Trade-related adjustments

Trade liberalization has been a major contributor to the world economy’s unprecedented growth over the past half century. In tackling remaining restrictions on trade in a multilateral framework, the Doha Development Agenda of the World Trade Organization (WTO) has the potential to benefit all countries. Yet, while overwhelmingly positive in its impact over time, opening the world trading environment further would require countries to adjust. And under certain circumstances, these adjustments could temporarily reduce export revenues, increase import bills, or cause other shortfalls in the external balance of payments.

Some of the potential adjustment pressures come from more competitive conditions in a country’s export markets. For example, the erosion of tariff preferences could lead to a reduction in the demand for a country’s exports because other suppliers can then compete on more equal terms. Another possible adjustment pressure relates to cuts in agricultural subsidies in developed countries. While of course benefiting the vast number of farmers in the developing world, such measures could nevertheless increase the price of food imports in some countries. Given these, it is important to help countries to reduce the exposure to risks arising from other-country specific shocks by enhancing risk-sharing.

According to Fund research, balance of payments shortfalls are unlikely to be large for most countries and would eventually be far exceeded by the positive impact of more open trade. Nevertheless, they could be significant in the short run for some countries.

IMF support for trade liberalization

The TIM aims to mitigate concerns, particularly in developing countries, about financing balance of payments shortfalls that are a result of multilateral liberalization.

The TIM is not a special facility that will provide new resources under special terms. Financial support for balance of payments difficulties arising from trade-related adjustments is already provided under the Fund’s existing lending facilities. Rather, the TIM is a policy designed to increase the predictability of resources that are available under existing facilities. The explicit emphasis on trade adjustments will ensure that their impact is carefully estimated and incorporated into Fund-supported programs. Also, the TIM contains a “deviation feature,” which provides countries with a greater degree of certainty that IMF financing will be available to assist with larger-than-anticipated adjustments.

How the TIM works

A member country can request consideration under the TIM if it expects a net balance of payments shortfall as a result of measures implemented by other countries that lead to more open market access for goods and services. Such measures would typically be introduced either under a WTO agreement or in some other way that treats all countries on a nondiscriminatory basis.

The TIM details how the Fund would provide access to its resources to meet a balance of payments need associated with such trade-related adjustments. In particular, the IMF would:

• stand ready to discuss with countries facing such balance of payments shortfalls new arrangements within its existing lending facilities;
• take into account the anticipated impact of the trade adjustment on the member’s balance of payments in determining the appropriate size of access under both new and existing arrangements (the “baseline feature”); and
• be prepared to augment arrangements under simplified procedures if the actual balance of payments effect turns out to be larger than anticipated (the “deviation feature”).

The TIM does not cover the implications of “own liberalization” measures—for example, any deterioration in a country’s balance of payments that results from a reduction in its own import tariffs. Nevertheless, the Fund will continue to assist its members in anticipating and managing the implications of domestic reforms that may be associated with multilateral trade liberalization commitments or that are undertaken unilaterally, including through financing under the Fund’s existing policies.

Three member countries (Bangladesh, the Dominican Republic, and the Republic of Madagascar) have so far requested and obtained support in accordance with the TIM.

Other IMF support for trade liberalization

Fund experts provide significant and long-standing technical assistance for data improvements, customs reform, and tax and tariff reform—including to mitigate the revenue implications of trade liberalization. In its areas of expertise, the Fund also participates in the multi-donor Enhanced Integrated Framework (EIF), which helps countries to tackle supply side constraints to trade, and aims to strengthen the incorporation of trade reforms in national poverty reduction strategies and to coordinate trade-related technical assistance.

The activities of the EIF, and Aid for Trade more generally, can support countries’ efforts to take greater advantage of the opportunities provided by the global trading system. As part of the process of Article IV surveillance, Fund staff engage with country authorities in identifying areas of opportunity and risk, and in devising appropriate policy responses to the challenges of international integration and liberalization. The Fund encourages non-discriminatory trade reforms, whether undertaken unilaterally or through multilateral trade negotiations such as the WTO Doha Round.