer items and other
products. The most recent example has been Japanese
use of more costly inspection systems for imported
metal softball bats than for bats produced in Japan.
On other products, exporters to Japan charge that
officials have deliberately delayed entry long enough
to allow Japanese manufacturers to introduce a com-
petitive product.
The government still controls trading in a variety of
products, including wheat, rice, barley, and tobacco.
government buying
practices have not limited imports of most of these
state-traded items, but they have hurt the sale of US
tobacco products
Japan still maintains a wide array of informal trade
barriers. Its close-knit industrial structure and com-
plex distribution system are formidable obstacles to
foreign competition. Major industries-steel, automo-
biles, and segments of the electronics industry-are
highly concentrated. The firms are frequently mem-
bers of large, self-contained industrial groups-keir-
etsu-which provide most of their raw materials,
intermediate products, and marketing channels. Keir-
etsu members tend to purchase within the group
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unless substantial price and quality differences dictate
otherwise. Even in such cases, group members may
still feel pressured to purchase within the group. In
fact, recent research by one leading US scholar
suggests that keiretsu buying patterns are becoming
more concentrated
Japan's highly segmented, multilayered distribution
system also tends to inhibit imports. Even if foreign
goods are price competitive, strong links between
Japanese manufacturers, wholesalers, and retailers
have proved to be major obstacles. In addition, long-
held cultural attitudes provide an important barrier.
total import bill. About one-third of the increase
would benefit US suppliers. If properly implemented,
some of the measures such as revising standards
procedures are potentially significant. At a minimum,
some of the aggravation of doing business in Japan
should be reduced, although foreign companies
burned in the past are not likely to respond quickly to
changes.
With national elections scheduled for this summer, we
do not expect Nakasone to take significant action on
sensitive trade issues.
Prime Minister Nakasone and his predecessor Prime
Minister Suzuki have taken steps to ease trade barri-
ers. Mainly in response to US pressure, Suzuki's
administration put together trade packages in Decem-
ber 1981 and May 1982. They included an accelera-
tion of tariff cuts agreed to in the Tokyo Round
negotiations, unilateral cuts on nearly 1,900 items,
commitments to improve customs procedures, estab-
lishment of the Office of Trade Ombudsman to deal
with foreign complaints, and foreign participation on
standards drafting committees
With formal barriers slipping in importance as a trade
issue, negotiations with Tokyo will probably become
even more difficult. We believe Japan has a more
diverse and integrated industrial policy than most
other advanced countries and that this policy has
inhibited imports. The tools are hard to identify,
however, and harder to quantify because they involve
longstanding relationships and agreements within in-
For his part, Prime Minister Nakasone has set a high
priority on shoring up relations with the United
States, especially on trade issues. He timed his early
efforts to precede his trip to Washington in January.
Almost immediately after taking office in November
he asked the Cabinet to draw up measures to open the
market further. The result was another package of
tariff cuts in January, expanded quotas on agricultur-
al products, an enhanced Office of Trade Ombuds-
man, promises to review all standards and certifica-
tion systems, and measures designed to increase
dustries and between government and industry.
Judging from the size and scope of Tokyo's industrial
policy, the impact on trade is probably large. In FY
1982 (April 1982-March 1983) Tokyo spent more
than $5 billion for industrial development out of the
general account, mainly for R&D.
foreign sales of manufactured tobacco.
Tokyo's efforts will have little visible impact on
imports for some time to come, however. We believe
the new tariff cuts will boost imports by no more than
$1 billion annually, less than 1 percent of last year's
In addition to money, Tokyo has used "administrative
guidance" to influence industrial development and
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thereby imports. The government intervened last year,
for example, to lower electricity rates to help domestic
aluminum smelters fend off foreign competition,
which enjoys lower energy costs. MITI also forced oil
refiners to lower the price of naphtha to help protect
the petrochemical industry from imports
We believe Tokyo will continue to target growth
industries for development and to protect some declin-
ing industries. Despite an austere FY 1983 budget,
spending for industrial policy will increase substan-
tially this year. In addition, Tokyo is debating a new
depressed industries law that would expand MITI's
power to protect problem sectors
From the US view, assessing the impact of industrial
policy on access to the Japanese market is difficult
because Tokyo continues to change tools. In part
because of Finance Ministry concern over the fiscal
deficit, Tokyo is making less use of special tax credits
and depreciation. Tokyo has offered accelerated de-
preciation allowances, for example, to buyers of ma-
chine tools requiring high technology being manufac-
tured for the first time in Japan. Public opposition has
also forced MITI to curtail the use of cartels to
restrict production and imports.
As a substitute, MITI will probably try to make
greater use of loans to help targeted industries. In FY
1983 government-backed loans will increase faster
than general expenditures, according to official bud-
get data. Academic studies indicate that government-
backed loans to firms in a targeted industry help the
firms acquire private loans because the banks believe
Tokyo will help foster growth in the good times and
protect the industry in bad times.
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Ottawa is responding to heavy pressure to protect
domestic industry by strengthening a variety of non-
tariff barriers. Declining domestic demand, coupled
with rising import penetration in the automobile,
textile, and footwear industries, have caused major
cutbacks in Canadian production and have led to
restraints on imports of these goods. Canada's protec-
tionist policies are unlikely to decrease no matter
which of the two major parties is in office.
Canadian business and government leaders have long
recognized the need for exports because the domestic
market of 24 million people is too small to support
large-scale production in many industries. At the
same time, successive Canadian governments-while
paying lipservice to an open international trading
system-have maintained high import tariff walls. In
response, foreign-largely US-firms moved inside
the walls by investing in Canadian corporations or
establishing subsidiaries. Now, foreign firms (74 per-
cent of them US) control 46 percent of Canada's
manufacturing sector. The highest degree of foreign
ownership is in the electrical products, transportation,
and chemical industries, more than three-fourths of
which are foreign controlled.
To bolster Canadian-owned business, Ottawa has
developed a range of instruments to protect Canadian
firms. The most extreme example, the National Ener-
gy Program, is explicitly aimed at boosting Canadian
ownership in the petroleum sector to at least 50
percent. Introduced in 1980 the NEP replaced deple-
tion allowances for oil and gas companies with dis-
criminatory exploration grants.
Grant levels are determined by the degree of domestic
ownership and control of the exploring company or
consortium. Moreover, petroleum companies involved
in large energy projects are strongly encouraged to
use Canadian sources of supplies and services.
Over the years nontariff barriers have played an
increasingly important role in Canadian protection-
ism. In line with MTN agreements, Ottawa has cut
tariffs significantly and further cuts will continue
until 1987.
Canadian agriculture has been a major beneficiary of
nontariff protection. Imports of several agricultural
commodities, such as fruits and sugar, are subject to
quotas. In addition, Canadian farmers benefit from
healthy subsidies which boost production and thus
discourage imports. Artificially low grain shipping
charges have held down the cost of western grain
shipped to the eastern provinces. This effectively
insulates the market from foreign competition and
improves export competitiveness.
Nontariff barriers also play a key role in the manufac-
turing industry. Traditional measures such as quotas
and subsidies are used mainly to protect declining
labor intensive industries from low-cost Third World
competition. Less visible devices, such as taxes and
crown corporations, typically give growth industries-
particularly those employing high technology-an
advantage in the domstic market.'
Canadian providers of services also benefit from
several protectionist measures. The tax system penal-
izes firms that patronize publications and broadcast-
ers deemed to have insufficient Canadian ownership.
For example, the cost of advertising in newspapers
and magazines that have less than 75 percent Canadi-
an ownership cannot be deducted from taxable in-
come. In addition, Ottawa limits foreign participation
' Crown corporations are federally or provincially owned corpora-
tions. They often invest in growth industries to ensure Canadian
participation. For example, the Canadian Development Corporation
has invested heavily in the petrochemical industry to develop
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Tariffs. Traditionally high; designed to protect small
domestic manufacturers from foreign competition.
Tariff protection remains significant for the textile,
clothing, footwear, shipbuilding, and railcar
industries.
to 15 percent if often granted the domestic producer.
Tenders often are not made public and only compa-
nies on government lists are allowed to bid. When
enough Canadian companies are listed, foreign firms
may be barred from bidding.
Quotas. A 1971 law allows Ottawa to impose
mandatory restrictions on imports of any manufac-
tures that cause or threaten to cause serious injury
to Canadian producers. Canadian quotas are
largely directed toward textile and footwear products
supplied by Third World manufacturers.
Taxes. A 1975 law terminated the tax deductions
for expenditures by Canadians on advertising in
Canada through the US media. The tax system
also encourages Canadians to keep their savings in
Canada.
Government Procurement. Ottawa and all the prov-
inces have guidelines on government and crown corpo-
ration procurement. A price preference of 10
in the banking industry to 8 percent of the domestic
market and mandates that data processing by banks
be performed within the country.
Ottawa also has several programs to promote ex-
ports-on which nearly one-fourth of the jobs in
Canada depends. The Trudeau government has been
particularly concerned with stimulating exports of
manufactured goods to move away from Canada's
traditional reliance on sales of natural resources. The
Export Development Corporation (EDC), established
in 1968, provides export financing to foreign buyers of
Canadian capital goods, equipment and services. In
1981, the EDC provided $1.4 billion in export financ-
ing and an additional $2.2 billion in insurance and
related guarantees. Last summer, legislation was pro-
posed in Parliament that would double the EDC's
authorized $810 million capital to boost its lending
Subsidies. Both the Ministry of Industry, Trade,
and Commerce and the Department of Regional
Economic Expansion offer subsidies to private
corporations to encourage domestic production.
Common methods employed are loan guarantees
and grants. Ottawa has financed a five-year $200
million aid program to restructure the textile and
clothing industries.
Crown Corporations. Petro-Canada, the Canada De-
velopment Corporation, Air Canada, and Canadian
Rail have invested in key industries thereby increas-
ing Canadian ownership. These corporations often are
used to promote development of high-growth indus-
tries, for example, petroleum, medical supplies, elec-
tric products, and chemicals.
In the agricultural area the Canadian Wheat Board
guarantees export credits at or below commercial
rates to purchasers of Canadian grain. Subsidized
credit sales by the CWB to the USSR, Poland, and
East Germany boosted Canadian grain exports in
1981 and 1982. A bill to set up a government
marketing corporation, Canagrex, to promote exports
of nongrain agricultural products is now before Par-
liament.
Recent economic problems have encouraged the rise
of import protection and export promotion policies.
Since mid-1981 the Canadian economy has contract-
ed more sharply than in any other postwar period; real
power.
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GNP plunged 5 percent last year. Since June 1981 the
unemployment rate has risen from 7.4 percent to 12.8
percent. Despite a record trade surplus in 1982, the
sharp rise in unemployment and severe import pene-
tration in key industries have intensified calls for
protection.
Ottawa has taken direct action to curb imports in the
automotive, textile and footwear areas. Despite a
Voluntary Export Restraint (VER) agreement limit-
ing Japanese sales of automobiles, Japan's share of
Canada's automobile market rose from 15 percent in
1980 to 23 percent in 1981, prompting Ottawa to
request negotiations for a second VER in 1982. When
Tokyo balked at Ottawa's proposal to limit shipments
to 146,000 vehicles, Canadian customs authorities
began to examine individually all Japanese vehicles
entering Vancouver, significantly slowing imports.
Japan then agreed to further restraints. Nevertheless,
because of slumping Canadian auto production, Ja-
pan's share of the automobile market increased even
further in 1982. This has pressured Ottawa to tighten
restraints; negotiations on a third VER are in pro-
gress.
In August 1982, Ottawa reinstated a global quota on
leather footwear similar to an existing quota on
canvas footwear. In 1978-81 the original quota had
contributed to cutting the import share of the leather
footwear market from 64 to 52 percent. When the
restrictions were suspended in late 1981, leather
footwear imports surged 19 percent over the next nine
months, dropping domestic production by 15 percent
and causing layoffs in many Canadian shoe factories.
Although the quota is aimed at low-cost Third World
imports, both the United States and the European
Community have been affected and have initiated
requests for compensation. (C NF)
The situation in the textile industry is similar to that
in footwear. Last July, the Canadian textile and
apparel industries made a joint submission to Ottawa
asking for rollbacks to 1980 levels in textile imports
from Hong Kong, South Korea, Taiwan, and China.
The request stemmed from the loss of over 27,000
jobs-15 percent of the industries' combined labor
force-since May 1981. Negotiations have been in-
conclusive, and imports of clothing continue to in-
crease.
The economic outlook remains bleak with only a weak
recovery expected over the next two years. Unemploy-
ment will remain over 12 percent in 1983 and improve
little in 1984. Canadian resource-based exports should
pick up as the United States emerges from the
recession, but the manufacturing industries-espe-
cially machinery, electrical products, and fabricated
metals-will be slow to recover.
Strong and militant labor unions in the automotive
and steel industries will continue to press for addition-
al protection. Canadian-US automotive trade present- 25X6
ly enjoys duty-free status under the 1965 Auto Pact,
FA govern-
ment-industry study on the status of the Canadian 25X1
automotive industry will be issued later this year and
is likely to suggest that some new protectionist mea-
sures are necessary, particularly against Japan. F_~
Regional disparities, aggravated by the current down-
turn, play a key role in fomenting Canadian protec-
tionism. Although the West's petroleum-based econo-
my has slowed, the traditional manufacturing sector
in Quebec and the fishing and lumber industries of
the Atlantic provinces have been battered. Spokesmen
for Quebec-a stronghold of Trudeau's Liberal Par-
ty-have a large impact on his decisions and are
pressing for policies to boost economic growth in the
east. The push for regional balance will continue as
recovery develops faster in the more resource-oriented
industries of western Canada.F___-] 25X1
Party Attitudes. Canada's protectionist policies are
unlikely to change greatly after the election to be held
by early 1985, although differences do exist between
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the parties. The Progressive Conservatives under Joe
Clark or a new leader are not politically dependent on
Quebec but probably cannot afford to ignore further
protection of declining, labor-intensive industries.
They have supported the Trudeau's government's
moves to limit imports over the past two years. The
Liberals are unlikely to alter their protectionist poli-
cies even if Trudeau retires.
Protectionism could get a boost, however, if a minor-
ity Liberal government takes office, dependent on
support from the New Democrats. The New Demo-
crats are highly nationalistic and protectionist, partic-
ularly toward unionized heavy industries. Their influ-
ence would, at the least, make a minority Liberal
government even more sensitive to the fortunes of
such industries as automobiles and steel.
Implications for the United States
Canadian protectionism has its heaviest impact on the
United States because it is Canada's largest trading
partner by far.
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To the United States (billion US $)
38.0
41.2
46.2
As a percent of total exports
68
63
66
As a percent of total US imports
18
17
18
41.5
45.3
72
71
69
21
19
18
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Less Developed Countries
Most LDCs continue to rely heavily on import barri-
ers to protect local industries from foreign competi-
tion. Although the levels of protection remain high,
they tend to rise and fall with the countries' foreign
financial positions. Recently, many LDCs have raised
barriers to deal with burgeoning debt problems. There
are a few exceptions. The more dynamic exporters
such as South Korea and Taiwan have steadily eased
barriers since the late 1970s.
Developed nations have accepted the LDC need for
protection for both "infant industry" and financial
reasons. In GATT negotiations, for example, LDCs
benefit from all developed country trade liberalization
on a most-favored-nation basis, but they are not
obligated to extend reciprocal concessions. In prac-
tice, many LDCs have interpreted their exemption
from selected GATT obligations as a license to main-
tain restrictive import regimes. Although arrange-
ments between LDC debtors and the IMF for financ-
ing packages customarily include trade liberalization
objectives, all parties recognize that a reduction in
protectionism will be possible only in later stages of
economic recovery
Argentina. Argentina's military government liberal-
ized the country's traditionally protectionist import
policies during the past several years, but strict import
control measures imposed during the April 1982
Falklands conflict remain in effect. In April 1982 a
licensing requirement was imposed on all imports, and
in May nonessential imports, including most consum-
er goods, were banned. Before the Falklands conflict,
only about 200 items-primarily machinery and
equipment-required licenses. Banned items had been
reduced from 700 in 1975 to a handful in early 1982.
As is currently the case in other countries with severe
payments problems, issuance of import licenses may
depend on foreign exchange availability, administra-
tive determination of need for the import, or the
influence or pressure an importer can exert on govern-
ment officials.
Brazil. Brazil's import policies have become consider-
ably more restrictive in the past year in response to its
balance-of-payments problems. About 1,900 items-
largely chemicals, pharmaceuticals, and machinery-
were added to the list of banned imports, which
consisted mostly of luxuries and nonessential goods.
The ban, however, does not apply to imports from
other Latin American Integration Association mem-
bers. Private firms are now being required to cut
imports by 5 percent on top of the announced 10-
percent cuts imposed in July 1982. State-owned firms
have been forced to cut back as well. In addition, the
Foreign Trade Department of the Bank of Brazil is
supposed to be clamping down on import licenses.F_
India. India began to liberalize its import policy
slightly in the late 1970s when its foreign exchange
position was comfortable. Licensing-the main vehi-
cle for controlling imports-has been simplified. Raw
materials and components may be imported relatively
easily, and the government now tolerates limited
import competition for domestic manufacturers. Ex-
porters receive special consideration in the granting of
import licenses. Nevertheless, imports of most con-
sumer products are still prohibited, and New Delhi
views import substitution in petroleum, fertilizer,
steel, and cement as a major aspect of its economic
policy. Moreover, India now faces a huge foreign
trade deficit, and higher tariff rates were announced
last December and again this February. New Delhi
may be tempted to tighten import controls when its
annual import-export policy is announced in April,
but it presumably would have to convince the IMF
that such moves would not violate the conditions laid
down for further disbursements of the Fund's $5.7
billion loan.
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Automotive Import Barriers:
An Illustration of LDC Protectionism
To stimulate industrialization and create employ-
ment, most advanced developing countries maintain
extensive barriers to automobile and truck imports.
Barriers include tariffs, quotas, and import licensing
requirements, as well as harsh local content rules.
These policies have forced US, Japanese, and West
European manufacturers to establish manufacturing
and assembly facilities or joint ventures in many
LDCs in order to participate in local markets. Local
content rules for selected LDCs are as follow:
Mexico 50 percent local content required for
cars, 65 percent for trucks, but recom-
mended levels are 75 percent and 85
percent.
Venezuela 55 percent local content required, ris-
ing to 59 percent in 1985. Producers
can satisfy part of requirement by
exporting.
Argentina 96 percent local content rule-a virtual
import ban-was being liberalized be-
fore the 1982 import clampdown, with
some auto imports and exchanges of
components between domestic and for-
eign plants allowed.
Brazil Autos must be 99-percent Brazilian by
value. Rules include partial or total
bans on imports that compete with
domestic components.
Chile 1973 local content rule of 70 percent
has been phased down to 15 percent.
Auto consumer tax and tariff had also
been falling until this year.
Colombia Stated goal is 25 percent local content,
but parts imports are denied only when
local product is competitive.
Mexico. Last September Mexico substantially raised
import barriers in response to the mounting financial
crisis. Licensing requirements were imposed on all
imports, and only food and capital goods may be
imported at the controlled exchange rate. The emer-
gency measures reversed a program begun in 1977 to
remove import licensing requirements from a large
India Local sourcing required whenever
possible.
Indonesia Generally required to use local compo-
nents whenever available. Japanese
firms have exploited this by establish-
ing affiliated parts makers.
Philippines Tariff breaks on unassembled vehicles
promote local labor content.
South Korea Usually required to use local parts
when available. The government pres-
sures,foreign firms to develop local
sourcing.
Thailand 50 percent local content will be re-
quired later this year.
Morocco 14 percent local content is required for
autos, 21 percent for trucks. May be
increased.
number of items and replace them with higher tariffs,
thereby improving the predictability of import regula-
tion.
the de la Madrid government is beginning to take a
more practical approach on import policy and is
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allowing exceptions to the import licensing rules
where controls have hurt efficiency and hindered
investment. However,
some operations are unable to
import needed supplies because of limited foreign
exchange availability
Nigeria. Before Nigeria's current financial difficul-
ties, import restrictions were very limited. The few
items that did not enter freely were controlled through
licensing and import bans-such as those on goods
coming from South Africa and Namibia. In April
1982, however, licensing requirements and import
bans were broadened significantly, and import depos-
its from 25 to 250 percent of the value of the import
were required. Additional restrictions announced in
January added 150 general categories to the import
licensing system, thereby including all remaining sig-
nificant imports. Lagos also raised tariffs substantial-
ly-some to 175 percent-while reducing compulsory
import deposits.
Philippines. With Philippine accession to GATT in
1980, Manila instituted a four-year program of tariff
and import license liberalization. A World Bank
structural adjustment program begun in 1981 has also
resulted in liberalization of trade and foreign ex-
change controls. Some items are no longer restricted,
and 960 of 1,300 restricted goods are being liberalized
over three years beginning in 1981. Average tariffs
have been reduced from 42 percent in 1978 to 28
percent at present. Nevertheless, in response to its
worsening payments position, Manila in January im-
posed a 3-percent surtax on all imports and required
that duties and taxes be paid when opening letters of
credit. Imports used in the production of exports are
exempt.
South Korea. South Korea is much less protectionist
than most developing countries. In 1979 Seoul insti-
tuted a plan to liberalize 90 percent of South Korean
import classifications by 1986. Tariffs were cut 11 to
25 percent in 1979 and are now around 5 to 10
percent for raw materials, 20 to 30 percent for capital
goods, and 50 to 60 percent for finished goods.
Uncompetitive domestic industries, producers of stra-
tegic items, and many agricultural producers will
continue to be protected, but rules for machinery,
electrical and metal products, petrochemicals, and
products in which South Korea is internationally
competitive have been or are scheduled to be liberal-
ized.
Taiwan. Taiwan has been steadily easing its import
restraints over the past several years. In 1979 the
government stated its intention to drop tariffs to levels
maintained by developed countries, and the following
year announced plans to drop average tariffs from 32
to 13 percent by 1983. Priority was given to cutting
tariffs on raw materials and capital goods not pro-
duced in Taiwan. Although all imports require li-
censes, about 97 percent of all categories are licensed
automatically and can be imported subject only to the
availability of foreign exchange. The remaining items,
primarily luxuries and consumer goods, are controlled
to protect domestic industries; licenses for them are
granted on a case-by-case basis,
Venezuela. Venezuela's traditionally protectionist
stance toughened substantially in January of this
year. Two hundred agricultural and industrial prod-
ucts were banned for balance-of-payments and com-
petitive reasons, and tariffs, already high on consumer
goods, were increased. Import licenses were made
mandatory on 565 new items, including foods, auto
parts, and construction materials. Also in response to
the payments crisis, the Venezuelan Government an-
nounced foreign exchange controls in February, with
only imports of essential goods qualifying for foreign
exchange at the preferential rate. Press reports quote
a Colombian Andean Pact official as saying the
actions could cut pact trade with Venezuela in half
this year. In response, Venezuela has attacked other
members' nontariff barriers that harm Venezuelan
exports.
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