Volatile exchange markets spawn protectionism, anti-dumping actions

Turbulent financial flows and exchange-rate misalignments are undermining the ability of developing countries to successfully participate in international trade. Speaking on behalf of UNCTAD at the WTO recently, the UN body’s chief economist stressed the need to redress this incoherence between the global trading and financial systems so that these multilateral arrangements mutually reinforce each other in support of equitable, rapid and sustainable development.

by Chakravarthi Raghavan

GENEVA: In a world of floating exchange rates and volatile global financial markets, tariffs no longer provide predictable trade security, and this is responsible for the proliferation of non-tariff barriers like anti-dumping measures impeding trade flows, in particular exports of developing countries, the World Trade Organization was told on 11 July.

A presentation on behalf of the UN Conference on Trade and Development (UNCTAD) by its chief economist Yilmaz Akyüz, who focussed on the incoherence between the global systems of trade and finance and the effects of financial instability and commodity price volatility on trade, finance and development, told trade negotiators that the  proliferation of non-tariff barriers such as abuse of anti-dumping measures was the result of floating exchange rates and volatility on the international exchange markets resulting in tariffs no longer providing predictability to international trade.

The trading system, after the Tokyo Round of negotiations, took six years to effect the agreed tariff reductions down to an average 5-6%, but the volatile exchange markets, where a 10% variation overnight in exchange rates is possible, can completely nullify the trade security of tariff-based protection.

It is this insecurity that is, on the one hand, creating pressures for protection in the form of anti-dumping measures and, on the other, coming in the way of developing countries’ ability to rely on trade and exports to finance development in a secure environment.

Akyüz, UNCTAD’s Director of the Division on Globalization and Development Strategies (according to the presentation made available to participants in the meeting), told the WTO Working Party on Trade, Debt and Finance that instead of being mutually supportive, there was  incoherence between the international trading and finance systems and arrangements. It was futile to hope for solutions to the problems arising from the finance system through the trading system or for resolving problems of the trading system through the finance system.

Solutions need to be sought within the framework of the United Nations system, as was envisaged by the architects of the original Havana Charter, Akyüz told the Working Party, which is chaired by Ambassador Hernando Jose Gomez of Colombia.

The UNCTAD presentation was warmly welcomed by a number of developing countries who spoke later, but the US and the EU, who did not seem to agree with the approach, indicated they would present their views in separate papers. The World Bank was due to make a presentation on 12 July.

Complex policy challenges

While governments of developing countries have to take responsibility for their own development and take measures to put their house in order, a country will not find it possible in today’s system to take measures on its own but needs concerted international actions, Akyüz said. It is no more possible for a developing country to tackle its financing and payments problems of a structural and long-term nature by itself, Akyüz said, than it is for the US to take actions on its own to put its house in order and prevent a precipitate slide in dollar values; rather international cooperation is needed - a point underscored recently by the IMF Managing Director.

The question of mutual support of the trade and financing systems was one that had faced the architects of the post-war international economic system, and they came to the conclusion that this had to be addressed to ensure political and economic security for all the citizens of the member states of the United Nations. That the Working Group was facing the same fundamental question of whether or not the multilateral rules and regulations in trade, debt and finance mutually reinforce each  other in support of equitable, rapid   and  sustainable  growth  and development, showed the difficulties in providing a durable solution, Akyüz said.

In today’s world of increased economic and political interdependence, achieving a broad-based, rapid and sustained growth in incomes and employment involves even more complex policy challenges than in the past, Akyüz noted.

The external environment of developing countries has undergone a number of fundamental changes that are unlikely to be reversed in the foreseeable future. The average cost of borrowing in international markets has become both higher and more variable;  the availability of external finance for these countries has become more unpredictable and  apt to undergo abrupt changes; and for many developing countries increased financial stringency has been associated with a prolonged depression of export prices and adverse terms of trade.

However, despite the recognition that global interdependence poses greater problems today, the mechanisms and institutions put in place over the past three decades have not been adequate to the challenge regarding the coherence, complementarity and coordination of global economic policymaking.  Proposals in the current context of globalization should start with an attempt to address these problems, inter alia, through the appropriate parts of the UN system. And as the focal point within the UN for the integrated treatment of trade and development and the interrelated issues in the areas of trade, finance, technology, investment and sustainable development, UNCTAD is well placed to examine these issues and to build a consensus for reformulation of policies from a development perspective, Akyüz said.

Tracing the developments in the post-war system, the failure of the Bretton Woods system to take account of the problems of development and of the developing countries, and the problems of the GATT trading system not supporting the development of developing countries (which led to the convening of UNCTAD and, after its establishment, to GATT formally considering the problems of the “less-developed contracting parties” and formulating Part IV as well as special and differential treatment and the provisions of Article XVIII:B for meeting the balance-of-payments problems of developing countries), Akyüz said that though GATT had now been transformed into the WTO, which is a fully-fledged international institution, a framework for the coordination of trade, macroeconomic and financial policy issues on the lines envisaged in the original Havana Charter is still missing.

The IMF, since the mid-1970s,  has abandoned its objective of providing stable exchange rates in an orderly international financial system, and international financial flows have been allowed to return to levels similar to those that caused instability in the inter-war period, generating exchange-rate gyrations and misalignments and leading to disruptions in international competitiveness.

In contrast to its early history, the IMF now lends exclusively to developing countries, substantially blurring the distinction between short-term liquidity requirements of a stable financial system and the long-term financing requirements for the development of lower-income countries. The World Bank has also given up its emphasis on longer-term infrastructure project lending and now concentrates on “structural adjustment” lending and poverty abatement.

Given the decline in official development assistance, the provision of long-term financing for developing countries has been left primarily to private capital flows; in direct contrast to the arrangements originally thought to be necessary to support the international trading system, current arrangements favour private capital flows over official flows, exchange-rate flexibility over stability, deflationary adjustment over financing, and the interests of creditors over debtors.  International trade has moved towards a single-tier system of rights and obligations, in which developing countries have generally the same level of obligations as the developed countries.  The recognition that full employment has to be an integral part of the success of increasingly free trade has been weakened.  The protectionist arrangements for the support of agricultural prices and incomes in industrial countries are a continuing source of difficulties in multilateral trade negotiations and of tensions in trade relations more generally.  And efforts to control chronic tendencies to excess supply of certain primary commodities - for example, through the provision of external financing for structural shifts into new activities in developing countries excessively dependent on primary commodity exports - have been limited and spasmodic.

Trade liberalization has been put in front of economic growth and full employment, thereby rekindling mercantilist agendas, particularly in developed countries.  While the post-war arrangements were founded on the belief that adverse influences emanating from trade, finance and debt should be countered through measures that preserved growth and development, under present arrangements and policies, developing countries almost invariably find themselves obliged to adjust to international imbalances through domestic retrenchment.

Destabilizing feedbacks

It is thus not surprising that once again the question has been raised whether the participation of developing countries in the system is compatible with their development objectives.  Just as in the immediate post-war period, success in maintaining an open multilateral trading system requires more than simply dealing with reductions in tariffs, quotas, subsidies and other impediments to the expansion of trade. If the international regime is to be capable of supporting the trading system, the financial system in particular must be compatible with an open multilateral trading system.

In the Marrakesh Declaration On The Contribution Of The World Trade Organization To Achieving Greater Coherence In Global Economic Policymaking, in paragraph 4, the Ministers recognized “that difficulties the origins of which lie outside the trade field cannot be redressed through measures taken in the trade field alone” and underscored the importance of efforts to improve other elements of global economic policymaking “to complement the effective implementation of the results achieved in the Uruguay Round.”

However, the recent experiences of repeated financial crises in developing countries suggest that current global arrangements are not capable of providing the financial and monetary stability to sustain the expansion of employment and output that is necessary for the success of the international trading system and improving the conditions in developing countries.

Initiatives taken in the context of the reform of the international financial architecture have not been effective in preventing financial crises in emerging markets, resulting in reductions in growth, employment and trade, and sharp declines in commodity prices and adverse movement in the terms of trade.

The tightened external payments constraint on developing countries resulting from the recent downturn in the world economy and from the pro-cyclical behaviour of international financial flows and interest rates raises the question of adequacy of multilateral arrangements for the provision of official balance-of-payments financing.

The question of stability and appropriate alignment of exchange rates among the G-3 currencies (i.e., dollar, euro and yen) remains unresolved, and large swings continue to pose threats to global financial stability, the international trading system, and to exchange-rate policy and other aspects of external financial management in developing countries.  The daily volatility in these rates can often offset annual gains in domestic productivity and drastically alter international competitiveness.

These recent experiences have raised questions, particularly from developing countries, about the effectiveness of current policies promoted by international financial institutions and of other major features of the international financial regime, making the need for reforms to bring back a greater degree of  coherence more pressing.

A major concern is the “destabilizing and deflationary” feedbacks among various spheres of economic activity, particularly trade, debt and finance, which often create impediments to development. Rather than being governed by comparative advantages, trade flows are frequently distorted by unstable and misaligned exchange rates with little relation to underlying economic fundamentals, and the effects often are analogous to changes in tariffs, a problem that is ignored in current global arrangements which are based on a false dichotomy between trade and finance.

By altering the relative competitive positions of various industries across countries, currency movements unrelated to economic fundamentals have the potential to trigger trade frictions and protectionism, undermining the international trading system. Exchange-rate misalignments have played an important part in recent trade disputes over shipping and steel, and the rise in non-tariff barriers like the proliferating anti-dumping measures and actions.

Shifts in international capital flows can also generate sharp swings in international trade flows by creating boom-bust cycles in economic activity.  As seen during the East Asian crisis and the more recent information-communication technology cycle in the United States, financial booms can lead to excessive expansion of investment, production and trade in particular sectors, which eventually come to an end with the collapse of the bubble, resulting in sharp declines in trade flows and prices.

Destabilizing linkages between trade and finance also operate through the cost and availability of external financing.  Since assessments of creditworthiness determine the costs and conditions of financing and payments arrangements for trade from both the public and private sectors, financial crises can make not only importing but also exporting more costly, even after large devaluations and improvements in competitiveness.  During major financial crises (such as the developing-country debt crisis of the 1980s) the effects may include a resort to countertrade - in other words, to discriminatory financing and payments arrangements similar to those which became widespread during the 1930s.  In the same vein, trade shocks lead to increased debt burdens and reduced capital inflows as they feed into higher risk spreads.

Systemic biases

Quite apart from destabilizing and deflationary feedbacks among various spheres of economic activity, there are also concerns that global arrangements in trade, debt and finance  contain systemic biases and asymmetries that constrain development.

Despite the general acceptance of the benefits of free trade, the international division of labour is greatly influenced by commercial policies which favour products and markets in which more advanced countries have a dominant position and a competitive edge.  High tariffs, tariff escalation, and subsidies in agriculture and fisheries are applied extensively to products that offer the greatest potential for export diversification in  developing countries.  The panorama of protectionism is no better for industrial products including footwear, clothing and textiles where many developing countries have competitive advantages.  The abuse of anti-dumping procedures and product standards against successful developing-country exporters creates further obstacles.

There is an inconsistency between the policy advice given by multilateral institutions to developing countries in favour of import liberalization and export-oriented growth strategies - advice which is often reflected in conditionalities attached to their lending in the context of structural adjustment programmes - and the continued protectionism in some industrial countries’ markets for agricultural and labour-intensive products.  Furthermore, through the promotion of unilateral trade liberalization beyond WTO commitments, developing countries are deprived of the means to gain concessions on market access in subsequent trade negotiations.

For most developing countries, the present  international trade and finance systems do not provide sufficient long-term financial resources to enable them to achieve the rapid and sustained growth needed to reach various poverty alleviation targets set by the international community for the new millennium.  Full implementation of commitments by most developing countries undertaken during the Uruguay Round, together with continued restrictions in market access in some major industrial countries, are generating payments imbalances that cannot be financed on a sustained and reliable basis by private international capital flows, Akyüz pointed out.

And, despite sustained international pressure, official financial flows continue to decline.  The outcome of the Monterrey Financing for Development Conference highlighted this inconsistency.

Redesigning the trade and financial systems

Remedies to this situation have  to be found on two fronts. The redesign of the architecture of the international financial system should be undertaken with the basic objective of easing the integration of developing countries into the international trading system, and a stable international financial system must be ensured that allows for greater participation of developing countries in international trade along with the full exploitation of their development potential.

Rather than focussing on these issues, the process of reform of the international financial architecture has so far placed undue emphasis on what should be done at the national level, but even here has failed to adopt an even-handed approach.

Referring to the most recent crises, and the way the cases of Argentina and Turkey had been tackled, with the IMF and others providing funds for Turkey, Akyüz (himself a national of Turkey) noted that the fundamentals in Argentina had been better than those of Turkey, and yet Argentina has received no help or assistance.

Current international efforts have concentrated on disciplining debtors, setting guidelines and standards for major areas of domestic policy, principally in debtor countries, and providing incentives and sanctions for their implementation.  Debtor countries have been urged to better manage risk by adopting stricter financial standards and regulations, holding larger international reserves, establishing contingent credit lines, and making contractual arrangements with private creditors so as to involve them in crisis resolution. The international financial system has continued to be organized around the principle of “laissez faire, laissez passer”, and developing countries are advised to adhere to the objective of an open capital account and convertibility.

All these have extended the global reach of financial markets without a corresponding strengthening of global institutions and a recognition of the need for them to operate in a coherent way to coordinate the trading and financial systems.

Just as the original design of the post-war international financial system was undertaken by an intergovernmental process under the auspices of the United Nations, the redesign of the current system should also be approached within the United Nations framework with full representation, the UNCTAD official argued. “It is essential to ensure that this broader approach to reform is built on an effort to bring coherence to the policies advocated by various international institutions so as to provide the necessary support for a successful and durable open multilateral trading system.”

Another aspect of reform should involve the integration and elaboration of specific measures within the WTO framework for situations where financing of external imbalances is insufficient or not available. Within the current global framework, owing to the inadequacy of financial resources or to conditions attached to the provision of international liquidity, the remedy for correcting payments imbalances is often sought in contractionary macroeconomic policies.  The balance-of-payments provisions of GATT provide an alternative mechanism for reduction in imports through temporary suspension of commitments.  However, recourse is made to these provisions only infrequently because they were not designed to deal with problems endemic in the current international system and because of the difficulties in the procedures involved.

International financial obligations now compete with rather than complement countries’ commitments in the trading system. Much like the considerations underlying the provision of short-term international liquidity by the IMF, the balance-of-payments provisions of GATT (in Article  XVIII:B) are premised on the assumption that the difficulties they are meant to address result from temporary payments imbalances caused by “expansion of internal markets and instability of the terms of trade” rather than problems associated with instability in financial flows, contagion and increases in debt service that may arise from changes in developed-country policies or other external shocks.

“In order to address the latter, the conditions under which measures could be taken to restrict imports for balance-of-payments purposes must be redefined,” Akyüz said. In this respect, the assessment of the adequacy of reserves should be revised in order to take into account the size of reserves necessary to preserve exchange-rate and financial stability, as well as financing needed for import of goods and services.

It must also be recognized that the usefulness of such measures in defending reserves or offsetting imbalances due to financial causes requires rapid implementation (or even on occasion measures  instituted in advance of actual events).  Hence the procedures must be made more flexible and more streamlined, and even extended to allow them to serve a preventive role. Greater flexibility is also needed in order to mitigate the possible adverse effects of import restrictions on the level of economic activity and investment.

The existing arrangements in the trading system do not adequately address the systemic problems associated with insufficient development finance or secular declines in commodity prices and export earnings of developing countries.  While Article XVIII:A allows measures to promote “a particular industry with a view to raising the general standard of living of its people”, it is not clear how far this article can be applied more generally to a country that seeks to reduce its dependence on primary export earnings by promoting structural change, upgrading and diversification, processes which typically involve more than one sector or industry.

Also, the provision for compensation (of trading partners) conflicts with the need to raise financing for development through higher export earnings. “It is not appropriate for the international community to ask for compensation from developing countries trying to deal with what is acknowledged to be a global problem.”

All these measures are required because of insufficient provision of liquidity in response to short-term imbalances, on the one hand, and of inadequate development financing, on the other.  Given that the imbalances experienced by developing countries on their external accounts are increasingly due to debt and debt servicing requirements rather than their trade deficits, simple measures to restrict goods and services imports are unlikely to be sufficient to provide relief. Measures that allow the management of debt service payments should be given equal or even greater importance, thus pointing to the need for a re-examination of the concept of admissible safeguard measures or actions, which would expand their applicability beyond the avoidance of damage to particular sectors or industries to cases where an entire economy is threatened by financial developments such as the sudden reversal of financial flows or large movements in important exchange rates. (SUNS5159)

From Third World Economics No. 284 (1-15 July 2002)