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The Uruguay Round - A Handbook on the Multilateral Trade Negotiations

October 31, 1987 Uruguay worldbank_document

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*** HF 1721 .U83 1987 ENG Finger, J . M. . The Uruguay Round: a handbook for the SECTORAL AESOURr.r= JUL 2 6 2005 'Od{iliilf!8 The Uruguay Round A Handbook on the Multilateral Trade Negotiations J.Michael Finger and Andrzej· Olechowski Editors The World Bank Washington, D.C. Copyright © 1987 by the International Reconstruction and Development/The World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing November 1987 The World Bank does not accept responsibility for the views expressed herein, which are those of the authors and should not be attributed World Bank, to its affiliated organizations, Board of Executive Directors and the govern- ments they represent. J. Michael Finger is chief of the International Economic Research Division of the World Banlc; Andrzej Olechowski is adviser to the president the National Bank of Poland. Bruce Ross-Larson edited the manuscript for publication. Michael Alloy prepared the ing desktop publishing. Library of Congress Cataloging-in-Publication The Uruguay Round. 1. General Agreement on Tariffs and Trade (Organization) 2. Tariff. 3. Commercial 4. Uruguay Round (1987 : Punta del Este, and Geneva, Switzerland) I. Finger, J.M. II. Olechowski, Andrezej. HF1721.U83 1987 382.9'2 ISBN 0-8213-0975-7 Foreword The fundamental truth that open markets spur efficient production and expanding prosperity is as sound today as it was 200 years ago, in Adam Smith's era, or 40 years ago, at the inception of the General Agreement on Tariffs and Trade (GATI). The multilateral trade negotiations un- der GATT have, for the past 40 years, been the only general effort to translate that fundamental truth into policy action. At Punta del Este, Uru- guay, in September 1986, the trading community agreed to begin a new round. That agreement is I the best recognition of the benefits of open international markets. At and since, I have encouraged vigorous tion by developing countries in the Uruguay round. But why specifically is the World to keep open the avenues of trade? Development is our business. Economic growth in developing countries can more easily be achieved in the context of a liberal trade environments. Countries benefit from trade because it offers opportunities for specialization and efficiency. These benefits are particularly important for countries whose domestic markets are small. Economic ineffi- ciency has often been the price of protection, and Contents 1. Introduction J MICHAEL FINGER Part I. Background 2. Objectives of the Uruguay Round 3. Why trade liberalization is a good idea 4. Why trade liberalization meets resistance 5. Economic costs of trade restrictions Part II. GATT's Approach to Trade 6. Multilateral liberalization ROBEKI E. BALDWIN 7. Reciprocity L. ALAN WINTERS 8. Unilateral liberalization and the MTNs 9. The codes approach ROBEKI' 10. Different and more favorable treatment•· 11. Bargaining in the Uruguay Round 12. Functioning of the GAIT system Part III. Subjects for Negotiation in 13. Tariff-cutting formulas •· and complications 14. Tariff preferences SAMUEL 15. The escalation of trade barriers 16. Nontariff barriers to trade ANDRZEJ OLECHOWSKI 17. Nonborder measures to assist industry 18. Technical regulations and standards 19. Safeguards GARY SAMPSON 20. Antidumping and antisubsidy measures 21. Agriculture DELBEKI' Fll'CHEIT 22. Tropical products VINCENT CABLE 23. Textiles and clothing VINCENT CABLE 24. Technology-intensive goods PAUL KRUGMAN 25. Intellectual property RICHARD STERN 26. Services JAGDISH BHAGWA11 27. Investment related to trade STEPHEN GUISINGER Annexes 1. Glossary of terms 2. Table of contents of the General Agreement 3. The Punta del Este Ministerial Declaration 4. Participants at the multilateral trade negotiations 5. Status of the Tokyo Round agreements on 1 June 1986 6. Country groups 7. Trade data on 128 countries 8. Antidumping and antisubsidy actions Initials and acronyms ACP African, Caribbean, CAP Common Agricultural CCITT International CCCN Customs Cooperation c.i.f. Cost, insurance, COMECON Council for CVD Countervailing duty DMF Different and EEC European Economic EFTA European Free FAO Food and Agriculture f.o.b. Free on board FTA Free-trade area GATT General Agreement GSP Generalized GSTP Global System IBRD International IEC International ILO International IMF International ISA International ISO International ITU International LTA Long-Term Arrangement MFA Multi.fiber MFN Most favored nation MTN Multilateral NBM Nonborder measure NIC Newly industrialized NTB Nontariff barrier OAP Offshore assembly OECD Organization OMA Orderly marketing QR Quantitative SDR Special drawing right SITC Standard International TBT Technical barrier TRIM Trade-related UNCTAD United Nations VER Voluntary export VIE Voluntary import VRA Voluntary restraint WIPO World Intellectual 1 Introduction J.MlcbaelFlnger The GATI system is three things: • The belief that an open international trading system conveys political and economic ad- vantages to each nation. • The international resolve to create and to defend such a trading system. • The technology •· the rules and procedures •· to translate this resolve into action. The international community must find ways to strengthen the GATI system •· the system em- bodying the General Agreement on Tariffs and Trade •· and reverse the trend toward increased protection. To do so will require agreements to set aside a long list of trade restrictions. It will also require a reawakening to the benefits an open trading system provides each nation. And it will require a rekindling of the political will to maintain t,hat openness. The Uruguay Round offers the opportunity to extend the technology of the GATI system to all sectors of the world economy and to newer forms of trade barriers. Bringing gray-area measures under GATI and extending GATI's coverage to textiles, agriculture, and services are important for strengthening the GATI system. The Uruguay Round also offers an opportunity •• a much more important one •· to expand the de~ veloping countries' participation and leadership in the GATI system. Both were critical in getting the round under way. In early 1986 it was diffi. cult to see how agreement to do so would ever be possible. Preparations were stuck, and agendas for the Punta del Este meeting were reviewed several times without progress. Quietly, however, officials from a group of middle-sized developing and developed countries began to discuss matters among themselves. They shaped perspectives, forged operational ideas, and calculated relevant Introduction negotiations, to reduce tariffs, did succeed. The result of these negotiations, GATI, is the only part of the initial design to come to life. likewise, other important vehicles for the reduction of developed countries' trade barriers -- such as negotiations to remove trade and exchange re- strictions in Europe and to form the European Economic Community (EEC) and the European Free Trade Association (EFTA) -· have also had a systemic focus. In the multilateral approach, trade liberaliza- tion is an exchange of concessions. Reductions of import restrictions increase the imports of the country granting the concessions, and are viewed as costs. But such costs, in the multilateral proc- ess, buy increased exports and help build the system from which all will benefit. For developing countries, the perspective on trade policy reform has been different -· with a national focus and a unilateral approach. This perspective perhaps includes a less complete appreciation of the value and fragility of a coher- ent international trading system. But it also in- cludes a more complete appreciation of the bene- fits that openness to international competition can convey to an individual economy. like the multilateral decisions of the developed countries, unilateral decisions for reform reflect an apprecia- tion of the economic benefits that export expan- sion allows. High-cost inputs are a burden to exports, and lower restrictions on imported in- puts are a stimulus to export expansion. Export expansion is a valid reason for import liberalization, but not the only one. Many devel- oping countries have built on the other reasons. They recognize that economic development re- quires the improvement of human resources and the acquisition of modern technology. They also recognize that close communication with other economies •· through the competitive process •· is an important stimulus to the upgrading of domes- tic resources and domestic forms of economic organization. Their experience provides many lessons on how an individual economy benefits from the removal of restrictions that isolate it from the international economy •· lessons on the gains from trade to an individual economy. Bringing the two perspectives together It is time to bring the two perspectives together •· the one's appreciation of a coherent international system's value, the other's opening to international competition. 2 Plan of this handbook A concern to expand exports and screen out troublesome imports reflects too narrow a con- ception of the gains from trade to allow progress at the Uruguay Round. This handbook·is written from the broader economic perspective that guides a unilateral decision to liberalize trade. Each chapter is loyal to the GATI spirit •• each appreciates the benefits to each nation of an open international trading system and the useful- ness of a multilateral approach to maintaining such a trading system •· though some are critical of GATI's current mechanics. Each has been written by an expert in that topic (and each is the responsibility of the author, not of the World Bank). If there is a common concern, it is that the economics of GATI's mechanics be improved, An internationalist has nothing to fear, however. Good economics suggests an open international trading system, not a closed one. The success of developing countries suggests that the same economics are good for both devel- oped and developing countries, and that all would benefit from being part of one open trad- ing system. These essays suggest that movement to a unified trading system requires replacing bad economics with good, not of replacing developing country economics with developed, or vice versa. Our suggestions are to take what is good from each rather than to debate which is less flawed. Part I Background 2 Objectives of the Uruguay Round Gardner Patterson and Eliza Patterson The new round, perhaps the most important since the GATI system was negotiated during and immediately after World War II, may be the most complex international economic negotiation ever. And it will take place in a less congenial environ- ment than any of the previous seven rounds. The round is important because the system •· which almost all careful observers conclude has served the world well for over three decades •· is "mori- bund," "in disarray," and continuing erosions.'' 1 Widely held perceptions in government and business circles are that GATI has become largely irrelevant to today's world and that, where it is relevant, its rules are more honored in the breach than in the observance. The system is operating much better than this. But it cannot be disputed that many existing rules are violated, that the system is often circumvented, and that large and growing sectors of international trade are not covered at all. Moreover, even if the perceptions of weakness are overblown, they can have enormous consequences. They often mean that governments and traders feel no serious obliga- tion to abide by the rules. Unless the new round can change this, there will almost surely be an acceleration in the recent trends toward protectionism, discrimination, lateral deals, regional arrangements, and cartel~ like "orderly marketing arrangements." The world had some experience with this sort of sys- tem in the 1930s. If the task of the new round is important, the problems facing the negotiators are daunting. Not only is the substance of the Punta del Este agenda complex (matters dealt with in some detail in other chapters of this handbook). The general environment could hardly be less propitious. The Objectltle$ of tbe Un,guay Round environment •· all for the fuller and more efficient use of thr. world's resources. More succinctly, the goal is to create a liberal, durable, and non- discriminatory multilateral trading system. Implicit, or subsumed, in the agreed-on goal are many supporting objectives. Some of these conflict with deeply entrenched present practices, and participants often have divergent aims and expectations regarding them. Almost every chap- ter in Part III of this handbook deals with one of the specific tasks of the new round. The focus here is on the objectives where failure to agree on an accommodation probably would result in a failure of the entire enterprise. These objectives are (1) to circumscribe the use of nontariff pro- tectionist measures, (2) to ensure that the devel- oping countries, while receiving special treat- ment, participate in the negotiations and that the more advanced of them assume many more of their GATI obligations than they now do, (3) to broaden and extend the coverage of GATI, par- ticularly to services and agricultural product, and (4) to restore respect for the GATI system. Circumscribing nontarlff protectionist measures The most corrosive actions and policies of the GATI system •· as it was originally envisaged and as it more or less functioned until roughly a decade ago •· have been those involving recourse to negotiate bilaterally for quantitative restrictions that protect domestic producers threatened by imports. 3 The measures have taken the form of orderly marketing arrangements, voluntary export restrictions, unilaterally imposed import quotas, and the like. The first two are now commonly called gray-area measures because some people see them as neither legal nor illegal under GATI. These gray-area measures •· covering products ranging from steel and automobiles to semicon- ductors and kitchen utensils •· have greatly dam- aged GATI's cornerstone, the most-favored-na- tion (MFN) or nondiscrimination principle. They have also made a mockery of the GATI escape clause (Article XIX) and other core GATI articles (XI and XIII) that severely restrict the use of quantitative restrictions for protection. Further, they foster cartel-like agreements, greatly interfere with market forces, and discourage adjustment to changed competitive conditions. They are, in sum, in fundamental conflict with the basic tenets of GATI. Finding means of unwinding the most objectionable ones and obtaining a firm commit• 8 Increasing the role of developing countries · In GA1T A critical objective that is subsumed in the overall goal is that the developing countries should par- ticipate effectively in the negotiations •· and al- though the principle of different and more favor- able treatment embodied in GATI should be honored, as should the decisions of the contract- ing parties, the time has come for some develop- ing countries to contribute more and to assume more GATI obligations. 4 That is, some of them should "graduate." There is general agreement on this proposal, but there are likely to be serious conflicts in giving the proposal substance. A major reason for the limited participation of developing countries in past negotiations has been the difficulty of reaching agreements as the number sitting around the table increases. So, the large industrial countries have often found it irresistible to negotiate among themselves, strike a deal, and let others take it or leave it. Bitterness and disappointment inevitably result because the major players are not willing to meet the demands of the smaller countries •· or the others are not willing to pay the price asked. This inherent outcome of any trade negotiation explains why no participant is ever fully satisfied. The major play- ers can often accommodate many of the more pressing needs of developing countries, if this accommodation is arranged before they reach their agreements. After that, any changes are strongly resisted to avoid upsetting the delicate balance. Experience from earlier rounds suggests that fulfilling three conditions can significantly reduce the difficulties of greater participation by the developing countries. The first is to have the major players do their negotiating in Geneva rather than in Brussels, Washington, or Tokyo. The second is to permit the GATI Secretariat to be an active and confidential go-between in pass- ing information on positions back and forth. The third is for the smaller nations. when they have important specific trade interests in common, to join and designate a single spokesperson, making them a "major" party to the discussion. More- over, if the smaller countries are to be more effec- tive, they must define the issues of importance to them and concentrate on those issues. The rea- son is that many developing countries lack the staff and expertise to cover all the issues. The developing countries, if they are to partici- pate fully in the new round, must have their major Objectives of tbe Uruguay Round treatment. That is, they might deny a NIC benefits if it does not undertake all or some of the obliga- tions or agreements. Through such devices the industrial country negotiators might promote graduation. Broadening and extending the coverage Services and agriculture are two sectors where conflicts among participants are most serious. 6 Neither has been adequately dealt with in GATI so far. The accepted goal of the new round speaks of trade generally. In the past GATI dealt almost exclusively with trade in goods, and pri- marily nonfarm goods at that. Production and trade in services, both within and across frontiers, have grown rapidly in recent years and promise to continue to grow. Along with this growth have come increasing new re- straints on foreign trade in services. This situ- ation caused several industrial countries, led by the United States, to insist that the new negotia- tions seek to establish rules, rights, and obliga- tions to liberalize trade in services. Several developing countries, led by Brazil and India, strongly opposed this in the months and years of preparatory work for the new round. Their opposition reflected four main concerns. One was the fear that negotiations now would lead to rules and commitments that would inhibit the growth of their infant and still unborn service industries. The second was that the more ad- vanced nations would seek concessions and threaten retaliation on trade in goods to get their way on rules on trade in services. Another was the belief that such a negotiation would divert attention from efforts to liberalize trade in goods, where they had major interests. The fourth was the considerable uncertainty about precisely where their long-term interests really lay in this field. These and other doubts were not put to rest in the preparatory work, but the industrial countries were adamant that services be included. As a compromise, the Punta del Este Declaration sepa- rates the agreements to negotiate on goods and on services. Negotiations on services are to be conducted separately from those on goods, but the aim would be "to establish a multilateral framework of principles and rules for trade in services." Moreover, GATI procedures and prac- tices would apply to these negotiations, and both the group negotiating on goods and the group negotiating on services would be under the Trade fact be handled primarily by spokespersons for agricultural ministers rather than by those respon- sible for the nation's overall trade policy. If so, the pressure will be strong for live-and-let-live solutions -- that is, for orderly marketing arrange- ments, not for an open trading system. The conflicts of interest among GATI members over the treatment of agriculture are deep. Some food-importing countries often welcome subsi- dies benefiting imports of certain goods, but these disappear as the agricultural production of many countries increases and diversifies. Effi- cient producers -- such as Canada, Australia, New Zealand, and for some goods the United States -- have as a top priority the removal or sharp limita- tion of any subsidy that aids exports. The Euro- pean Community -- in whose Common Agricul- tural Policy subsidies are critical and essential -- sees great virtue in subsidies but advocates some form of market sharing to limit the costs. Tradi- tionally, the United States has strongly opposed such a solution. This is not the stuff of which easy agreement is fashioned. The differences over what should be done were papered over in the Punta del Este Declaration. Many observers believe these differences are likely to inhibit changes in present practices. Others note two reasons for likely progress. First, the recognized costs of current policies and prac- tices have become so great in the industrial coun- tries that there are more pressures than in earlier rounds to alter domestic policies. Second, the rising number and level of disputes among gov- ernments in recent years is also driving them toward some agreement. Because of the difficul- ties, however, perhaps the most feasible objec- tives would be (1) some liberalization of current import restrictions and (2) a new and enforceable commitment to modify aspects of domestic farm programs •· notably subsidies •• that adversely af. fect the markets available to others. To give op- erational content to this limited objective would be no mean feat. Because of past experience and accumulated cynicism about restoring agricultural trade to the marketplace, failure to make great progress in agriculture probably would not devastate the entire round -- as would the failure to extend GATI to trade in services. Restoring respect for GATT Although given little attention in the Punta del Este Declaration, the success of the negotiations Objectt.ves of the Uruguay Round Moreover, the rule makes it difficult to cope with foot dragging and free riding •· phenomena that threaten to loom large in the Uruguay Round. A foot dragger is a country so large that no agree- ment can be reached without its participation because other countries are unwilling to accord it the benefits, through the MFN rule, of the agree- ment if it makes no contribution. A free rider is typically a small country that makes no contribu- tion but, through the MFN rule, enjoys whatever concessions the others negotiate. One free rider can often be tolerated, but if there are several of them there is a reluctance to conclude agree- ments. The problem appears to be so serious that, unless the unconditional MFN rule is modified, either nothing will happen or, more likely, like- minded countries will strike their deals outside the GAIT framework (and effectively circumvent the MFN rule). At the same time, to simply aban- don the rule would likely fragment the world trading system •· and, a.. earlier experiences demonstrate, open bitter political disputes. The answer would therefore seem to lie in a participa- tory MFN rule under which the benefits of all new undertakings except tariff cuts would be accorded only to those who adhere to the agreement. To ensure that the crucial multilateral aspects of the system are preserved and expanded, it will be essential for two conditions to be met. First, any new agreement or arrangement must not come into effect until countries accounting for much of the covered activity have signed. Sec- ond, all new accords must be open to all GAIT members, and the rights and obligations of those who join after the original negotiation would be the same as for the founding members (not con- ditional on a new negotiation). It would not be easy to reach agreement on the specifics of such a rule. Some countries drag their feet to strengthen their bargaining positions. Some like to be free riders. Some fear that any formal depar- ture from the unconditional MFN rule will result in all kinds of discrimination. Nonetheless, a change in the rule seems necessary for meeting the major objectives of the new round. Inappropriate objectives Two global problems are the huge and burden- some international debts of many developing countries and the large, persistent current ac- count imbalances of many nations, especially Japan and the United States. But it would be 12 welfare of Japan, the United States, and the debt- ridden developing countries should, of course, be substantial. There also are important linlcs between trade, money, and development. Actions and policies in these areas have too frequently been rigorously compartmentalized, both domestically and inter- nationally. Conflicting rather than supporting policies have often been pursued. It is therefore to be welcomed that in Punta del Este the minis- ters agreed that one of the objectives of the new round would be to "foster concurrent coopera- tive action at the national and international to strengthen the interrelationship between policies and other economic policies affecting growth and development." The obstacles to achieving this objective seem to be largely bu- reaucratic •• the province not of governments but of institutions, departments, and ministries. The objective may therefore be one of the most diffi. cult to achieve. Conclusion The major objectives of this round are and intricate •· and likely to prove as controversial •· as the substantive issues on the negotiating agenda discussed in later chapters of this hand- book. Given also the constraints on the negotia- tions, it seems clear that progress toward the stated objectives, not their full achievement, is the most that can be hoped for. To expect their full achievement •· or to insist on that as a condition of agreement •· is to doom the negotiations from the outset. But anything less than substantial progress toward the objectives discussed here will leave the international community with even larger problems. Notes 1. Five excellent studies - written dcalingwith many aspects of the new round, - arc Leutwiler and others (GATI 1985), Hufbauer and Schott (1985),AhoandAronson(1985),Viravanandothers(1986),and Camps and Diebold (1985). 2. Charles Blum, Assistant United States tive, quoted in Tbe Washington Post, December 3. For the seminal discussion of this The issue also is discussed in Viravan most careful and complete analysis of bilities of institutingan auction system 3 Why trade liberalization is a good idea Martin Wolf There is a fundamental antagonism between the seller and the buyer. The former wants the market to be scarce, in short supply, The latter wants them abundant, in plentiful supply, and cheap. Our laws, which should at least be of the seller against the buyer, the consumer, of high prices against low prices, of scarcity against abundance. They tionally, at least logically, on the assumption that a nation is rich when it is lacking 1964, p. 14). Trade liberalization can be likened to a journey that begins with little more than an intense desire to leave where one happens to be. For most countries the benefits of liberalization depend not so much on the desirability of the destination as on the undesirability of the starting point. Given a starting point of normal, chaotic interven- tionism, there is no need, when contemplating liberalization, to take a position on whether some theoretically ideal fonns of protection are prefer- able to free trade. In recommending liberaliza- tion to most countries, one can draw on the in- sights of a classical economic tradition that goes back to Adam Smith •· and on experience. The argument is not just about the theoretical con- structs of economists, so often derided by "prac- tical" men. Liberalization is a practical policy, even if "practical men" are too often unaware of this fact (Henderson 1986, chapter 4). What trade liberalization is about At its simplest, liberalization is about the relative roles of voluntary market transactions and execu- tive discretion. In a liberal economic system, government does not thwart private parties in their attempts to enter voluntary transactions, 14 Mancur Olson has expounded most recently (Olson 1982, chapter 5). Trade policy is at best irrelevant and at worst counterproductive for what in practice has been one of its most common aims: managing the balance of payments. Trade policy influences ratio of imports and exports to national income, because protection is a tax: on trade. There is no reason, however, to expect trade policy to alter the trade balance, which is the difference be- tween exports and imports. How trade has been liberalized Countries liberalize trade through unilateral ac- tions or through international bargaining (though they sometimes do both, wishing to gain credit with their trading partners for actions taken uni- laterally). In fact, since World War II the devel- oped and developing countries have moved to- ward different ways of handling trade policy. For the developed countries, there has been multi- laterally agreed-on liberalization, adulterated by unilaterally determined protection where deemed politically necessary. By contrast, trade policy for the developing countries has, with few excep- tions, consisted of unilaterally determined protec. tion, ameliorated by attempts at unilateral liberali- zation. Trade poltctes of developed countries Trade policies of developed countries have re- flected a series of "disarmament negotiations" among mercantilists in seven rounds of multilat- eral trade negotiations (MTNs) under GATT. With this disarmament (though inconsistent with some aspects of it) came discriminatory liberalization in Western Europe, starting with the Organization for European Economic Cooperation and pro- ceeding with the European Community and the European Free Trade Area (Curzon 1965, pp. 87- 107). During the 1950s the developed countries eliminated most of the quantitative restrictions on imports that they had justified by the problem of managing the balance of payments (Curzon 1965, chapter 6). Simultaneously, they lowered progressively, a process that continued in the 1960s and 1970s during the Dillon, Kennedy, and Tokyo rounds. After the cuts of the Tokyo Round, most-favored-nation tariffs on imports of manufactures have reached the exceptionally low average of 4.9 percent in the United States, 6.0 Wby trade liberalization Is a good Ider., in which the rest of the world follows free trade. Experience supports the a priori argument for global liberalization. There have been two sus- tained periods of fast economic growth in the global economy: the second half of the nine- teenth and early twentieth centuries and the period from the end of World War II to 1973. Both those periods began with substantial liber- alizations of trade. And in both periods the world economy became more integrated, with trade growing faster than global product. Between these two periods was an unstable one when trade shrank in relation to world product and the rate of growth of world product was also low (table 1. 1). Table 1.1 Growth of output and exports of developed countries Item 1870-1913 1913-50 1950-73 Output a 2.5 1.9 Volume of exports 3.9 1.0 a. Output is GDP at constant prices. Source: Angus Maddison, Phases of Capitalist Development (Oxford: Oxford University Press, 1982), There is another, now more pressing reason for global liberalization: the link between trade and international finance. Since capital flows are deferred trade, it is disturbing that the increasing liberalization of international finance cides with a rise in protectionism. Such tion raises the cost of servicing international and can make that servicing impossible. In gen- eral, the adjustments in balances of trade required by changes in the direction of net capital flows are far more difficult when trade grows slowly than when it grows quickly. For each participating country the global policy environment consists of the policies of other countries, but the effect of most individual coun- tries on that environment matters little. The exceptions naturally are Japan, the United States, and the European Community. Indeed, putting aside the trade in the European Community, one finds that these three economies together ac- count for half the world's imports (GATI Secre- tariat 1986, tables A6, AS, A9, and A12). The governments of these three blocs cannot intelli- gently ask what would make sense for them indi- 16 How protection damages developed countries liberalization by the developed countries does not mainly benefit the world economy as a whole. There are direct benefits for themselves, these being the mirror images of the costs of protection. The developed countries not only still of protection, but they are creating even more. What are the costs and characteristics of this protection? Features of protection in developed countries Agriculture and services have remained largely untouched by multilateral bargaining. industries that have been effectively excepted are those whose main client is the state, for which standard instruments of trade policy are largely irrelevant. Moreover, some products have been taken out of the normal process of liberalization by the construction of complex discriminatory systems of protection -- the multifiber arrange- ment (MFA) is the most fully developed example. But steel is receiving similar treatment. Two forces have joined to ensure that tariff rates remain variable. One is the reluctance of most developed countries to liberalize protection of certain "sensitive" industries. ineffectiveness of many smaller GATI members as bargainers -- an ineffectiveness that for many developing countries reflects a principled unwill- ingness to bargain. Consequently, the effective rates of tariff protection for certain activities, including the processing of raw materials, are quite high. There is also a bias against exports of developing countries (Balassa and Balassa 1984, pp. 180-84). Protection other than by tariffs -- and of industries that are specially favored by nontariff barriers -- tends further to increase the variance in nominal and effective rates of protec- tion. The result has been that the trade policies of the developed countries, while liberal overall, have features that call for further liberalization (Baldwin 1984). Moreover, not only are there such defects in the instruments and structure of protection in the developed countries, but policy is getting worse. Having lost the possibility of varying the tariff dosage, policymakers have filled the empty medicine flask with far more poisonous remedies. High unemployment, rapid changes in comparative advantage, and large swings in ex- change rates and current account balances have Why trade liberalization Is a good Idea value over five years of total economic losses has been estimated at S25 for each dollar of increased earnin~ (Tarr and Morlcre 1984, table 6.3). VERs are exceptionally expensive because transfer much of the implicit tax on consumers abroad, but even tariffs can be very costly set against the benefits of adjustment postponed. For the United States between September 1983 and August 1984, all existing tariffs taken together cost the economy S81 annually for every dollar of adjustment costs saved (Tarr and Morlcre 1984, p. 7). These sorts of results emerge again and again from the academic literature. Indeed, the effects of much protection are perverse even in terms of the stated objectives. For example, VERs have accelerated the move of competitors upmarket and have correspondingly increased the competi- tion facing already hard-pressed domestic indus- try in all but the very short run (Feenstra 1984, p. 56). How liberalization benefits developing countries Individually, small countries can be "free on the liberalization of others. Collectively, how- ever, they are important, because together they account for half the world's imports. Moreover, they include many of the world's most protection- ist countries. It would be highly desirable, there- fore, even from the global perspective, for these smaller countries (including developing coun- tries) to liberalize as well. But for this to happen they have to be convinced of the direct benefits. Features of protection in (leveloping countries The trade policies of many developing coun- tries feature high average levels of nominal pro- tection, reinforced by quantitative import controls and a wide dispersion of nominal and, still more, effective rates of protection (Krueger 1984, table 3.1). One reason for the dispersion is that pro- ducer goods, especially capital goods, being deemed more essential than consumer goods, are less protected. Similarly, the use of scarce foreign exchange to import goods produced domestically is condemned as wasteful. The outcome is the paradoxical one that the greatest incentives are given to the production of goods thought too inessential to import. There is also a against the production of exportables, because a tax on imports is a tax on exports (Clements and 18 many material imports from control. They continued in the 1960s with further liberalization, Export Processing Zones and bonded factories, some streamlining of export incentives, until in the 1970s Taiwan was virtually free of trade controls. There can be few such clear cases in economic history of cause and effect. (Little 1979, p. 474.) How ltberali.zation bas Improved economic performance The developing country "laboratory experi- ment" on trade policy gives useful insights into how liberalization improves performance. First, there is exploitation of comparative advantage. Exceptionally rapid growth of income and em~ ployment has been achieved by bringing an in- creasing proportion of the potential labor force into manufacture of labor-intensive goods for ex- port (Krueger 1983). Second, there is relaxation of the foreign exchange constraint. This con- straint becomes increasingly binding in an in- ward-looking economy as the attempt to increase the incentive to save foreign exchange with higher protection saves progressively less foreign ex- change at the margin. Third, there is the possibil- ity of exploiting economies of scope and scale. Finally, there is the greater competition facing firms operating on a large scale in the world mar- ket. This competition makes it imperative for them to improve their operations and, at the same time, makes it easier for them to obtain the infor- mation on how to do so. Countries following a protectionist policy might at least be better able to cope with external shocks, but the experience of more than a decade of turbulence does not bear this out (Balassa 1984). Economies without a bias against exports adjust to external shocks more effectively. The reason probably is that it is easier for these economies to switch output from domestic to international markets in response to changes in domestic aggregate demand, with relatively mod- est adjustments in the real rate of exchange. How ltberali.zation relates to efftctent poltcy Protectionist trade policy regimes, besides in- troducing a costly bias against exports, almost always generate a wide range of incentives among individual activities. Such disparities of incentives can have a significant effect on where an econ- omy uses its resources and with what efficiency. At one extreme a privately profitable activity (such as assembly of motor vehicles) might have nega- Wby trade liberalization Is a good Idea would be expended in a more socially profitable direction. True, the interventionist governments in economies like the Republic of Korea and Tai- wan (Province of China) have avoided the worst features of rent-seeking. But one needs to re- member the necessary (and rarely fulfilled) condi- tion for this success: an efficient and fundamen- tally honest government devoted to the goal of economic progress. Such a government must be armed with the knowledge that uniform incen- tives are necessary for efficiency and with the resolve to hold to such policies in the face of sincere pleas for special consideration. Another complex policy problem is that a gov- ernment cannot know what it is actually doing. Protectionist policy regimes tend in practice to be opaque in their effects. One reason for this is the extent of mutually offsetting protection •· another, the kinds of instruments chosen. There is, quite simply, too much policy. But it is impossible for a government to pursue a policy that has well- defined aims and related means •· even an inter- ventionist policy •· if it has no idea what the effect of its policies on incentives actually are. If an industry is to receive special assistance, it must be protected more than the others. In the usual chaotic protectionist regime, however, the level of protection is seldom tabulated, much less known. Governments in this predicament are like a mother who wishes to give presents to her child at a birthday party and then decides to throw them in the air for any child to grab. The more complex a policy, the more difficult for a govern- ment to assure that it is applied as intended. Liberalization and the MTNs Suppose one accepts that liberalization is, in- deed, the appropriate means to an improved trade policy. How does one ensure the right sort of liberalization? The formal conditions can be stated as follows: given the aim of reducing the variance in incen- tives, the liberalization needs two elements. The first is the elimination of quantitative restrictions, especially because such restrictions tend to create greater incentives for the production of protected goods than is usually recognized and make ficult to know what the pattern of incentives actu- ally is. The second element is a reduction dispersion in nominal rates of tariff protection, probably by first lowering the higher rates through the "concertina" method of tariff reduc- tion (Corden 1974, pp. 369-70). 20 especially because the possible alternative to lib- eralization is not the status quo but increased protection. For smaller countries, both devel- oped and developing, liberalization can be justi- fied more or less irrespectively of what happens elsewhere, but the attraction would be still greater in an open world economy. As in most journeys, it is best to take companions. But even if one is forced to travel alone, a journey toward greater trade liberalization will prove References Balassa, Bela. 1977. Export Incentives and Economic Per- fonnance in Developing Countries. World Bank Staff Working Paper 248. Washington, D.C. _ _ . 1984. Adjustment to External Shocks in Developing Economies. World Bank Staff Working Paper 472. Wash- ington, D.C. , and Carol Balassa. 1984. "Industrial ~ Developed Countries." 7,20une):179•96. Baldwin, Robert. 1984. "Trade Policies tries." In Ronald W. Jones and Handbook of International Economics. Vol. 1. Amster• dam: North Holland. Bastiat, Frederic. 1964. Economic Sophisms. Translated by Arthur Goddard. New York: The Foundation for Economic Education. Bhagwati, Jagdish N. 1986. Export Promoting Trade Strat• egy: Issues and Evidence. Development Policy Issues Series. Washington, D.C.: World Bank. _ _ , and Douglas A. Irwin. 1987. "Return rocitarians: U.S. Trade Policy Today." omy 10,2aune):109-30. Clements, Kenneth, and Larry A. Sjaastad. 1984. How Pro- tection Taxes Exporters. Thames Essay 39. London: Trade Policy Research Center. Congdon, T.G. 1985. Economic liberalism in the Cone of Lalin America. Thames Essay 40. London: Trade Policy Research Center. Corden, W.M. 1974. Trade Policy and Economic Welfare. Oxford: Clarendon Press. Curzon, Gerard. 1965. Multilateral Commercial Diplomacy: Tbe General Agreement on Tariffs and Trade and Its Impact on National Commercial Policies and Techniques. London: Michael Joseph. Feenstra, Robert C. 1984. "Voluntary U.S. Autos, 1980-81: Quality, Employment, and Welfare Effects." In Robert E. Baldwin Tbe Structure and Evolution of Recent U.S. Trade Policy. Chicago: University of Chicago Press, for the National T 4 Why liberalization meets resistance RJcbard Cooper Trade is not free because governments have at some time introduced measures to restrict trade and various parties have since come to rely on those restrictions, so they strongly resist their re- moval. Why, in view of the case for free trade, do gov- ernments nonetheless impose restrictions on trade -- and how valid are their reasons? Given that restrictions exist and some parties have come to rely on them, how can governments best over- come the resistance to removing the restrictions? The rest of this chapter addresses these two questions. Reasons given for restricting trade Why do governments restrict imports? No doubt the major reason is that political decisiorunakers generally have not believed the economic case. Instead, mercantilist sentiment still prevails widely: selling is good, buying is a regrettable necessity. It follows that buying at home is pref- erable to buying abroad, if price and quality are not egregiously sacrificed. Buying at home is thought to enhance the national welfare, buying abroad to enhance some other country's welfare. The difficulty with this widespread and appar- ently commonsensical view is that it ignores the indirect effects on the economy, especially on ex- ports, of restricting imports to encourage dents to buy at home. When imports of important raw materials or intermediate products or capital goods are restricted, the impact is obvious. Controlling low-cost imports of steel raises the cost of automobiles and other steel-using prod- ucts, making them less competitive with compa- rable products that can incorporate the less ex- pensive steel. 22 countries, may well be true for particular indus- tries or activities. But it cannot be true for a country as a whole. It cannot be true because wages in each country are paid in national cur- rency, and the money wages in different cannot even be compared until the exchange rate between their currencies is known. Yet the ex- change rate will, over the long run, reflect in large measure the productivity in the different coun- tries and the relative demand for their products on world markets. Countries well endowed with resources, or enjoying high productivity, tend to have high money wages as determined by their currency's exchange rates, but not necessarily high wage costs. The low-wage argument for protection also has to reckon with several empirical observations. First, the countries that have the severest restric- tions on imports today tend to be low-wage coun- tries, not high-wage ones. Low-wage countries often perceive that they cannot compete effec- tively with high-wage (highly developed) coun- tries. This judgment is correct for some but not all products; but for those products, high wages are not an impediment to successful exports. Second, during the 1950s much was made of a world "dollar shortage" because so many coun- tries wanted to buy American goods, despite the fact that U.S. wages were then, at prevailing ex0 change rates, by far the highest in the world. Third, the supercompetitive countries today are seen to be Japan and Germany, both of which are high-wage countries at prevailing exchange rates. Indeed, over the past three decades Japan's wages have risen sixfold in real terms (corrected for Japanese inflation), far more than wages in most other countries. And they have risen nine- fold in dollars, because of the appreciation of the yen against the dollar during this period. Japa- nese wages have risen in large part because of Japan's export success. At today's wages, Japan finds itself noncompetitive in some products that a decade ago it could export competitively. But that is due to Japan's success in exporting other products. The key point here is that no country can be globally competitive in all products, because wages are "too high" to compete with some products in all countries, no matter what the wage level is. And in a world that is continually growing and changing, with constant innovation, the list of products that most countries can export competitively is continually changing. To resist this change through import restrictions is to resist Wby liberalization meets resistance into whether it meets all the tests outlined above. And even if it meets the tests, there is no inquiry whether methods of support superior to import restriction can be found. Are import restrictions necessary for economic development? It is true that most countries have gone through a period of relatively high protec- tion against import competition. There are, however, some important exceptions, notably Hong Kong and Japan before World War I. Moreover, it is also true that most countries with high protection have come eventually to regret it •· and have reduced that protection to moderate levels. The regret stems mainly from realizing that while import restrictions can protect the domestic market against foreign competition, they cannot assure the competitiveness of the country's ex- ports in world markets. On the contrary, the re- strictions almost always weaken export competi- tiveness. And most countries have such small markets that good export performance is essential for continued economic growth. Easing adjustment to change Sometimes protection has its origin in an un- derstandable desire to ease the pain on firms or workers experiencing a relative decline in com- petitiveness that would lead at least temporarily to unemployed labor and capital. When the change is rapid and due to imports, temporary protection is permitted under Article XIX of the General Agreement on Tariffs and Trade, subject to several conditions. The problem is that pro- tection, once provided, is difficult to remove. Buyers of the goods become accustomed to the higher prices, and producers become accustomed to the protection and stand to lose, at least in the short run, without it. So they press hard to re- tain the protection, often achieving success. What starts as a temporary measure to ease the pain of adjustment to new foreign competition becomes a permanent measure that impedes ad- justment and lowers the standard of living of those other than the direct beneficiaries of the import restriction. Other reasons of immediacy also lead to import restrictions, with similar impediments to their later removal. Most notable among these are balance-of-payments difficulties and high or rap- idly rising unemployment. Balance-of.payments difficulties. Countries sometimes find themselves in acute balance-of- payments difficulties. Their reserves are declin- 24 Redutrlbuttngtncome This brin~ us naturally to one of the most powerful reasons for import restrictions. Protec- tion benefits some parties, often substantially, even at the expense of the general public. Some- times it is the original motivation. Always it is the reason for vigorous resistance to removal. As Cordell Hull, a former U.S. Secretary of State and strong advocate of a liberal, multilateral trading system, forcefully put it: "A protective tariff ... is immoral and dishonest, because its sole purpose is to increase prices artificially... thereby enabling one citizen to levy unjust tribute from another." Import restrictions for income redistribution may be installed knowingly when one group of citizens comes to command special sympathy and understanding from the citizenry as a whole. The most noteworthy case probably concerns the protection of farmers through national agricul- tural policies that hold prices of local farm goods well above world prices and therefore require restrictions on imports. In most cases, however, the redistributive aspects of import restrictions are probably not widely understood. But even when understood, they are not resisted. The usual explanation for this puzzling phe- nomenon is that consumers as a group are not as well organized as producers in most countries •• and the costs of import restriction are widely spread •· whereas the benefits are sufficiently concentrated to malce lobbying for them worth- while. Even in agriculture, consumers are proba- bly not aware of the magnitude of the transfer they are malcing to farmers through higher prices •· the focus of attention is usually on budgetary spending. And the political potency of farmers is said to be disproportionately high in many ad- vanced industrial countries, partly because changes in political representation have lagged behind the rapid decline in agricultural employ- ment, partly because farmers are alleged to vote their economic interests unburdened by party loyalties more readily than do other groups of society. Where redistribution is politically acceptable and desirable, import restrictions are almost al- ways a costly way of achieving it compared with more direct approaches through budgetary sup- port. The reason is that restrictions sumption of the products in question and encour- age the development of substitute products. An especially dramatic case is U.S. support for sugar. High price supports, maintained by imposing Wby liberalization meel$ reslstaace prices. That is, by restricting imports, a country can improve its international terms of trade. Improving the terms of trade is one motive for import restrictions that economists generally ac- cept, when viewed from a national rather than an international point of view. Curiously, this motive for restricting imports is almost absent from pol- icy discussions on import restrictions. It is worth asking why countries do not set out to improve their terms of trade by restricting imports. 1bree reasons come to mind. The first is that the more obvious way to improve the terms of trade is by raising export prices. Indeed, some countries have imposed taxes or other restrictions on exports with a view to raising their prices: for example, Brazil on coffee, Bangladesh on jute, and OPEC members collectively on oil. The sec- ond is that most countries may realize that they have no effective influence over their terms of trade. That is, they command no monopoly power in the world market for their exports, and no monopsony power in the world market for their imports. This surely is true, beyond some very short run, for most countries. The third reason for the rarity of the terms-of. trade argument may relate to the widespread mercantilist sentiment noted above. Under mer- cantilism, exporting is desirable, importing is a regrettable necessity, and no connection between imports and exports is perceived. In these cir- cumstances, it is not thought desirable to reduce import prices. Indeed; there have been many cases of major importers encouraging their trad- ing partners to restrict their exports and in so doing raise the foreign prices of imports: that is, to worsen the importing country's terms of trade. Recent examples are Japanese automobiles, Ko- rean or Brazilian steel, Japanese semiconductors, and of course the extensive and elaborate system of export controls on apparel by dozens of coun- tries. In these cases the costs to consumers in importing countries clearly and decisively exceed the gains to import-competing producers . . Noneconomic motivations Noneconomic reasons also motivate some im- port restrictions. The traditional reason national defense, where it is deemed necessary to maintain a minimum agricultural production, or a certain steel production, or an arms industry for reasons of security, even if the products are more costly than imports would be in peace time. This argument is widely accepted as legitimate. Being 26 Every country probably has a few shibboleths that will be impossible to overcome in the near future. Negotiators must simply work around them. The main source of resistance to trade liberalization will come from those in each coun- try who think they have much to lose. So the best approach involves a combination of steps to re- duce those losses •• that is, to ease the burden of adjustment to freer trade •· and steps to impress on the rest of the population the tangible gains that will flow from freer trade. Under the first set of steps •· to reduce the losses -· an obvious action is to phase in any trade liberalization measures over several years. This phasing has been typical in the major trade nego- tiations since 1945. The Tokyo Round of tariff reductions allowed for a transitional phase of eight years before the full negotiated reductions were put into effect. Another obvious action is to provide adjustment assistance directly to the in- jured parties, both firms and workers. Such assis- tance might involve grants to workers for retrain- ing and relocating, combined with support sti- pends to be paid during the retraining. It might also involve low-interest loans to firms or commu- nities that will have to improve their efficiency or alter their line of activity in response to the trade liberalization. It might even be desirable in some cases to provide direct compensation to the in- jured parties •· for example, through the absorp- tion of some outstanding debt of business firms. Apart from the transitional phase-in, these matters are largely in the hands of the national govern- ments. Under the second set of steps •· to impress people about the gains •• it is noteworthy that many gainers will be the actual and potential exporters. The actual exporters know who they are, but the potential ones may not. Resistance to liberalization comes from those who know (or fear) they stand to lose. Support for liberalization must come in part from those who are not sure they will gain, because the domestic link between import liberalization and export promotion is indirect, involving analytical reasoning, and also because of mercantilistic sentiments. For these reasons, trade negotiators have strongly empha- sized the reduction of foreign import barriers in trying to gain domestic support. The negotiated reductions in foreign tariffs and other import restrictions create new export possi- bilities. This argument is weak economics, but good politics. It has the outstanding disadvan- tage, however, of having little appeal when for- 5 Economic costs of trade restrictions Jagdtsb Bbagwati A country can impose trade restrictions at its borders, but its domestic measures can also affect trade. Indeed, many trade disputes reflect con- cerns with the impact of domestic measures on the fairness of competition in international trade. So do the GA1T codes on such issues as procure- ment and production subsidies. The focus here is on border measures, defined fairly broadly. 1 Border instruments to restrict trade are of two kinds: price and quantity. The price instruments typically include tariffs; the quantity instruments, quotas. Hybrid instruments include tariff-quotas: tariffs apply up to a certain level of imports, be- yond which quantitative restrictions (QRs) take over. These instruments apply to services, not just goods. But the force of nonborder control measures is more potent for services that require the physical proximity of providers and users and hence the transnational mobility of providers. The importing country can impose the border restrictions, such as import tariffs. Or the import- ing country can get one or more of the exporting countries to impose voluntary export restraints (VERs) instead. Although border restrictions typically affect imports, they also affect exports. Export duties to collect revenue and export QRs to hold on to "essential" items in scarce supply are not uncommon. And in recent years voluntary import expansions (VIEs) have emerged as a new form of export protectionism (Bhagwati 1987). Under VIEs, the trading partner is induced, by incentives or penalties, to import specific amounts from a particular exporting country. Ta.riffs Free trade brings economic gains. By the same token, protection imposes costs. What are these Economic costs of trade restrlc"ans tracted new suppliers to the international market, underlining the wisdom of those who advocate caution in invoking them. In addition, such tariffs open the possibility of retaliation, day. What about other failures of the market in conveying proper signals? Modem theory again shows that protection is an inappropriate remedy if these failures occur in the domestic sphere. There may be reasons to believe that goods mar- kets are imperfect because an import-competing industry creates greater positive externalities than the exporting rural sector. If so, a country should use a production subsidy to shift resources to- ward the undersized industry that free trade would cause. If a tariff were used instead to promote this outcome, it would also distort con- sumption decisions, causing a gratuitous "con- sumption loss." Thus, international trade theo- rists argue not against intervention but for the use of appropriate intervention to assist the failing invisible hand. In brief, if the distortion or mar- ket failure is domestic, a country should not use a trade policy to fix it (Bhagwati 1971). This argument is equally valid for infant-industry pro- tection where the alleged market failure is domes- tic and therefore appropriately requires a domes- tic remedy rather than an inappropriate (at best, second-best •· at worst, harmful) tariff. Second, the calculated deadweight losses are likely to be underestimates of the cost of protec- tion in practice.3 They ignore the fact that free trade can destroy a domestic monopoly whereas protection can sustain it. Where this happens, the cost of protection must include (1) losses resulting from inefficiency reflecting output-re- stricting profit-maximizing behavior of the mo- nopolist and (2) any further losses that may result from the "goofing off'' sheltered monopolist, which thereby increases costs. 4 Third, recent research in the theory of interna- tional trade has focused on several ancillary that go with protection. When industries in plu- ralistic societies lobby for and win protection that protection generates tariff revenues or, if import quotas are used, premia on QRs. Lobbies, in tum, can then arise to seek and secure these revenues or license premia. Economists now call such activities directly unproductive profit-seek- ing (DUP) activities since they withdraw resources from productive use while generating income for those who engage in them. S While the estimated deadweight losses are relatively modest at •2 to 3 30 country. Many analysts believe this transfer of rents to be the key reason why the exporting country prefers VERs to the import restrictions by the importing country. The VERs provide built-in compensation. Where the VERs take their customary form as quotas, such compensation will normally accrue to the exporting industry required to restrain exports. These quotas are allocated among differ- ent producers, often with the aid of a cartel, at times formed simply to distribute the VERs among its members. In such cases, the quantitative VERs can be seen to encourage the formation of mo- nopolistic market structures, which harm gainful trade in the longer run.8 Hence, it has been sug- gested (Bhagwati 1987) that exporting-country restraints be price instruments instead. The price instruments would transfer rents to the exporting government, rather than industry, and prevent cartelization. A fortuitous recent example of such a policy is the 15 percent export duty on Cana- dian lumber exports to the United States, imposed under U.S. pressure and reflecting the lumber lobby's sustained agitation. The focus on rent transfers obscures, however, the strong possibility that •· for undifferentiated and such relatively low-investment-cost industries as footwear and textiles •· the political economy may have operated in an altogether different way to encourage the use of VERs rather than import tariffs. In such activities, the possibility VERs are significantly less effective in restraining imports from the VER-targeted exporting coun- tries (Bhagwati 1987, p.5). So, the "porous pro- tection" ofVERs is the source of appeal to export- ing countries because it enables them to continue exporting closer to free trade levels than import tariffs would. It appeals to executive branches in the importing countries if they want freer trade but must make significant gestures that they are responding to powerful voices for import relief. The porous-protection model evidently does not apply when the executive branch has also become protectionist, removing the incentive to maintain freer market access, intensifying efforts at checking evasion and avoidance through third sources, and extending the VERs to these third sources. This has evidently happened over time in textiles and, to some extent, in steel. Some interesting questions in political economy await analysis. Who among the exporters gets targeted when VERs are imposed? Since VERs are inherently discriminatory among different export- ers, what is the sequencing of VER targets among Bconomtc costs of trade restrictions have turned to judging the openness of Japan (and other countries) by the bilateral ance between the two countries and indeed by reference to U.S. exports. The evidence of VIEs is all too manifest. For semiconductor chips, the United States reportedly wished to include in its pact with Japan an assur- ance that U.S. producers would supply 20 percent of the Japanese market by some target date. Al- though the formal agreement is reported not to have included this provision, it remained on the table as a way of measuring Japan's fulfillment of its commitment to open its market. Indeed, the United States' slapping of retaliatory tariffs in April 1987 on S300 million worth of Japanese exports, to punish Japan for nonfulfillment of its pact, cites the unsatisfactory U.S. sales in Japan as a principal cause for the aggressive trade meas- ure. Similarly, the aim of U.S. pressure on Japan to open its beef market was to increase Japan's imports of U.S. beef by increasing Japanese quo- tas. It was not to liberalize the Japanese import regime •· with the most likely consequence that Australia would have outcompeted both Japan and the United States. Conclusion The economic costs of the border instruments for restricting trade are easier to imagine than to measure or compare. The generally greater trans- parency of tariffs over such quantitative restric- tions as quotas is documented well •• as are their costs. Documented less well are the costs of VERs and VIEs, though the works cited in notes to the text are beginning to show the magnitudes of these measures. VERs appear to enable the country imposing them to avoid their costs and enjoy their benefits •· hence their appeal. But recent work shows this avoidance to be illusory, for the costs creep back to the country in less than obvious ways. VIEs also appear to enable the country imposing them to avoid the costs while enjoying the benefits. But here, again, the avoidance can be illusory •· especially when third countries come in to grab a big share of the expanded market. Each of these forms of protection imposes costs •· on the world and on the country imposing the protection. Countries bear these costs because governments respond to powerful interests that skim disproportionate benefits and leave the cost- paying to weaker interests that are disparate, bewildered, and voiceless. 32 , and T.N. Srinmsan. 1983. IActurn Tnadc. Cambrid,e, Mala.: MIT Presa. ec-stdn, Randi. 1986. "Quality Upgrading Industry: The Caae of the 1968-7.f VRA." lwnbia Unnasity. Processed. Brecher, Richard, and Jagdish Bhapad. 1985. "Voluncary Export Rabictiona versus Import Ralrictions: A Welfare- theoretic Comparison," In Heruyll: ill Honor of W. Cortkr,. Oxford, London: Basil Black- -11. Feenstra, Robert C. 1984. "Quality 1980-81: Quality, Employment and Welfare dendwn. In Robert Baldwin and Anne 0. Krueger, eds., 71M Stnu:tu,w and Evolution of R«ffll Icy. Chicago: University of Chicago Press. Reprinted in Jaadish Bhapad, ed., 1 1 ' 1 ~ Trod« s.l«ted R.adlngs. 2nd Edition. C&mbridge: ing. . 1985. "Automobile Prices Japan Trade Restraint." Journal of Policy Modelling 7(Spring):.f!)-68. _ _. 1986. "Quality Change Under Trade Restraints: Theory and Evidence from Japanese Autos." Qillfomia, Davis. Processed. Part II GATT's Approach to Trade Negotiations 6 Multilateral liberalization Robert B. Baldwin The Uruguay Round marks the eighth time since World War II that members of GATI have negoti- ated a reduction of trade barriers in framework. The success of this multilateral for- mat in reducing protection has been remarkable. Average tariffs in the major industrial declined from about 40 percent in the mid-1940s to less than 5 percent after the Tokyo Round (1974-79). This dismantling of the high import barriers that industrial nations erected during the economic depression of the 1930s is widely re- garded as a key to the ninefold increase in world trade and the more than fourfold increase in world real income between 1950 and 1985. The evidence also shows that developing countries with outward-looking liberal trade policies have increased their incomes more rapidly than those with inward-looking restrictive measures. Progress is now flagging, however, under the pressures of special macroeconomic conditions and significant shifts in comparative costs in the world economy. Many industrial countries have recently restricted the access to their domestic markets, especially through the use of nontariff measures. By so doing, they threaten the effi- ciency of allocating world resources and the prospects for world economic development. Concern about such adverse outcomes has been the main motive in the call for a new round of multilateral trade negotiations. The first two sections of this chapter explain how and why the multilateral approach to trade liberalization works. They also contrast the approach's advantages and disadvantages with those of unilateral, bilateral, and plurilateral methods of reducing trade barriers. The next sections describe how multilateral negotiations have evolved over the last forty-five years and Multilateral Uberollzallon petitive international markets, economies of scale, technological externalities, and various domestic distortions may provide additional theoretical arguments for protection. The relevance of these arguments for poli- cymaking depends on such matters as whether a country has enough monopoly power to improve its terms of trade (and whether other countries will retaliate if they also have this power). It also depends on the extent of imperfectly competitive markets and scale economies and on whether there are better policy measures than protection to deal with these conditions, even if they are empirically significant. The evidence from numer- ous case studies of developing and developed countries in the last forty years suggests that the conditions required for these protectionist argu- ments are not sufficiently prevalent to overturn the case for trade liberalization. Unilateral trade liberalization by a country, accompanied by ap- propriate macroeconomic policies, has generally been followed by an increase in the nation's rate of income growth. In contrast, inward-looking, restrictive policies have usually reduced coun- tries' growth rates and led to periodic balance-of. payments crises. The policies do this by directing resources into productive lines where they are in- efficient from an international viewpoint, by sti- fling incentives and competition, and by making it profitable to use resources for rent-seeking efforts rather than directly productive activities. Although unilateral liberalization has brought significant economic benefits to many countries, the public often perceives it as being outside the national interest. There is a widespread mercan- tilistic belief that exporting is good for a country, importing bad. Everyone knows that the way a business succeeds is for the value of the goods or services it sells to be greater than the value of the raw materials and services of labor and capital it purchases. Even for a people who sell their labor services, getting richer involves receiving more in income than spending on goods and services. Extending this notion to the nation as a whole, many people erroneously conclude that promot- ing imports by reducing trade barriers is economi- cally bad. Political leaders find it difficult to liberalize unilaterally because of this public perception about liberalization. They also find it difficult because of the opposition of capitalists and work- ers in highly protected import-competing indus- tries •· the ones likely to suffer a short-run eco- nomic loss from a lowering of import barriers. 38 kets further expands world trade and permits a country to specialize further in the industries of its comparative advantage, thereby bringing addi- tional income gains to the country. Many leaders also believe that trade liberalization promotes their country's, international political goals. Llke Cordell Hull, the person primarily responsible for initiating the U.S. reciprocal trade program in the 1930s, these leaders believe that the closer eco- nomic relations brought about by reciprocal cuts in protection foster more harmonious political relations among nations. So, unilateral liberalization has the advantage of enabling a country to gain the economic bene- fits of trade liberalization at the time and the rate it deems best. But bilateral and multilateral nego- tiations provide an opportunity for political lead- ers to achieve economic gains for their countries -- without having to correct the mercantilistic perceptions of the public or overcome the oppo- sition of special interest groups. Furthermore, these approaches to liberalization yield the added benefits of greater specialization and better inter- national political relations. Bilateral versus multilateral negotiations Reciprocal trade negotiations can take several forms. Countries can negotiate in pairs (bilater- ally) or in groups smaller than the membership of GATT (plurilaterally). How do the advantages and disadvantages of these negotiating modes compare with those of the multilateral approach involving all GATT members? The bilateral and plurilateral approaches have one obvious advantage. Countries can generally agree more easily and quickly on a negotiating agenda and conclude the bargaining in less time than if they are involved in a multilateral negotia- tion. Since major GATT decisions require unani- mous agreement by the members, deciding whether to hold multilateral negotiations and agreeing on an agenda take a long time. So do the negotiations -- the Kennedy and Tokyo rounds both lasted five years. Furthermore, bilat- eral and plurilateral negotiations enable the par- ticipants to focus on issues that mainly affect their trade with each other. In a multilateral frame- work, the trade problems affecting all participants and the difficulty of achieving a multilateral bal- ance of concessions overshadow disputes be- tween countries. Bilateral and plurilateral approaches also en- able a small number of countries to embark on MullUateral liberalization do not cut tariffs. But it is unlikely that the value of trade for which one country is the principal import supplier to another is equal to the value of trade for which the second country is the princi- pal supplier to the first. So, the political need to increase exports at least roughly as much as imports limits the trade value on which liberaliza- tion is possible. That value is limited to the smaller of the imports for which one country is the principal supplier of the other. Suppose, for example, that country A is the principal import supplier to country worth S200 million, while country Bis the princi- pal supplier to A of commodities worth UOO million (see figure 6.1). Even without the free- rider problem with third countries, a tariff cut on these imports by each country is likely to increase B's imports more lead to domestic political pressures in such a duty cut. Country B will have to 50 percent cut on only S100 million worth of imports from A or offer a smaller cut (say, 25 percent) on the S200 million of imports from country A. Yet country B might be quite willing to reduce tariffs on all the products for the principal supplier. It would be willing could offset the increased trade deficit try A by an increased trade surplus with some other negotiating partner. This wider spread is where plurilateral lateral negotiations have an advantage eral negotiations. There may be a third C, for which country B is the principal import supplier of S200 million worth of goods, while importing only UOO million worth of goods from C for which C is the principal supplier 6.1). If country C also is a principal country A such that C supplies S200 million of imports to A and A supplies $100 million of im- ports to C, each country's trade balanced, even though bilaterally unbalanced. So, a uniform duty reduction of 50 percent by all three countries is likely to increase the total ex- ports and imports of each roughly the same amount. Compared with the bilateral approach, there is more trade liberalization, while still meet- ing the political requirement of a rough balance in the change in exports and imports. Multilateral negotiations reduce the free-rider problem by involving all GAIT members, but they do not eliminate it. Generally some participants are unwilling to reduce protection as much as most others do. They thus gain greater access to the markets of others than others do to their 40 The time and cost of such renegotiations were among the main reasons that the United States shifted from the conditional to unconditional MFN principle in 1923. As explained previously, focusing on a balance of concessions between two or an exclusive group of countries, as the conditional MFN principle does, also results in lower overall cuts in protection than a multilateral approach based on the unconditional MFN prin- ciple. The reason is that trade is not bilaterally balanced between nations (nor is there any eco- nomic reason why it should be). Another prob- lem with the conditional MFN principle is that it tends to foster the belief by some countries that other countries are discriminating against them unfairly. It also undermines trade's possibilities for improving international relations. Negotiations on trade measures other than tar- iffs that affect most countries and on general GATI rules of "good" international trading be- havior are also better undertaken in a multilateral framework than a bilateral one. If, for example, a country has a special rule for customs valuation •• as the United States had with its American Selling Price method of valuing some imports -- it makes little sense to negotiate country-by-country modi- fications in such a rule. Such an approach con- sumes much time. It is also likely to lead either to a different rule for each country, which is costly to administer, or to subsequent renegotiations aimed at standardizing the procedure. Similarly, agreements on international rules for imposing antidumping and countervailing duties or on safe- guard procedures are best sought in a multilateral forum to reduce inconsistencies and the costs and time involved in negotiations. If broad groups of participants differ over par- ticular rules or procedures, multilateral negotia- tions can often still be useful by applying some- what different rules and responsibilities to the groups. Just as in the last two GA1T rounds, the general principles governing negotiations in the Uruguay Round state, for example, that the devel- oped countries do not expect reciprocity for their reductions in tariffs and other barriers from the developing countries. And as in the Tokyo Round, not all countries will have to sign agreements on such issues as services or subsidies. Thus, the multilateral approach does not require that all countries be treated the same in the extent of their liberalization or that all countries must reach agreement on all issues of trade policy. For this approach to succeed, however, there must be enough overlapping of agreements among groups Multilateral llberaltzallcm foreign cuts being sought. The negotiating teams eventually reconciled the differences in the re- quest-and-offer lists of the two countries so that each could conclude that it had achieved. recip- rocity in the tariff cuts that it granted and re- ceived. The United States negotiated thirty-one sepa- rate agreements between 1934 and 1945, many with Latin American countries. The average cut in all U.S. duties over this period was 33 percent. One reason for such a significant reduction, spite the severe global depression, was that many duties were so high in the early 1930s that they could be cut appreciably and still provide stantial import protection. That is why there was so little opposition from domestic import-compet- ing sectors. By the end of the 1930s, negotiators saw that the bilateral approach was constraining the liber- alization of world trade. One constraint was the need to focus on principally supplied goods be- cause of the free-rider problem. Another was the requirement for a bilateral balance of conces- sions. Then, in 1947, as part of the postwar efforts to establish international institutions that would provide an open international economic regime, twenty-three countries signed the General Agree- ment on Tariffs and Trade (GATI). GATI set forth a set of rules of "good" ior in trade policy. And its preamble provided for periodic multilateral negotiations "directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce." The first negotiations, in Geneva in 1947, re- duced U.S. import duties (and presumably those of the other major trading nations) about 20 percent. A strong political commitment by all signatories to begin a new period of harmonious international relations undoubtedly contributed to the success of this first GATT round of multilat- eral trade negotiations. The negotiating technique was not too different from the U.S. procedure in the 1930s, except that the participants conducted a whole series of negotiations simultaneously. Countries estab- lished country teams that negotiated duty reduc- tions with their opposite numbers from other countries on items that each country principally supplied to the other. Each country team also tried to keep in touch with the status of negotia- tions among other country teams so that they could take into account possible multilateral bal- ancing opportunities. 42 that any industry opposing such a reduction must make a special case against doing so. Compared with the item-by-item procedure, treating all in- dustries the same reduces the ability of any one industry to limit any tariff reductions on its prod- ucts. The formula approach significantly increased the depth of duty cuts. Import duties of the industrial nations on manufactured goods were reduced about 35 percent in the Kennedy Round and about 30 percent in the Tokyo Round (1974- 79). Dealing with nontariff trade measures Another negotiating problem became increasingly important during this period, however. Countries began to use nontariff measures with greater fre- quency to impede imports or to stimulate exports artificially. Such nontariff trade barriers (NTBs) include quantitative import restrictions, export and domestic production subsidies, preferential government purchasing policies, technical and administrative rules that discriminate against for- eign suppliers, and customs valuation rules that act as barriers against importing. Negotiators had authority to negotiate on NTBs in the Kennedy Round, but the tariff negotiations took so long that there was little time left for any NTB negotiations. By the time of the Tokyo Round, efforts to halt the spread of NTBs were high on the negotiating agenda. The procedure was to negotiate new sets of rules or codes that elaborated on the original articles of GATT. A series of GATT committees were also established to help resolve disputes arising in various catego- ries of NTBs. Codes dealing with NTBs that af- fected more than one industry covered: (1) sub- sidies and countervailing duties, (2) antidumping measures, (3) government procurement policies, (4) technical barriers to trade, (5) customs valu- ation practices, and (6) import licensing proce- dures. In addition agreements were reached on nontariff issues that affected dairy products, bo- vine meat, and the aircraft industry. (See chapter 9.) Early in the Tokyo Round there was consider- able hope for a series of sector negotiations. In these negotiations, the various tariff and nontariff barriers affecting a product line would be dis- cussed in one group rather than among different groups organized by types of nontariff measures. Such negotiations in manufacturing succeeded only for the aircraft industry. The agreement Muldlaleral Ubemli:r.allon government procurement code permits develop• ing countries to negotiate the exclusion of certain entities or products from the rules. In addition to these provisions, a general "enabling clause" was agreed on in the Tokyo Round. The clause provides a finner legal basis for continuing tariff preferences, more favorable treatment of nontariff trade measures, regional arrangement among developing countries for reducing or eliminating tariffs, and special treat• ment for the least developed of the developing countries. The clause states: "Notwithstanding the provisions of Article I in the General Agree- ment, contracting parties may accord differential and more favorable treatment to developing countries, without according such treatment to other contracting parties." But the developing countries also agreed that they expect that their capacity to make contributions or concessions during trade negotiations and to assume greater GATI responsibilities will improve "with the pro- gressive development of their economies and improvement of their trade situation." Conclusions Unilateral trade liberalization generally yields sig• nificant benefits for a country's efficiency and growth. The public, however, often misreads this approach as being outside the national interest. And import-competing industries likely to suffer short-run economic losses tend to oppose unilat- eral liberalization strongly. Bilateral, plurilateral, and multilateral approaches enable a country to gain the economic benefits of liberalization with• out requiring its leaders to correct the mercantil• istic perceptions of the general public or over• come the opposition of various special interest groups. Multilateral negotiations mobilize export inter- ests into supporting liberalization because of their increased access to foreign markets, thereby helping to offset the lobbying efforts against re• ducing protection. Multilateral negotiations also increase the economic gains from liberalization 44 7 Reciprocity L. Alan Winters .Reciprocity: Mutual or correspondent concession of ad- vantages or privileges, as forming a cial relations between two countries Oxford English Dictionary. Negotiations, almost by definition, are about re- ciprocity. They entail the search for mutually ac- ceptable outcomes when action by one party without reciprocal action by the other would be unacceptable. That is, negotiations involve the reciprocal exchange of concessions that neither party would wish to make in isolation. Reciprocity in trade negotiations comes in many guises, ranging from the simple bilateral swapping of tariff reductions, through multilateral reciprocity, to qualitative reciprocity in which mutual concessions are made in the design of agenda or of codes of practice. Although recip- rocity is difficult to define, several conventions grew up during the early GATI rounds to make it operational -- such conventions as the use of trade coverage to measure it and the adoption of principal-supplier modes of negotiation to ar- range it. This chapter describes these conven- tions and shows that, although the Kennedy and Tokyo rounds sought to broaden the basis of ne- gotiation, reciprocity still dominated their out- comes. Qualitative reciprocity is already evident in the agenda for the Uruguay Round. And recip- rocal principal-supplier negotiations could give developing countries the means to free their exports to industrial countries from quantitative restrictions. Reciprocity and mcrcantil.lsm Reciprocity provides a means of reducing trade restrictions any time a government believes that it has an interest in maintaining its barriers, but a, Reciprocity be able to win improved access and increased exports to foreign markets only by offering reduc- tions in the massive Smoot-Hawley tariff. The United States concluded twenty bilateral and explicitly reciprocal tariff agreements under the act. Presidents Kennedy and Nixon used similar arguments to launch the Kennedy and Tokyo Rounds. Reciprocity and GA1T The 1934 Act largely determined the U.S. attitude to the proposed International Trade Organization and to GATT. Thus the preamble of GATT refers to "entering reciprocal and mutually advanta- geous arrangements directed to the substantial reduction of tariffs and other barriers to trade." Its articles do not, however, define reciprocity or specify how reciprocal negotiations may be ar- ranged. Doing either of these things is no easy matter. The present director-general has said that "Reciprocity cannot be determined exactly; it can only be agreed upon." (GATT Press Release no. 1312, 5 March 1982). Dell •· an unrepentant mercantilist •· writes: "What it means is obscure and subjective and, in the end, may be deter- mined simply by what is politically acceptable" (1986). Nonetheless several procedures have grown up since 1947 to operationalize the con- cept in the GATT negotiations. A fundamental feature of GATT is the most-fa- vored-nation (MFN) clause. This clause compli- cates the operation of reciprocity because it re- quires that concessions •· tariff reductions •· granted to one supplier be extended to all others. So, while the country with which a concession is negotiated might be expected to offer a reciprocal concession in return, other suppliers can be free riders. They can wait quietly in the wings until the concession is eventually delivered without ever having to reciprocate. This complication, coupled with the mercantilist view of the benefits of trade liberalization, led naturally to the devel- opment of a principal-supplier pattern of negotia- tion. Mercantilist governments measured the benefits of a negotiating round by how much it increased their access to partners' markets, and the costs by how much it opened their own markets. Since these were unknown beforehand, however, and since actual producers were far more influential than potential ones, countries came to value their negotiating stances by the amount of actual trade subject to the tariff barrier in question. 46 1956. He also calculated group internalization ratios for the sets of countries participating in each round. These ratios reflect multilateral re- ciprocity: how much the benefits of concessions by the negotiating parties were kept among them- selves, even if they could not all be restricted to the principal suppliers. In 1947, 84 percent of U.S. imports in categories in which the United States cut tariffs came from the twenty-two other participants in the trade talks. In the next two rounds, group internalization was lower, but by the Dillon Round it reached an astonishing 96 percent. This multilateral reciprocity was a clear advantage of concentrating the bilateral talks in a single round. Reciprocity governs the coverage of conces- sions and their size. Although the binding tariffs was initially intended to be equivalent to cutting and binding higher ones, this never fully accepted. Thus, after 1952, negotia- tors sought reciprocal coverage of tariff cuts. Within the set of reductions, balance was also sought in the average depth of cuts, but less was made of this dimension of reciprocity publicly because it was less readily measurable. The principal-supplier procedure was perfectly natural in the mercantilist context, but it was buttressed by the GATI articles and the negotiat- ing rules for the various rounds. These rules presumed that only principal suppliers would request concessions and allowed countries to dismiss requests from other suppliers •• except, for example, where the principal supplier was not negotiating or where each of several partners requested a concession and was prepared to reciprocate for it. The articles do not mention principal suppliers in the context of negotiating new concessions. But Article XXVII grants the one or two principal supplier(s) the right to negotiate, along with the country that originally won a concession. The reason is that the with- drawal of a concession is likely to impinge hardest on the principal supplier regardless of the coun- try that originally received the concession. Reciprocity and optimum tariffs Economic theory admits one unambiguous wel- fare-maximizing case for import restrictions •• the optimum tariff. If a country is large enough to influence the world price for its imports, it may raise its welfare by taxing imports and so reducing the prices that foreign suppliers charge. This is not the prime motivation for modem trade inter- .Reciprocity on the basis of previous GAIT procedure, claimed that items primarily supplied by nonparticipants need not be considered in the reciprocity de- bate" •· and although this view was never formally agreed, it eventually prevailed de facto (Preeg 1970, p. 88). Reciprocity entered most critically in the debate over the American Selling Price customs valuation of benzenoid chemicals. This practice granted U.S. producers very high levels of protection, and the Europeans were desper- ately anxious to abolish it. But because the prac- tice was contrary to those prescribed by GAIT, the Europeans argued that the United States should abandon it unrequited. This the United States refused, and the issue remained dead- locked until Europeans finally responded with significant concessions in the chemicals The episode shows the dangers of sectoral negotiating groups and of excessive legalism trade negotiations. The Kennedy Round estab- lished special groups for five industrial sectors in which negotiations over exceptions looked likely to be very difficult. Those for paper and pulp and for chemicals succeeded but those for steel, tex- tiles, and aluminum did not achieve much. Simi- larly the special groups for agriculture -- grains, dairy, and meat -- were disappointing. Each group faced its problems, but a common theme was the difficulty of achieving reciprocity in the sector. Sectoral negotiation enhances the bar- gaining power of producers, and because most sectors have relatively unbalanced trade, net exporting countries have little to offer net import- ers in return for the tatters' concessions. Effec- tive reciprocity requires cross-sectoral deals, and indeed the whole Kennedy Round would have foundered but for the director-general's last-min- ute compromise exchanging concessions in steel, agriculture, and chemicals. The American Selling Price fell into what Dam calls a "legal half-light" (1970, p. 343). It was clearly contrary to GAIT Article VII but legally defensible under the grandfathering clause of the Protocol of Provisional Application because it existed before 1947. Any harm that it did to Europe was independent of its morality or legal- ity. So the rigid positions that legalism encour- aged during negotiations were as irrelevant to the main point as they were dangerous to the out- come. The Kennedy Round signified the ascendancy of multilateral over bilateral reciprocity, but recip- rocity was still king. For example, the main claim of the official U.S. summary of the round was that 48 United States, and Japan, respectively (GATI 1980). Toe average Japanese cut relative to actual tariffs was about 25 percent (Deardorff' and Stern 1985). The innovation of the Tokyo Round of agreements on nontariff barriers. Although there were a few reciprocal reductions nontariff barriers •· as there had been in the Kennedy Round -- progress in formulating codes of practice was significant. Toe major agreements covered customs valuations, government procure- ment, and subsidies and countervailing duties. The major failure concerned the safeguard ac- tions. Three facets of reciprocity were evident in these agreements. First, a qualitative reciprocity by which concessions in the negotiation of one code •· such as U.S. application of a material-in- jury criterion in the countervailing duties code •• was traded against those in another •• such as European agreements on agricultural barriers and subsidies. Second, quantitative reciprocity ap- plied within certain codes: the sets of institutions subject to the government procurement code were chosen at least partly to ensure similar impon coverage across countries. Third, the benefits of some codes were restricted to the contracting panies that signed and therefore applied them •· such as those on countervailing duties, technical standards, government procure- ment, and civil aircraft. Whether or not such discrimination is consistent with GATI •• and there is some debate on this •• it clearly reflects a form of bilateral reciprocity. Such "rules recip- rocity" has figured in American debate since 1980 •· the "new reciprocity" reciprocity based on levels of protection, rather than changes in protection as the GATI tariff negotiations have been, its danger is that some panics will increase the restrictiveness of their measures. Perhaps even more than the negotiation of tar- iffs, the negotiation of codes also shows that reciprocity provides the means but not the only motive for trade negotiations. Governments may find that the codes proposed in a GATI round are in the national interest independent of whether other countries sign them. For example, the codes may bolster the government against special interest groups or enforce the more accurate collection of economic statistics. Nonetheless, the governments may find it impossible for rea- sons of domestic politics to adopt such codes in the absence of external pressure and reciprocity, Reciprocity rangements, but excluding the Multifiber Arrange- ment (MFA), as well as variable levies, surveil- lance measures, and countervailing and anti- dumping duties. Moreover, because the data rely on countries reporting their own import barriers, nearly all voluntary export restrictions are omit- ted. The scope for concessions is described in tables 7.1 and 7.2. About 3.4 percent of Big Three imports from developing countries have a developing country as the principal supplier and face a quantitative restriction. Negotiations on the affected import categories with the relevant developing-country principal suppliers would liberalize up to S2. 7 billion of the latter's exports. After most-favored- nation extension, these concessions would cover S8.4 billion of developing countries' exports and SIO.O billion of world exports. So, for developing country exporters, the bilateral internalization ratio would average 27 percent, but the group internalization ratio for developing countries as a group would be 84 percent. The first ratio is rather lower than similar ratios in the early GATI rounds; the second shows the strpng community interest of developing countries as a whole. The coverage ratio also looks rather low, but it would be substantially higher (about 8.3 percent) MFA and VERs were included and higher still if other barriers were included. The data on developing countries' quantitative restrictions are very crude and probably underes- timate their prevalence. But even taking face value, 20 percent of the sample countries' imports from the Big Three are subject to such restrictions. In terms of potential negotiations, these restrictions affect S8. l billion principal suppliers' exports, and after extension by the most-favored-nation clause, up to Sl2.4 billion of Big Three exports and Sl5.0 world exports. Thus the bilateral internalization ratio for Big Three exporters would be 54 per- cent, the group internalization ratio for them 83 percent. Generalizing these calculations to all developing country markets would obviously in- crease the absolute amount of trade covered by negotiations, but would not have a predictable effect on either the coverage or internalization ratios. These calculations show that restricted princi- pal-supplier trade flows exist in sufficient number to render negotiations worthwhile and to allow developing countries bargaining power to prise open industrial countries' markets. Some difficul- ties will have to be overcome before negotiations 50 Table 7,2 Potential developing country concessions • Sample country imports (1981) from a Big Three supplier that faces a quantitative restriction As a percentage Billions of total Item of dollars affected imports Imports from principal suppliers 8.08 Imports from other Big Three countries 4.36 Imports from all other countries 2.58 17 Total imports 15.02 100 a. 1983 quantitative restrictions applied to 1981 imports. b. Bilateral internalization ratio for c. The sum of these items is the Big Three tion ratio. Source: Author's estimates. technique of principal-supplier requests and ne~ gotiation. These calculations also show that developing countries have considerable scope to negotiate market liberalization from industrial countries in the Uruguay Round, if only they will reciprocate. Moreover, Finger's findin~ about the Kennedy Round and the current rhetoric in American and 8 Unilateral liberalization and the MTNs J. Michael Finger and Paula Holmes At the Tokyo Round the GATT contracting parties committed themselves to liberalizations covering some Sl50 billion of imports. Since the Tokyo Round, the main policy news in the industrial countries has been the continued intensification of pressures for protection. But in many develop- ing countries, there has been notable movement in the direction of liberalization. • Kenya from 1983 to 1986 reduced all tariffs greater than 30 percent by about 12 percent on a large range of items to moderate the tariff structure and make it more uniform. Kenya is also converting quantitative restric- tions to tariffs and simplifying its licensing procedures. • After the Tokyo Round, about 14 percent of Turkey's imports were subject to quotas. Since then, Turkey has abolished import quotas on more than 300 items, reduced tariffs on 400 items, simplified its import li- censing procedures, and shifted the regula- tion of several items from licensing to tariffs. In addition, Turkey relaxed most quantitative limits on exports, and eliminated a require- ment that exporters buy domestic inputs. • Cote d'Ivoire has revised its tariff schedule to smooth out effective protection rates, and it is replacing its quantitative restrictions with tariffs. • Mauritius is replacing quotas with tariffs and has agreed to put no more quotas in place. • Pakistan removed restrictions on about 40 percent of previously restricted items. ° Korea has an ongoing program to narrow the tariff range (previously 0-150 percent) to 0-30 percent, a program scheduled for completion by 1988. Under another program to liberal- ize administrative controls, Korea had re- 52 that have taken such steps toward a more open trade strategy. A third consideration is careful calculation of the costs and the benefits the pol- icy changes would bring to the national economy. However the gains were conceived, these liberali~ zations were viewed not as "concessions" that a government would impose on its national econ- omy only if it received in exchange more than compensating benefits. They were viewed as ac- tions that would advance the national economic interest. For such unilateral liberalizers, the advent of the Uruguay Round provides a new opportunity and raises a new question. The opportunity is to obtain benefits from liberalization by the liberalization steps for improved access to export markets. The question this opportunity brings with it is whether a developing country has something to gain by delaying trade liberalization until it obtains reciprocal concessions through the MTNs. That is, would the immediate and unilateral implementation of a trade liberalization program seriously compromise the liberalization's "value" at the MTNs? The answer, this chapter will explain, The coin of the MTN is a country's commitment to its trading partners to allow some foreign ac- cess to its home market. The value of this com- mitment need not be compromised and may even be enhanced by having that access available be- fore the country made an international commit- ment to maintain it. To delay a liberalization is to continue to impose on a country's citizens the restrictions and pains of the existing policy struc- ture •· and to continue to delay the benefits to the national economic interest the liberalization will provide, without reducing the value of the liber- alization at the MTNs. The rationale behind this conclusion has three parts: (1) An explanation of the kinds of commit- ments that are accepted as "concessions" in GATT negotiations. (2) A listing of the provisions in GATT by which a contracting party may modify or withdraw a concession. (3) Illustrations of the kinds of commitments accepted as concessions in GATT bargain- ing, and the bargaining value of conces- sions that developing countries have made. The GATT negotiations are negotiations •· bar- gaining situations, not fixed-price exchanges. What has value in a bargained exchange depends on much more than the intrinsic nature of the product one has to offer. Also important are a Unilateral Ubenlll:mllmt and tbe MTNs tions; for developing country participants, only 7 percent were reductions rather than bindings of existing tariffs. Toe bargaining value of concessions is indi- cated by the fact that the United States made con- cessions on a much higher percentage of its imports from active developing country partici- pants than on its imports from other developing countries•· on S571 million, or 33 percent of its (1964) imports from the nine active developing country participants (table 8.3). Of some S6 bil- lion of U.S. imports in 1964 from other develop- ing countries, only 5 percent were subject to con- cession. Toe "concessions received" by each group from the United States were almost all bindings at reduced rates. On the other side of the table, concessions by "other" participants were mostly bindings at existing rates (more than three-quar- Concessions by Variable Geneva (all calculated 1947 from U.S. imports (1939 and exports) data) Concession imports (reductions and bindings) as a percentage of total imports 78 39 Bindings as a percentage of total concessions (by import value) 71 80 Tariff reductions Reduction of imports as a percentage of dutiable imports 56 6 Average depth of cut (percentage reduction of ad valorem rate) 35 37 n.a. Not available. Sourer. J.M. Finger, "Trade Liberalization: Cballfflgers to a IJberal International 54 Partictpant Major participants a United States EEC Canada Japan United Kingdom Austria Denmark Finland Norway Sweden Switzerland Total Other developed country participants a Greece Iceland (acceded) Ireland New Zealand (1966 data) Poland (acceded) South Africa Turkey Israel Portugal Spain Yugoslavia (acceded) Total Active developing country participants a Argentina Brazil Chile Dominican Republic India Jamaica Korea (acceded) Peru Trinidad and Tobago Total n.a. Not available a. Countries are listed in the categories b. Poland agreed to increase its imports Sourer. Same as table 8.1, table 9- Unilateral liberalization and tbe MTNs Concessions concessions Country group Major participants b Other developed country participants Active developing country participants Other developing countries a. Bindings and reductions. b. Excluding the United States. Source: Sarne as table 8. 1, tables 4 and 9, accession to GATI, reserved some flexibility by agreeing to bindings at higher rates than prevailed at the time of the negotiation. Mexico, in its 1986 accession agreement, reserved for a limited pe- riod the right to impose a surcharge to rates it had otherwise agreed on. India's schedule of tariff concessions at the Tokyo Round consisted of twenty-two tariff rate bindings •· thirteen at lower rates, and nine at higher (ceiling) rates. In return, the United States made tariff concessions on ninety-four product categories of interest to India, primarily on textile and apparel items. (Forty-three of those items were covered by quan- titative restrictions [QRs] in the United States. The gain to India was thus limited to the revenues the United States previously collected as tariffs.) A country can make a commitment to its trading partners in many ways other than a tariff binding. Indeed, the international community learned ear- ly on that a tariff binding could not be isolated from other dimensions of market access. To put into effect the tariff bargain achieved at the first GATI round, negotiators had to agree to comple- mentary commitments not to offset the market access implicit in stated tariff levels by inflating customs values, imposing other taxes differentially on imported goods, and so on. The GATI con- tract covers these many dimensions of "market access," so GATI bargaining and a meaningful commitment to trading partners can be made in any of these many dimensions. 56 twelve bindin~ were offered to the United States. In return the EEC decreased tariffs on six items for Colombia, and the United States gave tariff concessions on cut flowers (with a trade value of S22.5 million in 1976) and several clothing items. Thailand, on its accession in 1982, submitted ninety-five tariff items to bindin~. Thailand also agreed to bring several taxes into accord with Article III, which requires that internal taxes not be applied differentially to imports. Among other market access commitments by developing countries at the Tokyo Round, Korea bound its tariffs on 143 items, and put 166 four- digit CCCN items on the automatic imports. Israel agreed to eliminate import-licensing requirements on several items. Cote d'Ivoire agreed to liberal- ize regulations regarding pre-importation inspec- tion of certain merchandise and to modify certain discriminatory aspects of its import-licensing fees. In return, the United States eliminated its tariff on cocoa butter, for which Cote d'Ivoire was a prin- cipal supplier, a concession with a trade value of S35 million in 1976. Peru, in exchange for agree- ing to make automatic the licensing on twelve import items, received in return tariff concessions from the United States on nine products for which Peru was the principal supplier. Modillcations As with many contracts, GATI recognizes that as circumstances change, there will be instances when a contracting party will want to be relieved of a commitment under the contract. Article XXVIII provides that a contracting party may, every three years, renegotiate all or part of its schedule of commitments. A contracting party may at any time request that the GATI member- ship authorize such negotiations. Negotiations in those circumstances would include the contract- ing party with whom the concessions were origi- nally negotiated, other contracting parties that are principal suppliers, and other contracting parties having a substantial interest in the concession. All countries involved then work together to negotiate the desired change in binding. It may be necessary for the country proposing the modification to provide compensation in the form of another concession (such as lowering the tariff on another item) to the other parties in- volved. If satisfactory agreement among the countries is not reached, the beneficiary contract- ing parties may then withdraw concessions they originally granted to the country making the Unilateral llberr.,Uzatlon and tbe MJ'Ns government's position against domestic interests pressing to reverse the reforms. Provisions in GAIT to modify a concession might, from one perspective, be a requirement that a country negotiate with its trading partners what it could otherwise do unilaterally. From another perspective, such negotiations are an opportunity to bring to the attention of a trading partner that partner's policy actions contributed to the first one's need to modify a concession. Agreement that developing countries receive different and more favorable treatment in GAIT may be presented as an excuse to stay out of the bazaar - or as a basis for urging a negotiating 58 9 The codes approach Robert Stem and Bernard Hoekman A major accomplishment of the Tokyo Round was the negotiation of eleven stand-alone agreements. Nine of these agreements dealt wholly or in part with nontariJI measures, and two with tariffs. There were six specific agreements on nontariff barriers (NTBs) : these related to dumping, subsi- dies, standards, government procurement, cus- toms valuation, and import licensing procedures. Three additional nontariff agreements were sec- tor-specific and related to civil aircraft, dairy products, and bovine meat. In this chapter the word "codes" refers to the six ments and the civil aircraft agreement.1 In what follows, we first review briefly how the codes relate to the GATT and then devote sepa- rate sections to a summary description and as- sessment of the individual codes. Issues of spe- cial interest to developing countries will be noted where relevant. We end with some conclusions and suggestions for improving the operation of the existing codes and the design of new codes. Relation of the codes to GATT The Tokyo Round codes form an extension of GATT in that they explicitly extend trade disci- pline to, or define more precisely existing disci- pline and rules for, specific NTBs. 2 GATT had already governed most of the subjects that the codes addressed -· to a greater (antidumping, subsidies, licensing, and customs valuation) or lesser (standards, government procurement, and aircraft trade) extent. The difference between the GATT approach and the codes approach is one of degree. In large part the codes are used as an instrument because amending GATT has proven difficult. The basic principles of GATT •• nondis- crimination, using tariffs rather than less transpar- Tbe codes approach which only signatories have access. The structure of this mechanism is based on general GATI procedures. That is, the first step in resolving disputes is through bilateral consultation. If this fails, the code committee can discuss the dispute. If necessary, a panel of independent experts can be established to address the dispute. The GATI Secretariat acts as the secretariat to each code committee. The customs valuation and civil aircraft codes have an additional technical subcommittee. In general, code committees may create ad hoc working groups to address (often technical) issues of interpretation of code provi- sions. Membership in the codes is substantially less than membership in GATI, but many nonsig- natories have observer status in some or all of the codes (see annex S for a list of signatories to the various codes). Finally, the codes are not static agreements, so they can be expected to evolve over time. Some of the codes explicitly incorporate provisions for further expansion of their scope (the government procurement code, for example). The codes approach can thus also be seen as a process -- a method for gradually achieving increasing multi- lateral agreement on the rules and procedures that govern the relevant aspects of national com- mercial policies. Description and assessment of the GATI codca Although it would be desirable to discuss the commercial impact of each code as part of an assessment, the requisite data ar, not available. What follows is thus based primarily on qualitative information derived from the experiences that public officials, public agencies, and the private sector have had with the codes. Drawing conclu- sions from this information involves much judg- ment and leaves room for disagreement. But until more definitive information can be obtained, a qualitative assessment is the best we can do. Anttdumping The antidumping code deals with the imposi- tion by an importing nation of antidumping duties on dumped products that cause, or threaten to cause, material injury to an existing domestic industry or materially retard the establishment of an industry. Dumping is deemed to occur when a product is considered to be exported by a firm at less than its normal value, which is defined as {,() that the prerequisites for imposing protection have some bite. It is clear though that the in- creased openness and the rigorous requirements rqF.rding the determination of dumping and in- jury have come at substantial cost, both in money and time. lbis could be detrimental especially to developing country exporters, given that they will be called on to supply cost and price information quickly and efficiently when an action is taken in an importing country. They may not always be able to comply in time. Many developing countries feel that dumping is not necessarily an activity to be countervailed. Given the fa.ct that the code has no positive obli- gations -- that is, a signatory is not obliged to have or use antidumping legislation •· there are no major disincentives to joining the code. Thus, it is somewhat surprising that developing country membership remains limited. By joining, these countries would have an opportunity to partici- pate in further development of the code and to implement a Tokyo Round understanding that {purported) dumping by a developing country firm would not automatically justify an investiga- tion by an importing country. In addition, they could then bring up specific antidumping cases in committee meetings and attempt to defend their interests to the greatest extent possible. Substdtes The intent of the subsidies code is to ensure that government subsidies do not adversely affect or prejudice the interests of exporting countries and that countervailing measures by importers do not unjustifiably impede trade. In particular, the code: (1) Prohibits export subsidies on nonprimary products. (2) Recommends that domestic subsidies should not distort trade. (3) Permits the use of countervailing duties only if material injury to domestic produc- ers can be shown (or threatened). (4) Condones export subsidies on primary products only if export market shares are not increased unduly or prices depressed. (5) Requires that GATI be notified about all subsidies. (6) Permits developing countries to use export subsidies on industrial products but urges these countries to reduce or eliminate the subsidies when they are inconsistent with their competitive and development needs. Tbe codes approach decided without injury tests. Countries might want to weigh gains from joining the code against the commitment that the United States asks to recognize the country as a signatory. Membership would also enable them to address in committee meetings the features of the code that they find objectionable, as well as specific CVD cases. The subsidies code has received the most nega- tive publicity of all the Tokyo Round codes, and many consider it not to have been very successful. Perhaps the major explanation for this perceived lack of success is that, in drafting the code, it was not possible to obtain consensus on such impor- tant issues as the appropriate use of agricultural subsidies, the definition of subsidies, and the reduction of developing country subsidies. By the same token, increasing agreement has been achieved among signatories regarding the proce- dures for dealing with subsidies and imposing CVDs. The problem, then, is that lack of agree- ment on some substantive issues has devalued the agreement on procedures. The Uruguay Round provides an opportunity to address these issues and to reduce the scope for conflict and potential damages arising from government subsidies. Standards The standards code addresses the problem of the barriers to trade that arise from standards, technical regulations, and certification systems. It does not develop or write standards or technical regulations. The code provides that standards should not disrupt trade, that countries should provide national and nondiscriminatory treatment to imported products as far as standards are concerned, that foreign manufacturers are to be granted access to domestic certification systems, and that international standards should be used as much as possible. Further, there should be prior notification and maintenance of a comment period on proposed . regulations, and countries should establish inquiry points to make informa- tion available on their standards. Developing countries may request specific, time-limited ex- ceptions from certain provisions of the request technical assistance in implementing the code. Only central governments are directly bound by the code, although endeavors are to be made to ensure that all bodies writing standards comply with the code. The code does not apply to services, technical specifications included in government procurement contracts, or standards established by companies for their own use. 62 closed to foreign producers by formal or informal systems of national discrimination in favor of domestic producers. Some countries maintained essentially closed procurement systems; others maintained implicit or explicit price preferences for domestic producers. Furthermore, state- owned or controlled enterprises often followed discriminatory procurement practices, too. The main objective of the procurement code is to subject domestic procurement to international competition. To accomplish this, the code estab- lished far-reaching obligations of nondiscrimina- tion for purchases by specified government enti- ties, including national treatment and elaborate measures to ensure transparency of tendering procedures. The tradeoff for such obligations, however, was restrictive coverage: the code ap- plies only to entities included on the schedules submitted by signatory nations. Although the cov- erage of entities was thus somewhat limited ini- tially, it was contemplated that more entities would be included in renegotiations of the code. The code exempts purchases under SOR 150,000, to be lowered to SOR 130,000 in 1988. As might be expected, given the sensitivity of procurement decisions and a tradition of buy- national policies by many signatories, the fi.mc- tioning of the procurement code has not been altogether smooth. During the first few years especially, signatories notified code committee meetings of numerous instances of noncompli- ance. Some of the issues brought up were inade- quacies in publishing tender notices, in maintain- ing response deadlines too short for bid submis- sions, and in notifying unsuccessful bidders. A number of these difficulties were resolved after bilateral consultations and discussions in commit- tee meetings. As countries acquired more experi- ence in implementing the code, it became clear that many of the early problems were those of starting up. But some practices objectionable to some countries continue to appear on the agenda of code committee meetings. Examples include the use of such noncompetitive procurement proce; dures as single-tendering (asking only one firm to submit a bid) and the practice of splitting large contracts into smaller lots so as to fall below the minimum threshold specified in the code. In general, because noncompliance is often difficult to detect, there are problems in monitoring the implementation of the code. In addition, the code does not provide for a bid-protest proce- dure or for an adequate remedy if a protest were Tbe codes approach insofar as the implementation of the code is nondiscriminatory and with a substantial admhJis. trative burden, the incentive for a developing country to sign the code may be mostly a matter of how a commitment to the code can help a gov- ernment give its policies the discipline it wants. Customs valuation Customs valuation is the process by which customs authorities assign a tariff classification and value to imports. Valuation procedures may become NTBs if officials assign goods to an incor- rect classification to which a higher tariff applies or assign goods a value greater than appropriate. It may also be that the documenting of imports is excessively time-consuming and expensive. The main purpose of the customs valuation establish an equitable, uniform, and neutral sys- tem of determining the value of goods for cus- toms purposes. The code does not address tariff classification issues. The primary valuation meth- od specified is based on transaction values as rep- resented by the price paid or payable for the goods. When there is a transaction between re- lated parties and the relationship has demonstra- bly affected the price reported, the code provides for a transaction value method based on identical or similar goods imported. When this is not fea- sible, the code allows specially constructed meas- ures of value to be used. The success of the valuation code has been remarkable. The code has apparently resulted in a fairer, more uniform, and greatly simplified sys- tem of valuation. Most signatories appear to have implemented the transaction value, method with- out delay or problems. More thah 90 percent of customs valuation by signatories is now based on transaction values. The duties that will have to be paid are now highly predictable, and both traders and customs authorities have benefited from the greater ease of customs administration. Only minor issues have been brought up in committee meetin~ regarding code implementation and in• terpretation, with most of them settled harmoni- ously. Compliance is generally perceived to be excellent, and signatories generally cooperate when problems must be resolved. As indicated above, there have been important cost savings and much greater certainty in valuation than be- fore the Tokyo Round. The sources of the code's success are its technical arid relatively concrete subject matter and the uniformity and transpar- ency of its procedures. 64 An important difficulty in assessing the code is that the United States views it mainly as a nontar~ iff code while the EEC views it more as dealing with the removal of tariffs. Both the subsidies and standards codes apply to civil aircraft, and the United States has attempted to pursue subsi- dies in the context of the aircraft code. Experi- ence with the code suggests that it has facilitated trade in civil aircraft and, since it is nondiscrimi- natory, has been beneficial to other GAIT mem- bers, whether or not they are signatories. The United States has not been satisfied with the code •· because it has not resulted in effective disci- pline over the use of subsidies, particularly for the European Airbus, and because it has not been very effective in disciplining the political market- ing of aircraft. These disputes reflect a problem that also arises in the context of the subsidies code: that is, they are production subsidies, not expon subsidies, and thus are not explicitly for- bidden. Some observers have considered that the aircraft code might be a model for future sector- specific agreements. But the sometimes sharp division of views on the operation of the code casts some doubt on whether it provides a usefui precedent. Conclusions and suggestions for improving the GATI' codes The main conclusion is that the operation of the codes generally is favorable. Some common themes that emerge in analyzing the individual codes are: I. Membership and parttctpatlon. All the codes have achieved a core membership of the major industrial countries, enough to allow each of them to have some impact on the issues they address. 2. Transparency, exchange, and gathering of information. Each code has established an institutional framework that entails regu- lar meetin~ of government officials who represent code signatories. These meetin~ provide valuable opportunities for the ex- change of views and information about government regulation and practices and the collection of relevant data. The meet- in~ also enhance the understanding among nations about previously diverging policies on specific approaches to regulat- ing international trade. 3. Consultation. In the same vein, the regu- lar meetin~ of officials have provided the Tbe codes approach signatory to impose discipline on itself. This has certainly been a motivation for the EEC to participate in some of the codes, and it also may have been (and can be) important for other countries. 8. Improving the operation of the codes. There are many problems still to resolve -- and many ways to improve the operation of the codes. First, the effectiveness of some of the codes might be enhanced by in- creased participation, especially by the more advanced developing cmmtries. This prospect applies mostly to the subsidies, valuation, and licensing codes, where in- creased developing country membership could be of great significance. But given the nondiscriminatory application of most code provisions by the majority of signato- ries, incentives for increased membership may be limited. The U.S. practice of code conditionality in refusing to apply the sub- sidies code to nonsignatories without some reciprocal concessions makes it necessary for nonsignatories to consider whether the benefits that go with signing the code will be commensurate with the internal policy changes that may be required. Second, the codes may involve procedures that some countries find costly to implement, and indeed there is some question GATI Secretariat has enough staff and fa- cilities to function effectively. servers are concerned about the weak- nesses in the dispute settlement proce- dures of the individual codes -- and about the future problems that might arise if the procedures are to remain code-specific rather than being centralized. is the immensely difficult question of how much conformity the GATI system should seek to impose on sovereign nations. In this connection, the experience of the subsidies code has shown how difficult it is 66 10 Different and more favorable treatment -- and graduation Brian Hindley Four of the seven clauses defining the general principles governing negotiations in the Punta del Este Declaration deal with developing countries. Three of the clauses confirm that developing countries will be accorded different and more favorable treatment. The fourth asserts that de- veloping countries "expect to participate more fully in the framework of rights and obligations under the General Agreement" as their econo- mies develop. Different and more favorable (DMF) treatment of developing countries in GATI: (1) Allows developing countries to impose quantitative and other restrictions in order to protect infant industries and (after amendment in 1955) to combat payments imbalances. (2) Relieves developing countries from the ob- ligation to make reciprocal concessions order to benefit on a most-favored-nation (MFN) basis from the tariff and cessions made by other GATI members. The first of these two basic elements was spelled out in Article XVIII of the General Agree- ment, the principal part of the original document to deal specifically with the problems of develop- ing countries. The second came about when Part N of the GATI was added to the original agree- ment in 1964. In addition, the Decision of the Contracting Parties of 28 November 1979 on Dif- ferential and More Favorable Treatment, Recip- rocity, and Fuller Participation of Developing Countries (GATI 1979) supplies three further elements. It: (3) Recognizes special and different treatment of developing countries in the context of codes on nontariff barriers to trade negoti- ated in GATI. Different and more favorable treatment Probably the most important part of the article in practice, however, is section B, concerned with balance-of-payments problems. Section B asserts that developing countries "tend, when they are in rapid process of development, to experience bal- ance-of-payments difficulties." It goes on to per- mit a developing country with a balance-of-pay- ments problem to "control the general level of its imports by restricting the quantity or value of merchandise permitted to be imported." Article XVIII.B prescribes procedures that could, in principle, severely limit use of its provi- sions. In GATI's first decade, the checks on the use of the article as it then stood were applied with some rigor (Hudec 1986). Since then, the standards of application appear to have declined (Eglin 1987). GATI often seems not to be in- formed of tariffs or QRs applied by developing countries on balance-of-payments grounds. The reports of countries that do not notify GATI about trade restrictions used for balance-of-pay- ments purposes suggest that the restrictions are often applied to only a small fraction of all im- ports (Anjaria 1986, pp. 11-15). Since trade re- strictions genuinely used for balance-of-payments purposes are likely to be across-the-board, this strongly suggests that the notified trade restric- tions are being used for some other purpose. The upshot is that developing countries are able to adjust their tariffs and impose QRs almost at will. A variety of consequences flow from this free- dom from external constraint in the use of trade policy. The most important of these is the diffi- culty that it creates for developing country gov- ernments in the GATI negotiating process. In GATI terms, the "concessions" and "contribu- tions" of a country mean reductions in its barriers to imports, and a GATI negotiation is about ex- changes of such concessions. The government of a developing country may see the possibility of obtaining a reduction in protection against its products in foreign markets by reducing its protection against foreign prod- ucts. It may assess the political and economic value of what it must give up in the exchange as much less than the value of what it will because Article XVIII makes it so easy for a devel- oping country to withdraw from commitments, it is nevertheless possible that the government will not be able to cement the deal. Potential indus- trial country partners in the bargain may not be prepared to deal with a party that has the ability to withdraw legally from its side of the bargain, while holding them to their side. 68 fonn of special and different treatment of devel~ oping countries. The quality of the provision I. varies markedly between codes, however. Some- times the relevant clauses are vague exhortation, without clear meaning or binding legal force. For example, Article 13 of the antidumping code asks developed countries to consider more "con- structive" remedies than the imposition of anti- dumping duties on dumped exports from devel- oping countries. In other codes, however, there are exemptions from important elements of the behavior required of developed country signato- ries. The most outright, and possibly the most im- portant of these substantive exceptions, is the subsidies code. It excuses developing countries from the central obligation of the code, a flat pro- hibition on export subsidies on nonprimary prod- ucts. Both the standards code and the valuation code, however, contain statements that might have the same effect with respect to their central disciplines. The standards code excuses develop- ing countries from the use of standards that are "not appropriate to their development, financial, and trade needs." It also suggests that develop- ing countries will be justified in using standards that are "aimed at preserving indigenous technol- ogy and production methods and processes compatible with their development needs." Simi- larly, the valuation code appears to allow devel- oping countries to set aside the provisions of the code "on ... a transitional basis" maintain a system of fixed customs values. (Hudec [1986) discusses the application of the codes to developing countries.) Article XXIV The exemption of developing countries from the requirements of Article XXIV allows them to ex- •1 tend tariff preferences to one another without being forced by the MFN clause to extend the preference to all contracting parties. Developed countries exchanging preferences could avoid their extension to all other contracting parties only by making the preference total •• that is, by forming a customs union or free trade area. The Generalized System of Preferences The elements of different and more favorable treatment so far discussed are obligations, or lead • to obligations, in GATI. The GSP is not such an obligation. Different and more favorable tTeatment Their perception of that link is therefore likely to be central to their attitudes toward graduation within GATI. If graduation from other forms of DMF treatment is taken to imply accelerated graduation from the GSP, the link may have a substantial effect on their resistance to graduation in general, whatever their attitudes to other forms ofDMF. Before turning to the tactics of graduation, however, it is necessary to explore the issues lying behind the idea. And before graduation from DMF treatment can be sensibly discussed, the case for DMF treatment itself must be examined. The case for different and more favorable treatment That developing countries should receive DMF treatment in GATI is widely •· though by no means universally •· accepted. Several arguments are used in affirmations of the proposition, how- ever. The starting premise is that rich countries should transfer income to poor countries. The premise is almost universally accepted. But the problem is to explain why transfers of income and wealth should be made through the particular means of DMF treatment in GATI. Rules governing official interventions in inter- national trade have a value in themselves, and it is not evident that this value is less for developing than for developed countries. So long as wealth can be transferred to developing countries by other means, therefore, the ethical premise pro- vides no good reason to distort the rules of the trading system. Moreover, it is doubtful that DMF treatment as it exists can be derived from the ethical premise. And it is far from clear that developing countries are better off as a result of DMF treatment (other than the GSP). To maintain the position that developing coun- tries need high levels of protection to grow is increasingly difficult, for example. Many econo- mists argue, on the basis of the available evi- dence, that the prospects for growth of many developing countries would dramatically improve if their high levels of protection were reduced. Bhagwati (1986) and the World Bank (1987) sur- vey the evidence on this. An element of this condemnation of protection as an instrument of growth concerns the infant- industry argument, which provides the basis for much of Article XVIII. This argument for protec- tion was long taken to be powerful in theory but 70 from GATI reciprocal bargaining. Following the Haberler Report (GATI 1958), which argued that the trade policy of developed countries was in large part responsible for the lagging exports of developing countries, GATI established a commit- tee (Committee III) to investigate the position. In the words of Dam (1970), Committee III found that: ... high tariffs faced exports of less-developed in a wide range of products, particularly vegetable oils, coffee, tea, cocoa products, jute products, ucts, sporting goods, and leather goods in addition to certain more sophisticated manufactured products. The less-developed countries had experienced particular dif- ficulties in negotiating reductions cially because the principal suppliers products were not less-developed countries and be- cause the less-developed countries often had little to offer in tariff negotiations. They had little to offer because the imports of greatest importance development programs (such as capital entered at minimal duties, and because, in the absence of adequate internal tax systems, they were dependent upon customs duties on remaining imports for govern- mental revenues. 0/ 4,400 tariff concessions the Dillon Round, only 160 were on items be of exporl interest to the less-developed countries (pp. 229-30: emphasis added). There are, of course, other explanations of this apparent lack of success than those offered by Committee III. One is that the effects of Article XVIII, already in its present form at the time of the Dillon Round (1960-61), militated against having the developing countries engage in ex- changes of concessions. Another is that ing country negotiators were not effective in GATI. Yet another is that developing countries failed in GATI negotiations because their govern- ments did not have a secure enough grasp of their domestic politics to play by the GATI rules. On this view, developing country governments were not able to engage in exchanges of concessions because they could not overcome the domestic opposition to reductions in protection. These views carry a different flavor from (though they are not entirely inconsistent with) the hypotheses contained in the Committee III findings. Those findings suggest that developing countries had little hand in, or control over, their position in GATI •· and so were not responsible for the dif- ficulties they found themselves in. Whether that is true or not, developing coun- tries were faced with major problems in GATI. Manufactures and semimanufactures exported from developing countries tend to be labor-inten- sive, whether produced in developed or develop- Different and more favorable tTeatment concessions in the GATI negotiating process have the political merit of offering new opportunities to the residents of a country and therefore of engaging their interests in liberalization. Domes- tic exporters who know that reductions in protec- tion in foreign markets depend on reductions in domestic protection, for example, have a more direct interest in domestic tariff reduction than would otherwise be the case. So, measures of liberalization that would not otherwise be politi- cally feasible may become possible. To exempt a bloc of countries from the require- ment that they contribute to this domestic coali- tion-building is not politically costly when they have only a small share of world trade and pro- duce a narrow range of goods. Neither condition is any longer true of the advanced developing countries. Consequently, the developed coun- tries are increasingly reluctant to make unre- quited concessions. The possibility of avoiding unrequited concessions by concentrating tariff cuts on goods not produced in developing coun- tries is much more limited than it was, however. The more advanced developing countries now produce a range of goods that is too wide to be avoided, and they are capable of widening it fur. ther. That is why graduation -- the idea that the more advanced developing countries should ac- cept a higher level of obligation in GATI than less successful developing countries •• becomes an issue. Few developing countries are likely to become candidates for graduation very soon. Neverthe- less, developing countries in general do not favor the idea of graduation (UNCTAD 1982, pp. 1-S and 7-8). The Arusha Program (United Nations 1979) of the Group of 77, for example, states that "The Group of 77 rejects the concept of 'gradu- ation' sought to be introduced by developed countries in the trading system, which would, inter alia, allow developed countries to discrimi- nate among developing countries in a unilateral and arbitrary manner." That a country now re- ceiving DMF treatment should be so treated in perpetuity, regardless of its economic develop- ment, is not a proposition to be taken seriously. A more defensible interpretation of the Arusha statement appears when its last phrase is empha- sized. It can then be construed to say that gradu- ation should be on the basis of multilaterally agreed-on criteria, not on those decided unilater- ally by donors. In practice, the difficulties of multilateral deci- sion making may mean that to delay graduation 72 tide XII deals with the use of trade policy meas- ures for balance-of-payments purposes by devel- oped countries). Signatories to the code would reject the use of trade policy measures for bal- ance-of-payments purposes. Trade policy meas- ures for the support of infant industries would be used, if at all, only in the most tightly controlled circumstances. The condition might usefully be extended to the efforts of developed countries to rejuvenate senile industries through restrictions on trade. The arguments deployed in favor of such policies are indistinguishable from the in- fant-industry argument and therefore suffer from the same defects. Developing countries accepting such a code would accept substantially more GATT discipline than now applies to them. They would also re- gain the ability to make credible exchanges of concessions in the GATT negotiating framework. There clearly is much to be said, from the view- point of developing countries, for correcting a situation in which they will have difficulty changing concessions on levels of protection even if they wish to do so. Utat the membership of this code should be open to developing coun- tries other than those on whom graduation is being urged is therefore especially desirable. DeftnJng developing countries Whether graduation is complete or staged, an obvious question is: Which countries should graduate? One approach is to establish formal criteria. No definition of a developing country has ever been accepted by the GATT co~tracting parties. The problem this raises for deciding which coun- tries should receive DMF treatment has in the past been solved •· or avoided -- by self-selection: a nation declaring itself to be "developing" and with any plausible claim to that status has a good chance of receiving DMF treatment. Portugal and Spain, for example, received GSP preferences as developing countries until their accession to the European Community. One obvious criterion of development is per capita income. At least two countries have adopted such a criterion for graduation from their GSP schemes. The government of New Zealand announced in December 1984 that countries with a per capita GNP more than 70 percent of New Zealand's will no longer qualify for the New Zealand GSP scheme (UNCTAD 1985). In the United States, the trade and tariff m.tferent and more favorable treatment ate in GATI, but to offer some form of guarantee of a temporary continuation of the benefits of the schemes if they do graduate. Developed countries may fail to win the assent of two-thirds of GATr members to a definition of a developing country. In that likely event, devel- oped countries may be obliged to decide how much they are prepared to pay for graduation. References Anjaria, Shailendra. 1986. "Balance Issues in the Uruguay Round of Trade Negotiations." Paper presented at the Conference on Developing Countries in the Multilateral Trade Negotia- tions. Bangkok, Thailand, October 30 - November 1. Bhapati, Jagdish N. 1986. l!xporl Promoti"g egy: /ssun and EtJieumce. Development Policy Issues Series (October). Washington, D.C.: World Bank. , and V.K. Ramaswami. 1963. "Domestic Tariffs, and the Theory of Optimum Politkal Eccmomy XXI,l(February):44-50. Brown, Drusilla K. 1986. Trad.6 Preferences Counlrifl: A Suroey of Results. Discussion Paper 190. University of Michigan Research Seminar in International Economics. Ann Arbor. Dam, Kenneth W. 1970. Tbe GA1T: Law and Intemational Economic Organization. Chicago: University of Chicago Press. Eglin, Richard. 1987, "Sunieillance Measures In the GATI." lO(March):1-26. GATI Secretariat. 19S8. Tnmds in International Trade: R.po,t by a Panel of Experts. Geneva. _ _. 1979. .Ag,w,,,ents Relating to the Prameworlt for the Conduct of lntemational Trade. Geneva. _ _ 198S. Intemational Trad.6, 1984-85. Geneva. 74 11 Bargaining in the Uruguay Round HenryR Nau Two aspects of the Uruguay round stand out. First, the agenda is longer and more complex than that for previous rounds. It includes traditional industrial tariff and institutional issues; more re- cent concern with nontariff measures, including standstills and rollbacks for existing quota restric- tions; and largely new issues, such as agriculture, services, intellectual property, and trade-related investment measures. Second, the participants are more numerous and now include many devel- oping countries. Unlike the pattern of previous rounds, developing countries played a key role in launching the new round, acting through various groups, some of which cut across traditional north-south lines (such as the Group of 48 and the Cairns group on agriculture). The longer agenda and larger number of active participants alter the bargaining characteristics of this round. The round begins with no single, overriding issue or objective; it doesn't start with the across-the-board tariff-cutting formulas of the previous two rounds. The Punta del Este Minis- terial Declaration sets a four-year deadline for the negotiations but no politically salient objectives (such as a 50-percent reduction of tariffs) or sequence for attacking the numerous issues. Positions of the GATI members vary - from hard- line developing countries that seek immediate implementation of standstill and rollback commit• ments to the United States, which seeks priority (or fast track) treatment for agriculture and paral- lel progress for existing restrictions and new is- sues, such as services. Agreement at Punta del Este was possible only because everyone's issue was included. But without some early agreement on visible objectives and a further sequencing of these issues, the danger exists that negotiations will stall and that the coalitions will realign, Bargalnlng ,,. tbe Untpay Round the Round, the participants agreed on an overall tariff-cutting formula of 50 percent. Each country offered linear cuts of 50 percent and then negoti- ated on exceptions. This approach gave an early fillip to the negotiations, facilitating an initial large step forward and focusing negotiations on minor steps backward. The Kennedy Round also re- flected a sectoral approach to negotiations, be- cause agriculture and certain basic commodities were exempted from the across-the-board ap- proach. Toe Tokyo Round continued the across-the- board technique for tariffs -- substituting a combi- nation of linear and harmonized tariff reductions for pure linear reductions. But it also introduced a barrier-oriented and conditional (rather than MFN) approach for dealing with nontariff meas- ures (the codes). Tokyo also spotlighted a rela- tively new level of negotiations, involving broad framework and institutional issues, such as spe- cial and different treatment for developing coun- tries (the enabling clause). Toe across-the-board approach has clearly en- joyed the most success. It establishes politically salient overall goals early in a negotiation while permitting great flexibility in subsequent negotia- tions to deal with individual products, sectors, barriers, or framework and institutional issues. By contrast, the product and sector approaches are, taken alone, unlilcely to generate enough political interest and momentum to move negotia- tions forward at an early stage. Similarly, the barrier approach alone is either too restrictive or too general. For example, government procure- ment policies are a key factor in only a few coun- tries, while subsidy policies are often so pervasive they defy effective definition and limitation. And the framework approach lends itself too easily to old-style, north-south confrontation. All these ap- proaches can play a role in the Uruguay Round, but they will be more effective in the context of broader across-the-board goals determined early in the negotiations. Can this technique of setting politically salient objectives •· a technique used so effectively in earlier rounds -- be adapted to the new round's longer and more complex agenda? Goals and the sequence of Issues for the new round Previous rounds benefited from the overriding priority of cutting tariffs, to which other issues were subordinated. In the new round, many issues compete for priority. An early agreement 76 the Uruguay Round (table 11.1). The first phase includes issues on which the Commonwealth Secretariat feels the debate is relatively advanced or the commonality of position is already consid~ erable. The idea is to rebuild confidence in the GATI system by tackling the easier issues first, while minimizing the need for painful sacrifices by individual participating countries. According to the Commonwealth Secretariat, the issues are (and should be) appropriately tilted toward the interests of developing countries. Commonwealth Phase I, ending June 1988 Safeguards Dispute settlement Surveillance/transparency Codes Tropical products Natural resource products Treatment of least developed countries Source: Commonwealth Secretariat (1986). The Commonwealth proposal offers much food for thought. It is precisely the .kind of creative thinking that needs to be done to find equivalent measures for across-the-board tariff-cutting tar- gets of earlier rounds. The phases are not in- tended to be airtight compartments. Some work would begin on phase III issues during phase I. But it is recognized and accepted that priority work will go into certain areas at the outset in an effort to achieve confidence-building measures and facilitate tougher and more painful negotia- tions later on. Other sequencing options need to be consid- ered. The Commonwealth proposal may suffer from the possibility that early progress on rela- tively easier issues is not enough to gather mo- mentum for more difficult issues, particularly amidst the "drag" of current skepticism toward GATI in developed and developing countries. If high-level political officials are going to be called to strike broad agreements at the outset to the negotiations, why not aim for more ambitious compromises that could shake the lethargy of the current trading environment? The Common- wealth sugestions may also tilt the initial phase Bargaining In tbe Uruguay Round Phase I, ending January 1988 Agriculture Surveillance/transparency Tropical products Natural resource products Treatment of least developed countries Source: The author. Canada and the United States and Canada sup- port fast-track treatment for agriculture. Such a step would generate political momentum in the U.S. Congress for the new round and conceivably facilitate congressional acceptance of tougher steps in the second phase, such as the rollback of quotas on sensitive products. The EEC, however, sees little to be gained from early treatment of agriculture. Compromise will probably require some scaling down of American ambitions in the agricultural sector. Instead of free trade in agriculture, the United States might consider less dramatic but neverthe- less significant overall objectives and outcomes. There are three broad possibilities. One is con- trolling costs {and that translates into controlling surpluses and export subsidies) while generally accepting protectionist policies in agriculture. The second is agreeing on the principle of liber- alizing agriculture but accepting mode~~ initial goals of 10 to 30 percent reductions in agricul- tural protection. The third is seeking rapid and complete liberalization trade. The first goal is unacceptable to the United States, the third to the EEC. The second offers the possibility of compro- mise. After all, industrial protectionism was dis- mantled not in one trade round but over some thirty years by achieving IO-percent reductions in the Dillon Round and 35-percent reductions in each of the Kennedy and Tokyo Rounds. For agriculture, across-the-board protection-cutting might be derived from the concept of production subsidy equivalents. This measure of direct and indirect subsidies in agriculture has gained wide acceptance in the work of the OECD and the GATT Committee on Trade in Agriculture. The Uruguay Round might aim for a 10 to 30 percent 78 commitment to MFN treatment in future trade actions. The United States later cast further doubt on this commitment by implementing sev- eral discriminatory trade actions, such as the national security restrictions on imports of ma- chine tools. This lack of clarity on MFN treatment is corro- sive. The place to stop such corrosion is with respect to future trade actions, accepting for the moment existing discriminatory measures that are the subject of rollbacks and would be taken up in a second phase. The United States might forswear future discriminatory actions by letting cases of safeguards, countervailing duties, and antidump- ing measures go to completion (through imposing tariffs or duties) rather than short-circuiting them by negotiating voluntary export restraints. It might also agree to exercise provisions for unfair competitive practices in third markets through GATI (as it has done with the rice case against Japan). This type of explicit commitment in the first phase would go a long way toward reinforc- ing developing countries' confidence in the pros- pects of rollbacks in .the second phase. Spotlighting agriculture in the first phase avoids the deadlock over old or new issues. Both old and new, agriculture has been around for a long time but was initially exempted from GATI proce- dures (at the insistence of the United States). If it could be successfully treated early in the new round, the second phase could involve an implicit parallelism between the old and new issues. As developed countries took more painful measures on rollbacks (including textiles) and tariff negotia- tions (tariff escalation), developing countries would begin to bargain reciprocally with tariff concessions and bindings. They might also adopt less rigid positions in services, intellectual prop- erty, and trade-related investment measures, in- sisting nevertheless on more preferential treat- ment in these new sectors than they can expect to retain in the manufacturing sector. The initial negotiations on services might focus on an overall framework agreement in which general principles, including the handling of developing countries' interests, might be specified. Subsequent negotia- tions would then turn to individual service sec- tors (insurance, construction, and so on). Support mechanisms for the new round Phasing in some manner •• whether along the lines of table 11.1, table 11.2, or some other scheme •· seems essential to spark interest, build Bargalntng ,,. tbe l/nrp4y Rmlntl Conclusions The new round needs a quick start to galvanize political interest and momentum in a world econ- omy laden with skepticism about the international trade and financial systems -- and to sort out the far more numerous and complex issues on the agenda of this round than that of previous rounds. lbis infusion will undoubtedly require the participation of more than trade ministers. Finance ministers and heads of state and govern- ment must also be involved And the leaders of GATI, the IMF, and the World Bank have impor- tant responsibilities in this as well. The quick start involves setting politically sali- ent objectives and a sequence for the various issues on the agenda A simple tariff-cutting for- mula, which served to energize earlier rounds, is no longer possible. But the equivalent of such a formula might be found in the phasing of issues. For example, the first phase might give agriculture a high priority but accept more modest goals for eventual outcomes (10 to 30 percent reductions in production subsidy equivalents). Coupled with important agreements on tropical products, natu- 80 12 Functioning of the GAIT system Wllltam B. Kelly A major objective of GAIT, when negotiated in 1947, was to bring order to trading relationships and thereby to avoid the beggar-thy-neighbor trade practices of the 1930s. Toe global eco- nomic and political conditions immediately after the war were conducive to international coopera- tion and that cooperation was one reason for GATI's early success. Toe spirit of cooperation among wartime allies helped them to meet the challenges of trade and economic reconstruction. But today the trade problems have increased and become more complex. And this cooperative spirit has been overwhelmed by a competitive struggle for exports in a world where many mar- kets are shrinking rather than expanding. GAIT also worked well in its early days because of the dominant economic position of the United States and because of U.S. willingness to tolerate, for balance-of-payments reasons, discriminatory restrictions against its trade. But the dominant economic position of the United States during this era of the "dollar shortage" ended with the post- war economic recovery of Europe and Japan, the creation and expansion of the European Eco- nomic Community, and more recently the emer- gence of the newly industrialized countries (NICs) as major players in world trade. U.S. tol- erance for other countries' trade restrictions has disappeared as U.S. trade deficits have grown larger. Now there is no trading entity to play the dominant role. In addition, GATI worked well because the goodwill among the original negotiators contin~ ued as many of them became the national and GATI Secretariat officials charged with its im- plementation. Toe negotiators had a common motive for making it work. Trade officials today have no such common experience and no such Functioning of tbe GA1T system tive of political alignments that they might follow in other organizations. For example, in 1980 Brazil complained about Spanish tariff treatment of unroasted coffee that differentiated between the Arabica and Robusta beans grown in Brazil and the mild beans of Colombia. Brazil won the case, and Spain changed its tariff so that Colom- bian coffee would no longer receive a tariff pref- e1·ence. In 1982 Brazil was joined by eight other developing countries and by Australia in a case against the EEC's sugar regime. But some other developing country exporters of sugar did not support this action, because they enjoyed prefer- ential treatment in the EEC market. Even though GATI has sometimes been re- garded as a rich man's club, its history of dispute settlement supports the thesis that the principal beneficiaries of the GATI system are the small and medium-sized countries, developed and de- veloping. GATI provides a multilateral forum where their complaints can be aired and where they are in a much stronger bargaining position than if their complaints were taken up solely in a bilateral context. Large trading entities like the United States and the EEC could get along with- out the GATI multilateral system of rules, even though they would suffer economically. Some of the smaller countries would be economically devastated. Because of this increasingly recog- nized vital stake in the trading system, some of the developing countries now play a significant role in GATI activities. To maximize their gain, some developing countries, particularly the NICs, ap- pear prepared to make meaningful trade conces- sions and otherwise to participate fully in the Uruguay Round. Such participation should im• prove the way the system works. In sum, GATI today is operating in a much more difficult economic and political environ- ment, with a much larger, more diverse clientele. Nevertheless, despite strains and defects, the sys- tem remains intact, and the Uruguay Round an opportunity to deal with growing problems and to update and expand the system to include new areas. To succeed, however, a return to a constructive spirit of cooperation is needed. GATT achievements and problems Tariff achievements On 1 January 1987 the last of the tariff gotiated during the Tokyo Round came into effect --and without fanfare. These reductions culmi- 82 ing measures, and import licensing are preceden- tial and are working well. The government pro- curement code, the civil aircraft agreement, and the dairy and meat arrangements have had diffi. culties, but they have generally been successful within the parameters of their objectives and provisions. (1be Tokyo Round codes are dis- cussed in chapt~r 9.) The code that has not worked well -- and has thus received the most public attention •· is the subsidies code. This agreement has been severely tested by disputes between the United States and the EEC concerning pasta, wheat flour, and other agricultural products. These disputes are of great importance, because they involve fundamental issues that go far beyond the importance of the trade in these products. Furthermore, they re- flect divergent views on GATT itself. Some coun- tries, particularly the United States, tend to look on GATT as a legal system for settling disputes by obtaining legal rulings. Other countries, such as those of the EEC, have a more pragmatic ap~ proach that gives much greater emphasis to nego- tiations for settling disputes. Measures outside GAIT A more serious problem is not the disputes brought before GATT but those dealt with outside GATT, and more particularly, outside the frame- work of GATT rules. It was never envisaged that all trade disputes would be brought into the GATT machinery or into the code committees for resolution. GATT is not a world court. Even if it were, it has no police to enforce decisions. Dis- putes should only be brought to GATT as a last resort •· after countries have been unable to re- solve them bilaterally. Whether disputes are brought to GATT or not, they should be resolved in the framework of the GATT rules. Voluntary export restraints (VERs) and other gray-area measures that have frequently been used are not sanctioned by the General Agreement. In other words, the resolution of trade disputes should be within the parameters of the rules negotiated and ratified by the govern- ments involved. If they are not, world trade is misgoverned or, rather, ungoverned by ad hoc arrangements based on political needs of the moment. The world was without trade rules in the 1930s, with disastrous results for all con- cerned. Widespread resort to gray-area measures is one of the major developments undermining the func- Functioning of tbe GA1T system of nongovernmental experts in GATI matters" to serve on panels (GATI 1985, pp. 46-47). A very important part of dispute settlement practices is that GATI does not become involved in an infraction of rules unless a contracting party takes the initiative in bringing a complaint. Often, complaints are not made because of political reasons or because the injured party hopes to get a better deal in a VER or other gray-area arrange- ment. Although third countries may initiate ac- tion in GATI, this has seldom been the case. The GATI Secretariat has no authority to blow the whistle and initiate cases involving perceived infractions of the GATI rules. The Secretariat now publishes (semiannually) data on trade ac- tions by contracting parties that may or may not be in violation of their obligations. These reports are discussed in special meetings of the GATI Council. With these reports and council discus- sions, the Secretariat is playing a greater role than formerly in calling attention to possible GATI violations, but the Secretariat still has no author- ity to initiate any GATI action. The Uruguay Round The negotiating objectives of the Uruguay Round for the functioning of GATI are to develop under- standings and arrangements: (1) To enhance the sunreillance in GATT to enable regular monitoring of trade policies and practices of contracting parties and their impact on the functioning lateral trading system. (2) To improve the overall effectiveness and de- cisionmaking of GATT as an institution, including the involvement of ministers. (3) To increase the contribution of GATT to achieving greater coherence in nomic policymaking through strengtheni its relationship with other international or- ganizations responsible for monetary and fi. nancial matters. (GATT 1986, p. 8.) For the first objective relating to surveillance and monitoring of countries' trade actions, the standstill and rollback commitments of the Punta del Este Declaration are relevant. Under stand- still, participants in the negotiations have agreed not to take "any trade restrictive or distorting measure" inconsistent with GATI or its instru- ments. They have also agreed to use restraint in applying trade measures permitted by GATI, such 84 i minister of Uruguay. Given the positive spirit and •results of the Punta dcl Estc ministerial meeting in ., 1986, more frequent ministerial meetings might • help. Australia recently made such a proposal. On the third objective, GATI from its very be- ginning has had a contractual relationship with the International Monetary Fund, under which the IMF determines whether quantitative restric- tions are justified for balance-of-payments pur- poses. IMF officials participate in GATI balancc- of-payments consultations, and there is close coordination between the two organizations in such matters. The IMF has also published a report on the effect of flexible exchange rates on international trade, which was requested by the GATI contracting parties at the 1982 ministerial meeting. Personnel from GATI, the IMF, and the World Bank have participated in seminars and training sessions sponsored by their respective organizations, and professional contacts have been pursued informally. aoser cooperation between GATI, the IMF, and the World Bank has been urged. And it has been suggested that the GATI Secretariat should participate ration of IMF stabilization programs and in the consideration of World Bank structural ment loans. To pursue the foregoing objectives in the Uru- guay Round, a negotiating group, called Function- ing of the GATI System, has been established Its work, however, is related to several other of the fourteen negotiating groups on trade in goods, in• eluding those on safeguards, agriculture, dispute settlement, GATI articles, MTN agreements and Part III Subjects for Negotiation in the Uniguay Round 13 Tariff-cutting formulas -- and complications Samuel Laird and Alexander Yeats During the Tokyo Round the industrial countries' most-favored-nation (MFN) tariffs on manufac- tures were reduced by a further one-third. And when the final concessions are implemented in 1988, the tariffs will average about 5.5 percent. But the tariff cuts on products of interest to developing countries were well below average: GATI (1979) estimates that these duties were reduced only to three-fourths of their level before the Tokyo Round. Because the average tariff rates in developed countries have been reduced to low levels, there is a tendency in some quarters to downplay the role of these duties as trade barriers. That malces it important to assess the remaining duties on trade and to examine some longer-term tariff problems that will be raised in the Uruguay Round. One of these problems is that many na- tional tariffs are not legally bound. A second is that there are different (and adverse) effects of specific tariffs on developing countries' exports. Third, the cost-insurance-freight (c.i.f.), as op- posed to free-on-board (f.o.b.), procedures for customs valuation continue to discriminate agaim,t geographically disadvantaged developing countries, particularly those that are least devel- oped and landlocked Fourth, the problem of how to liberalize tariffs for products that are also covered by "hard core" nontariff barriers (NTBs) is unresolved Table 13.1 tabulates these and other major issues that the Uruguay Round should address. Tariffs after the Tokyo Round The divergences in the overall level of developed country tariffs could cause difficulties, since there appear to be both high and low tariff countries Tariff-cutting .formv1as - and complications Major negotiating issues Policy Issues General Tariff Problems Legal bindin~ Stacking tariffs and NTBs Structure of tariffs Departures from MFN Special Developing Country Problems Conflicts in negotiations The GSTP Nonredprocity Effects of the GSP Discriminatory tariffs Specific tariffs 90 Policy tssues Valuation base Offshore assembly operations Specific Tariff Problems Proct:dures for liberalization Nuisance tariffs Paratariffs Increasing transparency Tariff Preferences [GSTP], which establishes pref• erences for their intratrade.) What accounts for the wide differences be- tween some of the E~opean countries' MFN tariff averages and those based on duties applied? For example, the average MFN rate in both Norway and Finland is 4.8 percent, yet the average tariff rate applied in both countries is about a fifth of this figure. Similarly, for the EEC the applied rate (2. 5 percent) is about three-fifths of the average MFN tariff. Analysis of the underlying tariff statis- Tarljf-cuntng fonm,las - ""'1 Trade-weighted average Country/Country Group• Develo3d Countries Australia Austria Canada European Community b Finland Japan New Zealand Norway Sweden Switzerland United States Develogina; Countries Algeria (1982) Bangladesh (1983) CARICOM (1979) CEUCA (1977) Egypt (1981) India (1984) Indonesia (1980) Cote d'Ivoire (1980) Kenya (1982) Korea, Rep. of Malaysia (1981) Mexico (1984) Morocco Nigeria (1982) Pakistan (1982) Philippines (1985) Saudi Arabia (1980) Singapore (1983) Sri Lanka (1983) Tanzania (1981) Thailand (1981) Tunisia Yugoslavia (1980) N;,,r. Applied rates for regional groups South-East Asian Nations (ASBAN) ind the Central Africa (CEUCA) are no doubt lower preferential tarifl's for trade among for the EEC are hued on external trade of the "applied" MPN rates Incorporated especially Important for a county lilce howeYer, raised back to the legally bound a. 1be data shown In parentheses show contain information on developing counuy b. 1be trade-weighted rates are hued on Sourer. Developed counuy tariff averages have been computed from data in the UNCTAD 92 States. In addition, the European ta.riffs have their most discriminatory effects on non-Euro- pean developed countries. While developing countries often have preferential access to Euro- pean markets under the GSP or the Lome Conven- tion, such d~eloped countries as Japan, Canada, New Zealand, and the United States are at a competitive disadvantage since they are among the few countries that face the higher MFN rates. Although the average developed country tariffs may appear to be low, they are still high in some sectors and countries (table 13.3). MFN ta.riffs on clothing in Canada, Austria, and t&e United States range from 20 to 50 percent, but they average 93 percent in New Zealand. Tariffs on footwear stand at about 14 percent in Japan; MFN ta.riffs for these products are 40 percent or more in Austra- lia and New Zealand. Aside from demonstrating that MFN ta.riffs are still a major trade barrier in some sectors, table 13.3 provides further informa- tion on the deviations from the MFN principle, particularly in Europe. For example, Finnish MFN ta.riffs on footwear average about 16 percent, but due to multiple special trading arrangements, the average applied tariff is about 4 percent. way, MFN ta.riffs on clothing average but the applied tariffs are only about Other examples can be drawn from table 13.3 to show frequently sizable differences between MFN and applied tariffs. The differences show that ta.riffs may have major discriminatory effects de- pending on the product and the country of origin. The extreme disparities in tariffs •· some sectors having high duties and others very low •• should be addressed in the Uruguay Round and reduced. In particular, the very low (or zero) tection for such production inputs as and agricultural raw materials and the higher duties on such processed products as chemicals or other manufactures indicate that the latter sectors enjoy relatively high rates of effec- tive tariff protection. 2 Analyses should be made to determine how the structure of any proposed nominal tariff cuts in the Uruguay Round will influence effective tariff rates. An effort should be made to ensure that disproportionately large cuts for production inputs do not raise effective pro- tection, since there is some evidence that this happened in the Tokyo Round (UNCTAD 1980). General approaches to tariff UberalJzation One approach for negotiating a tariff liberaliza- tion is to proceed item-by-item, an approach 1'ariff-cultlng formulas - awl complicati The formula was intended to significantly duce the tariff disparities between countries industries. For example, on the basis of a pro- posed coefficient (a) of 16, an initial percent would be reduced to (16 x 10)/(16 + 10), or to about 6.15 percent. A higher tariff would be reduced by a greater proportion, a lower tariff by a smaller one. If applied without exceptions, GATI (1979) estimates that this for- mula would have reduced the average tariff of the main industrial countries by about 40 percent. Figure 13.1 traces the relations between pre- and post-liberalization tariffs under the different tariff-cutting formulas. This figure also indicates the difficulties that may confrpnt individual coun- tries in the Uruguay Round. For example, if a nation's exports now face generally low tariffs -- in the range of, say, 5 to 10 percent -- one of the linear formulas would produce deeper cuts than those aimed at achieving harmonization ing disparities. But at higher tariffs rates (say, those exceeding 20 percent) the linear approach might produce the smallest absolute and percent- age reductions. The message is that negotiators should enter the Uruguay Round with complete and accurate information on the tariffs their pri- mary (and potential) exports face in the major markets, a clear idea of the post-liberalization tariff profiles sought, and knowledge of the for- mulas needed to produce these desired profiles. Given the complexity of the calculations required for proper evaluation of alternative tariff-cutting formulas, special computational assistance may have to be made available to developing countries if they are to participate effectively tions. 3 Developed and developing countries that re- ceive preferences face a major problem in the Tokyo Round, and they will face it again in the Uruguay Round. The problem is to decide whether to work for broad cuts in MFN tariffs or to pursue limited reductions and thus to preserve preferential tariff margins. The tradeoffs are ex- amined in detail in chapter 14, but the basic point is that MFN tariff cuts can erode preferential margins and divert some existing exports to other suppliers. 4 Although the issue has received little attention, there is another way that MFN tariff cuts can have important adverse consequences for developed and developing countries. Provisions in many developed country tariff codes allow for the duty- 94 POllt•Tokyo, applied, Canada P.EC Finland Japan Norway Average 6.2 3.7 8.9 9.7 2.8 6.8 3.2 9.3 10.0 3.0 6.0 10.3 7.9 5.6 4.5 o.o 0.1 0.8 0.3 0.0 0.6 3.4 1.1 0.7 0.6 2.1 2.8 1.9 2.5 1.5 5.4 5.5 3.9 5.0 1.8 2.2 3.2 1.2 5.5 1.9 1.4 0.1 0.1 1.5 0.0 6.4 8.4 2.4 5.5 5.9 7.0 8.1 8.2 5.7 6.1 3.8 10.2 11.8 11.9 4.7 9.4 17.3 22.7 8.6 12.8 12.6 19.9 32.0 15.0 20.3 11.9 22.5 16.0 14.2 11.2 0.1 4.8 1.3 2.3 2.0 Average 3.0 4.4 5.2 9.4 1.4 2.9 4.8 5.7 9.7 1.5 4.6 4.9 5.5 4.8 4.3 0.1 0.0 0.8 0.3 0.0 3.7 0.4 1.0 0.3 0.4 2.7 0.7 0.1 1.8 0.4 5.6 2.3 0.1 2.9 0.7 2.8 0.5 0.0 4.3 0.1 0.2 0.3 0.0 1.2 0.0 3,0 3.4 0.1 4.8 0.4 6.2 4.6 1.3 4.6 1.3 11.0 2.1 2.3 10.7 0.8 18.3 5.3 1.0 7.1 1.6 17.2 7.3 7.7 10.0 3,0 23.4 6.5 3.8 12.5 2.4 4.7 0.1 0.1 0.7 0.4 4.4 2.5 1.0 3.1 1.0 Average 1.5 5.0 7.0 11.1 0.3 1.3 5.1 7.2 11.7 0.3 5.6 6.2 8.8 5.0 3,2 0.0 0.0 10.7 1.2 0.0 3,1 0.5 5.5 0.5 0.5 0.5 0.5 0.1 1.3 0.3 4.0 3,3 0.4 2.0 , 0.4 0.9 0.5 0.0 3.1 1.7 0.0 0.2 0.0 1.3 0.0 6.1 4.1 0.1 5.1 0.2 13.8 6.4 9,3 4.2 5.9 9-6 2.8 6.1 8.4 5.5 19.8 7.6 6.0 6.1 11.0 16.2 9.3 23.6 8.6 18.9 23.3 9.1 14.8 7.9 11.6 5.6 0.1 0.1 1.0 0.1 4.4 2.1 4.6 2.3 2.8 Tariff-cuffing jonnuku - ..ti complications Analysis of the : New tariff (t 1) Key I Formulas t, = at0 30 t, = at0 + b --- As above except that: 25 . -----· --- t, = t, =at.,t(a +tol 20 15 10 5 5 10 15 free re-entry of domestically produced compo- nents assembled abroad. For example, yarn pro- duced in the United States can be shipped to Mexico, woven into cloth, and then imported into the United States under a tariff applied only to the value-added component of the prod1;1ct. Develop• ing countries, particularly those near a developed country market, have been able to take advantage of these offshore-assembly provisions (OAPs). Some studies (Finger 1975) estimate that their trade-creation effects have been at least of the GSP. Since MFN tariff cuts in the Uruguay Round have the potential to reduce the competi- tive advantages of assembly operations offshore - and lower the value of investments made in pro- duction facilities geared to take advantage of these provisions •· developing countries have an obvious interest in how the Uruguay Round will influence this trade. The potential losses that developing countries may incur through the erosion of GSP, OAP, or Lome Convention margins has direct relevance for the way they choose to participate in the Uruguay Round. Specifically, developing coun- tries bargaining to obtain concessions by offering reductions in their trade barriers could be in a 96 Tariff-line Items In major standard International EEC srrc Description Items Value 0 Food and live animals 38.8 46.8 1 Beverages and tobacco 74.6 81.4 2 Crude materials, inedible 2.3 1.7 3 Mineral fuels 3.6 4 Animal and vegetable oils 16.0 13.4 15.4 5 Chemicals 1.9 2.4 6 Manufactured goods 2.7 5.5 7 Machinery and transport 0.6 0.1 8 Miscellaneous manufactures 4.4 12.0 Averages based on imports from: Developing countries 7.5 Developed countries 10.8 All sources 10.2 10.1 a The developed and developing country Source: Alexander J. Yeats, Tr4M Banwrs unit of the import. Several empirical investiga- tions show that these tariffs generally have an ad valorem incidence on developing country exports that is about twice that for similar products ex- ported by developed countries. One analysis of U.S. specific tariffs before the Tokyo Round com- puted the ratio of these charges to the average unit value of imports from both developed and developing countries for some 200 distinct tariff. line products. The results showed that specific tariffs had an average ad valorem incidence of 19.2 percent on the latter's products but only 10.4 percent on items originating in the develop- ing countries. A similar discriminatory pattern was found in an analysis of Switzerland's specific tariffs (Yeats 1976 and 1979). Given the discriminatory effects of specific tar~ ifls, these duties are applied in developed coun- tries so often that they are a major problem for developing countries (table 13.4). About a third of all tariff lines are covered by specific duties in Tariff-cutting formulas - and complications of imports, but other developed countries use the c.i.f. value. Since the c.i.f. procedure applies tariffs to the product value plus the freight and insurance cost of imports, the countries that pay higher-than-average transport costs also incur higher-than-average tariff assessments. Toe dis- criminatory effects of c.i.f. tariff valuation systems have been found to be particularly important for some geographically disadvantaged developing countries, especially those that are landlocked. 5 The issue of tariff valuation should be raised in the Uruguay Round, with the possible objective of converting c.i.f. to f.o.b. tariffs. Baldwin (1970) has argued for such a conversion on the grounds that it would lead to a more rational use of world transport systems. A related point is that such a conversion would, by itself, lower tariff barriers since a given tariff rate (say, 10 percent) results in a higher revenue for a specific product if assessed on a c.i.f. basis rather than f.o.b. This has impor- tant implications for the negotiations since a Japa- nese or European c.i.f. tariff has a greater protec- tive effect than an identical U.S., Canadian, or Australian f.o.b. tariff. Paratariffs and the NTB problem Several trade controls employed by both devel- oped and developing countries closely resemble tariffs but differ in one or several important as- pects. Ranging from tariff quotas to variable import levies, these paratariffs must receive spe- cial consideration in the Uruguay Round. One of the first problems is to define precisely which paratariff measures will be negotiated with tariffs. Here it may help to adopt a definition similar to that of existing inventories of trade control measures and include tariff quotas, sea- sonal tariffs, import deposit requirements, import levies, and all other special import charges with normal tariffs. 6 Aside from this classification problem, however, most of these measures will also pose more difficult negotiating problems than pure tariffs. The reason is that they normally contain additional features that cannot be dealt with through the use of general liberalization formulas. For example, a tariff quota involves at least two tariff levels as well as specific quantity limits in moving from one tariff rate to another. The quantity limits are key elements that must be negotiated along with the tariff levels. Similarly, seasonal tariffs involve at least two import duty rates as well as specific dates when the duties change. From the standpoint of the negotiations, 98 quo for developing countries •· it could compen- sate for any losses of quota rents they now ac- quire under the MFA or other quantitative re- straints. In addition, the revenues collected under these new MFN tariffs could be earmarked for easing the adjustment problems in affected industries. Although variations of these proposals have already been made, they deserve fresh atten- tion since the Uruguay Round provides a forum for direct action. Tariffs and the needs of developing countries Despite the tendency in some quarters to downplay the importance of post-Tokyo Round tariffs, they remain very high in such sectors as textiles, clothing, footwear, and agriculture •• and they constitute important barriers to trade. In addition, several other difficult but important points will have to be resolved in the tariff nego- tiations•· ranging from the loss ofGSP, European, and other special preferences to problems con- nected with legal bindings, different tariff-valu- ation procedures, the stacking of tariffs and NTBs, and the discriminatory effects of specific tariffs on developing country exporters. In short, guay Round will have to address many difficult problems of major concern to both developed and developing countries. The Tokyo Round called for different and more favorable treatment for developing countries. But results show clearly that developed countries did not fully honor their commitment to this objec- tive. 9 As such, there would appear to be consid- erable merit in establishing certain ground rules for securing such different treatment Uruguay Round negotiations begin. There is also a need to find new ways or procedures for assess- ing (quantifying) the extent or importance of the different treatment actually received. Concerning this treatment, GATT has suggested that the fol- lowing issues should be addressed. Should the preferential duties in the Generalized System of Preferences be bound in accord with the wishes of developing countries? Could deeper cuts than any general formula be given to products of spe- cial export interest to these countries? Should products for which developing countries enjoy preferences be exempted from MFN cuts of any general formula •• and so maintain their margin or preference? Should new subcategories in the tariff classification be created to provide an op- portunity for more favorable treatment for devel- oping country exports? And should there be Tarlf/-cutdng .tor,,a,i.s - alfll comparison with the average tariff reduction See UNCTAD (1982) for decails. 5. With the United States as an illustration, shown that the conversion of the existing f.o.b. to a cU. ftluation bue would raise the level of ing countries by between 20 and 26 percent on average, with the highest increase for the East African dC9Cloping coun- tries. See Olechowski and Yeats (1979) for details. 6. As part of its work on protec:tionism adjusanent, UNCTAD has compiled a detailed paratariffs and other trade restrictions (market) economies and in about fifty developing countries. The inventory records nontariff measures tariff line and proYides matching Information trade. Among the Intended applications of the inventoiy Is the provision of basic data for trade Uruguay Round. See UNCTAD (1983) for a description of the inventory and its potential uses. 7. Basic information needed for the negotiations on this matter could be drawn directly from the UNCTAD Data Base on NonTariff Measures. 8. Corrva-ting NT& to tariffs would duce duties that eicceeded GATf bindings. As such, legal waivers would be required for products where bound tariff rates were eicceeded. 9. For eD1llple, a GAIT analysis (1979) of the Tokyo Round tariff cuts concluded: "An indicated that less than (Swiss) formula reductions, or no reductions, had been offered for a good number of items in which the dC9Cloping countries were major suppliers. Such items were often eiccluded partially from the tariff cutting formula and did at GSP treaanent. The total or partial exceptions items for which developing countries were ers as well as other sectors such as footwear, cutlery, porcelain, wood or wood products, certain types of nonferrous metals, etc." 100 14 Tariff preferences Samuel Latrd and Andre Sapir The Generalized System of Preferences (GSP) has provided preferential tariff treatment to develop- ing country exports for more than a decade and a half. Under the GSP, developing countries are to be charged no duty for their manufactured ex- ports to developed country markets, while each developed country continues to levy the most• favored-nation (MFN) tariff on products from other developed countries. The GSP should thus provide developing countries with a margin of preference equal to the MFN tariff in developed countries and thereby foster their exports. But the GSP's trade expansion benefits for the devel- oping countries have not been fully realized be- cause of limits in its implementation. The GSP is not an agenda item for the new round of multilateral trade negotiations, since it is considered to be granted unilaterally by the pref- erence-granting countries. But it will be directly affected by the reduction and elimination of MFN tariffs that are to be negotiated to improve access to markets (GATI 1986, pp. 2-3). Inasmuch as the Uruguay Round will reduce MFN tariffs in the developed countries, there will be two possible effects for developing countries. First, developing countries eligible for GSP treatment will suffer trade losses in products currently covered by the schemes due to the erosion of preference mar- gins. Second, these developing countries will gain from the spillover associated with the appli- cation of the MFN principle to tariff cuts for products and countries that do not receive pref- erential treatment. They will also gain from the reductions where the negotiated MFN rates are lower than existing nonzero GSP rates. The ultimate balance between gains and losses for the developing countries is an empirical mat- ter that hinges on two matters: the present func- Tariff preferences emphasize its discriminatory aspect. The eco- nomic rationale for preferential rather than MFN tariff reductions was couched in the following infant-industry argument: "preferential treatment for exports of developing countries ... would help the industries of (these) countries to overcome the difficulties that they encounter in export markets because of their high costs" (Prebisch 1964, p. 65). The basic thrust was to have preferential ar- rangements as the only acceptable affirmative action for unilateral market access by developing countries. There was an implicit discounting of the unilateral access created for the developing countries through the application of MFN treat- ment to concessions negotiated between the developed countries -· the spillover effect. Al- though the developing countries took advantage of the tariff reductions on products they exported (Finger 1974, 1976), their key manufactured ex- ports were not at the center of the negotiations. The main reason for this was that the developing countries were not offering to exchange access to their markets in return for better access for their exports. So, after several rounds of negotiatio tariffs against developing country manufactured exports remained relatively high. And tariff cuts on the raw materi;tls the developing countries exported, there was even increased tariff escalation against some of their processed exports. In the climate of the times, this state of affairs was used as evidence in favor of prefer- ences rather than as an argument in favor of the fuller participation of the developing countries in the negotiations. Preferences for developing countries became a central issue in international trade policy at the GATT ministerial meeting of May 1963 and at the initial conference of UNCTAD in 1964. But it was not until UNCTAD II, in 1968, that the and objectives of a "generalized, nonreciprocal, nondiscriminatory system of preferences in favor of developing countries" were formally accepted. The GATT contracting parties, in their decision of June 1971, made it possible for the developed countries to implement their GSP schemes by waiving the MFN principle of Article I of the General Agreement for an initial period of ten years. As part of the outcome of the Tokyo Round, the contracting parties in November 1979 adopted the principle of "different and more favorable treatment, reciprocity, and fuller participation of developing countries." Known as the enabling 102 designed to expand imports from developing countries. Spain and Portugal began to apply progressively the community scheme after their accession to the European Community in January 1986. Before that, these two countries were GSP beneficiaries under a number of schemes. Beneficiary countries Most donor countries grant preference to all 120 or so developing countries presently mem- bers of the Group of 77. But most schemes have numerous additions and exceptions, sometimes only for certain products. The nonmembers of the Group most frequently included are Bulgaria, China, Hong Kong, Israel, Taiwan (Province of China), and Turkey. The Democratic Republic of Korea is excluded from most schemes. A number of other countries are also excluded on political grounds, mostly by the United States. Least developed countries receive better pref- erential treatment than other developing coun- tries from a number of donor countries. Special treatment of these countries generally implies freer access, with fewer restrictions in product coverage and preferential limitations. Product coverage In principle, most schemes grant duty-free en- try for all industrial products. In practice, how- ever, every scheme is designed to limit the poten- tial trade expansion in areas of particular interest to developing countries (notably textiles and clothing) by either excluding sensitive outright or imposing limits on their GSP treat- ment. Consider this indication of the of these limits: the inclusion of textiles and cloth- ing products alone in the GSP at duty-free rates and . without quClta limitation would almost double the imports under the GSP from the devel- oping countries. Most donor countries also grant partial or full tariff exemptions for selected agriculture prod- ucts. As originally conceived, the GSP was in- tended to boost developing country exports of manufactures, and food products were totally excluded. But food items have been progressively added to the list of GSP-eligible products to a varying degree in all the schemes. The potential for expansion of food imports from developing countries through the GSP is somewhat limited because tariffs are less important than nontariff barriers, which are widespread in this sector. l'arlff prefenmces Imports of preference-giving Market Total (1) (2) Australia 4,881 2,797 Austria 2,178 1,854 Canada 6,980 2,914 EC 80,505 30,462 Finland 1,726 680 Japan 32,553 15,268 New Zealand 1,002 297 Norway 934 293 Sweden 1,954 772 Switzerland 2,947 2,855 United States 89,600 65,925 Total OECD 225,259 124,087 Not« Australian and New Zealand data Source: UNCTAD (1986b) As the previous section has shown, some bene- ficiary countries, because of various limits, some continue in practice to pay MFN duties on some GSP-eligible imports. For OECD countries the average ratio of GSP-preferential trade to GSP- eligible trade is also about 50 percent. Again, there are important differences: from 100 per- cent in Australia and New Zealand to 36 percent in the EEC (table 14.1, column 7). Altogether, taking into account both product exclusions and the various limits on preferential treatment, total GSP-preferential imports by OECD countries are only 26 percent of their dutiable imports from beneficiaries of their schemes. The actual prefer- ential treatment differs considerably across donor countries. But the extent of GSP preferences granted by the two largest OECD markets is simi- lar, for different reasons: 28 percent from the EEC (wide product coverage but extensive limita- tions) and 20 percent for the United States (poor product coverage but relatively only moderate limitations) (column 8). aearly there is little in common between the rhetoric of generalized preferences and the reality. The level of GSP-preferential trade is an imper- fect indicator of trade benefits. What is really needed is an estimate of the additional trade resulting from the GSP, an estimate that requires a theoretical framework. Conceptually, the GSP is 104 is based primarily on Karsenty and Laird (1986) and Langhammer and Sapir (1987). Most of these studies support the view that preferences have stimulated exports from devel- oping countries. But the effect seems rather slim. Table 14.2 presents the trade benefits (trade crea- tion plus trade diversion) available under the GSP schemes of OECD countries. These estimates are based on the computations by Karsenty and Laird (1986), except that textiles and clothing have been excluded from showing any gain under the GSP.2 They are computed from a partial-equilib- rium simulation model, using trade and tariff data defined at the national tariff-line level. Overall, it is estimated that S4.6 billion of imports by OECD countries could be attributed to the GSP •in 1983, excluding any gains made in the area of textiles and clothing. The gain is mostly attributable to trade creation. In terms of beneficiary country exports to OECD markets, this represents about 8 percent of total trade. Other studies have compa- rable results •· see Brown (1986, table 2). Under full GSP liberalization -· covering all products, without any limit •· beneficiary coun- tries would (potentially) experience S20.6 billion in additional trade benefits over and above the benefits from the present schemes. This consid- Benefits available MEN-dutiable Market Imports (1) (2) Australia 2,661 Austria 1,566 Canada 2,319 EC (10) 30,462 Finland 585 Japan 13,877 New Zealand 269 Norway 273 Sweden 709 Switzerland 2,731 United States 65,925 Total OECD 121,377 Notr. Australian's and New 2'.ealand's Sourer. Kancnty and Laird (1986) and UNCTAD exclude t.eXtilcs and clothing (sec text Tariff preferences countries enjoy a strong competitive advantage. The leading product group is toys and sporting goods (SITC 894), benefiting by more than S400 million. Other leading items are telecommunica- tions apparatus (SITC 724), plastic articles (SITC 893), and footwear (SITC 851). Only three agri- cultural products are among the thirty leading items, with a total of S200 million in estimated benefits. The concentration of benefits among very few developing economies is remarkable. The top three beneficiary economies -- Hong Kong, the Republic of Korea, and Taiwan (Province of China) -- receive 45 percent of the total GSP gains. Even excluding the clothing items in which the East Asian beneficiaries are the largest suppli- ers, Taiwan receives close to three time the bene- fits from GSP as the fourth largest supplier -- Brazil. Hong Kong and the Republic of Korea receive more than twice the benefits that accrue to Brazil. Langhammer and Sapir (1987) also find that newly industrialized countries are the major beneficiaries of the American and European schemes. In conclusion, the impact of the GSP is small when compared with the exports of developing countries. True, preferences can raise exports, but they can raise them significantly only for products enjoying large preference margins and in which developing countries have a comparative advantage. The GSP and the Uruguay Round Will the gains from MFN liberalization outweigh the losses from the erosion of GSP margins? It is difficult to assess in advance the effects of the tariff-cutting exercise because it is not known what procedures (tariff-cutting formulas) will be adopted, what product exclusions will be made to such procedures, and what will be done about nontariff barriers. So, we first examine the opti- mal case in which tariffs are reduced according to a predetermined formula with no product excep- tions. We also assume that NTBs would be re- duced to permit trade to expand freely. Second, we consider what would happen if it is decided to exclude certain product categories of export in- terest to the developing countries -- as happened on previous occasions. Third, we question the sig- nificance of NTBs for the tariff-cutting exercise. The export gains that developing countries could expect from the MTNs obviously depend on the MFN cuts finally agreed on. Three outcomes 106 reciprocal concessions among the industrial countries were affected. But in the Kennedy and Tokyo Rounds it was decided to cut tariffs across- the-board, subject to specific exceptions. In ear- lier rounds, goods of special export interest to the developing countries were simply not included; in the later rounds, they were often excluded. These statements do not mean that the devel- oping countries did not benefit from the MFN tariff cuts in these rounds. Most studies show that the developing countries were expected to make net overall gains from the Tokyo Round. But a post hoc study will need to wait for the implementation of the final cuts and an analysis of the resulting trade flows. Analyses of the Dillon and Kennedy Rounds (Finger 1974, 1976) show that, despite the exclusion of many products of specific export interest to the developing coun- tries, the developing countries took advantage of the cuts on products typically traded among the developed countries and subject to tariff reduc- tions •· the spillover effect. Indeed, these studies showed that in the U.S., EEC, and Japanese mar- kets the developing countries responded more vigorously than other developed countries to the increased market opportunities. Thus, even if key products of special export interest to the develop- ing countries were excluded from the negotia, tions, the developing countries would still be able to take advantage of this spillover effect, as they have in previous rounds. To attach a number to the foregoing conclu- sions: even if textiles, clothing, and footwear were excluded from the negotiations, a zero MFN rate would still lead to an overall expansion of imports from the developing countries in excess of S6.6 billion, one and a half times the estimated value of the present scheme (Karsenty and Laird 1986). Also evident from that analysis is that the gains from the spillover of an MFN liberalizati are spread over an extensive range of products for which the individual gains are small but still cumulatively important. Apart from textiles, cloth- ing, and footwear, substantial gains from any MFN tariff cuts would occur in toys, furniture, travel goods, and telecommunications equipment. Pre- served fruit, fresh and preserved fish, and sugar and sugar confectionery are the main food items that could benefit even from tariff liberalization. Crude petroleum and petroleum would also gain much in absolute if not percentage terms. Nontariff barriers could nullify the potential trade expansion effects of any MFN tariff cuts agreed on in the new round for some of these Tariff prefere,tces Uruguay Round can hardly hurt the developing countries. On the contrary, under various tariff'. cutting assumptions, GSP beneficiaries would derive a net gain from MFN cuts. The reason is that the value of the GSP lies much more with its tariff-cutting clement than its preferential ment. Moreover, developing countries have prof- ited from the MFN cuts on products subject to reciprocal concessions among the developed countries •· the spillover effect. It malccs little difference to developing countries whether liberalization in favor of their exports talces place on an MFN or a preferential basis. What does matter is to ensure that their export products arc Included in the negotiations in a meaningful way. The developing countries would be well ad- vised to talcc an active part In the Uruguay Round and to seek deep MFN tariff cuts for products of Interest to them. Nevertheless, reasonable doubts may be expressed about whether the MFN route would succeed where the preferential strat- egy has failed, especially when the key to substan- tially expanded market access has become the elimination or reduction of nontariff barriers. As one commentator has noted: "There risy in the developed countries that needs to be confronted. They praise the idea of liberalism but do much to avoid granting it They arc probably quite happy, in practice, with the costless conces- sions they have granted to the developing coun- tries" (Wolf 1986, p. 19). In the battle for improving the export perform- ance by developing countries in industrial coun- try markets, two factors assume a much greater importance than the GSP. First, nontariff barriers have become the key to market access In the Industrial countries. Developing countries will have to devote substantial efforts in the new round to improve the situation In this area. Sec- ond, as some of the principal developing export- ers of manufactures have proved, it is possible to perform extremely well despite GSP restrictions or even without GSF preferences altogether, (such as the Taiwan [Province of China] In the EEC market). This possibility suggests that the trade and industrial policies of developing coun- tries may be even more important for success In trade than the GSP and other policies of the developed countries. Notes 1. Schemes that use quantity limits have c:etUin advantages for importers, which may be sble to capture from quoru rents. 2. The exclusion of textiles and dothing results for the EEC, where the estimated GSP beneftll are 108 of ti# ~ Sysl""' Geneft. Wolf, Martin. 1986. "Aid with Everything? More Favorable Treatment for the Developing Countries 15 The escalation of trade barriers Alexander Yeats Theoretical models of development and actual plans for industrialization often assign a key role to trade policy measures. In addition to maintain- ing steady growth in exports and the accompany- ing increases in foreign exchange earnings, the developing countries repeatedly stress their need to reduce their dependence on traditional pri• mary product exports. Among the factors cited for this proposed shift in exports are (1) the purported deterioration in the terms of trade for primary commodities, (2) the substitution of syn• thetics for many of these items (plastics for met- als, artificial for natural fibers, chemical sweeten- ers for sugar), (3) the instability of primary prod- uct prices in international markets, and ( 4) the increased employment opportunities associated with the production and export of manufactures. One method suggested for increasing the pro- portion of developing countries' trade in fabri- cated goods is to increase the processing of natu- ral-resource-based products now exported mary form. But often cited as working against efforts to increase domestic processing is the structure of tariffs and other forms of trade barri- ers in major import markets. Specifically, zero or low tariffs are generally applied to industrial countries' imports of primary (unprocessed) commodities •· with the duties increasing, or escalating, as the product undergoes increased fabrication. S1.1ch tariff escalation has been taken as an indication of bias against imports of pro- cessed goods due to the higher import duties imposed on these items. 1 The importance that developing countries attach to tariff escalation are the extensive policy debates in major interna- tional forums. For example, developing countries were instrumental in having a plank inserted in the 1982 GATI Ministerial Declaration (p. 16) 110 description of this scheme; table 15.2 gives more detail. To illustrate the policy issues involved, table 15.1 shows processing stages for a number of in- dividual commodities and gives the 1982 value and share of these items in both developing country and world exports. The average "ap- plied" tariffs in ten major developed country markets have been computed for each processing stage •· that is, trade-weighted averages of the MFN, GSP, or special preference tariff actually applied. MFN average tariffs for twenty-three major developing countries are also shown. In addition, the table indicates the proportion of tariff-line items in each processing stage that encounters such hard-core nontariff barriers as quotas, variable import levies, prohibitions, or restrictive licensing requirements. Three important points emerge from table 15.1. First, with only one or two exceptions (fish in the developed countries or fruit in developing coun- tries) post-Tokyo Round tariffs escalate in both developed and developing countries. Developing country tariffs rise by ten percentage points or more for all but four processing chains; devel- oped country tariffs increase by at least five points in the vegetable, fruit, tobacco, leather, and cot- ton chains. Second, the developing country ex- ports are normally highly concentrated in the primary (unprocessed) stage. For example, more than 70 percent of their meat, fish, fruit, and vegetable exports are in the primary stage; more than 90 percent of their cocoa and sugar exports are unprocessed. 2 Third, the NTB ratios show that relatively high proportions of both primary and processed items are often subject to nontariff barriers. Since these constraints would likely limit (or negate) the effects of tariff cuts for products also covered by NTBs, they will complicate the liberalization for many of these commodities. Although the problem may have to be dealt with product-by-product, some agreement will be needed on NTBs if a tariff liberalization is to have its intended effect. A related point is that the application of nontariff measures shows a clear tendency to escalate in some chains, but in others the evidence is mixed. Thus, for example, the developed country NTB ratios increase by at least ten percentage points for tobacco, leather, iron, and phosphates •· with an increase of sixty points for the cotton chain. For food products, how- ever, the ratios seem to decline. The tariff averages for ten developed countries show that escalation is characteristic of all the de- Tbe escalation of trade barriers Trade barriers and the From Dweloplng val,,. Processing chain (I billion) Peramt Meat Fresh and frozen meat 2,043.6 78.9 Prepared meat 547.2 21.1 Total 2,590.8 100.0 Fish Fresh and frozen fish 4,732.1 83.2 Fish preparations 953.7 16.8 Total 5,685.5 100.00 Vegetables Fresh vegetables 2,693.5 77.7 Vegetable preparations 774.5 22.3 Total 3,468.0 100.0 Fruit Fresh fruit 3,883.2 72.8 Fruit preparations 1,450.1 27.2 Total 5,333.3 100.0 Vegetable oils Oilseeds 1,195.7 35.2 Vegetable oils 2,486.4 64.8 Total 3,682.1 100.0 Tobacco Unmanufactured 1,971.9 83.0 Manufactures 402.7 17.0 Total 2,374.6 100.0 Sugar Sugar and honey 7,703.3 98.3 Sugar preparations 136.7 1.7 Cocoa Beans, powder and paste 2,492.5 96.3 Chocolate and products 94.5 3.7 Total 2,587.0 100.0 Rubber Crude rubber 3,339.8 82.0 Rubber manufacture 734.9 18.0 Total 4,074.7 100.0 Leather Hides and skins 348.8 20.0 112 r;._m V. ue Proc•ssi"8.. cbai7t (I hillionl Leather 1,116.6 Leather articles 279.1 16.0 Total 1,744.5 100.0 Woode Wood rough 2,664.2 Wood shaped 1,718.3 Veneer and plywood 1,712.0 Wood manufactures 739.1 Total 6,833.6 Cotton Raw cotton 2,654.7 Cotton yarn 1,378.0 Cotton fabrics 2,100.9 Total 6,133.6 Iron Iron ore 3,222.2 Pig iron 969.1 Ingots and shapes 786.0 10.3 Bars and plates 2,633.4 Total 7,610.7 Other metallic ores d Ores, nonferrous 5,723.1 Wrought and unwrought metals 7,149.7 Total 12,872.8 Phosphates Natural phosphates 1,138.5 Phophatic fertilizer 897.8 Total 2,036.3 100.0 Petroleum Crude petroleum 210,996.4 Refined petroleum 40,657.5 Total 251,653.9 Source: Trade data taken from UNCTAD, Nations, New York, 1985). Tariff and NTM a. Trade-weighted average of the MFN, b. MFN tariff rat.es for Algeria, Bangladesh, Mexico, Morocco, Nigeria, Pakistan, Philippines, c. The trade barrier statistics include d. Includes aluminum, copper, tin, Zinc, Tbe escalatton a/trade barriers Analysis Processing chain Australia Austria Meat products Fresh and frozen meat 0.0 0 .2 Prepared meat 4.6 2.6 Fish Fresh and frozen fish 0.0 3.7 Fish preparations 0.9 7.2 12.4 Vegetable Fresh vegetables 3.4 2.1 Vegetable preparations 9.8 13.3 Fruit Fresh fruit 0.2 3.1 Prepared fruit 6.3 17.3 16.6 Coffee Green or roasted beans 0.0 14.3 Coffee extracts 0.5 3.5 13.8 Vegetable oils Vegetable oilseed 2.1 0.5 Vegetable oils 3.1 1.1 Sugar Raw sugar 0.1 0 .0 0.0 Refined sugar 16.4 0 .0 Chocolate Cocoa beans 0.0 5.0 Powder and butter 0.0 5.6 Chocolate 9 -3 0.6 Tobacco Raw tobacco 9.1 9,7 Tobacco products 16.6 211.3 61.8 Rubber Natural rubber 0.0 0.0 Unvulcanized rubber 12.2 0.5 Rubber products 16.2 1.2 Leather Hides and skins 0.0 0 .0 0.0 0.0 Leather 9.1 0.9 Leather products 20.0 2.0 Wood Rough wood 0.0 3.0 Shaped wood 1.5 1.1 Wood manufactured 14.5 1.2 Paper Pulpwood 0.0 1.4 Paper and board 5.7 1.8 Paper manufactures 11.6 5.1 Wood Not carded or combed 0.0 0.0 114 Processing chain Australia Carded or combed 0.0 Wool yam 3.4 Wool fabrics 25.6 Cotton Not carded or combed 0.0 Carded or combed 30.3 Cotton yam 13.9 Cotton fabrics 2.4 Jute Raw jute 0.0 Jute yam or cordage 8 .9 0 .8 2.0 Jute fabric 0.0 Jute bags 1.9 10.9 Sisal Sisal fibers 0.0 Cordage 8.3 Metal Ores 0 .0 Iron Iron bars and ignots 0.0 Iron plates and shapes 7.4 Copper Unwrought copper 0.0 Refined copper 5.2 Aluminum Unwrought aluminum 2.0 Refined aluminum 4.3 Lead Unwrought lead 0.1 Refined lead 0.4 Zinc Unwrought zinc 4.1 Refined zinc 2.8 Tin Unwrought tin 0.0 Refined tin 0.0 Phosphate Natural phosphates 0.0 6.9 0.0 Phosporic acid 19.0 0.0 6.1 Superphosphates 0.0 1.3 2.6 Petroleum Crude petroleum 0.0 Refined petroleum 0.0 1.6 1.0 Memo items Percentage of chains in which escalation occurs 88 88 Average tariff difference from primary to processed stage 6.9 9-5 6.7 Source: Computed from data produced in Tbe escafallo,f of lnlM barriers The level -d acalation of W.tgbted tariff Processed commodJty • average Foodstuffs Preserved meat (013) 21.9 Preserved fish (032) 30.1 Preseffed fruit (053) 11.1 Preseffed vqccables (055) 26.9 Coffee extracts (071.3) 13.5 Sugar confection (062.0) 26.8 Cocao butter/powder (072) 27.4 Chocolate (073.0) 29-7 Groundnut oil (421.4) 13.9 Coconut oil (422.3) 27.9 Palm kernel oil (422.4) 23.7 Metals Pig iron (671.2) 7.4 Iron ingots (672) 12.1 Iron bars & plates (673/4) 19.9 Copper unwrought (682.1) 33.7 Copper worked (682.2) 19.3 Aluminum unwrought (684.1) 11.3 Aluminum worked (684.2) 21.2 Lead unwrought (685.1) 13.1 Lead worked (685.2) 10.3 1.inc unwrought (686.1) 15.7 1.inc worked (686.2) 11.0 Tin unwrought (687.1) 18.7 Tin worked (687.2) 9.1 Textiles Wool Yam (651.2) 21.9 Wool fabrics (653.2) 26.4 Cotton yarn (651) 29.7 Cotton fabric (652) 32.1 Wood, leather & rubber Leather (611) 17.5 Leather mfg. (61) 33-9 Rubbers articles (629) 19,4 Plywood-veneers (631) 8.8 Wood manufactures (632) 24.5 Paper and board (641) 27.9 Articles of paper (642) 33.5 Other commodities Phosphatic fertilizer (561) 9,4 Gas and fuel oils (332) 12.8 a. SITC numbers are shown in parentheses. underlying four-digit SITC products in b. The statistics In these columns relate Bangladesh, CARICOM, CEUCA, Egypt, India, Pakistan, Philippines, Saudi Arabia, Singapore, c. Due to the fact that they had zero were excluded from calculations of the d. Measured in terms of the percentage stage to the indicated processed commodity. 116 Range In tariffs c Low (country/tariff rate) Hlgb Yugoslavia (15.0) Morocco (225.0) Malaysia (7.2) Morocco (225.0) Yugoslavia (11.1) Morocco (2~.1) Malaysia (5.9) Bangladesh (109.0) Malaysia (0.0) Morocco (225.0) CEUCA (15.0) Morocco (225.0) Malaysia (0.0) Pakistan (150.0) Yugoslavia (14.0) Indonesia (263.0) Egypt (0.0) India (60.0) Algeria (0.0) Pakistan (120.0) Algeria (0.0) Pakistan (70.0) CARICOM (0.0) India (40.0) Malaysia (0.0) India (66.5) Malaysia (0.0) India (74.8) Algeria (0.0) India (100.0) Algeria (0.5) India (92.5) Nigeria (0.0) India (40.0) Algeria (4 .8) Pakistan (76.9) Malaysia (0.0) India (55.0) Malaysia (0.0) Pakistan (80.0) CARICOM (0.0) India (50.0) Malaysia (0.0) Pakistan (76.0) Malaysia (0.0) Nigeria (66.7) Malaysia (0.0) Pakistan (76.0) Malaysia (6.0) Bangladesh (100.0) Yugoslavia (19.7) Bangladesh (300.0) Sri Lanka (7.5) Pakistan (85.0) Yugoslavia (18.0) Bangladesh (200.0) Yugoslavia (7.3) Bangladesh (150.0) Yugoslavia (15.0) Bangladesh (131.1) Malaysia (12.1) Bangladesh (118.8) Yugoslavia (10.3) Pakistan (168.0) Yugoslavia (10.6) Bangladesh (150.0) Malaysia (5.8) Bangladesh (106.8) Tanzania (15.0) Bangladesh (147.1) Egypt (0.0) Bangladesh (50.0) CEUCA (0.0) Saudi Arabia (157.0) Tbe escalation of ITade ban1ers ports by $558,000, or less than 3 percent. A similar cut for leather manufactures would in• crease imports by more than three times this amount. Thus, in assessing the influence of tariffs or other trade barriers, consideration must be given to underlying demand conditions to draw meaningful conclusions about their influence on trade structure. Stated differently, a bias against trade in processed products may still occur where tariffs fail to escalate. The variation in tariff escalation for different groups of commodities is considerable (table 15.3). For example, 85 percent or more of the developing countries' tariffs escalate for wool fabrics, cotton yarn, leather, and paper products. At the other extreme, fewer than half escalate for vegetable oils, coffee, unwrought aluminum, lead, zinc, and tin. But even with these exceptions, tariff escalation normally is considerable higher in developing countries than in developed coun- tries. The average difference between the devel- oping country tariffs in going from the primary to processed stages is about nine percentage points, compared with about five points in developed countries. This need not imply that the bias against trade in processed commodities is neces- sarily greater in developing countries, since they have lower import demand elasticities than the developed countries for most products. To account for the failure of some developing countries' tariffs to escalate, several sociations were tested. First, more than cent of the countries where tariffs did not in- crease do not have an important production capacity in the unprocessed commodity. Al- though this lack of a production capacity for raw materials need not preclude the establishment of a processing industry, the evidence shows that Illustration of the and Nominal tariff Processing stage (percent) Hides and skins 10 Leather 10 Leather manufacture 10 Note: These projections are based on the derived from a multiplicative function landed price of the good due to the tariff assessing the restrictive effects of trade 118 Approximations of the Aus- Processed commodity tralia Austria Processed meat products 18.4 9-4 Preseived sea food 3.0 15.4 Preseived fruits 22.8 55.5 Processed vegetables 27.0 43.5 Coffee extracts 2.2 -32.9 Chocolate 44 .6 -12.8 Wood manufactures 30.4 1.3 Paper and paperboard 13.7 2.3 Articles of paper 19.7 9.7 Rubber manufactures 22.7 2.4 Cotton yam -27.8 8.8 Wool yam 12.2 0.0 Jute yam 32.0 2.9 Cotton fibers -19.9 4.1 Wool fabrics 69.1 0.3 Jute fabrics • 7.0 Leather 22.8 2.3 Leather manufactures 36.0 3.6 Vegetable oils 10.5 5.5 Tobacco manufactures 23.2 401.5 Source: Effective rates of protection • No effective tariff rate is given the more foreign exporters must reduce returns to domestic labor and capital to penetrate the protected market. Thus, the effective protection concept provides insights about the true effect that some seemingly low tariffs have on process- ing and trade. Previous empirical studies have shown that some low nominal tariffs that appear to be unimportant may conceal high rates of ef- fective protection. Efforts should be made to identify where this is the case so that corrective action can be taken in the Uruguay Round. To illustrate the problem that will be encoun- tered in the negotiations, the post-Tokyo Round effective tariffs range to more than eight times the nominal rate of protection for such low value- added products as vegetable oils (table 15.4). Also, effective tariffs of 30 percent or more are frequent •· with effective rates of protection of more than 100 percent for processed tobacco in Japan and the EEC and for coffee extracts in New Zealand. A related study by the United States International Trade Commission (1975) also pro- vides numerous examples where low nominal tariffs conceal high rates of effective protection. Policy issues and the Uruguay Round Several issues of escalating trade barriers must be addressed when evaluating related liberalization chains, and that the magnitude of their increase was often higher than that of pre-Tokyo Round tariffs. being responsible for this behavior of liner conference pricing practice of "charging will bear," the increased fragility of some processed commodities, or the need to provide special transpon facilities for some processed modities to prevent spoilage. See Yeats information. 4. For the commodities in table 15.3 differences that exist in the extent of vidual countries. For example, Morocco, Korea, Yugoslavia, and the Caribbean Community only re- corded tariff declines as one moved from an unprocessed to a processed item in under five percent of the stages, while Nigeria, Kenya, and Tanzania recorded declines in .over 20 percent of these cases. For more details, (1987). References Commonwealth Secretariat. 1982. Protectionism: Tlm,at to /ntet"Pl4lkmal Order. London. Grubel, Herbert G. 1971. "Effective Non-Specialist Introduction to the tions and Controversies." In G. Johnson, eds., Eff«:tlw Tariff Protection. Geneva: GATT Secretariat. Johnson, Harry. 1965. "The Theory Special Reference to World Trade and ~lopment." In H. Johnson and P. Kenen, eds., Trad4, and Dewlop,Mnt. Gene91l: Librarie Droz. IJlird, Samuel, and Alexander Yeats. 1987. dence Concerning the Magnitude and Effects of Develop- 120 16 Nontariff barriers to trade Andrzej Olecbowski Nontariff trade barriers (NTBs) regulate about 18 percent of developed country imports and a much larger share of developing country imports. They continue to proliferate, and they constitute the single most important obstacle to the growth of international trade, particularly the trade of developing countries. What arc NTBs? Nontariff barriers, as the name suggests, are eas- ier to define by what they are not than what they are. That is, NTBs are all barriers to trade that are not tariffs. With such a definition, no list of NTBs can be complete. Defined here as nontariff barriers are all public regulations and government practices that intro- duce unequal treatment for domestic and foreign goods of the same or similar production. On the basis of this definition, UNCTAD (1985) enumer- ates twenty-two broad categories of NTBs. More "official" and more relevant is the list that GATI developed. For example, in its Report of the Group on Quantitative Restric- tions and Other Nontarljf Measures, the GATI Secretariat specifies more than forty categories of NTBs. Most of them are meas~es used at the border to restrict the inflow of foreign goods. They can be classed in five groups: quantitative import restrictions, voluntary export restraints, price controls, tariff-type measures, and monitor- ing measures (see Nogues and others 1986). Quantitative import restrictions are measures to prevent or limit the volume of imports. They include: • Quotas. Ceilings are imposed on the import of a product for a given period; they may be global, country-specific, or seasonal. Nontarlff barriers lo trade Tariff-type measures are fiscal charges to in• crease the prices of imported products. They include: • Tariff quotas. Two tariff rates are applied, and the higher (penalty) rate comes into op- eration when the quantity of imported goods exceeds a specified level. • Seasonal tariffs. Different tariff rates are applied to the same (agricultural) product ac- cording to the time of year. Monitoring measures are administrative actions to control imports regarded as sensitive. They include: • Price and volume tnvesttgattons and sur- vetllance. A government may formally inves- tigate charges by domestic producers about unfair trading practices of an exporting coun- try. And it may formally monitor the evolu- tion of imports of sensitive products, with or without prior import authorization being required. An investigation is obviously nec- essary to determine the facts, but there is evidence that the inquiry process itself has a protective effect independent of the eventual findings (Finger 1981, UNCTAD 1984). Put- ting a product under surveillance generates uncertainty about continuing access to the market •· and encourages exporters to raise prices or limit quantities to avoid the imposi- tion of a more restrictive measure. • Anttdumptng and counteroatltng duttes. In theory, antidumping duties are levied on a product sold in the importing country at a lower price than in the exporting country. Countervailing duties are levied to offset export rebates or subsidies with the rationale that such measures create a situation that more closely approximates the outcomes under free trade regimes. Dickey (1979) finds, however, that such measures have a greater disincentive on imports than do com- parable (mainly antitrust) regulations on domestic firms •· and that they protect do- mestic producers. There is evidence that the economics of antidumping and countervail- ing duties are much the same as the econom- ics of safeguard actions (Finger, Hall, and Nelson 1982). What Is their purpose? Despite persistent warnings from economists that restrictions hurt economic development, govern- ments intervene in imports to protect the eco- 122 commercial considerations, influence imports. But they do not measure the degree of this influ- ence. For this measurement, they use two statis- tical indicators (for details, see Nogues and others 1986, pp. 8-12): • The import coverage ratio •· the share of a country's import value subject to NTBs in to- tal import value for a given product category. • The frequency ratio •· the numerator here is the number of import categories subject to NTBs, in commodity-by-country detail (such as oranges from Spain), and the denominator is the number of such categories. In 1984 about 15 percent of the product cate- gories in imports of the major developed coun- tries •· categories accounting for 18 percent of the import value •· were subject to nontariff trade barriers •· about the same proportion as that of the developed countries' imports on which tariff concessions were agreed at the Tokyo Round. Indices are for three industries: vehicles, iron and steel, and textiles and clothing. Along with agriculture, these sectors are "responsible" for the larger part of the NTB protection in devel- oped countries. Agricultural products account for 24 percent of total value of imports covered by NTBs, vehicles account for 14 percent, textiles and clothing for 11 percent, and iron and steel for 8 percent. lbis high concentration could provide a major obstacle to removing NTBs, because such removal would require very large and highly vis- ible transfers of income away from a few (well- organized) producers. It may prove difficult to find economic groups powerful enough to offset protectionist pressures by these producers. The sectoral pattern of developed country NTBs suggests a relatively high incidence on imports from developing countries (table 16.1). In addition, many country-specific NTBs are im- posed on imports from developing countries only. This bias is reflected in the extent of NTBs by product categories. Twenty-one percent of the import categories from developing countries are subject to NTBs, compared with only 11 percent of such flows from other developed countries. In import values, 19 percent of imports from devel- oping countries are covered by NTBs, compared with 17 percent of imports from other developed countries. The numbers suggest that NTBs against imports from developing countries have the greater restrictive effect. Of the different types of NTBs, monitoring measures and quantitative import restrictions are the most pervasive. Since these measures are Nontarl/f "4rrlers to trade Fifteen developed and Product category All Agricultural Fuels and ores Industrial Textiles Steel Footwear Electrical machines Vehicles Definitions: Fifteen developed markets: Exporting countries: World Bank definitions oping to industrial countries. Product categories: All: CCCN 0101-9906; 9906; Textiles and Clothing: 5001-6302; Vehicles: 8707-8714. Source: Pinger and Olechowslti (1986). NTBs in selected Product category All Food Agricultural materials Ores and metals Fuels Manufactures Chemicals Machinery and transport equipment Other Definitions: Developing countries: Antigua, Rep. of Korea, Malaysia, Paltistan, Singapore, Colombia, Central African Republic, Congo, Kuwait, Oman, Qatar, Saudi Arabia, Syria, Product categories: Food: SITC 0+1+22+4; Manufactures: 5+6+7+8-67-68; Chemicals: NTBs: Quotas, prohibitions, restrictive ments. Source: Laird and Pinger (1986). 124 NTBs in selected Country category Low-income Lower middle-income Upper middle-income High-income oil exporters All Definitions: Developing countries: 109 Washington, D.C. 1986. Country categories: World Bank definitions, Source: Finger and Olechowski (1986). How NTBs are proliferating The large current account imbalances, particu- larly of the largest developed countries, greatly increase the domestic pressures for import pro- tection. Since most developed country tariffs are bound under GATT, these pressures -- where accommodated •· have increased the use of non- tariff barriers. By how much? Laird and Finger (1986) used constant 1981 trade weights to find that the im- port coverage of hard-core NTBs ( quantitative restrictions, voluntary export restraints, and measures to encourage decreed import prices) increased some ten percentage points between 1981 and 1985. In other words, NTBs in 1985 affected 10 percent more of developed country imports than five years earlier. The increase in coverage of nonfuel imports was even greater: nineteen points for all NTBs and fifteen points for the hard-core measures. Finger and Olechowski (1986) have established a smaller but equally significant growth of NTBs by decomposing the change in current (rather than constant) indices of import coverage in 1981 and 1984 into several elements. Such a change -- a difference in the proportion of import value at two times -- masks the expansion of NTBs. It also masks the effect of NTBs in slowing the imports and therefore makes the products on which NTBs are imposed a smaller part of the total. The decomposition revealed that the new NTBs added some 2.4 percentage points to the 1981 coverage of total imports, more in the case of imports from developing countries (2.6 points) than from other industrial countries (1.5 points). Nontarl.ff barriers to trade GAIT, and (3) negotiated reductions or elimina- tion of the remaining NTBs. Uberalizing NTBs is perhaps the greatest chal- lenge for the new round. The political economy of these measures is complex, and the current account imbalances in the world economy are large. Moreover, GAIT's methods for eliminating trade obstacles may sometimes be inappropriate. First, there is a problem of equivalence of vari- ous measures. If the reductions were carried out on the basis of strict reciprocity, some conversion factors would need to be worked out to reduce quotas and minimum prices. Thus complex esti- mating procedures would need to be agreed on •· unlikely, since the real-life negotiators under- standably dislike negotiating with theoretical esti- mates. Second, there is a problem of illegal NTBs •· those introduced outside GAIT rules. not rolled back, could they be eliminated in ex- change for legal NTBs? Would such an exchange establish a bad precedent for future trade rela- tions and negotiations? Third, NTBs in some product sectors, such as agriculture, have particular objectives, and their removal would require international coordination of domestic policies. Is such an action possible? Can there be an exchange of reductions in differ- ent sectors? If not, how can all countries pate in the exchange of concessions? Several technical proposals have already been formulated to solve these problems. For example, the problem of equivalence can be dealt with by an agreement on time limits for phasing out re- strictions and for specifying growth rates in the market share of imports subject to those restric- tions. Similarly, different NTBs may be converted to tariffs and then gradually reduced. Prohibi- tions, licensing requirements, and price restric- tions may be converted to global quotas of a certain minimum size and the quotas progres- sively enlarged. The elimination of NTBs may be also agreed on through the traditional request- and-offer procedure. For illegal NTBs, GAIT provisions may be involved. And when they cannot be invoked, NTBs would need to be elimi- nated unilaterally. Or such NTBs (voluntary export restraints) might be replaced by measures that conform to GAIT provisions. Or requests might be made for waivers under GAIT Article XXV:5. For agricultural NTBs international caps might be imposed on the amount of farm output that could benefit from government support. And so on. 126 17 Nonborder measures to assist industry Patrick Messerlin The Tokyo Round was the first to recognize that nonborder measures (NBMs) augment such bor- der measures as tariffs and quantitative restric- tions in affecting trade flows. They are also shaped by nonborder measures granting assis- tance to industry. The subsidies code, though focusing on a border measure (export subsidies), has provisions for nonborder subsidies. Accord~ ing to these provisions the signatories agree that they will to avoid causing injury, nullification, or serious prejudice through the use of any subsidy. The standards code and the government procure- ment code deal exclusively with NBMs. Their main goal is to provide "national treatment" to imported products and to increase international cooperation for the creation and implementation of standards and tendering procedures (see chap- ter 9 and Stem and others 1986). The Punta del Este Declaration follows the Tokyo Round on this track, as shown by the list of the objectives assigned to the negotiators (see annex 3). Explicit if somewhat conventional wording about "other nontariff measures and ob- stacles" and "a wider coverage of world trade under agreed, effective, and enforceable multilat- eral disciplines" is included in the two first objec- tives. More important, the fourth objective states that negotiators should "foster concurrent erative action at the national and international levels to strengthen the interrelationship trade policies and other economic policies affect~ ing growth and development." This willingness of sovereign states to negotiate on NBMs is striking because it suggests the sup- port of some powerful interests to do so. NBMs cover a vast array of heterogeneous in- struments. First, they include all types of mone- tary subsidies to domestic producers, such as Nonborder measures to assist industry The domestic cost of NBMs, though frequently ignored, is crucial. Tax rebates and subsidies to domestic producers and to domestic factors of production have to be financed by taxes. In the same vein, the differences between interest rates charged to the beneficiaries of soft loans and market interest rates •· and the differences be- tween prices granted to consumers and costs of production -- also have to be financed by addi- tional taxes levied on some domestic producers or consumers. Public procurement -- when grant- ing higher prices to domestic producers than the prices from auctioning on unrestricted interna- tional markets •· imposes additional charges on domestic consumers. Technical standards provid- ing (even transitory) monopoly power to some domestic firms hurt domestic consumers who presumably must pay monopoly rents. macroeconomic policies that impose constraints on prices and interest rates may be costly for some industries. This fact •· that a subsidy to a domestic industry necessarily implies that other domestic industries are directly or indirectly taxed •· dramatically changes people's views on NBMs. For instance, NBMs may favor industries with troubles, but they also hurt industries without troubles as well as potential industries. NBMs maintaining higher outputs than dictated by international competi- tion in the troubled industries pull down the output of other industries. And NBMs allowing labor and capital to remain in industries that are no longer competitive necessarily reduce the availability of both for the other industries in the domestic economy. Even the subsidy component of NBMs has a dark side, also frequently forgotten. Because NBMs distort domestic prices, they may indirectly affect trade flows, even if they are not designed to do so. By subsidizing an industry, a country decreases the prices of the goods produced by that industry for its consumers. If these goods are exported or are inputs for exports, foreign con- sumers benefit from the subsidy granted. In other words, NBMs contribute to the deteriora- tion of the country's terms of trade (they decrease export prices relative to the import prices). Any industry may be affected by several NBMs, some of which are a subsidy to that industry, others a cost. The full impact on the industry is the net effect of these gains and losses. 1 Several NBMs are likely to offset one other so that their overall global impact is lower than might be ex- pected when looking at each of them separately. 128 Before the 1970s: no need for negotiations Until the 1970s there was no need for interna- tional negotiations on NBMs because neither the external nor the internal control motive was stimulated. 3 First, developed countries did not undertake massive NBM programs. Such measures were im- plemented mainly in France, Italy, Japan, and to less extent in the United Kingdom. They con- cerned few goods and services. Some of these goods were nontradable: electricity, housing, and railways. Others -- mainly coal, aircraft, and ship- building -- were not traded much because their markets were highly protected and regulated. More important, they were traded in noninte- grated markets in the sense that the existing tech- nology tolerated relatively small firms and allowed scale economies to be developed behind national or imperial preferences. In other words, increas- ing returns and external economies seem to have been satisfied in existing markets. domestic growth coupled with the growth of in- traindustry trade among developed countries smoothed adjustment problems. And the general approach to adjustment during the 1950s and 1960s was quite different from what it is today. For example, French and Italian farmers were asked to leave their jobs without compensation for their losses in land and capital. Second, developing countries were strongly opposed to international rules and limits on NBMs. Many developing countries had imple- mented import-substitution policies that re- mained in force throughout the 1960s. The widely accepted belief in the fruitfulness of such policies blunted the internal control motive nego- tiations for NBMs. Nor was the external motive stimulated during this period. The negligible weight of developing country trade in the world economy -- and the possibility for developed countries to keep their privileged access to devel- oping economies through traditional political links -- left few developed countries threatened by the NBMs of developing countries. And the trade among developing countries was small. Third, GATI's initial rules were rather silent on NBMs. They were negotiated during the late 1940s, when there were no examples of massive NBMs and the subsidy problem was of little rele- vance. Only the United States had the public financing potential to finance NBMs, but it was reluctant to do so. The first French Plan was limited and hard to finance. Moreover, GATI, Nonborder meas,aes to assist Industry . capital shortages and unemployment. Despite the high cost of NBMs created under these two crite• ria, sectoral plans began to flourish. Under the trade-balance criterion, NBMs were granted to aircraft (Great Britain, France, and Germany) and to computers (France). Under the value-added criterion, NBMs were granted to steel Oapan, Italy, France, and Great Britain) and to chemicals (Italy). Then, too, there is Common Agricultural Policy of the European Community. Two outside facts accentuated the upsurge of these creeping NBMs during the mid-1970s: the 1973-74 oil shock, and the developing countries' success in implementing export-promoting poli• cies. These facts, and GATI's benevolence on the NBM issue, induced developed countries to im· plement huge adjustment programs before finally turning to border measures, such as NTBs. Spending by developing countries on NBMs during the 1960s, remained modest and stable when expressed in subsidy ratios •· that is, subsi- dies as a percentage of GDP (table 17.1). 5 The nonweighted average of these ratios is 1. 7 percent for 1960-65 and 1.8 percent for 1965-70. Such limited spending could hardly push governments to negotiate on NBMs. But after the mid-1970s, the cost of NBMs jumped: the nonweighted average of the subsidy ratios rose from 2 percent of GDP to 3 percent between 1973 and 1977. These increases were largely due to massive ex- pansions of soft loan programs, made excessivel costly because of inconsistent macroeconomic policies that boosted interest rates. Two more facts are important. First, oped countries •· not just such traditional users of NBMs as France, Ireland, and Sweden •• experi• enced the same evolution. Second, the reductions in these ratios are rare and slow. Although one- percentage-point increases in the ratios over five years are not rare, there are few such reductions. The reductions have generally been limited to less than half a percentage point since the late 1970s. This inertia in NBMs reflects the progressive ina• bility of developed countries to resist pressures from domestic interest groups. It suggests that developed countries will still have a strong inter- est in negotiations to strengthen international discipline on NBMs during the Uruguay Round. NBMs during the Uruguay Round: a necessity for developing countries? Is it likely that the developing countries will be- come more involved in the negotiations on NBMs 130 years of import-substitution policies in developing countries provides ample evidence of the high risks of powerful private groups. The recent disappointment with industrial poli- cies in Western Europe has much to do with the general feeling that the twenty years of subsidiz- ing steel or the fifteen years of targeting aircraft redistributed considerable sums from taxpayers to very narrow groups of workers or capitalists. The same process is under way in most developing countries, but there is also a major dissimilarity. The industrial economies are huge, complex, and relatively competitive. That builds in countervail- ing forces: numerous producing firms face nu- merous using firms; every factor of production faces a host of other factors. So, coalitions be- tween factors for getting rents through NBMs are costly to establish and maintain. And many struggles for rent-seeking are lost before going up to the governments. By contrast, the developing countries are more sensitive to coalitions because their economies are relatively small, uncomplete, and oligopolistic. The costs of coalitions between some dominant factors of production may thus be low. The growing recognition of this feature by developing country governments may induce them to seek international discipline on NBMs to keep these pressure groups within reasonable limits. NBMs and the threat of trade wars Since the mid-1970s, a dozen developing coun- tries experienced great economic success under export-promoting policies. These policies did not aim at directly opening domestic economies in the sense that imports remained tightly con- trolled. Morever, NBMs have played a heavy role in these economies, often leading to problems similar to those in developed countries.7 But export-promoting policies in these countries to strengthen progressively the external control motive for participating in negotiations They do this in two indirect ways. First, because export-promoting developing countries are now substantial suppliers of indus- trial goods in developed countries' markets, they can only be increasingly interested in well-de- signed and well-established international disci- pline for the reduction of NBMs by developed countries. Production subsidies to Western Euro- pean shipyards cannot leave South Korean au- thorities indifferent. Fair public procurement for personal computers in public schools in devel- Nonbortler IIMIIISlln!S to assist Sub9Jdia ea-try 1965 1966 1967 Greece 1.1 1.6 1.8 Ireland 4.0 4.2 4.7 Ponugal u 1.3 1.3 Spain 0.9 0.7 0.9 Turkey o.s 0.8 0.4 Yugoslavia 1.8 1.0 0.8 Australia 0.7 0.8 0.8 Austria 2.2 2.2 2.1 Belgium 2.3 2.7 2.S Canada 0.9 1.1 1.0 Denmark 1.8 2.1 2.4 Finland 3.2 3.2 2.9 France 2.2 2.2 2.2 Germany 1.3 1.2 1.1 Iceland 4.4 4.3 s.s Italy 1.3 1.3 u Japan 0.7 0.8 0.9 Luxembourg 2.4 2.S 2.6 Netherland 1.1 1.1 1.3 New Zealand 1.0 1.0 o.s Norway 4.S 4.4 4.3 Sweden u 1.6 1.6 Switzerland 0.9 0.9 0.9 United Kingdom 1.6 1.S 2.0 United States 0.4 o.s o.s Average 1.8 1.8 1.9 Note: Comparisons between countries are Source: Organization of Economic Cooperation 132 1976 1977 1978 1979 1980 1981 1982 2.8 3.0 2.9 2.3 2.4 4.2 4.8 6.4 8.S 9.4 8.9 7.9 6.7 6.4 4.0 3.8 4.6 4.S S.2 s.6 S.6 1.3 1.4 1.9 1.7 2.1 2.0 2.S 0.8 t.S 1.4 1.1 1.7 1.7 2.3 1.S 3.1 2.6 2.6 2.S 2.1 2.S 1.2 1.4 t.S t.S t.6 1.7 1.8 2.9 2.9 3.2 2.9 3.0 3.0 3.0 3-9 4.2 4.2 4.S 4.0 4.1 4.0 1.9 1.8 1.7 2.0 2.7 2.7 2.S 3.1 3.1 3.4 3.2 3.2 3.0 3.2 3.8 3-6 3.3 3.S 3.2 3-3 3.2 2.7 2.8 2.6 2.6 2.S 2.8 2.7 2.0 2.1 2.3 2.2 2.1 1.9 1.8 3.3 2.9 3.4 3.9 3.2 3.2 3.8 2.6 2.7 2.9 3.1 3.0 3.1 3.7 1.3 1.3 1.3 1.3 1.s 1.S 1.4 3.4 4.1 4.0 3.9 3.8 4.7 4.7 2.4 2.S 2.6 2.8 2.7 2.s 2.7 1.7 1.9 2.S 1.8 1.S 2.1 2.4 6.8 7.4 7.7 7.0 7.0 6.7 6.S 3.9 4.1 4.2 4.3 4.3 4.7 s.o 1.3 1.4 1.4 1.4 1.3 1.2 1.3 2.7 2.2 2.2 2.3 2.5 2.6 2.1 0.3 0.4 0.4 0.4 0.4 0.4 0.5 2.7 3.0 3.1 3.0 3.0 3.1 3.2 Nonborder mea.ssa-e.s to aulsl industry Public subsidies to the domesdc Years 1970 1971 1972 Argentina 4.8 Chile 4.3 Egypt Ghana 2.4 India Indonesia 0.2 Israel 6.7 Kenya Korea 0.7 0.6 Malaysia 7.3 Mexico 2.1 Pakistan Peru 4.2 2.3 2.4 Philippines 0.4 Singapore 2.2 Tunisia 3.5 Nonweighted Average (4.2) (1.4) (3.0) Australia 2.4 2.8 Austria 7.8 7.8 7.6 Belgium 5.1 4.8 5.5 Canada Denmark 3.7 3.8 3.7 Finland 6.1 France 4.4 Germany 2.6 2.6 2.7 Greece 1.6 Iceland 4.8 Ireland 10.1 9.9 9,4 Italy Japan 1.4 0.9 1.3 Luxemburg 3.0 3.2 3.1 Netherlands New Zealand 4.0 5.0 7.1 Norway 7.0 Spain 1.5 1.6 1.2 Sweden 14.2 10.4 10.9 Switzerland 3.5 3,9 3.6 Turkey 2.4 1.8 United Kingdom 5.0 5.0 5.5 United States 2.3 Yugoslavia Nonweighted (Yugoslavia excluded) Average (5.2) (4.5) (4.6) (4.4) Note: Comparisons between countries are a. Subsidies are calculated as follow: + {Subsidies & Other Current +{Subsidies & Other Current Transfers • {Transfers to Other Level of • {Transfers Abroad of Central Note that some of the above parameters available for some of the years. In that of subsidies & other current transfers. • • • Denmark and Netherlands subsidy Source: International Monetary Fund (Government 134 1981 1982 1983 1984 1985 1970-75 4.3 3.7 5.8 8.2 9.4 7.8 7.1 6.4 4.4 20.7 13.8 15.6 14.4 21.0 0.9 1.2 0.8 1.5 4.7 4.9 5.0 3.0 3.7 2.6 2.5 2.1 2.0 19.4 17.4 18.7 20.2 2.5 3.6 2.0 2.9 0.6 0.1 0.7 1.2 1.3 0.8 5.3 3.6 10.9 5.5 4.6 1.7 0.9 0.7 1.2 3.0 0.2 0.6 0.3 0.1 0.2 0.6 0.8 0.6 0.5 1.0 5.0 4.6 4.1 6.0 (5.1) (S.O) (4.7) (2.6) 4.4 3.4 3.6 4.0 4.0 4.3 2.7 10.3 10.7 10.8 10.5 6.7 6.1 7.3 7.0 13.0 15.4 15.0 14.6 8.2 3.2 3.6 3.6 3.4 3.S 3.S 8.3 8.4 8.9 7.8 5.1 5.3 5.4 5.9 5.6 4.6 4.4 4.2 4.1 3.8 5.6 3.4 4.4 5.7 4.0 11 .0 11.8 12.2 12.1 3.4 1.9 2.1 2.0 1.8 7.6 7.5 8.0 2.8 3.1 3.5 3.4 9.7 10.1 9.7 4.8 4.5 4.2 2.6 1.8 2.2 18.0 18.6 18.3 16.6 16.9 11.7 4.5 4.8 4.8 4.9 2.6 4.7 7.9 8.5 7.7 8.1 4.7 4.8 5.0 4.7 2.4 1.2 1.0 1.2 (6.2) (6.7) (6.7) (7.0) Nonborder --.nll'ff to GATI Secretariat. 1986. Th Tats of th Taiyo Round Agreements. Geneva. Gerken, Egbert, ICarl-Heinz Juttemeier, und Klaus-Dieter Schmidt. 1985. Mehr Arbeitsplatze durch Su~tionsabbau. Cambridge: Dilcussion Paper. Kiel, Germany: Institut fur Weltwirtschaft. Malmgren, Harald. 1977. lntff'IUltioruu sldia. Thames Essay 11. london: Trade Policy Research Center. 136 18 Technical regulations and standards Lawrence Hieber Technical regulations, standards, and testing or inspection requirements often differ from one country to another. But they differ for reasons not connected solely with national conditions and policies. They may be defined by government regulations, which are thus mandatory in the national market. Or they may be defined by nonregulatory voluntary standards that are widely accepted in buyer-seller transactions. Because of such differences, minor but costly modifications must often be made to the same basic product for different national markets. Such requirements, viewed as inhibiting free trade between countries or regions are referred to as technical barriers to trade. For example, an automobile produced to meet the laws of one country will often have to be adapted to meet those of another. Manufacturers tend therefore to produce special models for separate markets and explain that added costs resulting from the need to meet different requires ments must be passed on to the consumer. Dif. ferent countries should be able to reach agree- ment on a common set of legal requirements for automobiles, but this has proven difficult -- in part because of different national interpretations of safety limits and perhaps in part because of at- tempts to protect local manufacturers and retail- ers from imports. National technical regulations and nonregulatory standards The terms "technical regulation" are used here in the sense given to them in inter- national standardization circles (ISO/IEC Guide 2, 1986, and the GATT standards code). Techni- cal regulations and standards are the two basic Teclmlcal ,egu/allons and standartls Los Angeles was the first to act. Because the problem was not felt with the same intensity in other parts of the United States or in other coun- tries, the relevant standards and technical regula- tions were not developed in a coherent way. The United States, in 1965, was first to adopt national legislation, which was later made more Later the 1983 U.S. standard was adopted by such countries as Japan and Switzerland and more recently (for large cars only) by the European Community. Thus while some international har- monization seems to be happening, the remaining technical differences still mean that special modi- fications are needed for automobiles intended for different markets. In sum: standardization •· or normative prac- tice, both compulsory and voluntary •• is an im- portant component of the industrial and commer- cial infrastructure of all developed countries. It involves marketwide decisions to use agreed-on techniques for specifying or assessing materials and finished products. The objectives are basi- cally to improve technical communication be- tween buyers and sellers, to reduce cost by quan- tity production, and to permit desired inter- changeability and interoperability. National origins of normative practices In most countries only a small proportion of the normative practices are regulatory. Government technical regulations are usually limited to ques- tions of public health, workplace safety, and environmental protection and to the operation of public utilities. National nonregulatory standards have been developed by producers and users in response to specific needs of their sectors of activity. This began with standards limited to one company and its suppliers, a well-known early example being the Winchester rifle. The development of industry made it desirable to harmonize standards in national markets. And around the tum of the century, national stan- dards organizations began to appear in major industrial countries. Some were part of scientific and professional associations, as in the United States. Others were centralized nongovernmental institutions, such as the British Standards Institu• tion in the United Kingdom (1902) and its equiva- lent (DIN) in Germany (1917). Such organiza- tions' standards were prepared by technical committees with representatives of producers and users. As voluntary standardization work began to be structured, legal authorities became more 138 tional standards. Other organizations producing international standards, including the specialized United Nations agencies, are listed in the ISO index of international standards (table 18.1 ). GATT negotiations on technical barriers to trade Toward the end of the 1%0s, the tariff-lowering effects of the Kennedy Round made policymakers more aware of what traders had already discov- ered. Technical barriers to trade stayed obsti- nately in place even when tariff barriers were lowered. It was of little help for manufacturers to Documents listed in the Organization ISO International Organization IEC International Electrotechnical Commission CAC Codex Alimentarius Commission CCITT International Telegraph IDF International Dairy Federation UIC International Union of Railways OIML International Organization CEE International Commission Certification of Electrical Equipment IAEA International Atomic Energy Agency IMO International Maritime Organization CIE International Commission on Illumination ILO International Labor Organization WIPO World Intellectual Property Organization ICRU International Commission ICRPC International Commission ICAO International Civil Aviation Organization BISFA International Bureau for UNESCO United Nations Educational, CCIR International Radio Consultative Committee CISPR International Special IIR International Institute of Refrigeration IFIA International Federation BIPM International Bureau of IWO International Vine and Wine Office IATA International Air Transport Association IOOC International Olive Oil Council OIE International Office of Eqizootics CCC Customs Cooperation Council WHO World Health Organization Total for twenty-nine international standardizing bodies , ecbntcal regulations and standards the lack of incentive to invest heavily in harmoniz- ing such national rules as those governing the electrical installations of buildings -- and the in- compatibility of electric plugs and outlets. 2 But similar technical barriers also appeared for technology, such as electronic components. In the 1960s, for example, the EEC developed a system for the mutual recognition of quality as- sessment of electronic components. This system raised concerns that countries outside the EEC would not have open access to the recognition procedures, thus putting their industries at a dis- advantage -- a potential obstacle to international trade in a highly expanding market. 3 These technical aspects of the problems arising from nontarift' barriers were addressed in the Tokyo Round. The outcome was the agreement on technical barriers to trade, known also as the GATT standards code, which came into force in 1980. The code has been signed by thirty-eight governments and by the Commission of the Euro- pean Communities. These signatories have, for the first time, accepted internationally binding obligations to reduce the unnecessary obstacles to trade that arise from technical regulations, standards, testing arrangements, and certification systems. The standards code does not attempt to create or harmonize regulations or standards for individ- ual products -- to set up specific testing or certi- fication systems. Negotiators recognize that these activities are a matter for individual countries and appropriate international standardizing bodies. The code does, however, oblige each government not to prepare or use such technical regulations or standards in a way that would create obstacles to international trade. It also provides for the settlement of disputes. Furthermore, products imported from other countries must be given no less favorable treatment than that given to na- tional products in relation to such technical regu- lations or standards. These obligations also ex- tend to conformity to technical regulations and standards, including conformity certification sys- tems. In particular, provisions are made to en- sure open access to certification systems, to avoid the obstacles to trade described earlier. An important provision of the standards code is that central governments should use international standards as a basis for their technical regulations whenever these standards are appropriate for their purposes. The code also stipulates that government should encourage nongovernmental standardizing bodies and local regulatory authori- 140 Questions for the Umguay Round The Uruguay Round may seek to broaden some obligations of the standards code. For the cover- age of local government regulations, standardiza- tion systems, and mutual recognition of test re- sults and product certification, there is great scope for international harmonization. Level of obligation. Today only central govern- ments are directly committed to enforce the pro- visions of the standards code. Local governments and nongovernmental bodies are covered only indirectly. That is, the code's signatories are to use "such reasonable measures as may be avail- able to them" to ensure that other bodies in their countries also apply the code. To extend direct obligations to local authorities, negotiators will have to weigh the possible trade barriers that stem from not notifying other parties of local regulations against the tremendous administrative burden of making such notifications. The in- creased application of international standards might ease the problem. Transparency. Generally, the national stan- dards-setting processes follow the basic rules laid down in the standards code and are accessible to both foreign and domestic parties. The ability of foreign parties to monitor developments in stan- dardization and regulation is the subject of the present notification procedures. (Before the code, many countries' standards-related activities were closed to foreign monitoring.) Transpar- ency and notification will continue to be one of the discussion issues, since local producers are often aware of proposed standards long before foreign producers are, giving them a time advan- tage in addition to their being in a better position to influence the standards' formation. Rer:ognttton of test results. The standards code provides for measures to open access to national or regional certification systems or discrimina testing practices that might constitute obstacles to trade. Nevertheless, further attention be given to such problems as duplicate testing (the need to retest a product in each importing country), the cost of obtaining product certifica- tion in foreign countries, and the administrative difficulties and delays traders encounter even when the trade path is ostensibly clear. Mutual acceptance of testing and inspection results is an avenue to relieving the complexity for importers. The intense activity generated by the EEC's decision to speed up harmonization of the na- tional certification schemes of its member states is J eclmtcal regulations and standards dards in 1980, 11,600 pages in 1984 - cent in just four years! 2. It was not until 1967, when the committee to deal with wiring rules for buildings, that a worldwide effort was made to harmonize essential aspects of these rules internationally. Such harmonization was a pre- requisite to any attempt to standardize outlet system, now well in progress in the IEC. 3. On the nongovernmental side, this concern resulted in the opening of the European system and development of a worldwide IEC quality assessment system for electronic com- ponents operating since 1983 and now having thirteen certi- 142 19 Safeguards Gary Sampson Article XIX, as written, permits governments to escape from their GATI obligations and raise trade barriers to safeguard any of their producers seriously injured by the liberalization of trade. The article also provides that foreign suppliers may retaliate or be compensated for losses from the restricted market access. Article XIX does not state that actions should be nondiscriminatory, something specified by Article I. To the uninitiated, all this makes sense. The problem is: Article XIX has rarely, if ever, been interpreted in a way that would appear to be consistent with the text. Indeed, international trade lawyers find the language of Article XIX "extraordinarily oblique" and plainable by reference to the historical develop- ment of the language and practice under it" Oackson 1969, p. 557). Some early determinations greatly weakened the stringency of the conditions for applying Ar- ticle XIX. The first (and most famous) Article XIX decision •· the hatters' fur case, with the United States invoking Article XIX against Czechoslovakia •· delinked injury from trade liberalization. A working party reviewing the matter determined that there had been a change in fashion and that the United States' authorities could not have fore- seen how much the change in fashion would af. feet the competitive situation Oackson, p. 60). What this meant in practical terms was that any increase in imports, even if through normal changes in international competitiveness, could therefore be considered actionable under Article XIX. Another early decision (in the same case) was that the exporting country had to prove that there was no serious injury •· rather than having the importing country prove that there was injury. Safeguards ing faster just when adjustments to shocks are •• for social, political, and economic reasons •• more difficult. Article XIX in many ways holds the success or failure of the Uruguay Round. Govern• ments will not roll back existing trade and stand still in the face of demands for new ones if there is no safety valve to permit them to deal with seriously injured producers in a politi- cally acceptable manner. The main message of this chapter is rather simple •· as simple as Article XIX should be.1 Whether governments protect producers from serious injury has little to do with GAIT. The decision is a national choice that has to be made, and governments should take it bearing in mind all interests •· not just those of injured producers. In this process, it is possible to strengthen the hand of government (make it more politically palatable) in resisting pressures for protection (and public assistance more generally). This could be done if the decisions were taken after public scrutiny of a "balance sheet" (to use the terms of the Leutwiler Report [GAIT 1985)). There would be very few protective actions if serious injury referred to national interests rather than to those of injured producers. On compen- sation, there is a case for compensating foreign suppliers that goes beyond equity consider• ations.2 While the payment of compensation is not in the interest of the country considering the safeguard action, the obligation to pay compensa- tion strengthens the hand of the importing coun- try government over the electorate in resisting claims for protection. The idea of retaliation (compensation) by the exporting country's raising its trade barriers to products originating in the country experiencing injury (Article XIX) is tanta• mount to shooting oneself in the foot. The interpretation of Article XIX may be related to the fact that trade negotiators and many other public officials apparently do not share the views of liberal economists. The motive for reducing trade barriers seems not to be to improve the domestic distribution of resources but to gain access to someones else's market. As a corollary, when trade barriers are raised, the effects are evaluated not by the cost of the distortion of resources domestically, but by the access denied to trading partners. GATI has little control over national decisionmaking, and its role is usually limited to supporting certain options. But honor• ing an international obligation and maximizing domestic efficiency should not conflict. This 144 Export restraint Machine Transport Electronic Steel tools equipment EEC Number 14 .a 2 9 Price controls 12 1 Quality restrictions 9 Other 2 1 United States Number 25 1 1 Price controls 1 Quality restrictions 24 1 Other 1 Other Number 3 Price controls Other Total Number 39 3 13 Price controls 12 2 Quality restrictions 24 1 13 Other 3 a. Includes country arrangements that Source: Basic information drawn from GAIT, • Product categories most heavily affected by export restraint arrangements include steel and steel products (thirty-nine arrange- ments), textiles (eleven arrangements outside the MFA), agricultural products (fifteen), cars and other transport equipment (thirteen), electronic products (six, all with Japan), machine tools (three, with Japan), and foot- wear (five). In twenty-five cases the arrange- ments restricted exports originating in Japan, thirty in developing countries (fourteen in Korea) and seventeen in the centrally planned economies of Eastern Europe (table 19.2). In only four cases did the exports originate in the EEC or the United States.3 • In the four decades of GATI history, there have been only 132 Article XIX actions, many of them involving insignificant shares of world trade -- for example, Nigerian imports of cement, Peruvian imports of lead arsenate, Safeguards Voluntary export restraints hnporting Exporting Japan EEC a United States Developing countries (Republic of Korea) Centrally planned economies Other a. Includes country arrangements that Source: Basic information drawn from GATI, statistics contained in the document showed that total imports covered were valued in the same year at $1.6 billion. World trade was valued at about $2,000 billion in the same year. • Perhaps the most damning comment about the lack of application of Article XIX, how- ever, is that even when it has been invoked, the conditions for its application have not been met. The desire of governments to have legal cover for their actions has "led to the invocation of Article XIX to justify safe- guard measures which patently fell far short of the requirements of the article" (GATI 1979, p. 90). Selectivity, coverage, and surveillance In the Tokyo Declaration of 1973 the ministers decided that the multilateral trade negotiations then launched should aim to "include an exami- nation of the adequacy of the multilateral safe- guard system, considering particularly the modali- ties of application of Article XIX, with a view to furthering trade liberalization and preserving its results" (GATI 1974, paragraph 3d). Accordingly, these issues were addressed in the negotiations by a special group: Safeguards. At the beginning of the Tokyo Round, develop- ing countries proposed that in any safeguard sys- tem, special rules should be provided for them, including the general rule that they be excluded from the application of safeguard measures by developed countries. When several developed countries put forward a draft integrated text on safeguards in July 1978, it became apparent that 146 Economy Number and period of cases United States 1950-59 11 1960-69 3 1970-79 9 1980-86 5 Total 28 Australia 1950-59 2 1960-69 15 1970-79 17 1980-86 4 Total 38 Canada 1950-59 I 1960-69 5 1970-79 3 1980-86 4 Total 22 EEC 1950-59 1 1960-69 5 1970-79 3 1980-86 10 Total 19 Other 1950-59 3 1960-69 9 1970-79 5 1980-86 8 Total 25 Note: Actions currently outstanding have Source: Various GATI documents Viewed in the broader perspective, the key is- sue in the reform of Article XIX is whether GATT discipline should be tightened and an effort made to ensure that countries act in accord with a slightly modified Article XIX •· or whether it should be radically revised so that it fully reflects current practice (legitimizing the application of voluntary export restraints and other gray-area measures). Most proposals seem to opt for the Safeguards best done by establishing procedures for ensuring that decisions are more rational, even if this in- volves expanding the use of instruments not cur- rently allowed. Of the more specific issues, there is no doubt that selectivity is the dominant concern for nego- tiators. Advocates of selectivity hold the view that GATI contracting parties should be permitted to apply safeguard measures only against imports from countries apparently causing the injury, arguing that safeguard actions should affect only the guilty. This proposal has met with strong reactions from smaller trading countries - from developing countries, some developed countries (Australia), and the socialist countries of Eastern Europe. Countries opposing selectivity argue that re- stricting imports from one source will merely open the door to other suppliers and lead to a comprehensive network of restraint arrange- ments. Witness, for example, the expanding prod- uct and country coverage of textile trade re- straints (over the past three decades) and more recently the generalization of the restraint ar- rangements covering world steel trade. Further, since changes in import (and domestic) competi- tion often develop rapidly, it is not possible to identify quickly the cause of the injury and the amount of injury attributable to individual suppli- ers (foreign and domestic). Perhaps more impor- tant, smaller trading countries, which lack retali- atory power to ensure enforcement of their rights, maintain that only through nondiscrimina- tion in the application of Article I would their interests and rights be protected. The nondis- criminatory application of Article XIX is the main attraction for smaller trading nations to adhere to GATI. Perhaps the most convincing argument against selectivity, however, can be found in the Leut- wiler Report (GATI 1985, p. 43). According to the report, Article XIX is not "a punishment for an offending exporter, but an admission that the protected industry is not competitive. Since a nondiscriminatory safeguard action affects all suppliers, actual and potential, they have a strong common interest in the early removal •of the re- striction. This concentrates the pressure for ad- justment where it ought to be -- on the protecting country and the protected industry." Developing countries are the strongest oppo- nents of selectivity because they feel -- particularly from their MFA experience -- that selectivity will be a license for importing countries to discrimi- 148 example, relies heavily on agricultural exports restrained by measures other than Article XIX. The United States secured a waiver of its obliga- tions -· under Article XIX -- for agricultural im- ports. And the EEC applies variable levies that it has traditionally considered nonnegotiable. The terms of the Swiss accession to GATI have kept their agricultural regime outside GATI, and Cana- dians justify limits on agricultural Article XI. In addition, potential exports to these countries are deflected to other markets Australians' disadvantage. Australian imports are primarily manufactured goods, and additional protection required justification under Article XIX. Unlike the measures controlling agricultural exports, Article XIX can lead to compensation or retaliation. Not surprisingly, Australia assigns much importance to the revision of Article XIX. • A further important issue relates to surveillance -- to the way and time frame for scrutinizing protective action. As noted above, many arrange- ments used as alternatives to Article XIX are made • by governments (or with the knowledge of gov- ' ernments) and without meeting the criteria, con- ditions, or disciplines of Article XIX. Accordingly, some countries have proposed that all such meas- ures be subject to a notification requirement and that an Article XIX committee be established for continuing surveillance, monitoring, and concili- ation. This committee would be a standing body • to scrutinize the criteria and conditions of Article XIX actions and ensure the honoring of commit- ments (such as the implementation of adjustment measures). The interpretation of several other terms is important in the context of Article XIX discus- sions. (UNCTAD [1983] discusses these and other concepts in detail.) The term "producers" in Article XIX could be interpreted in such a way as to award protection to only a few of the pro- ducers in an industry. There has been a measure of agreement that the term "producers" should be equated to "industry" and that to warrant Article XIX action a "major part" (in the sense of Article VI) would have to be af. fected. The "duration" of Article XIX action is important because it was clearly never contem- plated that actions under Article XIX should be indefinite or prolonged. Yet, some measures have been in existence, in one form or another, for many years. Although it is tempting to assign a maximum duration to Article XIX actions, maxi- mums often become minimums with the reverse effect of prolonging the Article XIX actions. The Safeguards seems to be a good place to start when thinking of revisions. Determining serious tnjury As noted above, Article XIX could be greatly improved by changing the interpretation of a serious injury. Giving economic content to seri- ous injury by considering the economywide impli- cations of protection holds the key to reform. A recent OECD report (1986) gave some useful ideas about why the economywide costs and benefits of protection and other public assistance to industry are shortchanged in decisionmaking. "Whether protection spreads, imposing major harm on the world economy, depends on three factors: the costs and benefits of trade for domes- tic political actors; these actors' access to and control over the process of government; and the extent to which international commitments and obligations to trade policy are viewed as binding by national governments" {pp. 19-20). Economywide perspective. Too often, provid- ing cheaper imports through reducing protection or normal competition is considered a burden on producers. Consideration is given rarely, if ever, to the fact that imports could improve the alloca- tion of resources in the importing country and make exports internationally competitive. This phenomenon is closely related to the fact that highly visible coalitions prevent change that is not in their interests (Olson 1982). This fact has been translated into a serious institutional bias (Article XIX protects only producers from serious injury) in favor of the few (the political actors) at the expense of the many (the uncoordinated users of imported goods). Thus, a case can be made for the reform of national institutions that would permit, through public inquiry, a formal econo- mywide evaluation of the costs and benefits of public assistance to industries, whether it be sought as a result of trade liberalization or normal import competition (Laird and Sampson 1987). Whether, in resisting protection or removing public assistance (through trade liberalization), the losers should be compensated is a political choice that many governments appear to have taken. In political communiques announcing intentions to liberalize trade or deregulate more generally, a favorite commitment is to burden of adjustment equitably." compensating losers is one thing, current ments prevent the loss rather than write it off against the larger gains. In making the case for or 150 lower priced goods, serious tnJury (with the economywide losses from trade greater than the gains) is established, and governments are to in- tervene. How should this be done? If industrial restructuring is deemed appropriate, this raises an important question: what is the appropriate policy for improving the capacity to adjust •· impaired as that capacity may be by low levels of economic activity and by structural rigidities? Here it is possible to draw on the considerable theoretical literature on optimal policies for over- coming trade-induced difficulties. (See and others 1969; Corden 1974 and 1986; and many others.) If the decision is that tance will ease adjustment, the unanimous con- clusion of this literature is that the vention should be made as close as possible to the source of the distortion that hampers adjust- ment. In other words, if the problem is the inade- quate sectoral mobility of labor, the appropriate policy is to provide adjustment assistance that enhances the mobility of workers. In almost all cases, direct restrictions on trade are far removed from being first-best policies. Why governments resort to the n-th best option has been explored by a number of authors (Hindley 1980). Conclusion New institutions are needed to evaluate and benefits of industrial assistance in an econo- mywide perspective. This is being increasingly accepted. And there is some scope for optimism because there appears to be a popularization of the belief in the need to evaluate the costs and benefits of protection in an economywide con- text. A good example is the Leutwiler Report. According to this report, institutions providing a "magnifying glass" to highlight bution of the costs and benefits of protection ... should be developed in all countries" (GAIT 1985, p. 36). The OECD (1986) also noted: "Neither national nor international arrangements provide adequately developed mechanisms for ensuring that, in determining the content of gov- ernment intervention, the balance between socio- political factors and economic factors is struck in favor of effective structural adjustment." The policy implications are clear. Governments should look at trade liberalization from the per- spective of improving the domestic structure of production. The objective should not be simple mercantilism •· export promotion through negoti- ated market access. It should be increasing ex- .. for Action. Geneva. 1986. Ministerial Declaration of the Uruguay ~ n d. 1396(25 September) Geneva. Hindley, Brian. 1980. "Voluntary GA1Ts Main Escape Clause." The World Economy. 3(November):313-4 l. Jackson, John. 1969. World TraM and the Law of GAIT. Indianapolis, Ind.: Bobbs-Merrill. wrd, Samuel, and Gary P. Sampson. 1987. ating Protection in an Economy Wide World Economy. lOOune):ln-92. Leddy, John M. 1981. A New Safeguard COtk. Washington, D.C.: The Atlantic Council of the United States. Long, Oliver. 1985. Law and Its /Jmitations in the GATT Multilateral System. Netherlands: Martinus Nijhoff. McGovern, Edmond. 1982. International Tratk Regulation: GAIT, the United States and the European Community. Exeter: Globefield Press. Meier, G. M. 1978. "The Safeguard oping Countries." In TraM Poliaff Toward Developing Countrks: the Multilateral Tratk Negotiations. ton, D.C.: Intergovernmental and International Affairs 152 20 Antidumping and antisubsidy measures j. Michael Finger The term "dumping" usually describes selling a commodity at different prices in different markets. But it often extends to various types of sales at prices lower than those generally current, even though the lower prices are available to all buy- ers. Indeed, any kind of competition that a do- mestic producer experiences from imports is from time to time described in emotional terms as dumping. Many kinds of imports are troublesome. GATI and its supporting codes outline several proce- dures by which a country may regulate such imports. Some of these regulate the trading prac- tices that foreign sellers may use: they regulate the "fairness" of import competition. Antidump- ing and antisubsidy (countervailing duty) proce~ dures fall in this category. Others deal with in- stances of major injury from import competition, without regard to the fairness or unfairness of this competition. (Chapter 19 examines such "safe- guards" or "escape clause" procedures.) An antidumping procedure is a specialized procedure intended to offset import prices that are lower than the prices the foreign seller charges in its domestic market. countervailing duty (CVD) procedure is intended to offset a foreign subsidy on imports. Through its specification of the content of these dures, GAIT provides that a country may in some circumstances restrict imports to nullify fects of competition from these imports. The specification of these circumstances, while legally complex, incorporates a very narrow economic perspective -- the effects of imports on competing domestic producers. Absent from this perspective are "half" of the economically the importing country, the purchasers and users of the imported goods. The economic interests ..... Antutumping and an&ubsldy ~ exports and imports, and through these actions the economic interests of other countries. Although membership in the codes is separate from membership in GATI, the codes are elabora- tions of the GATI approach •· and as their formal titles indicate, interpretations and applications of the relevant parts. Subsidies code The subsidies code's preamble lists the con- cerns the international community wants to bal- ance to bring appropriate discipline to the use of subsidies and countervailing duties. The code recognizes that "subsidies are used by govern- ments to promote important objectives of na- tional policy." The code also recognizes that "subsidies may have harmful effects on trade and production." To police subsidies, the code speci- fies a desire "to insure that the use of subsidies does not adversely affect or prejudice the inter- ests of any signatory to this agreement." But it expresses a desire "that countervailing measures do not unjustifiably impede international trade." The code does not question the "positive" propositions that one country's subsidies might cause harm to another, nor that countervailing duties impede trade. Its concern is to strike a normative balance on each matter. It provides certain "rules" for the use of subsidies, certain "rules" for the application of CVDs. There is an intuitive complementarity between rules for use of subsidies and rules for use of CVDs, b~t this complementarity is not formal. Llmits that one part of the code puts on the use of subsidies are neither the economic nor the legal inverse of provisions in another part on the use of CVDs. It is indeed possible that a subsidy be "legal" under the code, and that a CVD against that subsidy be equally "legal. ,,z Subsidy rules. The code provides that signato- ries shall seek to avoid causing, through use of any subsidy, either "injury to the domestic indus- try of another signatory" or "adverse another signatory arising through (1) effects of the subsidized imports in the domestic market of the importing signatory, (2) effects of the subsidy in displacing or impeding imports of like products into the market of the subsidizing country, or (3) effects of subsidized exports in displacing exports of like products of another signatory from a third country's market. The code also states that "sig- natories shall not grant export subsidies on prod- ucts other than certain primary products."3 154 to a domestic industry. The relevant wording in the code is simply "subsidy," or "export subsidy." The code details in ten pages how a country will conduct subsidy-injury investigations. The instances in which a country may impose a CVD are thus specified indirectly as any instance in which the national procedures the code outlines determine that imports into that country have received a subsidy, and have brought injury to domestic interests. and "shall nots" of countervailing duties are expressed in the language of these procedures, not as definitions of "subsidy" Anttdumping code Comparing the preambles of the antidumping code and the subsidies code reveals a significant difference. There are no good words for dump- ing in the antidumping code •· nothing to parallel the affirmation in the subsidies code "that subsi- dies are used by governments to promote impor- tant objectives of national policy." Thus while the subsidies code provides rules about the use of subsidies and other rules about the use of CVDs, the antidumping code provides only one set of rules. These are parallel to the subsidies code's CVD rules, reviewed above. An antidumping duty is to be imposed only under the circumstances outlined in Article VI of GATI and pursuant to an investigation in accord with the code. Article VI provides that a product is dumped if its export price is less value. The principal meaning of normal value is the price of the product in the exporter's home market, but the article provides that "in the ab- sence of such domestic price," the highest com- parable price in a third market or the estimated cost of production in the exporting country may be used. The code provides twelve pages of detail on how dumping and injury investigations will be conducted, how antidumping duties or price undertakings will be put into effect. 4 The dispute settlement procedure under the code has the basic structure of such GATI ar- rangements: consultations, conciliation, dispute settlement, and authorized countermeasures. A signatory to the code can appeal to a preliminary or a final antidumping action against it. 5 Logtc of the approach From the perspective of bringing discipline to the use of CVDs, the logic of the code is this: if Anttdumping and anlurlbsldy measures various consultations the code provided, the in- ternational community might move toward a clearer understanding of what practices would be accepted -· that is, toward clarification of what is meant by "acceptable subsidy" able CVD." This has not happened, and the lack of convergence is evident in the pattern of who initiates, and whose policies are the subject of, CVD investigations. Ninety-two percent (421 of 460) of the CVD cases initiated in 1980-86 were initiated in two countries, the United States and Chile (table 20.1). Only one CVD case was initi- ated against the United States (in Australia), and none against Chile. Ninety-four percent (432 of 460) CVD cases were against countries in which there were no such cases. Chile's cases were almost all against four countries: Brazil, Argen- tina, Peru, and Spain (see Annex 8, table 1). And nearly all were initiated before March 1983, when Chile doubled its uniform tariff rate and devalued its currency. 6 In brief, CVD actions are against a different group of countries more than they are by. Except for a brief and soon-abandoned pe- riod of activity by Chile, CVD actions all by the United States. Patrick Messerlin hardly overstates the case when he concludes: United States, the code is an instrument to con- trol subsidies. To the rest of the world, it is an instrument to control U.S. countervailing duties" (1986, p.16). The lack of success of the subsidies code seems thus attributable to an unreconciled difference among its participants rather than a flaw in the GATI approach. The antidumping code has received good no- tices from the legal community for bringing a considerable degree of international standardiza- tion to national antidumping practices. The code's negotiation and implementation brought significant modification in U.S. and EEC practices toward increased access by "defendants" (export- ers and importers of the product subject to inves- tigation) to information that is developed and used in a case. (Van Bael and Bellis, pp. 24ff. on the EEC; Stem and others, pp. 14ff. on the United States.) The antidumping committee's ongoing reviews of national legislation and its periodic reviews of national cases have focused primarily on technical matters •· such as how and what information from a case will be made available to the "defendant" and the form questionnaires used to collect information. Dif. ferences that have become formal disputes under the antidumping code have been mostly proce- dural and technical, such as clarifications .of the 156 I. Countries in which at least one countervailing duty case was initiated United States Chile Australia Canada European Community policies a Japan Summary, Part I As a percentage of all cases II. Countries in which no CVD cases have been initiated Brazil Spain Argentina Mexico Peru France Korea Other EEC member states a Other countries (40) Summary, Part II As a percentage of all cases Source: Annex 8, tables 1 and 2. a. In the EEC, the CVD instrument exists states and the Community provide subsidies subtract more from than they add to the national economic interest of the country that imposes them. There is nothing in such economics to suggest that import competition will not be troub- lesome to some domestic interests. There are net gains from trade because the benefits to some domestic interests exceed the costs of imports to other domestic interests. These gains from trade stem from the foreign price's being different from the national cost of the product. Whether foreign price are above, below, or equal to the foreign costs, the economics of "If you can buy it for less than you can build it, you are better off to buy it," applies to nations as well as to individuals. Neither dumping by the foreign seller nor in- jury to competing domestic producers is an indi- AnllaUmplng and antuubsidy ~ Antldumping cases Country Australia United States EEC a West Germany (FRG) Italy United Kingdom France Belgium Others Canada Other countries party to the code Totals Memo item: Countries not party to the code tables 3 and 4. Source: Annex 8 , a Antidumping actions are taken by EEC national economic interest is the policing of predatory pricing policies by foreign firms. Preda- tory pricing is aggressive pricing •· perhaps below cost, perhaps supported by subsidies ~ would drive domestic firms out of business and leave foreign sellers with a quasi monopoly. Foreign sellers would then exploit their market power, and the dumped-on country would, over the long run, end up paying more for the product than it would have if it had applied antidumping measures or CVDs to defend domestic producers. It is not likely that predatory pricing in today's international markets could have this effect. In an open international trading system, there is little likelihood that predatory pricing will eventually deprive a consumer of access to a particular product at a reasonable price. Even if the preda- tor drives one supplier out of business, an abun- dance of alternative sources will remain. The customer's best defense against predatory pricing is an alternative supplier. Worse economics In practice, the use of antidumping duties tends to be carried far beyond the restriction of foreign sellers to the standards of trading prac- tices by which domestic sellers must abide. Ex- aminations of how antidumping is applied in Australia, the United States, and the EEC -- three 158 petition from a third or a fourth will prevent the second one from achieving the market power to recoup its initial losses. But the (likely) use of antidumping actions for policing full-cost pricing and market sharing would tum what would other- wise be bad business decisions into "cash cows." Impossible economics As explained above, the theory underlying the GATI approach is that the use of antidumping duties can be limited by specifying the form of unfair pricing and the degree of injury that must be demonstrated before an antidumping restric- tion is put in place. The antidumping code is the obvious extension of this theory •· more detailed specification of these conditions. At the cost of increased complexity, this detail will, in theory, add precision to these conditions, thereby in- creasing the proportion of cases that can be re- solved on technical grounds. And if the technical standard for action is appropriately set, this detail will limit the resulting number of trade interven- tions. Not all expert observers are convinced, how- ever, that increased complexity has brought in- creased uniformity and precision. For example, William Carmichael, drawing on twelve years' experience as head of the staff of the Australian Industries Assistance Commission, concluded that "the procedures to be followed in antidumping investigations are not amenable to precise and consistent application. This means that the task of administering the legislation is not simply a task of following a set of unambiguous rules" (1986, p. 2). To determine, for example, which good sold in the home market is "like" the good sold for export involves judgment and discretion about which technical rules to apply. That determina- tion also demands expertise in the application of the selected technical procedures. Similar mixes of judgment and skill are required in many other parts of both pricing and injury determinations. The transparency of the process is like the trans- parency of a crystal chandelier rather than of a windowpane. An expert will be able to predict how a ray of light will pass through any prism or plate in the chandelier. But it will be impossible to predict how each prism and plate will be turned at any moment, and hence how a ray of light will pass through the complexity of the whole. In this view, technical procedures are a complex and costly language that imposes no limits on possible outcomes. Those outcomes Antldumptng and llllllsubsllly IJM!mllleS gestions for how the international community might bring additional discipline to the national use of antidumping and countervailing duties. Under the more or less legal view {explained in the first section) the antidumping code is working reasonably well. Although technicians might have suggestions for fine-tuning, the antidumping code provides a basis for taking up differences at a technical level, thereby preventing those differ- ences from becoming political matters. Problems with the subsidies code mainly reflect bilateral differences between the United States and the EEC over matters of agricultural policy. In this situation a proposed change of definition or technical standard will be evaluated not for principles but for how it would affect decided positions on existing policies. Direct bargaining over the specific policies may be the better route to progress •· an exchange of concessions rather than a generic agreement on what national poli- cies should be. The alternative, more strictly economic view of how to deal with troublesome imports suggests a more thorough revision, built on three central elements: (I) Ask the right question. (2) Get the economics right. (3) Attack the big problems directly. This approach sees national antidumping and CVD procedures primarily as channels for manag- ing domestic pressures for import restrictions. An antidumping or CVD petition is a request for an action by a national government, and that pro- posed action should be the focus of the national decision. The right question is: Who in the domestic economy will benefit from the proposed action and who will lose? The traditional ques- tion •· What are the trade practices of foreign exporters, and how do these practices affect one part of the domestic economy? •• is the wrong one. Next, get the economics right. The domestic economic costs of a trade-restricting action are as substantive as the gains. They have never been given legal substance because the legal profession has never been charged to do so, not because it cannot be done. A domestic loss and a domestic loser from an impediment to imports should have the same standing in law and in administrative procedures as a gain or a gainer •• including the administrative mechanics to petition for removal of an impediment to imports when that impedi- ment compromises his or her economic interests. From a legal perspective that presumes an 160 another counay's subsidy. For eumple, if counay A pro- vides a 5-pen:ent subsidy on its exports in tum, adds a 5-pen:ent countemliling duty to these goods as they are imported, there would be no policy exactly offsets the other - except fer from A's treasury to B's, nor. Thus, in the way economists are trained to view such things, a CVD is the inverse of a subsidy, alization is the inverse of protection. is an odd perception, like insisting that an eraser is the opposite of a pencil. 3. These products include any of fishery in natural form or processed as is customarily re- quired to prepare it for marketing in substantial volume in international trade. 4. Article VI specifies "material" provides an illustrative, but explicitly indicators of injury, such as reduced lcet share. 5. Formally, there are "parties" ment and "signatories" to the terms are related by the first footnote ment. It reads "The term 'signatories' mean Parties to this agreement." standard GATT approach to dispute settlement - to allow any party to bring up any matter that it considers impair a benefit accruing to it from the agreement. 6. During 1980-86 only one of 140 CVD cases initiated in Chile reached an affirmative final determination. conversation, Chilean trade officials consideration in Chile's decision was the threat of retaliation by trading cases were brought. 7. Dumping is usually a private action and subsidizing a government action, so it should be easier reach agreement on how each will regulate someone else than on how they will (collectively) regulate each other. 8. The arguments could also be applied to the way that GATT sanctions other sorts of trade-impeding practices. 9. Since most international trade is imports buyers are more likely producers than consumers. 10. Finger and Nogues (1987) examine how procedures (apart from outcomes) might be used to the advantage of home producers. II. In the United States the restrictions are mainly the outcome of a series of antidumping and CVD petitions. 12. Korea and other exporters end up as net gainers. The "rents" they collect because more than offset their losses from charged production and sales. A similar pattern - net costs to and net gains to trading partners - is on agricultural trade. See World Bank (1986, table 6.8). References Beseler, J.F., and A.N. Williams. 1986. Antidumping and Antisubsidy Law: The European Communities. London: Sweet and Maxwell. Carmichael, W.B. 1986. "Review of the Customs Tariff, (Antidumping) Act." Submission berra. Processed. 21 Agriculture Delbert FttclJett Pervasive government intervention in domestic agricultural markets is the fundamental cause of the current disarray in world agricultural markets. It is also the force behind the pressures for in• creasingly protectionist agricultural policies in developed and developing economies. 1bis is not new. But there have been some marked changes in the world economy in the past two or so dec- ades, changes that have had a big impact on global agricultural markets. First, the trade in agricultural commodities has risen considerably, and the variety of goods traded has broadened. Second, major new exporting and importing countries have come onto the world agricultural markets. Third, the shift from fixed to variable exchange rates by the principal trading countries has had a major impact on domestic and com- modity and financial markets, both domestic and foreign, and thus on domestic farm producers. In these circumstances the typical farm policies of developed and developing countries appear to be poorly designed for encouraging economically efficient decisions by producers, traders, and consumers. Among the anomalies of these poli- cies, as Miller (1986) has catalogued, are the fol- lowing: (1) The budgetary cost of the U.S. farm pro- gram in 1986 was nearly S700 for each nonfarm family •· that of the EEC's, more than S900. (2) Consumers in Japan are paying food prices about 60 percent higher than they would if internal prices reflected the fall in world prices and the appreciation of the yen since 1980. (3) In the EEC and the United States, the quar- ter of farmers with the largest output re- ceived three-quarters of the farm support. 162 between achieving one or the other have often been necessary. In many developing countries the objective of cheap food -- when pursued through policies that depress the prices and in- comes of the farming population -- has consis- tently lowered production, hurt trade balances, and set back a country's economic advancement. And despite expensive agricultural support pro- grams, the OECD countries are beset by numer- ous problems. Farmers' incomes appear to have dropped precipitously in the United States in recent years. The costs of agricultural support programs in both the EEC and the United States have become appallingly high. And commodity prices -- especially on world markets -- have by and large limped along at historical real lows. Concurrently, the rate of growth in the volume of agriculture trade has fallen during the last five years, and stocks of some commodities in the hands of the OECD governments have bur- geoned. Paradoxically, the world food economy has performed reasonably well in the past two decades. One recent World Bank report, Poverty and Hunger, suggested that the specter of famine had been effectively banished: the main problem remaining is the scant purchasing power of the very poor, who cannot assemble the resources to demand (effectively) an adequate diet (World Bank 1986b). Although the grotesque juxtaposi- tions of glut and famine may have been exorcised, improved farm production, productivity, and in- come will continue to represent a major opportu- nity for economic growth and proverty alleviation in the developing countries. Types of agricultural protectionism The variety and ingenuity of measures that OECD governments apply to limit access of imported agricultural commodities to their domestic mar- kets have driven a progressively thicker wedge between the prices on world markets and the prices domestic producers receive. The interven- tions in agricultural commodity trade flows are commonly divided into border and nonborder measures. Tariffs are a common border measure, but they appear in a myriad of forms: specific charges and ad valorem; customs valuations based on fictitious minimum or reference prices rather than actual invoices; fixed (bound) or vari- able levies (according to a target price); and so on. Similarly, export incentives (nonborder meas- ures) take the form of tax drawbacks, bonus commodity certificates, surplus stock disposals Agriculture Frequency Tariff quotas and seasonal tariffs Commodity (1) Meat and live animals 12.3 Dairy products 6.9 Fruits and vegetables 15.7 Sugar and confectionary 0.0 Cereals 1.7 Other food 0.8 Tea, coffee, cocoa 0.4 Other beverages 18.5 Raw materials 0.0 All agriculture 8.2 Manufactures 2.2 Note: Data arc the number of import items items. The industrial-country markets the United States. a. This column will be less than the sum Source: World Bank 1986a. vene in their agricultural trading systems. Taxes on the sector's trade generally represent a much more important share of their fiscal revenue than in the developed countries. Concurrently, the share of farm products in the typical urban con• sumption basket is much greater than in the developed countries -- thus often intensifying the politicization of price interventions for farm commodities. On balance, the maintenance of producer prices and incomes has tended to be less important than the government's fiscal con- siderations or shon-term urban consumer inter- ests. It also appears that exchange rate manipula- tions have been much more central or responsive to pressures to transfer resources out of the farm- ing sector for developing countries than for devel- oped countries. Overvalued exchange rates and inordinate protection to industry have strongly influenced the distribution of income and wealth in most developing countries. On balance, the typical array of policies has depressed resource allocation, productivity, profitability, and income growth in the agricultural sectors of developing countries. In this situation, one can legitimately question the ability of many developing countries 164 Nominal protection coeftlclents commodities Wheat Course lf!_atns Producer Consumer ProducerConsumer Country or Region NPC NPC NPC Australia 1.04 1.08 Canada 1.15 1.12 EC b 1.25 1.30 Other Europe c 1.70 1.70 Japan 3.80 1.25 New Zealand 1.00 1.00 United States 1.15 1.00 Weighted Average 1.19 1.20 Pork and poultry Datry products Produ- Consu- Produ- Consu- cer mer cer mer NPC NPC NPC NPC 1.00 1.00 1.30 1.40 1.10 1.10 1.95 1.95 1.25 1.25 1.75 1.80 1.35 1.35 2.40 2.40 1.50 1.50 2.90 2.90 1.00 1.00 1.00 1.00 1.00 1.00 2.00 2.00 • 1.17 1.17 1.88 1.93 a. Averages are weighted by the values b. Excludes Greece, Portugal, and Spain c. Austria, Finland, Norway, Sweden, Source: World Bank, 1986a. The commodity market equilibrium studies are much more ambitious, estimating possible gains for developed and developing countries from jointly or even separately liberalizing their agricul- tural trade regimes (tables 21.4 and 21.5). These tables partly underestimate the possible gains, given the downward trends in world commodity prices since much of the work was carried out. For the considered commodities the major bene- ficiaries of trade liberalization would be the liber- alizers. For the principal trading groups, obtain- ing concessions without any liberalizing measures of one's own seems to be a self-defeating strategy. But in focusing in greater detail on individual developing countries, there appears in some cases to be a real deterioration in their situation -- for example, the very low income cereals im- porters would face higher prices for their cereals purchases from abroad (Zietz and Valdes 1986). Agriculture Indtt of nominal and real protection African Cereals 1972-83 Nominal Real Nominal Country index index Cameroon 129 90 Cote d'Ivoire 140 Ethiopia 73 55 Kenya 115 94 Malawi 85 79 Mali 128 79 Niger 170 119 Nigeria 126 66 Senegal 109 79 Sierra Leone 104 95 Sudan 174 119 Tanzania 127 88 Zambia 107 93 All Sub-Saharan Africa 122 89 Note: The nominal index measures the change currency at official exchange rates. The prices converted into local currency at Source: World Bank 1986a. dency for these program to hike food prices, some pressure for such a partial solution may not be all that far-fetched. A second clear deterrent to the developing countries' sitting out the agri- cultural trade negotiation is the estimate that unilateral liberalization of agricultural trade by the OECD countries would represent losses to the developing countries of SI 1.8 billion in 1980 prices (table 21.5). Past treatment of agriculture in GATT In principle, trade in agricultural products is subject to the same GATT discipline as trade in other commodities. But several important excep- tions exist. The general prohibition of quantita- tive import and export restrictions or quotas (Article XI) may be relaxed in certain circum- stances: • Temporary export restrictions may be intro- duced to prevent or relieve shortages of food or other essential products. 166 Intemational price and trade effects Country or country group tn wbtcb ltberaltzatton takes place Wheat EEC 1 Japan 0 United States 1 OECD 2 Developing countries 7 All market economies 9 Percentage change in world trade volume EEC 0 Japan 0 United States 0 OECD -1 Developing countries 7 All market economies 6 Note: Data are based on the removal of Portugal, and Spain. Source: World Bank 1986a. Efficiency gains by liberalization Country group Developing countries Industrial market economies East European nonmarket economies Worldwide Note: Data are based on the removal of Source: World Bank 1986a. subsidies •· including price and income support programs •· that may affect agricultural commod- ity trade flows, parties are not explicitly enjoined from applying them. But they are required to notify GATI of such subsidies and to consult with other members when requested. (Ibe subsidies code and the antidumping code also provide procedures for applying countervailing measures when subsidies are shown to cause injury.) A Agriculture Growth of world (Average annual Item 1960-69 Exports All merchandise 8.5 Agricultre 4.0 Mining 6.5 Manufacturing 10.5 Production All merchandise 6.0 Agriculture 2.5 Mining 5.0 Manufacturing 7.4 Source: GATI 1986b. ages •· have tended to be between the major developed country participants. By the Tokyo Round these participants were the United -States, the EEC (whose Common Agricultural Policy was only in its formative stages at the Kennedy Round), and Japan. The main agricultural trade concessions related to those three parties. An initiative that did not prosper was the conclusion of a new, more ambitious International Wheat Agreement. In the Tokyo Round, there was no real attempt to grasp the nettle of domestic cultural policies as representing a major disequili- brating force on international commodity mar- kets. Despite the most-favored-nation principle un- derlying GATT, an enabling clause authorized developed country members to grant preferential and nonreciprocal tariff concessions to develop- ing countries under the auspices of the General- ized System of Preferences (GSP). Currently about twenty-five developed countries grant GSP concessions. The coverage of agricultural prod- ucts by these arrangements is limited, however. In recent years fewer than 20 percent of the imports accorded GSP treatment by the United States, the EEC, and Japan have been agricultural products (Congressional Research Service 1986). Problems remain with the higher rates of duty charged on processed and semiprocessed prod- ucts in contrast to primary products. Moreover, 168 trade issues - a Committee on Trade in Agricul- ture, with forty-nine member states, was estab- lished in 1982 and instructed to review: • Improvements in the conditions of market access. • Notification and examination of national agri• cultural policies. • Distortions to competition in agricultural trade arising from direct and indirect export subsidies. The recommendations of the committee fo- cused on strengthening the Article XI injunction on quantitative restrictions. Such barriers untary export restraints, variable levies, unbound tariffs, and minimum import prices would be brought under the range of measures to be regu- lated. The use •· and abuse •· of export subsidies would be more closely circumscribed. Both the domestic and agricultural trade policies of mem- bers would be subject to regular review (Congres- sional Research Service 1986). This move to raise domestic agricultural policies as a central element in international trade in farm products is a water- shed. The opportunity for underdeveloped coun- tries to pursue this theme to reduce the disarray in international commodity markets -· disarray that operates to their disadvantage -· is an impor- tant one for them to exploit. In some respects, the situation may not seem to be propitious for progress in reducing barriers or liberalizing trade in agricultural products. Since 1960 the growth in the volume of world agricul- tural trade has been slowing -- this, when the growth of world agricultural production has been upward (table 21.6). This phenomenon may derive in part from the general drive in part for food self-sufficiency by many countries in the 1970s •· in reaction to the widely advertised food "crisis." A notable expansion of agricultural in~ frastructure and on-farm investment occurred in that decade. Fueling this expansion were optimis- tic market prospects and facile access to invest- ment and commodity trade finance arising from the liquidity on world financial markets. There was also a rapid uptake of new, more productive inputs and techniques. Moreover, domestic food demand was expanding relatively rapidly in middle- and low-income developing countries. Turmoil on financial and foreign exchange markets and lower growth rates in both the devel- oped and developing countries in the 1980s have punctured the early buoyancy of these world commodity markets. But agricultural production has continued to grow. New exporters have Agriculture oping an improved GATI framework for address- ing and resolving these issues. Arc domestic farm policies on the negotiating table? The domestic farm policies of the United States, the EEC, and Japan are keys to moderating the disarray that has gripped global agricultural com- modity markets during the 1980s. Yet, the eco- nomic and political concerns for the pace and direction of structural change in agriculture are legitimate. The processes and time frame under which their farm producers, processors, and suppliers will be encouraged to adjust production capacity to likely future demand •• in scale, product composition, geographical bution, and comparative advantage •· cannot be divorced from the move to a more liberal agricul- tural trading environment. There appear to be two approaches, poles apart, to this adjustment: (l) Allocating production and trade quotas to the principal producer and market partici- pants, to manage the supply and prices of principal traded commodities. (2). Harmonizing domestic agricultural income and price support policies with agricultural trade policies to remove the market wedge of domestic support policies. The member nations of the EEC apparently prefer the first approach. The second alternative more closely parallels the proposals of the United States and is manifest in U.S. 1985 farm legislation to reduce (if perhaps very timidly) to world mar- ket price levels its domestic support and target prices for major traded commodities. It also parallels further proposals progressively to de- couple farm income support programs from indi- vidual commodity production decisions. Concurrently, many developing countries must redress the policy distortions that have depressed agricultural productivity and profitability. thermore, so that their agricultural producers, processors, and traders can promptly respond to the opportunities of a more liberal trading envi- ronment, their domestic and external trade re- gimes must experience a parallel liberalization. They also need a stable macroeconomic environ- ment to provide an aura of stability and confi- dence that can underpin further development. But how can agricultural programs in the OECD and the developing countries be shaped to 170 22 Tropical products Vincent Cable Acknowledged as distinct and important twenty- five years ago, negotiations on tropical products essentially concern trade barriers on agricultural raw materials •· in processed and nonprocessed forms. 1 As such, they have provided a forum for liberalizing trade on many agricultural items of concern to developing countries without becom- ing entangled in the more intractable difficulties surrounding temperate agriculture. In the Tokyo Round, of the 4,000 dutiable items at the tariff. line level subject to requests for concessions in the tropical products negotiations, some most- favored-nation (MFN) concessions (or conces- sions under the various GSP schemes) were made on 2,930 items (GAIT 1979). By contrast, there was little headway in agricultural negotiations on temperate products. The negotiations on tropical products also provide a means to give practical effect to com- mitments by developed countries to assist devel- oping countries •· and more widely to offer "special and different treatment" many number of low-income or small developing countries.2 Almost 100 developing countries are not newly industrialized countries (NICs), high- income oil exporters, or major low-income coun- tries (India and China) •· all of which have some capacity to negotiate effectively in their own inter- est, even if enjoying preferential treatment. These other countries •· call them the Group of 100 •· are overwhelmingly commodity exporters, mainly of tropical agricultural goods. Although many raw materials face no trade restrictions, there are some serious barriers facing tropical products, and even more on processed goods. It is on these products that most of the Group of 100 will concentrate their efforts in the new round. Other forums involving developing 1'roptcal prodllCIS (4) Tobacco, tobacco products, rice, manioc, and tropical roots. (5) Tropical fruits (bananas, pineapples, gua- vas, mangoes, and so on) and tropical nuts. (6) Tropical wood and wood products (but not pulp and paper); natural rubber and rubber products (excluding rubber shoes and tires). (7) Jute and hard fibers. Some major tropical products have thus been excluded from negotiations. Cane sugar has supposedly been dealt with -· if it has been dealt with at all •· in agricultural negotiations (see chapter 21). The same applies to a number of oil seeds and vegetable oils (soya and olive oil). livestock are excluded in the form of meat and live animals (handled under agriculture) or leather and leather products (handled in the main body of industrial trade negotiations). Fish and fish products will be dealt with under natural- resource-based products. Other than products of jute and hard fibers (such as sisal), products of textiles fibers are dealt with in separate sions on textiles (see chapter 23). Even within the seven groups, there is much scope for argu- ment over the boundaries: for example, tropical as against temperate fruit and vegetables, espe- cially in relation to such Mediterranean products as peaches, apricots, and citrus fruits. In this chapter, .tropical products will often be used in a broader sense than that encompassed by the seven categories so far identified in GATT; but emphasis is given to those categories. Trade barriers facing tropical products Concessions on tropical products in the Tokyo Round •· and subsequently •· have centered on tariff reductions, even though NTBs in many cases represent more serious barriers. The remaining tariffs nevertheless are often substantial, espe- cially when considered in effective rather than nominal terms. They will thus be considered in some detail here. Nominal tariffs Table 22.1 gives a crude snapshot of tropical product tariff levels prevailing before and after the Tokyo Round: crude, because the tariffs are (nominal) arithmetic averages of broad categories containing many tariff lines, an incomplete group of developed countries, and a coverage somewhat different from that of the Tokyo Round. The 172 Tariff Stage of Product processing description 1 Fruit, fresh dried 2 Fruit, provisionally prepared 3 Fruit prepared 1 Coffee 2 Processed coffee 1 Cocoa beans 2 Processed cocoa 3 Chocolate products 1 Oil seeds 2 Vegetable oil 1 Unmanufactured tobacco 2 Manufactured tobacco 1 Natural rubber 2 Semiprocessed rubber (unvulcanized) 3 Rubber articles 1 Raw hides and skins 2 Semimanufactured leather 4102-8,4110,4302 3 Travel goods, handbags, etc. 4 Manufactured leather articles 5 Footwear 1 Vegetable textile yams (ex:c. hemp) 5706-7 2 Twine, rope and articles 5904-6,6203 3 Jute fabrics 1 Semimanufactured wood 4405,14,16,17,18 2 Wood panels 3 Wood articles 4 Furniture a. The ten markets are the EEC, Japan, b. Unweighted average of product averages c. Change in tariff escalation is derived Source: UNCTAD. tropical products and of high levels of effective protection •· in some cases, extremely high. Moreover, the highest rates of effective protection are to be found in industries based on fibers, hides, skins, and oil seeds, where labor-intensity is also relatively high (Balassa 1%8). Considerations of effective protection compli~ cate the tactics in trade neogtiations, since deeper tariff and NTB reductions on production inputs can raise the effective rates of protection for processed goods. For example, the effective protection of refined coconut oils is higher under the EEC's lower GSP tariffs than under MFN tariff lroplcal products average of a mere 0.3 percent) than for semi- manufactures (by 30 percent to an average of 4 percent) and for finished manufactures (by 34 percent to 6.5 percent) (GATI 1979 and UNCTAD 1980). To take a specific example under the Tokyo Round, the essentially unchanged U.S. and Japanese tariffs for processed meat, coupled with a reduction for fresh meat, significantly increased the effective protection. The upshot of tariff escalation is a pattern of international trade in which developing countries export a much smaller proportion of processed tropical products than developed countries ex- porting the same items. In some fields, though, the developing countries have made significant processing advances •· chocolate, leather goods, jute goods, cotton goods, and palm oil (table 22.2). They have advanced partly because they neutralized tariff escalation by taxing exports of unprocessed goods. The World Bank estimates that removing tariffs on processed varieties of eight agricultural products in which developing countries have a significant world market share would raise the value added in the processing of those exports by 20 percent •• that is more than the GSP, taken as a whole, has done (World Bank 1981, p. 23). Preferences, discrimination, and tropical products Recent literature on trade liberalization has pointed to the greater gains for developing coun- tries from achieving maximum possible MFN cuts •• greater than those from seeking to protect or enlarge GSP margins. 4 Whatever the general merits of the argument, it applies even more to tropical agricultural products, for which the GSP has limited application and there is little scope for trade diversions from industrial country export- ers. And there are clear advantages to having bound tariff cuts in GATI rather than reversible, and qualified, cuts in the GSP. There are, how- ever, some cases when preferences are relevant in considering tropical products, such that seeking maximum MFN cuts may not be optimal for devel- oping countries. One such case is when substantial competing imports from developed countries into prefer- ence-giving countries make possible some prefer- ential diversion of trade. This is most obviously the case with processed tropical products, but it also applies to some agricultural items, such as tobacco. Even more important is that the main 174 Developed countries' Imports raw 1970 Raw and processed Percentage tn value Product (mtlltons of dollars) Coffee 2,876.7 Fruit 1,383.6 Cotton 1,329.4 Rubber 849.5 Vegetables 637.4 Cocoa 771.4 Sugar 1,177.8 Meat 8%.0 Leather 363.1 Copra 285.6 Jute40 9.0 Palm kernel 97.0 Source: UNCTAD. There is a generally accepted case for giving priority to the least developed countries. In 1985, 65 percent of their export earnings were from tea, coffee, tobacco, cotton, fruit, and nuts. These countries are not only heavily dependent on tropical products but are also small suppliers of them. The only tropical products in which they have over a quarter of all developed country imports are jute (Bangladesh is by far the world's largest exporter), dried fruit, live animals, hides and skins, and dressed furs. Only the first two of these fall within tropical products negotiations currently defined. For this reason the specific interests of the least developed countries liberalization of trade in tropical products are limited to a small number of items. They have concentrated instead on seeking discriminatory liberalization within GSP schemes. Within the limit of GSP schemes, the main donors appear to give favorable treatment to the least developed countries. The EEC now gives duty-free treatment to them under the GSP, as do Canada and many minor donors. Japan has removed tariffs from jute, the main area of restric- tion. The Unites States, as of April 1985, ex- empted least developed countries from competi- tive-need limits (UNCTAD 1985). But most GSP schemes, and especially that of the Japanese, have poor coverage of tropical and other agricultural items. Mainly for this reason, only 42 percent of Tropical prodUCIS guaranteed domestic prices when import prices are fluctuating. The EEC uses them widely under the Common Agricultural Policy, but they affect only a few tropical products. One is sugar, which is affected directly and indirectly (as applied on the sugar content of tinned fruit, for example). But for sugar the price support applies to ACP as well as EEC producers. Variable levies are also used in the United States (sugar, notably); Swe- den (vegetable seeds and oils and tropical root flour); Switzerland (vegetable oils and some fresh cut flowers); and Austria (vegetable oils, vege- tables, fruits and nuts, sugar, and cereals). The effects of some of these restrictions are complex and difficult to unravel. The high protection (through variable levies) on EEC butter and beef has probably done much to stimulate imports from some developing countries of oil seeds (for margarine) and oil meal (for cattle feed). But the EEC is now countering with a tax on fa.ts and oils designed to recapture the market for butter. Quantitative restrictions (QRs) are widely em- ployed, though not always for domestic protec- tion. The EEC's quotas on bananas, for example, are designed to safeguard the market for ACP producers. But some QRs are clearly designed to restrict access of developing country exporters of tropical products. Japan uses QRs to protect fruit processing (the EEC uses them less). Japan and the United States impose QRs on groundnut imports. Several European countries use QRs (or controls by state trading agencies) to restrict tobacco imports. Japan uses state trading agen- cies to restrict imports of rice. One of the more controversial QRs in recent years concerns manioc. Manioc exports to the EEC from Thailand formed a growing, and com- petitive, source of animal feed until the early 1980s. Then, at the behest of EEC cereal grow- ers, VERs were imposed under an agreement that has since lasted five years. Quotas have also been extended to cover China. The complexity and severity of protection is increased by variable levels and tariffs, including tariff quotas, on these and other exporters. Quantitative restrictions on manioc •· though obviously less important in global terms -· also apply in Scandinavia. Health and sanitary requirements are difficult to interpret since they may be genuinely nondis- criminatory and used to defend the interests of consumers. But some have been used on tropical products in ways that, on the face of it, suggest the influence of special interest lobbies. This appears to be so for Japanese restrictions on the 176 liberalization primarily designed Bangladesh's exports. Tropical products In the new round Discussions on tropical products have enjoyed much continuity. Since the Tokyo Round the GAIT Trade and Development Committee has dealt with another 412 requests and concessions in 146 cases (mainly in relation to spices, jute goods, and tropical fruits and nuts). These con• cessions have been made mainly in three rounds of consultations on developing countries' tabled requests for liberalization by individual developed countries. But some have also been unilateral. Moreover, the GSP provides a mechanism for continuing attention •· albeit outside multilateral negotiations •· to problems of tropical products. This continuity now creates both an advantage and a disadvantage for developing country nego- tiators. The advantage is that the ground rules are well established and much background work has already been done. The disadvantage is that most of the relatively easy and noncontroversial concessions have been made. Developing countries have had four concerns in the preparatory work for the new round. The first is that tropical products receive priority as a major, separate subject in its own right. The second is that questions of tariff escalation and NTBs are tackled more seriously than before. The third is that agreement is reached speedily, provision for advance implementation of conces- sions. And the fourth is that negotiations be conducted on the basis of special and different treatment, without reciprocity from the develop• ing countries. There are, of course, negotiating objectives that will have to be traded off against others and each other. In particular, the EEC and the United States are reported to be seeking re- ciprocal liberalization from some developing countries for tropical products or their equiva• lent. Nevertheless these concerns are incorpo- rated, in spirit, in the Punta del Este Declaration: The problem now •· given the limited coverage and the difficulties in tackling the remaining areas where trade barriers are severe -· is to find ways of giving effect to these priorities in the negotia• tions. Coverage In a study of the effects of a 50-percent cut in agricultural tariff barriers facing ninety-nine com- Tropical products tective barriers operated by Japan, which has re- stricted GSP coverage of agricultural items, very high tariff barriers in some cases (fruit process- ing), and many NTBs. The EEC is more circum- scribed because of its commitments to the ACP countries and the coverage of tropical products under the GSP, especially for the least developed countries. But there are two areas in which the EEC could make a major move. The first is on internal taxes, especially on beverages and spices: being nondiscriminatory, they do not affect pref- erences. The second is to ensure that reforms of the Common Agricultural Policy, including multi- laterally agreed-on liberalization, extend to some highly protected items, such as rice. States has a small number of highly protected areas •· fruit, fruit processing, tobacco, groundnuts -- but otherwise quite liberal access. And for all the major and minor developed coun- tries, a systematic attempt to reduce tariff and NTB escalation on processed goods would be a priority. Reciprocity and discrimination The negotiations on tropical products face some difficulties if they are to serve vehicle for the interests of many low-income and small developing countries. First, the least devel- oped countries •· and the ACP countries .in the EEC •· have preferential access to protect. Al- ready identified here, however, are some priority issues (such as internal taxes on beverages and spices) that will be of particular, but not exclu- sive, benefit to these countries. And there are some important fields •· notably in relation to the Japanese market •· where access rather than pref- erence is the key issue. Second, some of the NICs are major exporters of tropical products, especially in manufactured form. 5 Moreover, the main beneficiaries of re- duced tariff and NTB escalation on raw material processing are likely to be countries with a devel- oped manufactured export base (World Bank 1981). Demands for reciprocity or discriminatio are likely. One way to meet some of these de- mands, at least over processing, is for these devel- oping countries to reciprocate by dismantling some of the raw material export restraints that have had the effect of neutralizing the effects of escalating protection in developed countries. Such mutual liberalization would lift an unin- tended burden of taxation on trade in raw mate- rials (Golub and Finger 1979). Further, where 178 TD/229/Supp2. Geneva. _ _ . 1980. G.-ral Review of the World Commod#y Situation: The Infl~ ofProtecmmism on TrtUk in Pri- mary and Procns.J Commoditia. TD/B/C.1/207 .Add2. Geneva. _ _. 1985. Mld-tffffl Global RffltlW of Progress Towards tlH Implementation of SNPA for t/H 1980s for ti# Least De- veloped Co,mtrin. TD/B/AC.17/25 Add 2. Geneva. . 1986. Protectionism and Structural Adjustment. TD/B/1081, Pan 1. Geneva. 23 Textiles and clothing Vincent Cable Much of the world's textile trade is governed by the multi.fiber arrangement, or MFA. 1 Of the esti- mated textile and clothing trade of S105 billion in 1985, there are broadly three main components (table 23.1): (1) S44.5 billion is trade between developed countries. The majority of this -- S21.6 billion of intra-EEC trade and S8. 7 billion EEC-EFfA trade -- is almost entirely free of quotas and tariffs, barring some transitional quotas on exports from Spain or Portugal. A small part is quota-controlled: the Sl.25 billion of Japanese exports to the United States. The rest is restricted only by tariffs. (2) S29.5 billion is the value of exports from developing countries and the eastern trad- ing area - including China -- to developed countries. Almost all is potentially covered by the MFA or other quota systems (non- MFA quotas in the exports of Taiwan (Prov- ince of China); industry-to-industry VERs rather than MFA quotas on imports by Ja- pan). Excepted, until MFA4, were S3 bil- lion of goods made of non-MFA fibers (jute, silk, linen, and so on). Not all potentially controlled trade is regulated, and not all quotas are fully used. But trigger mecha- nisms exist to stop rapid import growth. (3) The residual S30.4 billion is trade among developing and eastern trading area coun- tries. Except imports by Hong Kong (S4 billion in 1985), very little is freely traded. The MFA is an anomaly: a sector-specific GATT agreement running counter to GATT's nondis- criminatory principles. It sanctions bilaterally ne- gotiated quotas designed to slow down growth of imports from low-cost (mainly developing coun- try) sources to developed country markets. 180 Textiles From Developed Developing and eastern trading area Source: GATI. producers in developed countries has become permanent. In multilateral trade negotiations, textiles have • been marginalized. In the Kennedy and Tokyo Rounds, a snapback clause made acceptance of .,. the MFA a prior condition for tariff negotiations on textiles. Even then, tariff cuts were only half · the average cuts on manufactures, and levels are now two to three times higher than the average. At the 1982 GATT ministerial meeting, the con- tracting parties agreed to study ways of liberaliz- ing textiles and clothing trade with a view to re- turning it to GATT rules (GATT 1984). But no specific recommendations were made, and the MFA was continued for a further period. The introduction of the MFA and the subse- quent tightening of controls led to a sharp decel- eration in the (real) annual growth of imports in industrial countries -- from the 21 percent of the LTA period during 1963-73 for clothing (7 percent for textiles) to 14.4 percent in 1973-76 (-0.4 per- cent for textiles), and 4.6 percent from 1976-78 (2.5 percent for textiles). The cutback was most striking in the EEC, particularly following the ad- ditional controls introduced under MFA2. Low- cost imports in the EEC grew by a mere 1.5 per- cent a year during 1976-81, while imports from developed countries grew 3.9 percent a year (table 23.3). There was a marked change after 1981, in the period of MFA3. Imports in the United from MFA sources grew rapidly (though imports from the rest of the world grew even idly). Much of this growth could be attributed to the high value of the dollar and the high growth in U.S. consumer spending. But there was also a spurt in low-cost imports in the EEC (by 6.5 percent a year), not matched by import gro~ from other sources. Texttles and clothing Arrangements Agreem4mt Period STA 1961-62 LTA 1962-74 (including two agreed extensions MFAl 1974-77 MFA2 1978-82 MFA3 1982-86 MFA4 1986-91 182 Real growth of low-cost (Average EEC Imports from Low-cost developed Period imports countries 1973-76 24.1 11.9 1976-81 1.5 3.9 1981-85 6.5 -1.4 Notes: Low-cost in an EEC context includes context, it relates to all countries except Source: Based on Wolf (1986). stagnation, and business forecasts were favorable. The EEC signaled its willingness to relax restric~ tions, which had been more tightly enforced than in the United States. Under the combined influ- ence of rising home demand and an appreciating dollar, U.S. exports declined during 1982-84, and import volumes almost doubled. When output fell in 1984, MFA suppliers bore the brunt of action to stem imports. The first step was to tighten existing agreements: in the first six months of 1984 there were more than 100 "calls for restraint" against more than twenty develop- ing countries. Monthly import limits were set, and more restrictive rules of origin were intro- duced. In addition, the U.S. administration made a commitment to the industry to secure an MFA4 that was more restrictive in certain respects. It began to renegotiate and tighten its bilateral agreements with major suppliers -- Hong Kong, the Republic of Korea, and Taiwan (Province of China) -- even though the existing agreements had two years to run and the terms of the next MFA were not yet multilaterally agreed. The admini· stration was under pressure from the Congress, which wanted more drastic action. Industrial countries thus approached negotia- tions seeking a continuation of the MFA and, for the United States, more restrictive terms. As in earlier MFA negotiations, developing countries faced the threat of something worse: a reversion to quotas imposed by importing countries with- out the quota rent that accrues to exporting countries administering voluntary restraints. More serious, a jointly declared intention to oppose MFA renewal was belied by the evident interest of some suppliers in maintaining it (while iexttles and clotblng Compound growth rates Cana,. Aust• Luxem- Source da USA Japan tralia World 3 -0.68 4.9() 0.79 0.36 321 1.41 0.70 1.S9 1.00 322 3.76 9.Sl s.78 1.10 Non-0ECD 3 2.97 6.70 O.S6 3.Sl 321 4.96 6.64 1.02 9.99 322 7.32 10.9() 6.18 2.Sl Developing (Africa & America & 3 8.06 4.94 1.40 3.81 321 6.17 6.75 1.50 4.02 322 7.8S 11.00 6.26 2.60 MCs 3 O.lS 11.22 2.9() 9.10 321 5.05 0.27 -1.95 9.02 322 1.02 9.21 4.79 3.74 Source: Estimates from data given in Table • The codes are: 3 manufactures; 321 Source: 0.E.C.D. Department of Economics paper No. 31, March 1986. Based on original gage mats, mattin~, and carpets typically made from such fibers as jute, coir, sisal, abaca, maguey, and henequen." Only hair fibers (cashmere and angora) and mineral fibers (glass and asbestos) are now outside MFA coverage. Thus, the limited flexibility allowed to reflect demand and technological changes is further diminished. 0 Provisions against false declarations have been tightened. 0 Article 3 •• governing the conditions for uni- lateral rather than bilaterally agreed quotas •• has been tightened to strengthen the capacity of developed countries for holding down imports and fixing a low base for subsequent bilateral agreements. 0 The "reasonable departures" legitimized the strengthening of restrictive provisions under MFA2 •• has been resur- rected. But it is diluted, and it proscribes "negative growth" and visions. 184 MFA3: around 1 percent a year on average for major suppliers. The EEC's bilateral agreements also discriminate in terms of quota growth rates between major suppliers •· Macao, Hong Kong, the Republic of Korea, Taiwan (Province of China) •· specially favored suppliers, and others. The EEC has liberalized its controls by scrapping a quarter of its (underused) quotas, dispensing with quotas for half a dozen minor Latin American suppliers and Bangladesh, and relaxing controls on outward processing operations. Taken as a whole, the combined effect of MFA4 bilateral agreements seems no more restrictive than MFA3. likely effects of liberalization On exporters On one estimate, the removal of tariff and nontar- iff barriers could increase developing country exports to the main OECD markets by 82 percent for textiles and 93 percent for clothing (Kirmani and others 1984). Another estimate is that com- plete, nondiscriminatory liberalization could raise developing country exports of clothing by 135 percent and of textiles by 78 percent (UNCTAD 1986). Set against these gains are the terms-of. trade losses resulting from loss of quota premia •· which are large for some developing coun-tries. 3 The increased imports are almost certainly exag- gerated in these estimates, which appear to ig- nore the short-term supply constraints on export expansion and overestimate the extent to which controls now bite. But there would be expan- sion. There would be a stimulus to new invest~ ment. And there would be some encouragement to decisionmakers in developing countries to face the adjustment costs of adapting to a more ex- port-oriented trade policy •· and reduced incen- tives to exporters to make money from quota scarcities rather than improving productivity and quality. There would also be some distributive implica- tions for developing country exporters. Such is the degree of regulation at present that it is diffi. cult to say which countries would benefit most from liberal trade. On the few occasions when it has been possible to simulate market conditions (the adoption of global quotas by Norway), there was a strong shift to Hong Kong. But in the long term, Hong Kong and other major exporters face supply constraints, especially in labor-intensive garment-making. Then, the center of gravity of Textiles and clothing employment, while sectoral protection reduces them. Such simulations are necessarily limited in their explanatory force by the assumptions of the model. But they do illustrate a wider truth: while jobs might be "saved" by selective one industry or location, the secondary effects of that intervention •· be it a subsidy or trade barrier •· may make it counterproductive in terms of jobs, economywide (Cable and Weale 1985). Adjustment, technology, and comparative advantage All parties to the MFA agree that "adjustment should take place to reflect comparative advan- tage and that industrial country governments should encourage businesses which are less competitive internationally to move progressively into more viable lines of production or into other sectors of the economy" (Article 1:4). Some of the options open to textile and clothing enter- prises are summarized in table 23.5.4 One conse- quence of the MFA, however, has been the en- couragement of a belief in industrial countries that, after a period of temporary protection and new investment in automated equipment, it may be possible to reverse comparative disadvantage. The rents earned through protection assist in financing such investment. Automation has been occurring for decades in the textiles industry where shuttleless looms (from the 1960s) and open ended spinning (from the early 1970s) have radically transformed the cost structure of pro- duction. The textile industry of industrial coun- tries appears now to be more capital-intensive than all manufacturing capital per worker. In practice, however, automated mass production of standardized textiles goods has not proved, in itself, a secure form of adjustment for developed country producers. The dependence on high brcakeven prices in competitive markets has left them exposed to serious loss of market share when relative price factors •· notably exchange rates •· have been adverse (OECD 1983). The world's most successful textile exporter, Ger- many, has achieved this position through quality and innovation, not through capital-deepening in a protected environment (Shepherd 1981). One argument for continued protection in developed countries is that microprocessor-based technologies will create a decisive shift in com- parative advantage, affecting clothing as well as textiles. These technologies offer possibilities for better maintenance, improved product quality 186 Adjustment Strategy Manmade fibers Product (or horizontal) diversification New products New manmade fibers (kevlar line, tyvek) Market segmentation Concentrate on industrial fibers of high unit value items New industry Shift fiber paints ized Process (or vertical) diversification 'Offshore' investment for home market Foreign investment Large foreign for overseas markets investment by major fiber Switch into distribution Vertical integration including distribution Defensive adjustment Capital deepening Use of micro-electronics control devices Restructuring Scraping excess Vertical integration put into reverse Labor Shift working for continuous process ,antes and clothing work -· in which case continued protection will not be needed, and a period of liberalization must be envisaged for repaying the rest of the community in importing countries the cost of temporary protection. Or else there is not -- in which case there is danger that continued protec- tion will engender yet further investment that is not economically viable and that will present additional adjustment problems in future. Reforming the textile arrangements A new round of multilateral negotiations is not needed to liberalize the MFA. Bilateral agree- ments could be made more flexible and less re- strictive. A more radical step could be complete removal of MFA quotas on textiles for which developed, not developing, country producers are now the dominant exporters. Linked issues The shape of any post-MFA textiles regime depends on what is nego-tiated in the Uruguay Round for tariffs, safeguards, and other issues. And what is negotiated on these issues depends in part on expectations about the future of textile trade. One issue to consider in tariff negotiations is whether quotas under the MFA should be suc- ceeded by (relatively high) tariffs as part of a return to GATI rules. Weighted-average MFN tariff levels for textiles and clothing remain high in the developed countries, even after the Tokyo Round cuts. They are 11.5 percent in Japan and the EEC, 19 percent in the United States, and 21.5 percent in Canada. Generally speaking, MFN tariffs on textiles and clothing are now between two and three times higher than tariffs on manu- factures as a whole. Levels of effective are even higher, as a result of tariff escalation. Because of the prevalence of quotas, however, tariffs are of secondary importance to the low- cost exporters covered by them. Australia is an exception. Following its departure from the MFA in 1977, it replaced its VERs with high tariffs {albeit with tariff quotas). The high levels in- volved appear to have had the same protective effect as quantity restrictions in other countries. One way of phasing out the MFA could be for other countries to follow the Australian example. {That is, they could convert VERs or QRs to equivalent tariffs, which would then be gradually reduced. This would help to make the costs of 188 create greater flexibility in the framework of bilat- eral agreements, or at least those still open to further negotiation: 0 Improving and gradually widening the car- ryover and swing provisions. 0 Eliminating, in phases, the controls on small and new exporters. 0 Broad banding to eliminate unnecessary proliferation of quota categories girls', men's/boys', and knitted/woven distinctions could go). 0 Eliminating underused quotas and those on industries where import penetration is close to 100 percent. In some respects, this stage could be said to be partly under way. The bilateral agreements nego- tiated by the EEC, at least, have incorporated some of these features. One further suggestion that could signal the phasing out of restrictions is the removal of textiles quotas that have been made largely redundant by technology change and represent an unnecessary cost to the garment industry. Increased outward-processing quotas is one way of restoring the balance of interests between clothing and textile producers. That would permit developed country clothing manu- facturers to import garments outside of quotas which are made in offshore assembly operations. When MFA4 expires in 1991, a protocol will be required amending the MFA and providing in concrete terms for its phasing out. This could be done by specifying an end-date to the MFA •• not too far ahead •· and by incorporating specific commitments to degressivity within the transi- tional period. These commitments would ensure that growth rates and flexibility provisions under bilateral agreements are expanded progressively. The principle and general conditions governing the phasing-out and incorporated in the protocol would have already been settled in the negotia- tions. And by the early 1990s, an irreversible process of widening and dismantling quotas would be in train. Conclusion Experience might suggest to the more cynical a pessimistic conclusion: that the Uruguay Round will make no real progress in negotiating an end to the MFA or in moving toward a more liberal regime for textiles. The politically influential vested interests in industrial countries, and the acquiescence of many developing countries, have together given this temporary arrangement a lextlles and clothing Silbenson, A 1984. Tbe MFA and the UK Economy. London: HMSO. Tarr, D. G., and M. Morkrc. 1984. Aggregate Costs to the United States of Tariffs and Quotas on Imports. Gemn-al Tariff Cuts and Removal of Quotas on Automobiles, Steel, Sugar and Textiles. Washington, D.C.: Federal Trade 190 24 Technology-intensive goods Paul Krugman Technology-intensive goods are goods whose production cost includes a substantial investment in creating knowledge. This investment may take the form of explicit expenditure on research and development, and in practice industries are often classified as technology-intensive on the basis of their ratio of R&D to sales or value added. But the investment in knowledge may also take more indirect forms, such as a willingness to accept low initial earnings or losses on a new product to gain experience and move down the learning curve. Among the best-known examples of technology• intensive goods are such products as aircraft, computers, semiconductors, and pharmaceuti- cals. As this list suggests, technology-intensive goods typically draw on recent scientific and engineering advances. Because of the sophistica- tion of the technology used, these industries are also often referred to as high-technology indus- tries. From an economic point of view, however, the term "technology-intensive" is preferable: it is the investment in creating knowledge, rather than the glossiness of the machinery, that gives technology-intensive goods their special eco- nomic character. At the heart of this specialness are two features of investment in knowledge: its fixed-cost aspect, and its public-good aspect. Inevitably, an invest- ment in knowledge is like a fixed cost. Once a firm has learned how to produce one unit of a good, or how to improve the efficiency of a pro- duction process, this knowledge can be applied to an indefinite number of units of the good at no additional cost. Thus, investment in knowledge necessarily carries with it some increasing returns for the firm. At the same time, what one learned about technology other firms can apply, either in the same or in different industries. Teclmology-mtennve goods than in more conventional industries, for at least three reasons. First, the public-good aspect of technological development makes it difficult to distinguish between government policies that aim at correcting domestic market failures and those targeted at trade. Second, the dynamic increasing returns in tech- nology-intensive sectors mean that trade policies have some nonstandard effects. In particular, in technology-intensive sectors a protected domestic market will often promote exports. Third, the unconventional effects of policy and the technol- ogy intensive industries' inherent it difficult to quantify government intervention. Domestic policy and tnternational trade Domestic economic policies affect international trade flows in all goods. But it is harder in tech- nology-intensive goods than in other products to distinguish between policies that correct distor- tions in domestic markets and policies that distort international markets. The most noticeable and controversial link between domestic policy and trade in technology- intensive goods is the link with technology policy. Support of research is universally agreed on to be a legitimate and necessary government action, with no clear dividing line between basic research and research with more direct commercial appli- cation. In technology-intensive industries, how- ever, government research support can easily slide into industrial policy targeting for specific in- dustries, and become a source of international friction. An example of such friction is Japan's support of tecnological development in the semiconduc- tor industry during the 1970s and early 1980s. The Japanese government organized and sup- ported with moderate government subsidy a col- laborative research project to develop improved technology in the manufacture of a semiconduc- tor chips, the Very Large Scale Integration (VLSI) program. 1 Such a program, while closer to the development of a commercial technology than most U.S. government-sponsored research, makes reasonable sense as an attempt to overcome public-good problems in research. That is, it is not an obviously market-distorting policy. The VLSI program, however, played at least some role in Japan's success in achieving large market shares in some kinds of semiconductor produc- tion, and hence in a new source of trade friction between the United States and Japan. The point 192 A protected market need not be created through trade restrictions. Government procure- ment, such as purchases by the military or by state enterprises, can have the same effect. The clearest example is aircraft, where military are a large part of demand and where military products are often close substitutes for civilian goods. U.S. aircraft manufacturers have been able to extend their production runs for commercial jet transports by selling modified versions to the Pentagon. For example, the Boeing 707, no longer manufactured for civilian use, continues to be manufactured as the AWACS reconnaisance plane. The expectation of such sales must have encouraged the firms to make larger initial invest- ments in technology and thus to encourage ex- ports. 3 Measurement problems Measuring the protection that a government gives to an industry, or the effective size of a subsidy, is always difficult. For technology-inten~ sive industries it is even more difficult, because of the problems introduced by the possibly uncon- ventional effects of trade policy and the dynamic character of the industries. The problem of unconventional trade policy effects may be illustrated by referring to the case already mentioned: semiconductors. If the accu- sations against Japan are correct, the protected domestic market in Japan acted like an export subsidy. But to place a value on that export subsidy requires more than a look at government outlays. It is necessary instead to calculate an export-promotion effect on the basis of an inevi- tably controversial model of international compe- tition in the industry. That is, the calculation of implicit export subsidy shifts from ascertaining the facts to producing the best model. The problem of dynamics can be illustrated by the European airbus consortium. This firm, owned by four European governments that pro- vide its capital, has consistently lost money since it began delivering aircraft in 1974. But these financial losses cannot be simply counted as a subsidy. New aircraft always lose money for an extended period. To measure the subsidy to Airbus, it is necessary to ask a hypothetical ques- tion: What is the present value of Airbus's stream of expected earnings, evaluated at the market rate of return? Since the returns of Airbus are far from in, this is a matter of opinion. Airbus's backers can still claim (though not too plausibly) that they Tecbnology-lltlenslve gootls Hypothetical profitable p -20 p -20 Boeing 100 N 0 Hypothetical profitable market p 5 p -20 Boeing 125 N 0 194 clear. Once Boeing has committed itself to P, Airbus will find that p leads to losses. So Airbus will be deterred from producing, and will choose n, allowing Boeing to earn excess returns. Now suppose, however, that before Boeing can commit itself to production, the European gov- ernment offers Airbus a subsidy of 25 if it pro- duces. The result is to change the matrix facing the firms, to that shown in figure 24.2. The sub- sidy is enough to induce Airbus to produce even if Boeing does. But if Boeing knows this, it will itself be deterred from producing. Thus the out- come will shift from Pn to Np. A subsidy of 25 will lead to Airbus profits of 125 •· that is, profits will exceed the subsidy. This represents an in- crease in Europe's national income of 100, achieved at U.S. expense. Criticisms of strategic trade policy The strategic trade policy concept is an uncon- ventional yet simple argument for interventioni trade policies. The simplicity makes it danger- ously attractive to policymakers. Thus, it is impor- tant to emphasize the weaknesses of the argu- ment as a guide to practical action. These weak- nesses are of three main kinds: (1) the need for detailed information about the industry, (2) the competition among domestic industries for scarce resources, and (3) the problem of retaliation. The need for detailed information should be apparent from figures 24.1 and 24.2. A fairly small change in the values of the entries would lead to a situation in which Boeing will produce even when Airbus is subsidized. A subsidy that fails to deter foreign competition will, however, reduce national income instead of increasing it. More broadly, the success of a strategic trade policy depends on the details of competition in an in- dustry. Theoretical research has shown, for ex- ample, that an export subsidy will raise national income if firms compete in quantity •· but lower national income if firms compete in price (Gross- man 1986). Since the determination of such details is difficult and uncertain, questions may be raised about the ability of a government to devise a useful strategic trade policy. The problem of scarce resources is passed over in the numerical example given above, which focuses only on a single industry. In practice, however, each industry competes for domestic resources with other industries, some of which are also potential sources of excess returns. A subsidy that creates a strategic advantage for Tecbnology-intenstve goods tional. For example, suppose that investment in technology by a computer firm conveys valuable information to other firms, and thus that there is an external economy generated by its R&D expen- diture. It might be that only firms in the same country can learn from the firm's R&D. But it is equally plausible that the firm's products can be reverse-engineered equally well by firms any- where in the world. In the first case, there is a U.S. incentive to ensure that computer R&D takes place in the United States rather than Japan. In the second case, the benefits of the technological spillover accrue to the United States whether or not the investment in knowledge took place in that country. Casual observation suggests that many impor- tant external economies are international rather than national. Fundamental new products or production concepts can be observed and imi- tated by anyone with the right competence. It is hard to see why national boundaries make a crucial difference. At the other extreme, detailed production knowledge is not easy to imitate and thus may not diffuse easily internationally. But it is also relatively easy for firms to keep such knowledge proprietary, and there may thus be no external economy problem. National as opposed to international external economies are most likely to occur when informa- tion diffuses between firms through word of mouth and personal contacts. Such local spill- overs of information clearly happen: Silicon Val- ley and Route 128 attest to that. But not all tech- nology-intensive industries exhibit clusters of firms of this kind, so that national external econo- mies cannot be viewed as universal in these in- dustries. Who benefits? Even when external economies are national rather than international, there is not always a conflict of national interest. The benefits of exter- nal economies may be internationally diffused through a lower price rather than captured as higher income by the producing country. Suppose that because of the advantages of word-of-mouth diffusion of knowledge, . world semiconductor manufacture tends to concentrate in a single Silicon Valley somewhere. It may be a matter of historical accident whether the industry ends up in Palo Alto, Osaka, or Oxford. Wherever the industry ends up, does this give the lucky country an economic advantage? 196 excess returns at other countries' expense, while nations may compete for industries that are be- lieved to yield valuable external economics. The importance of technology-intensive goods in world trade has probably been increasing. More important, international competition in these goods has become much more intensive, as the historical U.S. comparative advantage nology-intensive goods has given way to a more equal competition among the United States, Ja- pan, and Western Europe. It has thus become more important to find ways of managing trade conflicts in an area where real, though limited, conflicts of national interest may be more preva- lent than in more conventional goods. Notes 1. A description of Japan's promotion is in United States (1983). 2. The possibility of import protection tion can apply only to some industries. The presence of 25 Intellectual property Richard Stem GAIT expressly exempts law patents, copyrights, and other intellectual property rights from its discipline. But there is not universal agreement that this should be the case, for such laws obvi- ously affect the volume and composition of inter- national trade. For example, whether a product patented in one country can be patented in an- other influences the transfer of technology across national borders. For such reasons, it has at times been suggested that GATI-type disciplines should be directed against national intellectual property laws. This chapter provides background information on these issues, reports on efforts to promote comity (the recognition of each country's laws and judicial decisions) in this area, and investi- gates whether a GATI agreement on intellectual property might foster improved trade relations. The paper begins with a description of the major kinds of intellectual property laws, such as pat- ents and copyrights. It then addresses whether national intellectual property laws are barriers to trade •· and suggests that a more useful question is whether a nation's intellectual property law differs enough from the norm to exceed the GAIT exemption of intellectual property law from the GATI proscription of NTBs. Political difficulties appear to make it question- able that multilateral GATI approaches will help in resolving controversy in the area. Controversy here results from disharmony and lack of comity among nations. So, attempts to harmonize na- tional intellectual property law and promote comity toward intellectual property rights •• such as missionary efforts by the World Intellectual Property Organization (WIPO) •• may appear more likely to be fruitful than a direct GATI approach under which failure to have "normal" 198 interest in encouraging industrial innovation and the investment that promotes such innovation. Copyright and neighboring rights are directed primarily at the literary and artistic creations of authors and artists. These bodies of law therefore tend to reflect the personal values of authors and artists in the integrity of their creations and society's interest in encouraging such creative activity. But recently there has been an increas- ing tendency to expand copyright law to protect mass-produced articles of commerce. To some extent, notably in computer software, that exten- sion has caused tension in the law. The reason is ,that the values reflected in industrial property law and the values reflected in copyright law are not wholly congruent. This chapter focuses primarily on aspects of copyright that tend to parallel in: dustrial property law by protecting economic interests in mass-marketed articles of commerce, rather than the integrity of works of art. The for- mer aspects more significantly raise questions of nontariff barriers to trade (NTBs). In addition to industrial property and copyright .laws, a closely related body of law, which may be ·termed "unfair competition law," .rights in commercial products. It is only a matter of semantics whether this law is termed industrial property law -- or a type of law protecting indus- trialists' interests that fall short rights." Examples of such laws are those prohib- iting the commercial exploitation of trade secrets of others, the slavish copying of designs, and the misappropriation of other commercial values. Whether the values protected by such laws are "property rights" or are merely ests, the laws are functional equivalents of indus- trial property laws. For the purposes of this chapter, therefore, they are appropriately consid- ered with industrial property laws. Patent law Patent law is the best recognized form of indus- trial property law. Typically, the owner of a pat- ent enjoys the right to prevent other persons from making, using, or selling the subject matter of the invention protected by the patent, for about twenty years. Patents are granted only to meritorious techno- logical advances -- ones that display a significant advance over the prior work of others in technol- ogy. The standard of merit is called "inventive step" in most countries, "nonobviousness" United States. lnteUectual prop,er,y owner. In the United States, the rule seems to be that manufacture or sale authorized under one national patent does not justify importing the product into the territory covered by another patent. The EEC apparently applies the same rule to goods imported from outside the EEC. The following example illustrates these prin- ciples. Company P owns patents on a drug D, in the United States, United Kingdom, and France. P licenses U in the United States, G in the United Kingdom, and F in France. Each licensee makes and sells the drug in its own country. Importers buy the drug in the various countries and pro- ceed to ship it in international trade. Under U.S. patent law, the products made by G and F can be kept out of the United States. Under EEC law, the product of G cannot be kept out of France. Nor can that of F be kept out of the United Kingdom. But U's product can be kept out of both France and the United Kingdom. Copyright law Copyright law largely parallels patent law, as described above. But there are significant differ- ences. Patents cover ideas to the extent that the ideas can be embodied into some tangible form, such as that of a machine, product, or process. Copy- right law purports not to cover ideas as such, but only particular expressions of ideas in a particular tangible written form. Thus, if I write a book on how to make watches, I can stop you from re- printing my book. But I cannot stop you from describing the same process in other words in your own book. Nor can I prevent you from making the watches that I have described in my book. There is generally no merit requirement for copyright parallel to the "inventive obviousness" requirement of patent law. The usual requirement for entitlement to copyright is only that the work be "original," it was not copied outright from a prior work. The term of a copyright is typically about seventy-five years. In some nations, the subject matter of copy- right has been expanded considerably beyond books, music, paintinp, and similar articles. Whether copyright embraces computer software has in recent years been a matter of considerable dispute. The tendency now seems to be toward according copyright protection to software. But controversy is now brewing over the proper 200 United Kingdom response was that intellectual property rights are recognized exceptions under the treaty (as they are under GATI). Critics have responded that the United Kingdom interpreta- tion of copyright law went so far beyond what other countries consider copyright to be that it was not intellectual property law at all, in the sense that copyright and intellectual property were intended to be exempted by the Treaty of Rome. (The GATT implications of this contro- versy seem clear. Even though GATT exempts intellectual property, it may be argued that a nation's interpretation of its intellectual property laws is so aberrant that it goes beyond the intent of the exemption.) Trademarks Most countries recognize that the user of a symbol that identifies its goods should be allowed to prevent other persons from using that symbol in a way that confuses purchasers into mistaking the other person's goods for those of the first user. The principle often is not restricted to use of the mark with the identical goods, but extends to similar goods. Thus a trademark used on gaso- line would probably be protected against un- authorized use on motor oil. This concept blends into that of sponsorship, where a mark is pro- tected against confusion over whether the first user makes or sells the goods sold by the other person. It is also protected against confusion over whether the first user is associated with the other person in some way or sponsors or en- dorses the other person's goods. And it is gener- ally recognized that a symbol may identify services as well as goods. The conventional legal theory behind trade- mark law is that a trademark protects the public from confusion over the source of the goods. The trademark owner is protected and benefited indirectly to protect the public against deception. Another theory sometimes advanced is that the trademark owner has a protectible interest (prop- erty right) in the mark by virtue of having money in persuading the public that it wants goods bearing that mark. The difference in the- ory may lead to different kinds of things being protected. Parallel importation controversies have been common in the trademark field. The law is some- what more unsettled for trademarks than for pat- ents, so that it cannot be stated with certainty when parallel importation of goods bearing a lntellectual property chip topography the EEC will subsequently move to a single law generally similar to that of the United States and Japan. The main difference in these various laws is the extent to which they tolerate the practice of re- verse-engineering. The U.S. law, and apparently the Japanese law, permit chip manufacturers to study one another's products and then make and sell similar products, subject to several condi- tions. The second chip must not be an identical copy of the first. It must be the product of sub- stantial original work; the copied material must be accompanied by some modifications. U.K. copy- right law, by contrast, appears not to allow re- verse-engineering at all. What the EEC position will be, if there is a uniform EEC chip topography law, is uncertain because of intra-EEC differences of opinion over the proper scope of reverse-engi- neering. The difference of opinion over reverse-engi- neering may have significant implications for international trade. Conceivably, a Japanese re- verse-engineered version of a U.S. company's chip might be permitted to be sold in the United States and Japan, but not in the United Kingdom. The United Kingdom might well treat chips made by reverse-engineering as it has treated spare parts for motor cars (see above). Thus, it might treat the competitive chips as copyright infringements. In that event, the manufacturer of the second chip might consider itself a victim of an NTB. Unfair competttton There are legal rights against a number of other practices, akin to the rights discussed above. Two of the most important are those on trade secrets and slavish copying. A trade secret is information useful in industry or trade and not generally known. The proprie- tor of a trade secret must also take reasonable steps to keep it from becoming known. If another person acquires the secret by improper means, such as commercial espionage, bribery of employ- ees, or breach of a confidential relationship, the owner of the trade secret is entitled to prevent the other person from using or disclosing the secret. Some nations recognize trade secret rights; others do not. A nation that recognizes trade secret rights, such as the United States, will bar from import the goods made by means of a misappropriated trade secret, irrespective of whether the country of origin of the goods recog- nized trade secret rights. 202 security, health, and safety. Inspection of air travelers or imports for hidden weapons, drugs, symptoms of plague, and the like are in this cate- gory. Perhaps, intent to hinder trade should be a test for NTBs cognizable under GATT but it would be most difficult to administer. Beyond these criteria, distinguishing acceptable from unaccept- able NTBs becomes exceedingly difficult. Probably, the only sensible way to approach NTBs that do not fall under one of the preceding categories is to attempt to balance the national interest in having the NTB with the free trade (or other) interest in not having it. This is a very difficult process, to say the least, because it in- volves a balancing of interests where there is no common denominator for measurement. Clearly, a nation that imposed a barrier in the first place would put a very great weight on whatever inter- est led it to Impose the barrier, or that it said led it to impose the barrier. At the same time, those confronting the barrier would seek to put little weight on that interest and would seek to put great weight on the countervailing interest. This tends to produce an ideological debate, which rapidly reaches an impasse. An impasse may probably be avoided only If the debate can in some way be shifted from ideology to economics -- a point explored below. Interests in intellectual property law probably fit the paradigm suggested above. There does not appear to exist an agreed-on common denomina. tor for measuring and comparing national inter- ests in respecting and disrespecting intellectual property doctrines. Nations recognizing intellec- tual property rights tend to use terms such as "piracy" and "theft" recognize such rights. Nations without a signifi- cant technological infrastructure tend to use equally pejorative language to describe intellec- tual property as a weapon in the struggle of "haves" against "have nots." Such discussion is not enlightening. In any case, there is considerable difficulty in presenting a satisfactory explanation, persuasively based on general principles, of why intellectual property laws are not the kind NTBs cognizable under GATT. The reason that intellectual property laws are not NTBs cognizable under GATT is simply arbitrary from the standpoint of the disinterested nonpartisan observer. If the question •· of whether national intellec- tual property laws should be considered NTBs cognizable under GATT were really open for dis- cussion, it probably could not be resolved in a lnteuectuaJ property in the drawing, the United Kingdom gives a patent on such things as spare parts without the proce- dures or safeguards of a patent system (such as the "inventive step"). Does that make this application of United King- dom copyright law an NTB? It might. The Treaty of Rome, which established the European Com- munity, makes intellectual property law an excep- tion to the treaty's ban on intra-EEC barriers to trade, a ban that may be equated to the GATT ban of NTBs. Thus, if an appropriate tribunal in the EEC determined that this U.K. application of copyright law was beyond the scope of intellec- tual property law as contemplated by the Treaty of Rome, the application to spare parts would be unlawful and in violation of the treaty. The legal question is not necessarily easy to resolve. But it is the type of question that tribunals can deal with and probably can render a decision on without unduly offending the sensibilities of the parties. In short, a scope-of-intellectual-property dispute, such as that over copyright in spare parts, would be the sort of question that the GATT framework can address. It is interesting to speculate how recent exten- sions of copyright law in the United States (still confined to a few lower courts) to aspects of computer software going beyond the lines of code in programs, and to microcode, might fare under such an analysis. Some decisions have protected the structure of programs and visual display screens. Oaims are being advanced to proprietary rights in "user interfaces" commands. In many countries, and in the view of many people the United States, the result of this doctrine is conceived impermissibly to protect the "ideas" of software, rather which are the traditional subject matter to which copyright law is said to be strictly limited. If this expanded view of the scope of copyright prevails in the United States, and it affects international trade, a GATT-based argument might be made that parallels the Treaty of Rome-based argument about U.K. copyright law and spare parts. Failure to recognize intellectual property rights as a GAIT issue The suggestion has recently been made in the United States that a nation's failure to recognize intellectual property rights should be addressed in a GATT framework. 1 The underlying concept appears to be, at most, that failure to respect intellectual property is as obnoxious and harmful 204 ticularly severe about extending intellectual prop- erty principles to frontier technologies. It has been shown that in bilateral settin~ it is possible to encourage nations without intellectual property laws to adopt intellectual property laws. Apparently, appropriate incentives have been found in such contexts. It is much more ques- tionable, however, that this approach will be ef- fective in a multilateral setting. Nonetheless, it cany be expected that the issue of adopting intel- lectual property law will be raised in multilateral trade liberalization discussions. Tbe comtty approach National intellectual property laws act like NTBs only where there is disharmony in the law of nations. If every nation had identical intellectual property laws, to piclc an extreme case, intellec- tual property laws would not operate as NTBs. The only trade that intellectual property law would prevent, in principle, would be trade al- ready prevented by the domestic law of the na- tion from which the goods would emanate. A significant part of the mission of the World Intellectual Property Organization (WIPO) has been to encourage the adoption throughout the world of intellectual property laws that operate on similar premises. WIPO has sought to encour- age adoption of conventions establishing mini- mum levels of intellectual property protection to which signatories would commit themselves. It has offered model statutes. Generally, it has acted as a "missionary" spokesman for recogni- tion of intellectual property rights. that WIPO is successful in this mission, it could diminish the whole issue of intellectual property being an NTB. Therefore, the success of WIPO's projects in this area could tend to decrease fric- tion in international trade relations. Presumably, a GAIT agreement that adherence to at least a specified minimum level of recogni- tion of intellectual property rights should be part of an international trade code would strengthen WIPOs position and similar positions of others on fostering comity toward intellectual property rights. Unfortunately, difficulties with that pro- posal strongly suggest that the comity approach to eliminating intellectual property trade barriers will not succeed. First, and most basic, there is a difficulty with the comity approach to eliminating discord over intellectual property rights: comity cannot readily be achieved on terms acceptable to all nations; it intellectual property fuller national employment •· because agreement on how to weigh the competing interests is un- likely. It might be possible to break this impasse by introducing a few alternative concepts. Instead of regarding lack of intellectual property laws as a trade barrier, it may be more fruitful to view it as a tax on the returns from intellectual property. For example, a weak national intellectual property law, which reduced from SI O to S6 the economic rent in the nation on technology protected by intellectual property law, would be the equivalent of a S4 national tax on the intellectual property. (The "tax" difiers from a tax ment, however, in that revenues do not go into the general treasury but instead go as the equiva- lent of a subsidy to the nonpaying users of the technology.) If all relevant intellectual property were owned by foreign companies, the S4 would amount to a tariff. Such tariffs are typically the subject matter of international negotiations. By the same token, so too may such intellectual property laws. An analogous tariff may be imposed on labor- intensive goods in highly developed countries. These are goods on which developing countries have comparative advantage relative to highly developed countries. When a developing country refuses to adopt strong intellectual property laws, it refuses to reward highly developed countries for their comparative advantage in the creation and mastery of new technology. In principle, it should be as possible to place a cash value on highly developed countries' intellectual property comparative advantage as on developing coun- tries' labor-intensive goods comparative advan- tage. Thus, a highly developed country might by negotiation reduce (or increase) its tariff on cof- fee or shirts in response to a negotiated tion (or unwillingness to recognize) of intellectual property rights. Indeed, that has already been proposed in the United States, although only in the negative direction (proposed retaliatory tar- iffs). Surely the proposal lends itself to operating in either direction. Import levels and tariff revenues are readily quantified, so that the value of particular tokens in tariff negotiations may be ascertained with some confidence. The revenue stream from and cost to users of intellectual property law is less certain. But this is a problem in precision of data, not one as severe as is assigning cash values to ideological tokens. Other technical problems may exist. For example, there may not be enough 206 26 Services Jagdisb Bbagwatl The inclusion of services in the Uruguay Round was a principal source of discord between the Group of 10, led by Brazil and India, and the developed countries, led by the United States. Between these two hard-line groups were other developing countries that doubtless shared G-10 concerns. They nevertheless felt pressured enough on the issues •· by the protectionist threat in the United States and the energetic and relent- less diplomacy of its negotiators •· to become the moderate brokers of a compromise at Punta del Este. The compromise merely clears the way for launching the trade talks despite the discordant views on services. It relates to procedures, which the contending parties fought over as proxies for basic substantive differences. But the procedural compromises cannot remove the basic differences the negotiations will have to address, differences that raise broader conceptual questions and nar~ rower negotiating issues. 1b.is chapter examines these matters and defines an agenda that develop- ing countries might seek in service negotiations. One track or two? The procedural issues that divided the United States and the G-10 related to two distinct ques- tions. • First, would the GAIT be augmented to handle a service compact, or would there be a separate institution or agreement to over- see and regulate world commerce in serv- ices? • Second, would the negotiations for arriving at such a compact be conducted (1) under GAIT auspices or outside, (2) by contracting parties or by a different group, and (3) paral- The compromise at Punta del Este was this: The dual track was preserved in that the contract- ing parties would negotiate on goods -- and would change their hats to governments when they negotiated on services. But the G-10 yielded that both groups would operate under the aegis of the Trade Negotiations Committee, to which they would take their recommendations. And the question whether GATT would be augmented or bypassed through a separate services compact was deliberately avoided. Services or goods? How are services to be defined? How do they differ from goods? In trying to come up with answers, Hill (1977) focused on the nonstorabil- ity of services by producers, stressing that services must be consumed as they are produced. . They cannot be put into stock by producers. This key characteristic will not cover all items that we customarily report as services: for example, an- swering services do store messages nowadays. But such exceptions do not detract from the usefulness of a definition of services that charac- terizes them as nonstorable because they require the simultaneity of provision and use (Bhagwati 1984 and 1985). Face-to-face or arm's length If services must be used as they are produced, there must be interaction between the user and the provider of the service. But this interaction, in tum, implies two essential categories of serv- ices: those that require the proximity of the user and the provider; and those that do not, though such physical proximity may indeed be useful. The class of services where physical proximity is essential is usefully thought of as having three categories. One important class of services re- quires that the provider go to the user, where the reverse mobility is simply impossible (Korean construction services in the Middle East). In another important class of services, the user must move to the provider because there is really no way to do it the other way around (heart trans- plants). Finally, there is a range of services where mobility is symmetrically possible (haircuts, tai- lored suits, and lectures). For the other broad class of services, proximity between providers and users may be useful, but it is not necessary. Live music concerts that are televised and data that arc transmitted "over the 208 construction firm's right to construct a road or a harbor by importing skilled and unskilled labor, both constituting an inte- gral component of the service transaction in that sector. In short, the factor mobility can be complex, not fitting any mold. What is certain, however, is that the concept of the right to establish cannot meaningfully or justifiably be circumscribed to exclude the inward mobility of foreign labor and its services. And the problem this raises can- not be dismissed simply by saying, "Oh, we cannot dismantle immigration restrictions and have free mobility of labor tional borders." The critical issue is, not immigration, but the temporary of labor to make the service transaction possible. (4) Conceptual clarification of service transac- tions has thus led to a keen awareness that freeing trade in services, and the associated right to establish question, will raise seri- ous questions relating to labor relocation as well. As long as the right to establish was regarded as simply a question of U.S. banks, insurance companies, and multina- tional professional firms setting up branches in Bangkok and Dar es Salaam, there was at times a sense of patronizing disdain for the hesitations of the countries that found the factor-mobility aspects wor- risome. As Hindley (1986b) shrewdly remarks, how- ever, a certain ambivalence has apparently crept into the U.S. negotiating attitudes, now that the labor-mobility issue suggests that the difficulties may go the other way. On the one hand, the impression given at times is that the overall serv- ices compact should simply confine itself to long- distance and arm's-length transactions, ruling out right-to-establish questions and hence the corre- sponding enormous range of services that require such establishment. On the other hand, since the powerful lobbies from the service sector continue to clamor for the right to establish, some official spokesmen have instead tended to opt in favor of an emasculated (and unfortunately self-serving) notion of the "right of presence" or "right These euphemisms artfully ensure the soft-ped- dling of the labor-mobility aspects of the right-to- establish question. 2 Any attempt, however, to circumscribe the serv- ices compact to exclude services that require sig- Sen/tees been the cause of miniscule progress. In the EEC the convergence of regulatory regimes through freer service trade has not been permitted; nor have efforts been successful to harmonize the regimes to permit such service trade either. It is unlikely, therefore, that the developing countries, where regulation tends to be stiffer, are likely to be enthusiastic about these matters either. lntrastructure and control Overlaying these difficulties is the problem that hesitant developing countries regard some service sectors (banking) as part of their infrastructure. They feel they must control this infrastructure •• for political reasons •· much as, say, the United States restricts ownership by foreign nationals in its media (services) sector. Moreover, transbor- der data flows and information sectors are re- garded as sensitive areas that raise issues of na- tional security for such middle powers as India, Brazil, and Argentina. In these areas it is difficult to urge the hesitant developing countries to dis- card such notions altogether, especially when many influential people in the developed coun- tries hold symmetrical views about some services and many goods. Comparative advantage In services The export advantage in many services, as re- vealed by existing patterns of trade in services, seems to lie substantially with the developed countries. Recall that the trade data for services are extremely unreliable. But Sapir's (1985) care- ful analysis of what is available underlines strongly what common sense would suggest. Many traded services tend to be intensive in the use of technology and of capital, whether human or physical. This gives the developed countries a competitive edge. Nonetheless, when Sapir (1985, p. 37) looks at the balance of trade in services, the advanced NICs (such as Singapore, the Republic of Korea, and Taiwan (Province of China]) come out with small positive or negative balances rather than a large deficit, as with many developing countries. More important, table 26.1, compiled by Sapir, gives an aggregated and admittedly crude picture of service trade among industrial and developing countries for 1980. The data can be read two ways. On the one hand, they show that the share of service exports in total exports is substantially smaller for developing countries than for indus- 210 Trade between the To traditional otl exporters Merchandise trade 97 Fuels 2 Other primary products 13 Manufactures 82 Service trade Transport Travel Other private services Source: Sapir (1985, table 2), based on and for service trade, own estimates. firms, during the 1970s and 1980s. It also has legitimacy in Western Europe's practice in post- war guestworker programs and in the latest U.S. legislation, enacted in 1986, which permits more than 300,000 workers to be imported for specific types of short-term work in U.S. agriculture. Cost of protection and policy options In extremely important point needs to be remem- bered by the developing countries. Many traded services happen to be intermediates. Higher costs of banking and insurance, for example, follow from protecting these sectors. In turn, this cannot but affect the ability to export goods as well. The effects of protecting intermediate services are similar to those that result from increasing the cost of such intermediate goods as steel. 4 But the adverse effects on exports of goods are more serious in the present instance because, in deny- ing the domestic exporters of goods access to efficient banking services, the protective policies succeed in denying access to more than cheaper credit. More important, the exporters are denied access to the entire vector of services that mod- ern international banks can provide by way of facilitating international commerce. The protec~ tion of intermediate services, in the interest of such goals as political control, therefore has costs that are not negligible and have presumably not been properly assessed by the developing coun- tries. Market shares of International construction 250 International 1980 United States 48.3 (45%) France 8.1 (7%) Germany 8.6 (8%) Italy 6.2 (6%) Britain 4.9 (5%) Other Europeans 9.2 (8%) Japan 4.1 (4%) Korea 9.5 (9%) All Other 9.4 (9%) Total 108.3 Source: Various issues of Engineering ton, D.C. Remember that the know-how is embodied in one's people. If one looks at the national origin of scientists in only the robotics, computer sci- ence, and artificial intelligence labs and institutes in the United States, it is possible to find many Indian mathematicians and scientists, even in leadership positions. These Indians embody know-how in these fields at the very cutting edge of technology. Since the sociology of international migration of professional classes has increasingly moved in the direction of permitting immigrants to retain ethnic ties to their countries of origin, the Indian government in this instance has the distinct op- tion of developing a policy to use this U.S.-based 212 nationals are impossible to achieve with one pol- icy instrument, that of protection. But they are achievable by the use of two policy instruments: (1) world-price imports of computers and related technology; and (2) an open-door policy on outmigration combined with a policy to use the embodied know-how in one's nationals abroad. Doubtless, such a policy mix breaks the protec- tionist mold and requires an imaginative and simultaneous use of policies in what generally are considered to be unrelated areas of government intervention. But they do offer the prospect of a far superior approach for those countries that have the talents and the skills to make such a policy mix feasible in informatics. Developing countries' bargaining options Developing countries cannot be expected to opt en bloc for one approach on services any more than they have identical positions on agricultural liberalization or on the optimal redesign of safe- guard procedures. Singapore and Hong Kong can be expected to agree to the more hard-line devel- oped-country positions on services. Brazil and India can be expected to oppose them. They, and the developing countries that went under the G-48 umbrella to get the Uruguay Round off to a start, will have to decide what game they want to play, now that the players are assembling. The options that they must consider are best defined by determining the demands that the developed countries, especially the United States, have been making on the issue. S These options will have to be defined in terms of the responses that the developing countries make to these demands or negotiating positions as they have been indicated so far. The discussion here begins with what are generally understood to be the , broad outlines of the current U.S. positions, ' however negotiable they may turn out to be in the course of the Uruguay Round. , Generally perceived U.S. postttons Including services in the Uruguay Round •• and indeed other "new" sectors and areas such as intellectual property and trade-related investment rules •· is considered to be part of a grand trade- off. These new areas benefit the United States, and in return the United States is willing to con- sider rollbaclcs and standstills on goods. The grand tradeoff is seen in two ways: in the international interest and in the U.S. interest The Perceived U.S. "benefits" and zation of U.S. benefits Services Intellectual property Trade-related investments Reverse market access to developing countries Agriculture Note: Agriculture is included here on at the expense of the EEC and Japan but, tries. are prepared to accept the reality of full recip- rocity and yield on their sense that the bargain being offered to them is simply not one. This difficulty stems from the fact that it is wholly unclear what the United States, and for that mat- ter the EEC, can offer by way of standstills and rollbacks on goods even if these developing coun- tries offer concessions on services. Admittedly, even unilateral trade liberalization in intermediate services should have big payoffs for the develop- ing countries. But the developing countries can- not realistically be expected to be less mercantilist than those who preach free trade but then prac- tice mercantilism themselves. A pity, but a reality, too. The hesitant developing countries should nonetheless get actively into the service negotia- tions, instead of rejecting them on grounds of first-difference-reciprocity unfairness, and they should then seek quid pro quo (in export possi- bilities) in the service sector. Why? Reason 1: It is risky to let the developed coun- tries define the services compact all by them- selves. They would almost surely serve their narrower export interests -- rather than reflect more fairly and adequately the general principles, which also serve the developing country export interests. 7 214 Section 301.) This is probably unavoidable, given the immense congressional and matching lobby- ing pressures to produce quick results. To some extent, the U.S. Trade Representative can be expected to see that these bilateral ap- proaches are used to "set useful precedents" for the multilateral code. At the same time, there is some cause for apprehension that the sectoral lobbying pressures to produce results may lead to "quantity" rather than "rule" tendency to substitute quantity outcomes in favor of U.S. export sectors rather than to secure rule- oriented liberalization abroad is a peril that has not been easy to avoid. It was evident in the beef quotas in Japan: the United States reportedly wanted a larger quota rather than genuine Japa- nese liberalization, under which Australia have triumphed over both the United States and Japan. It was more evident with semiconductor chips: an assured market share in Japan for United States firms has been actively urged and was the reference by which Japanese "perform- ance" was judged when President Reagan im- posed punitive tariffs on selected Japanese prod- ucts in April 1987. This is such an interesting innovation in trade policy that I have recently christened it as a voluntary import expansion, or VIE (Bhagwati 1987). There is little that the developing countries, so targeted, will be able to do because, as in the Ko• rean case, the strong prevail over the weak. This is the oldest argument in the book for resorting to multilateralism, regarded as the only shield of the weak. As this bilateral targeting multiplies •· sometimes with quantity-oriented outcomes to boot •· the wisdom of the developing countries in joining in devising a multilateral compact will increasingly become evident Such a multilateral code would provide some measure of defense to the countries that the United States can be ex- pected to target bilaterally for opening their serv- ice sectors. Reason 4: Yet another compelling reason for the developing countries to join in writing the multilateral rules is that rules written between equals will tend to underplay the problems that unequals face in the liberalization of services. One would have to be deranged to imagine Citi- bank and American Express taking over wholly from the Big Five in Britain if banking were fully liberalized. But such fears are routine in New Delhi and Dar es Salaam. The issues of political control take on added significance in the context of such fears. Senltces References Bhagwati, Jagdish N. 1984. "Splintering of Semces and Developing Nations." 7Qune):133-43. . 1986. "International Trade ~ c e for Economic Development." Xth Annual Lecture of the Geneva Association. In Tbe Emerging Services World Economy Series 1. Oxford: Pergamon Press. _ _ . 1987. "VERs, Quid Pro Quo DFI Economy-Theoretic Analyses,•• Jnt"& Joumal 1,l(Spring): 1-14. Feketekuty, Gcza. 1986. "Trade in Overview." Tbe LBgal Porum (University School) 1,l(Man:h). GAIT Secretariat. 198S. Trtuk Policies for a Bettw Plllure: Proposals for Action. Geneva. Hill, T.P. 1977. "On Goods and Services." and WBaltb 23,4(December):31S-38. Hindley, Brian. 1986a. "A Comment Geneva Association Lecture." In 216 27 Investment related to trade Stephen Guisinger Investment policies have undergone two major developments in the postwar period. The first was the shift from laissez-faire to activist policies designed to influence the level and composition of domestic investment. This shift came as gov- ernments assumed greater responsibility for main- taining full employment and stimulating economic growth. The second was the adoption of regula- tions and incentives relating to foreign direct investment. Although multinational corporations began to emerge in the late nineteenth century, the surge in foreign direct investment did not occur until the early 1960s, when U.S. investors moved to Europe to take advantage of the newly created European Economic Community (EEC). The two developments have in almost all coun- tries produced laws, taxes, and regulations de- signed both to control and to encourage foreign investment. Some policies •· for example, those found in the EEC and especially among its smaller members •· are quite liberal, offering more incen- tives than controls. In other countries, particu0 larly such large developing countries as Brazil, Mexico, and Indonesia, policies are less liberal. Their governments have devoted more attention to regulations, adopting various measures to channel foreign capital to specific sectors, to exclude foreign investment from other sectors, and in general to exercise control over the invest- ment process. Some capital-exporting countries, especially the United States, hold the view that aspects of invest- ment policies should be brought under the disci- pline of GATI. They take the position that restric- tions on the flow of capital to a host country deny access to that country's market no less than pro- tective tariffs. Moreover, they argue that require- ments for local content and export performance Investment related lo ITtlde Taxonomy Measures Measures affecttng: Cost of fixed assets Cash grants Tax credits Subsidized leasing Tariff exemption on imported machines Sales tax exemption on domestic machinery Subsidized buildin~ Subsidized land Tax exemptions on land Prior import deposits • Local content requirements on machinery limits on use of used equipment Tariffs or quotas Cost of debt Subsidized loans Loan guarantees Elimination of exchange risk on foreign loans Granting priority access to credit Cost of equity Subsidized equity purchases by government Exemption from registration taxes Dividend tax waivers Non-expropriation guarantees Debt-equity swap programs limits on debt-equity ratios Controls or taxes on remitted dividends Coporate tax liabilitites Corporate tax Tax holidays and reductions Accelerated depreciation Inflation adjustments in tax accounting Tax sparing agreements liberal loss-carry forward provisions Revenues Tariffs Export subsidies Quotas • Export minimums Government procurement preferences Exclusive licensing 218 Input costs Tariffs Export subsidies Quotas • Local content requirements Subsidized inputs Labor Wage subsidies Training grants • Requirements on use of local labor Other measures • limits on foreign ownership of equity • Countertrade requirements • Foreign exchange balancing requirements Note: Asterisks indicate performance requiremen grants and reduced tariffs on raw materials in the package of investment incentives offered to new investors. Table 27 .1 presents the policy instru- ments included under this broader definition. The measurement of investment incentives No country uses all the incentives and disincen- tives in table 27.1. Nor does any government apply the same set of policy instruments to all in- vestments in a country. The influence of a country's policies on a decision to invest, export, or import can only be judged by reference to the net incentive •· the value of incentives minus the value of disincentives •· that applies to that par- ticular investment. For example, to judge the in- fluence of any one instrument on an investor's decision, the contribution of that instrument to the net investment incentive and the value of the net incentive must both be known. But no widely accepted yardstick for measuring the net invest- ment incentive exists in the same way that, say, the effective rate of protection has come into common use as a measure of the height of tariff barriers. Compounding the problem of measurement is a special instrument known as a performance re- quirement. Performance requirements, identified in table 27 .1 by an asterisk, establish certain investment related to trade should attempt to achieve, imposing only minor penalties for nonfulfillment. Other governments have contractual agreements with firms that in- clude claw-back provisions, requiring investors to return the value of incentives received if perform- ance requirements are not met. How investment policies arc admJnJ5tered in practice One of the principal differences between invest- ment incentives and other incentives is that the granting of investment incentives is frequently discretionary. Unlike tariffs -- which provide protection automatically and uniformly to all firms in the same industry -- sqme investment incentives and performance requirements are negotiated case-by-case. Firms in the same,.industry can receive quite different combinations of invest- ment incentives and performance requirements. Administrative procedures for setting and nego- tiating incentives vary widely among countries, but frequently governments delegate this function to an investment screening agency. The screening agency may fall under the control of one branch of government -- a ministry of finance or industry, for example. Or it may take the form of a board of investment, whose membership typically in- cludes representatives from all the concerned ministries, such as finance, industry, and com- merce. Administrative discretion by these agen- cies produces several results not possible with other forms of protection. First, discrimination among investors is possible. For example, foreign investors may receive more or less favorable treat- ment than local investors. Second, performance requirements may be imposed implicitly. Rather than explicitly requiring firms to achieve certain targets, governments can simply refuse to grant incentives to investments unlikely to achieve the desired targets and provide generous incentives to firms that "voluntarily" Several examples illustrate these features of investment policies. Ireland currently offers cash grants to investors of as much as 60 percent of eligible fixed assets in Ireland's least developed areas (45 percent elsewhere). Projects eligible for grants must generate exports, replace imports, or use advanced technology. Employment crea- tion has been a traditional goal of Irish incentive policy. But recently the government has shifted its priority from creating employment value added. The amount of the grant can be varied, depending on how much projects satisfy 220 decision to invest. Both a tariff and the net in- vestment incentive have cash-grant equivalents -~ that is, sums of money paid in the first year of operations that the-investor rega,rds as equivalent to the value of the tariff protection or the invest- ment incentives received. When the two cash- grant equivalents are equal, the investor's rate of return will be the same, regardless of the form of government encouragement. The principal differ- ence is that incentives reduce investment costs, while tariffs raise revenues. ln •this sense, invest- ment incentives are, to some degree, substitutes for tariff protection. But they are only imperfect substitutes because some incentives, such as tax holidays, may not have any value to the firm in the absence of tariff protection. Because of this substitutability, investment in- centives and performance requirements can be said to be trade-distorting. Like tariffs, investment incentives alter the pattern of investment from that under free trade. And performance require- ments enhance the trade-distorting properties of investment incentives. They act as turbochargers, concentrating and redirecting the benefits of in- vestment incentives to achieve certain very spe- cific objectives beyond just raising an invest- ment's rate of return. Because performance re- quirements are disincentives for the firm, they generally cannot be imposed without simultane- ously granting the firm either investment incen- tives or tariff protection. Thus, investment poli- cies can clearly distort international patterns of trade. The actual distortion can be determined only by empirical research that examines the inci- dence and effectiveness of investment policies. So far, the data on these issues are fragmentar The incidence of incentives and performance requirements The limited research available suggests that almost all countries employ at least one invest- ment incentive instrument, while a smaller num- ber impose export or local-content requirements. One study by the U.S. government found that of seventy-six countries surveyed, fifty-two main• tained at least one trade-related performance requirement. But more than the number of in- centive instruments used, it is their significance that determines the effect on trade and invest- ment patterns. There are very few hard data on the significance of these measures •· for example, the average net incentive offered by countries, the variation in the net incentive across industries investment related to trade its magnitude with other policy instruments known to affect investment. One study of Irish incentive policies (Bond and Guisinger 1985) examined the total protection to the manufactur- ing sector by adding the benefits of incentives and tariff protection together. The study found that investment incentives provided as much as 40 percent of the total protection in some industries. It would be difficult to maintain that, for such industries, tariffs had an impact on investment decisions while incentives did not. The study also found a substantial increase in the use of invest- ment incentives over time, which the authors at- tributed to Ireland's entrance into the EEC in 1973. Because Ireland hap to reduce its tariffs in many industries to comply with the EEC's com- mon tariff, investment incentives were substituted for tariffs to maintain the attractiveness of Ireland to potential investors. Another way to determine effectiveness is to survey attitudes of investors. Several surveys of foreign investors have concluded that investment incentives are not effective (Frank 1980). But these studies point to one of the paradoxes of incentives when countries compete for foreign investment. If all countries were to increase in- centives in the same proportion, the distributi of foreign investment among countries would, other things equal, remain unaffected. But the total volume of foreign investment to all countries would likely increase. And the increased incen- tives would benefit only the firms receiving them. If one country were to keep its incentives at exist- ing levels, that country would soon find foreign investment flowing to countries that had in- creased their incentives. This quandary is known as the prisoner's di- lemma. Countries would be better off to agree not to provide incentives aimed at increasing each country's share of the pool of foreign investment. But the absence of an agreement -- or the difficul- ties of enforcing such an agreement -· makes it likely that countries will continue to grant ineffec- tive investment incentives. When countries offer roughly similar incentive levels, it is easy to un- derstand why investors do not cite them as an important factor in site selection. Another opinion survey, based on responses from more than 100 North American and Euro- pean multinational firms (Conference Board 1983), concluded that for about half the compa- nies, performllJilce requirements operated as dis- incentives, causing firms to buy more expensive inputs in the local market or to export at disad- 222 States, the OECD •· through various associated bodies such as the Working Group on Interna- tional Investment Policies and the Business In- dustry Advisory Committee •· has continued to monitor investment policies of both developed and developing countries. For the most part, however, these efforts have been directed at the investment policies of devel- oped countries. In the latter part of the 1970s, the U.S. government launched an initiative to draw the developing countries into formal discus- sions of investment issues by encouraging the Development Committee, a body with representa- tion from the World Bank and the International Monetary Fund, to create a Task Force on Private Foreign Investment. The task force, which in- cluded senior officials from developed and devel- oping countries as well as representatives from the World Bank and IMF, prepared papers on a wide range of investment issues. The issues in- cluded a detailed review of investment incentive and performance requirement policies in selected developed and developing countries. The task force reached clear conclusions on several peripheral issues, such as the ineffective- ness of tax holidays and the need for greater transparency in incentive measures. But it failed to reconcile the fundamental differences between the developed countries and the developing countries. The U.S. government saw few substan- tive benefits from the performance requirements imposed by developing countries. And the devel- oping countries generally regarded performance requirements as necessary instruments for over• coming impediments present in both the domes- tic and the international economy. On receiving the report of the task force, the Development Committee referred the matter to the World Bank for further study. An attempt by the United States to place invest- ment-related matters on the agenda for the 1982 ministerial meeting of GATT failed, although the United States issued a clear signal of its concern these issues. In the same year, the United States for the first time used the forum of GATI to ob- ject to a country's performance requirements, in this instance those requirements maintained by Canada through its Foreign Investment Review Agency. The agency sought commitments from prospective foreign investors to increase exports and local content. A three-member panel ap- pointed by the GATT Council found that the agency's actions to increase local content were in violation of Articles III and XVII, but that the ing countries (and for a number of developed countries, as well) is the capacity for fine-tuning that they provide to governments. Tariff levels can be varied across industry groups but not across firms in the same industry among regions of the country. And only with some difficulty can they be varied over time. Discretionary incentives and performance requirements permit govern- ments, in principle, to act as perfectly discriminat- ing monopolists. It is doubtful that governments ever know the exact tax or subsidy on finns achieved by investment policies. But the great variety of policy instruments and the proliferation of investment-screening agencies with discretion- ary powers suggest a strong desire to intervene in a discriminating fashion rather than remain pas- sive providers of protection. Moreover, the costs and the benefits of performance requirements and investment incentives (except cash grants) are not transparent. This opacity makes it difficult for taxpayers and other countries to know how much protection is being afforded and what its effects are. Conclusions What is needed to produce agreement on how investment incentives and performance require- ments should be addressed within the framework of GATf? Many differences in objectives and many technical problems will have to be over- come for the current round. Even among the capital-exporting countries that have pushed for the inclusion of investment issues in the Uruguay Round, opinions differ on the significance of in- vestment policies as trade barriers. The United States is the principal actor, and a relative small number of large developing countries appear to be the main target of U.S. concern. Yet, even if all members agreed on the need to incorporate in- vestment issues into GATT, serious barriers to a workable code would remain. The instruments that fall under the rubric of investment policies are diverse and lack a common denominator, making measurement of their impact on trade and investment decisions far more difficult than for tariffs. And because of the ease with which most investment policies substitute for each other, only a comprehensive agreement covering all instru- ments makes sense. Agreements that prohibit or place ceilings on the use of only some of these instruments are unlikely to gain many adherents. At a technical level, the numerous devices that governments use to alter the profitability of in- 224 the concern expressed by the capital-exporting countries would be allayed. Finally, for intelligent discourse to proceed on the issue of investment incentives and perform- ance requirements, research must do more than collect anecdotes. It must move to a more seri- ous effort of data gathering and analysis that will result in estimates of the magnitude of provided by investment policies, estimates compa- rable to those now available for tariff protection. This effort should include estimates of an average incentive for each country, dispersion of incen- tive levels among industry groups within coun- tries, and some idea of trends over time. It is noteworthy that, from the public documents now available, none of the participants in the Uruguay Round has yet to produce even a consistent tax• onomy of investment policies and performance requirements, let alone comprehensive measures of magnitude or impact. Trade restrictions have borne the brunt of scru- tiny in the current debate over the unfairness of national industrial policies. They have done this not only because they have been an important component of those policies, but also because widely accepted measures of their impact and empirical evidence on their magnitudes are avail- Annex 1 Glossary of terms This glossary covers some of the principal special- ist terms in the language of international trade. It does not cover terms whose meanings in trade are the same as those in current usage. Given the focus of this handbook and the newly launched Uruguay Round of multilateral trade negotiations under GATI', many definitions are in the sense of current GATI' practice. The definitions also include, where appropriate, refer- ence to some of the relevant GATI' instruments: 0 Art.II: Article II of the General Agreement on Tariffs and Trade 0 BISD, 26S/141 : Basic Instruments and Se- lected Documents, twenty-sixth supplement, page 141. AD VALOREM An ad valorem duty (tariff, charge, and so on) is based on the value of the dutiable item and expressed in percentage terms: for example, a duty of 20% on the value of auto- mobiles. ANTIDUMPING DU1Y Duty levied on imports to offset the effect of DUMPING. (Article VI; Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, BISD, 26S/171.) AUTOMATIC LICENSING See LICENSING. AUXILIARY DU1Y OF CUSTOMS Additional CUSTOMS DU1Y levied on a product, over and above the bound rate (TARIFF CONCESSION). BASIC IMPORT PRICE See MINIMUM PRICE SYSTEM. BIIATERAL QUOTA See QUOTA BINDING See TARIFF CONCESSION. BORDER TAX ADJUSTMENT Fiscal measure compensating, in whole or in part, for the differ- ent treatment either between imports and similar domestic products or between exports and siini- Glossary of terms country(ies); "Contracting Parties" denotes all the contracting parties acting as a body. COPYRIGHT See INTELLEplJAL PROPER1Y. COUNTERTRADE Form of barter committing the exporter to offset the value of his exports, in whole or in part, by imports from his trading partner. Also see OFFSET REQUIREMENT. COUNTERVAILING DUlY Duty levied on imported goods to offset the effect of a BOUN1Y or SUBSIDY granted on the manufacture, produc- tion, or export of these goods. (Art. VI; Agree- ment on Interpretation and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade, BISD, 26S/56.) CUSTOMS DU1Y Charge levied on imports and listed in the importing country's tariff sched- ule. Duties may be SPECIFIC or AD VALOREM or a combination of the two (ad valorem with a specific minimum). (Art. II.) CUSTOMS UNION As defined in GATI, a group of countries forming a single customs terri- tory in which (1) tariffs and other barriers are eliminated on substantially all the trade between the constituent countries, at least with respect to products originating in these countries, and (2) substantially the same measures are applied by each of the countries in the union to their trade with countries not included in the union, such as a common external tariff. Also see FREE-TRADE AREA. (Art. XXIV.) CUSTOMS VALUATION See VALUATION. DEFICIENCY PAYMENT Direct monetary pay- ment by government to producers to compensate for the difference between the market price of a good and a higher guaranteed price for that good in the case of, say, low international commodity prices. DEGRESSM1Y Built-in element of a measure ensuring reduction in the severity of its applica- tion over time. DIFFERENTIAL AND MORE FA- VORABLE TREATMENT See ENABLING CIAUSE. DISCRETIONARY LICENSING See LICENS- ING. DOMESTIC CONTENT See CONTENT. DRAWBACK A form of BORDER TAX ADJUST- MENT whereby the duties or taxes levied on imported goods are refunded, in whole or in part, when the goods are re-exported. DUMPING A form of price discrimination by which, in GATT terminology, a "product of one country is introduced into the commerce of an- other country at less than its normal value": that is, "the export price of the product exported from one country to another is less than the compa• 228 Round of Multilateral Trade Negotiations: (1) Differential and More Favorable Treatment, Recip- rocity and Fuller Participation of Developing Countries (the "Enabling aause") (2) Declara- tion on Trade Measures Taken for Balance-of- Payments Purposes (3) Safeguard Action for De- velopment Purposes ( 4) Understanding Regarding Notification, Consultation, Dispute Settlement and Surveillance. (BISD, 26S/203 and ff.) FREE-TRADE AREA As defined in GAIT, a group of countries in which the tariffs and other barriers are eliminated on substantially all the trade between the member countries of the free- trade area in products originating in those coun- , tries. Also see CUSTOMS UNION. (Art. XXIV.) GENERALIZED SYSTEM OF PREFERENCES International agreement, negotiated under the auspices of UNCTAD, whereby developed coun- tries accord temporary and nonreciprocal duty preferences to imports from developing coun- tries. Each importing country sets its own system, including product coverage, and the volume of imports affected. In GAIT a ten-year waiver of the provisions of Article I of the General Agree- ment was granted in 1971 to permit implementa- tion of the system. The waiver was not renewed in view of the 1979 decision on "Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries. See ENA- BLING CIAUSE and FRAMEWORK AGREEMENTS. (BISD, lSS/24.) GLOBAL SYSTEM OF TRADE PREFERENCES Agreement being negotiated under the auspices of UNCTAD to allow for the granting of trade preferences by developing countries on the trade of other developing countries. GLOBAL QUOTA See QUOTA GOVERNMENT PROCUREMENT Purchasing, leasing, rental, or hire-purchasing by government entities or agencies. (Agreement on Government Procurement, BISD, 26S/33.) GRADUATION Concept linking the rights and obligations of a developing country to its level of development. GRANDFATHER CIAUSE In the PROTOCOL OF PROVISIONAL APPLICATION, the clause ex- empting from GATI obligations certain trade practices of individual contracting parties when those practices were governed by mandatory national legislation predating accession to GATI. Subsequent protocols of accession to GAIT con- tain similar clauses. GRAY-AREA MEASURE Measure whose confor- mity with contractual obligations is unclear: for Glossary of terms to which the imported good is to be put; the purchase of a specified quantity of the do- mestically produced like product; or the availability on the domestic market of the domestically produced like product. • Discretionary licensing: nonautomatic licens- ing (see above). • liberal licensing: term used by certain au- thorities to describe a regime of nonautomatic licensing that is not very restrictive. (Art. XI; Art. XIII; Agreement on Import licensing Procedures, BISD, 26S/154.) LOCAL CONTENT See CONTENT. MARGIN OF DUMPING See DUMPING. MARKETING STANDARD See TECHNICAL BARRIER TO TRADE. MARKING REGULATION See TECHNICAL BARRIER TO TRADE. MAXIMUM PRICE SYSTEM (for imports) Price(s) decreed by the authorities of the importing country and above which price(s) imports may not enter the domestic market. MINIMUM PRICE SYSTEM (for imports) Mini- mum price(s) for imports decreed by the authori- ties of the importing country. Actual import prices below the decreed minimums trigger a protective action, such as the imposition of addi- tional duties or of a quantitative restriction. Dif. ferent terms are used in different countries and different sectors: basic import price, minimum import price, reference price, and trigger price. MIXING REGULATION Describes two kinds of practices: (1) regulation specifying the propor- tion of domestically produced content in prod- ucts offered for sale on the domestic market; (2) regulation specifying, for any imports of a given product, the quantity of a domestically produced like product that must be purchased by the im- porter. MONETARY POLICY Government policy that operates through the monetary system (money supply and interest rates). MOST-FAVORED-NATION PRINCIPLE ciple embodied in Article I of the General Agree- ment on Tariffs and Trade whereby any privilege or concession granted by one contracting party to GATT to a product of another contracting party will be unconditionally granted to the like prod- uct of all other contracting parties. (Art. I.) MTN AGREEMENTS The Agreements (also referred to as Codes) negotiated in the Tokyo Round of Multilateral Trade Negotiations: Agreement on Technical Barriers to Trade - Agreement on Government Procurement the criteria, a product might be considered as originating in a specific country if its domestically produced content or domestically added value in that country equals or exceeds a specified pro- portion, or if it has undergone substantial trans- formation in the course of processing or manufac- turing that country. Also see CONTENT. (BISD, 2S/53.) PACKAGING REQUIREMENT See TECHNICAL BARRIER TO TRADE. PART N Part N of the General Agreement on Tariffs and Trade, relating to "Trade and Develop~ ment." This later addition to the General Agree- ment entered into force in June 1966. (Arts. XXXVI-XXXVIII.) PATENT See INTELLECTUAL PROPER1Y. PHYfOSANITARY REGUIATION See TECHNI- CAL BARRIER TO TRADE. PREFERENCE Preferential treatment. In GATI terms, this represents a derogation, in the sense of more favorable treatment from the MOST-FA- VORED-NATION PRINCIPLE embodied in Article I of the General Agreement: for example, GENER- ALIZED SYSTEM OF PREFERENCES. PRINCIPAL-SUPPLIER RULE Rule, in bilateral negotiating procedures, according to which an import concession on a specific product is to be negotiated only with the country that is actually or potentially the principal supplier of that prod- uct. In GATT, under its MOST-FAVORED-NA- TION PRINCIPLE, the concession would then be extended to the other contracting parties. PROCUREMENT See GOVERNMENT PRO- CUREMENT. PROTOCOL OF ACCESSION Legal document recording the conditions and obligations under which a country accedes to an international agreement or organization. Also see PROTOCOL OF PROVISIONAL APPLICATION. PROTOCOL OF PROVISIONAL APPLICATION Legal document recording the conditions and obligations under which the original contracting parties to the GATT undertook, in 1947, to apply the General Agreement. The undertaking was meant to be provisional as full accession immedi- ately would have necessitated time-consuming and politically costly amendments of already exist- ing national legislation on trade. GRANDFATHER CIAUSE. (BISD, Vol. N, p. 77.) QUANTITATIVE RESTRICTION Measure aim- ing directly to restrict the quantity of a good imported (or exported). Quantitative restrictions include quotas, nonautomatic licensing, mixing regulations, voluntary export restraints, and pro- Glossary of terms RULE OF ORIGIN See ORIGIN RULE. SAFEGUARD AcnON Emergency action taken to protect (safeguard): (1) domestic producers of a specific good from an unforeseen surge in imports (Art. XIX; BISD, 26S/209, 29S/12 and 30S/216) (also see ESCAPE CIAUSE), (2) a country's external financial position and balance- of-payments (Art. XII, XVIII:B), (3) an infant in- dustry being established in a less-developed country to further that country's economic devel- opment (Art. XVIII:C; BISD, 26S/209.) SANITARY REGUIATION See TECHNICAL BARRIER TO TRADE. SELECITVI1Y Application of a rule, regulation, or trade action not to all parties universally (say, according to the MOST-FAVORED-NATION PRIN- CIPLE) but to some parties selectively. SPECIAL AND DIFFERENTIAL TREATMENT See ENABLING CIAUSE. SPECIAL ORAWING RIGHT International pay- ments facility administered by the International Monetary Fund. Also used as an international unit of accounting, defined in terms of the five most important national currencies in interna- tional trade. SPECIFIC A specific duty (tariff, charge, and so on) is expressed in terms of a fixed amount per unit of the dutiable item: for example, a U,000 duty on each imported vehicle or a duty of S50 on each ton of wheat. SPECIFICI1Y Characteristic of a measure that is specific in its application to an enterprise or in- dustry or to a group of enterprises or industries. STANDARD See TECHNICAL BARRIER TO TRADE. STATE TRADING Trade by a government agency or enterprise or by an enterprise to which the government has granted special privileges in respect of international trade. State trading does not necessarily involve a monopoly or quantita• tive restriction of trade. (Art. XVII.) STANDSTILL In the context of the Uruguay Round of multilateral trade negotiations, a com- mitment (1) not to take any trade restrictive or distorting measure inconsistent with the provi- sions of the General Agreement or the Instru- ments negotiated within the framework of GATI or under its auspices; (2) not to take any trade restrictive or distorting measure in the legitimate exercise of GATI rights, that would go beyond that necessary to remedy specific situations, as provided for in the General Agreement and the Instruments referred to in (l); and (3) not to take any trade measures to improve one's negotiating 232 regulations). TRIGGER PRICE See MINIMUM PRICE SYS- TEM. VALUATION (FOR CUSTOMS PURPOSES) Establishment, according to defined criteria, of the value of goods for the purpose of levying ad valorem customs duties on their importation. (Art. VII; Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade, BISD, 26S/116 and 151.) VARIABLE LEVY Variable import charge that brings the import price of a good into line with or above a decreed internal price to protect domes- tic production from import competition. Given the decreed internal price, the levy will vary in- Annex 2 Table of contents of the General Agreement Preface Text of the General Agreement on Tariffs Preamble Part I Article I General Article II Schedules Part II Article III National Article IV Special Article V Freedom Article VI Antidumping Article VII Valuation Article VIII Fees and Article IX Marks of Origin Article X Publication Article XI General Article XII Restrictions Article XIII Nondiscriminatory Article XIV Exceptions Article XV Exchange Article XVI Subsidies Article XVII State Trading Article XVIII Government Article XIX Emergency Article XX General Article XXI Security Article XXII Consultation Article XXIII Nullification Article XXIV Territorial trade Areas Article XXV Joint Action Article XXVI Acceptance, Article XXVII Withholding Article XXVIII Modification 234 Article XXVIIlbis Tariff Article XXIX The Relation Article XXX Amendments Article XXXI Withdrawal Article XXXII Contracting Article XXXIII Accession Article XXXIV Annexes Article XXXV Nonapplication Article XXXVI Principles Article XXXVII Commitments Article XXXVIII Joint Action Annexes A to G Relating Annex H Relating Annex I Notes Protocol of provisional application Appendix I. Source and Effective Date of GATT Provisions II. Key to Abbreviations used in this i.35the Application of certain portions Annex 3 The Punta del Este Ministerial Declaration Meeting in Punta del Este (Uruguay) from 15-20 September on the occasion of the special session of the GATI Contracting Parties, ministers of GATI member countries adopted a Declaration launching a new round of multilateral trade nego- tiations •· the Uruguay Round. The Declaration falls into two parts. As contracting parties, the ministers adopted Part I of the declaration regarding trade in goods. It establishes the objectives and principles of the negotiations, and the launch of issues on which negotiations will take place. The Declaration provides for a standstill and rollback on trade restrictive or trade distortive measures under which goverments undertake not to increase ex- isting levels of protection and to phase out their existing breaches of GATI disciplines. As representatives of governments meeting on the occasion of the Session, the ministers further decided to launch a negotiation on trade in serv- ices, and adopted Part II of the Declaration in that regard. It has been agreed that these nego- tiations will not be placed within the legal frame- work of GATI, but that GATI practices and pro- cedures will nevertheless apply to them. _ Ministers then adopted the Ministerial Declara- tion as a whole as a single policy commitment launching the Uruguay Round. The negotiations are to extend over four years. Ministerial Declaration on the Uruguay Round Ministers, meeting on the occasion of the Special Session of Contracting Parties at Punta del Este, have decided to launch Multilateral Trade Nego- tiations (The Uruguay Round). To this end, they Reprinted &om GATI Pocus, 8 October 1986 236 sion of world trade to the benefit of all countries, especially less-developed contracting parties, in• eluding the improvement of access to markets by the reduction and elimination of tariffs, quantita• tive restrictions and other non-tariff measures and obstacles; (ii) strengthen the role of GATI, improve the multilateral trading system based on the principles and rules of the GATI and bring about a wider coverage of world trade under agreed, effective and enforceable multilateral disciplines; (iii) increase the responsiveness of the GATI system to the evolving international economic environment, through facilitating necessary struc- tural adjustment, enhancing the relationship of the GATI with the relevant international organiza- tions and taking account of changes in trade patterns and prospects, including the growing importance of trade in high technology products, serious difficulties in commodity markets and the importance of an improved trading environment providing, inter alia, for the ability of indebted countries to meet their financial obligations; (iv) foster concurrent co-operative action at the national and international levels to strengthen the inter-relationship between trade policies and other economic policies affecting growth and development, and to contribute towards contin- ued, effective and determined efforts to improve the functioning of the international monetary system and the flow of financial and real invest- ment resources to developing countries. B. General principles governing negotiations (i) Negotiations shall be conducted in a trans• parent manner, and consistent with the objectives and commitments agreed in this Declaration and with the principles of the General Agreement in order to ensure mutual advantage and increased benefits to all participants. (ii) The launching, the conduct and the im• plementation of the outcome of the negotiations shall be treated as parts of a single undertaking. However, agreements reached at an early stage may be implemented on a provisional or a defini- tive basis by agreement prior to the formal con- clusion of the negotiations. Early agreements shall be taken into account in assessing the over• all balance of the negotiations. (ill) Balanced concessions should be sought within broad trading areas and subjects to be negotiated in order to avoid unwarranted cross- sectoral demands. l oe Punta del Este Ministerial Declaration within the framework of GATI or under its aus- pices; (ii) not to take any trade restrictive or distorting measure in the legitimate exercise of its GATI rights, that would go beyond that which is neces- sary to remedy specific situations, as provided for in the General Agreement and the Instruments referred to in (i) above; (iii) not to take any trade measures in such a manner as to improve its negotiating positions. Rollback (i) that all trade restrictive or distorting meas- ures inconsistent with the provisions of the Gen- eral Agreement or Instruments negotiated within the framework of GATI or under its auspices, shall be phased out or brought into conformity within an agreed timeframe not later than by the date of the formal completion off the negotia- tions, taking into account multilateral agreements, undertakings and understandings, including strengthened rules and disciplines, reached in pursuance of the Objectives of the Negotiations; (ii) there shall be progressive implementation of this commitment on an equitable basis in con- sultations among participants concerned, includ- ing all affected participants. This commitment shall take account of the concerns expressed by any participant about measures directly affecting its trade interests; (iii) there shall be no GATI concessions re- quested for the elimination of these measures. Surveillance of standstill and rollback Each participant agrees that the implementa- tion of these commitments on standstill and roll- back shall be subject to multilateral surveillance so as to ensure that these commitments are being met. The Trade Negotiations Committee will decide on the appropriate mechanisms to carry out the surveillance, including periodic reviews and evaluations. Any participant may bring to the attention of the appropriate surveillance mecha- nism any actions or ommissions it believes to be relevant to the fulfilment of these commitments. These notifications should be addressed to the GATI secretariat which may also provide further relevant information. D. Subjects for negotiations Tariffs Negotiations shall aim, by appropriate methods, to reduce or, as appropriate, eliminate tariffs including the reduction or elimination of high tariff and tariff escalation. Emphasis shall be given to the expansion of the scope of tariff 238 dealing with their causes; (iii) minimizing the adverse effects that sanitary and phytosanitary regulations and barriers can have on trade in agriculture, talcing into account the relevant international agreements. In order to achieve the above objectives, the negotiating group having primary responsibility for all aspects of agriculture will use the Recom- mendations adopted by the Contracting Parties at their Fortieth Session, which were developed in accordance with the GAIT 1982 Ministerial Pro- gramme and take account of the approaches sug- gested in the work of the Committee on Trade in Agriculture without prejudice to other alternative that might achiel'e the objectives of the Negotiatiom. GAIT Articles Participants shall review existing GAIT articles, provisions and disciplines as requested by inter- ested contracting parties and, as appropriate, undertake negotiations. Safeguards (i) A comprehensive agreement on safeguards is of particular importance to the strengthening of the GAIT system and to progress in the MTNs. (ii) The agreement on safeguards: -shall be based on the basic principles of the General Agreement; -shall contain, inter alia, the following elements: transparency, coverage, objective criteria for ac- tion including the concept of serious injury or threat thereof, temporary nature, degressivity, and structural adjustment, compensation and re- taliation, notifications, consultation, multilateral surveillance and dispute settlement; and -shall clarify and reinforce the disciplines of the General Agreement and should apply to all contracting parties. M7'N agreements and arrangements Negotiations shall aim to improve, clarify, or expand, as appropriate, agreements and arrange- ments negotiated in the Tokyo Round of multilat- eral negotiations. Subsidies and countervailing measures Negotiations on subsidies and countervailing measures shall be based on a review of Articles VI and XVI and the MTN agreement on subsidies and countervailing measures with the objective of improving GAIT disciplines relating to all subsi- dies and countervailing measures that affect inter- national trade. A negotiating group will be estab- lished to deal with these issues. Dispute settlement In order to ensure prompt and effective resolu- tion of disputes to the benefit of all contracting Tbe Punta del Este Ministerial F. Participation (a) Negotiations will be open to: (1) all contracting parties (2) countries having acceded provisionally, (3) countries applying the GATI on a de facto basis having announced, not later than 30 April 1987, their intention to accede to GATI and to participate in the negotiations, (4) countries that have already informed the Contracting Parties, at a regular meeting of the Council of Representatives of their intention negotiate the terms of their metnbership as a contracting party, and •~ (5) developing countries that have, by 30 April 1987, initiated procedures for accession to the GATI, with the intention of negotiating the terms of their accession during the course of the nego- tiations. (b) Participation in negotiations relating to the amendment or application of GATI provisions or the negotiations of new provisions will, however, be open only to contracting parties. G. Organization of the negotiations A Group of Negotiations on Goods (GNG) is established to carry out the programme of nego- tiations contained in this Part of the Declaration. The GNG shall, inter alia: (i) elaborate and put into effect detailed trade negotiating plans prior to 19 December 1986; (ii) designate the appropriate mechanism for surveillance of commitments to standstill and roll- back; (iii) establish negotiating groups as required. Because of the interrelationship of some issues and taking fully into account the general prin- ciples governing the negotiations as stated in B(iii) above it is recognized that aspects of one issue may be discussed in more than one negoti- ating group. Therefore each negotiating group should as required take into account relevant aspects emerging in other groups; (iv) also decide upon inclusion of additional subject matters in the negotiations; (v) coordinate the work of the negotiating groups and supervise the progress of the negotia- tions. As a guideline not more than two negotiat- ing groups should meet at the same time; 240 Annex 4 Participants at the multilateral trade Algeria France Antigua & Barbuda Germany, Fed. Rep. of Argentina Greece Australia Ireland Austria Italy Bangladesh Luxembourg Barbados Netherlands Belize Portugal Benin Spain Botswana United Kingdom Brazil Burkina Faso Finland Burma Fiji Burundi Gabon Cameroon Gambia Canada Ghana Central African Guyana Republic Guatemala Chad Haiti Chile Honduras China Hong Kong Colombia Hungary Congo Iceland Costa Rica India Cote d'Ivoire Indonesia Cuba Israel Cyprus Jamaica Czechoslovakia Japan Dominican Republic Kenya El Salvador Korea, Rep. of Egypt Kuwait Lesotho European Economic Community Madagascar Malawi Belgium Malaysia Denmark Maldives Malta Zimbabwe Annex 5 Status of Tokyo Round agreements on 1 June 1986 COUN'rlllH Geneva CONTIIACTINO 1979 MIITIH Prolocol Araent1na A Australia Austria A Bela,um A Belize Brazil Canada A Chile Colombia Cole d' lvo,re c,echoslovalua A Denmar1t A" Dominican Repubhc EnvnJ European Con,munities A Finland A France A Germany (Fed. Reo) A' Greece Haiti Hano Kona HtJnnan, A Iceland A India Indonesia Ireland A Israel s ilalv A Jamaica A Japan A" Korea. Rep Luxemboura A Malawi Malaysia Nelherlands A New Zealand A Nooeroa No<way A Pakistan Peru Phohpp,nes Poland A Portuaat Romarua A Rwanda s,naar,ore South Africa A Spa,n A Sweden A Switzerland A Tur~ey United K,ngdom A Untted States A Uruauav Yuooslavia A Zaire 01'Mall COUNTIIIES Botswana Buloaria Guatemata Turos ra .. • ReservatlOf't . cond,ton .. Provisional access.on to GAIT Reprinted from GA.Tr Activitia 1985. Annex 6 Country groups AFRICA, CARIBBEAN, AND PACIFIC (ACP) Antigua & Barbuda - Bahamas - Barbados Cameroon - Cape Verde - Central African - Dominica -Equatorial Guinea - Ethiopia Bissau - Guyana - Jamaica - Kenya - Kiribati - Mauritius - Mozambique - Niger - Nigeria St. Lucia - St. Vincent & the Grenadines Solomon Islands -Somalia - Sudan - Suriname - Tuvalu - Uganda - Vanuatu - Western COMECON Albania - Bulgaria - Czechoslovakia - Hungary· Mongolia - Poland - Romania EEC Belgium - Denmark - Federal Republic of erlands - Portugal - Spain - United Kingdom. EFTA Austria• Iceland - Norway- Sweden - with EFTA). Annex 7 Trade data on 128 countries Growlb of mercbawllse ITode Low-income economies China and India Other low-income I Ethiopia 2 Bangladesh 3 Burkina Faso 4 Mali 5 Bhutan 6 Mozambique 7 Nepal 8 Malawi 9 Zaire 10 Bunna 11 Burundi 12 Togo 13 Madagascar 14 Niger 15 Benin 16 Central African Rep. 17 India 18 Rwanda 19 Somalia 20 Kenya 21 Tanzania 22 Sudan 23 China 24 Haiti 25 Guinea 26 Sierra Leone 27 Senegal 28 Ghana 29 Pakistan 30 Sri Lanka 31 Zambia 32 Afghanistan 33 Chad 34 Kampuchea, Dem. 35 LaoPDR 36 Uganda 37 VierNam Middle-income economies Lower middle-income 38 Mauritania 39 Bolivia 40 Lesotho< 41 Liberia 42 Indonesia 43 Yemen , PDR 44 Yemen, Arab Rep. 45 Morocco 46 Philippines 47 Egypt, Arab Rep. 48 Cote d'Ivoire 49 Papua New Guinea 50 Zimbabwe 51 Honduras 52 Nicaragua 53 Dominican Rep. 54 Nigeria 55 Thailand 56 Cameroon 57 El Salvador 58 Botswana' 59 Paraguay 60 Jamaica 61 Peru 62 Turkey 63 Mauritius 64 Congo, People ·s Rep. 65 Ecuador 66 Tunisia 67 Guatemala Note: For data comparability and coverage. 246 Expons 1985 68 Costa Rica 69 Colombia 3,696 70 Chile 3,743 71 Jordan 72 Syrian Arab Rep. 73 Lebanon Upper middle-income 288,534 I 74 Brazil 25,637 75 Uruguay 76 Hungary 8,513 77 Ponugal 5,680 78 Malaysia 15 ,282 79 South Africa' 80 Poland 11,447 81 Yugoslavia I0,700 82 Mexico 21,866 83 Panama 1,949 84 Argentina 8,396 85 Korea, Rep. of 30,283 86 Algeria 13,034 87 Venezuela 12,272 88 Greece 4,539 89 Israel 6,601 90 Trinidad and Tobago 2,196 91 Hong Kong 30,1 84 92 Oman 4,962 93 Singapore 22,812 94 Iran , Islamic Rep. 13,186 95 Iraq 9,050 96 Romania 12,167 Developing economies Oil exporters 119,837 I Exporters of manufactures Highly indebted countries 117,517 I Sub-Saharan Africa High-income oil exporters 97 Libya 10,841 98 Saudi Arabia 27,403 99 Kuwait 10,992 100 United Arab Emirates 14.337 Industrial market economies IOI Spain 24,307 102 Ireland I0,399 I03 Italy 78,943 104 New Zealand 5,731 105 Belgiumd 53,316 106 United Kingdom 101,096 I07 Austria 17,102 I08 Netherlands 68.283 109 France 97,457 I JO Australia 22,760 111 Finland 13,609 112 Gennany, Fed. Rep. 25,684 113 Denmark 17.082 114 Japan 175,858 I 15 Sweden 30,403 116 Canada 87,502 117 Norway 19,853 118 Switzerland 27,281 119 United States 213,144 Nonreporting nonmember economies 120 Albania 121 Angola 122 Bulgaria 123 Cuba I24 Czechoslovakia 125 German Dem. Rep. 126 Korea, Dem. Rep. 127 Monjolia 128 USS a. See the technical notes. b. World Bank land; trade between the component territories Slnletllre of mercbantllse minmls, Low-income economies China and India Other low-income 24w 23 w I Ethiopia (. ) 10 2 Bangladesh .. 3 Burkina Faso 4 Mali 5 Bhutan 6 Mozambique 14 IZ 7 Nepal 8 Malawi (. ) (.) 9 Zain: 72 74 10 Bunna 5 /5 11 Burundi (.) 2 12 Togo 33 52 13 Madagascar 4 5 14 Niger ( .) 15 Benin I 45 16 Central African Rep. 17 India IO 25 18 Rwanda 40 19 Somalia (.) (.) 20 Kenya 13 22 21 Tanzania 22 Sudan 23 China 24 Haiti 25 Guinea 26 Sierra Leone 25 34 27 Senegal 9 /8 28 Ghana 13 30 29 Pakistan 2 2 30 Sri Lanka 2 JO 31 Zambia 97 94 32 Afghanistan (.) 33 Chad 5 34 Kampuchea, Dem. (. ) 35 LaoPDR 62 36 Uganda 13 (.) 37 VietNam Middle-income economies 34w 40w Lower middle-income 28w 51 w 38 Mauritania 94 58 39 Bolivia 93 82 40 Lesothob 41 Liberia 72 65 42 Indonesia 43 75 43 Yemen, PDR 79 94 44 Yemen. Arab Rep. .. 45 Morocco 40 32 46 Philippines II 13 47 Egypt, Arab Rep. 8 72 48 Cote d'Ivoire 49 Papua New Guinea (.) 51 50 Zimbabwe 24 25 51 Honduras 6 7 52 Nicaragua 4 53 Dominican Rep. 10 (.) 54 Nigeria 32 96- 55 Thailand II 56 Cameroon 17 63 57 El Salvador 2 58 Botswanab 59 Paraguay ( .) (.) 60 Jamaica 28 67 61 Peru 45 70 62 Turkey 9 JO 63 Mauritius 0 (.) 64 Congo, People's Rep. 65 Ecuador 2 74 66 Tunisia 31 47 67 Guatemala (.) Note: For data comparability and coverage. 248 Fuels, minerals, and melals 1965 1985 68 Costa Rica (.) (.) 69 Colombia 18 15 70 Chile 89 64 71 Jonlan 27 32 72 Syrian Arab Rep. I 65 73 Lebanon 14 Upper middle-income 37 w 37 w 74 Brazil 9 15 75 Uruguay (.) (.) 76 Hungary 5 8 77 Portugal 4 5 78 Malaysia 35 34 79 South Africah 24 39 80 Poland 81 Yugoslavia IO 8 82 Mexico 22 64 83 Panama 35 3 84 Argentina I 5 85 Korea, Rep. of 15 4 86 Algeria 57 98 87 Venezuela 97 94 88 Greece 8 19 89 Israel 6 3 90 Trinidad and Tobago 84 84 91 Hong Kong 2 2 92 Oman 93 Singapore 21 29 94 Iran, Islamic Rep. 88 98 95 Iraq 95 99 96 Romania Developing economies 32 w 39 w Oil exporters 66w 84w Exporters of manufactures 9w 13 w Highly indebted countries 38w 46w Sub-Saharan Africa 32w 63 w High-income oil exporters 98w 98w 97 Libya 99 98 98 Saudi Arabia 98 98 99 Kuwait 98 95 100 United Arab Emirates 99 95 Industrial market economies 9w 11 w IOI Spain 9 12 102 Ireland 3 3 l03 Italy 8 6 104 New Zealand I 7 105 Belgium' 106 United Kingdom 7 24 l07 Austria 8 6 I08 Netherlands 12 25 109 France 8 7 I IO Australia 13 44 111 Finland 3 8 112 Gennany, Fed. Rep. 7 5 113 Denmark 2 7 114 Japan 2 I 115 Sweden 9 9 116 Canada 28 22 117 Norway 21 62 118 Switzerland 3 3 119 United States 8 8 Nonreporting nonmember economies 120 Albania 121 Angola 122 Bulgaria 123 Cuba 4 124 Czechoslovakia 125 German Dem. Rep. 126 Korea, Dem. Rep. 127 Mongolia 128 USSR a. Textiles and clothing is a subgroup swana, and Swaziland; trade between the ~tructure of merchandise imports 1965 Low-income economies 20w China and India Other low-income 19 w I Ethiopia 6 2 Bangladesh .. 3 Burkina Faso 23 4 Mali 20 5 Bhuran 6 Mozambique 17 7 Nepal 8 Malawi 15 9 Zaire 18 10 Burma 15 11 Burundi 16 12 Togo 14 13 Madagascar 19 14 Niger 12 15 Benin 18 16 Central African Rep. 13 17 India 22 18 Rwanda 12 19 Somalia 31 20 Kenya 21 Tanzania 22 Sudan 23 23 China 24 Haiti 25 Guinea 26 Sierra Leone 17 27 Senegal 36 28 Ghana 12 29 Pakisran 20 30 Sri Lanka 41 31 Zambia 9 32 Afghanistan 17 33 Chad 13 34 Kampuchea, Dem. 6 35 LooPDR 27 36 Uganda 37 VietNam Middle-income economies Lower middle-income 38 Maurirania 9 39 Bolivia 19 40 Lesotho" 41 Liberia 17 42 Indonesia 6 43 Yemen. PDR 19 44 Yemen, Arab Rep. 45 Morocco 36 46 Philippines 20 47 Egypt. Arab Rep. 26 48 Cote d'Ivoire 49 Papua New Guinea 23 50 Zimbabwe 7 51 Honduras II 52 Nicaragua 12 53 Dominican Rep. 24 54 Nigeria 9 55 Thailand 6 56 Cameroon II 57 El Salvador 15 58 Botswana' 59 Paraguay 14 60 Jamaica 21 61 Peru 17 25 62 Turkey 6 63 Mauritius 35 64 Congo, People's Rep. 65 Ecuador 10 66 Tunisia 16 15 67 Guatemala II Note: For data comparability and coverage. 250 Food 1965 1985 68 Costa Rica 9 JO 69 Colombia 8 JO 70 Chile 20 18 71 Jordan 28 19 72 Syrian Arab Rep. 22 18 73 Lebanon 28 Upper middle-income 15 w tow 74 Brazil 20 9 75 Uruguay 7 8 76 Hungary 12 7 77 Portugal 16 15 78 Malaysia 25 JI 79 South Africa• 80 Poland 81 Yugoslavia 16 5 82 Mexico 5 17 83 Panama II /0 84 Argentina 6 4 85 Korea, Rep. of 15 6 86 Algeria 27 /9 87 Venezuela 12 19 88 Greece 15 13 89 Israel 16 9 90 Trinidad and Tobago 12 17 91 HongKong 25 10 92 Oman 93 Singapore 23 9 94 Iran, Islamic Rep. 16 12 95 Iraq 24 15 96 Romania Developing economies Oil exporters 14 w 16 w Exporters of manufactures 19 w 9w Hirsy indebted countries 14 w 12 w Su Saharan Africa 15 w 18 w High-income oil exporters 22 w 10 w 97 Libya 13 JO 98 Saudi Arabia 30 JO 99 Kuwait 22 JO 100 United Arab Emirates Industrial market economies 19 w 10 w IOI Spain 19 10 102 Ireland 18 12 103 Italy 24 14 104 New Zealand 7 6 105 Belgiumb 14 II 106 United Kingdom 30 II 107 Austria 14 6 108 Netherlands 15 14 109 France 19 10 110 Australia 5 5 111 Finland 10 5 112 Germany, Fed. Rep. 22 12 113 Denmark 14 II 114 Japan 22 14 115 Sweden 12 6 116 Canada 10 6 117 Norway 10 6 118 Switzerland 16 8 119 United States 19 7 Nonreporting nonmember economies 120 Albania 121 Angola 17 26 122 Bulgaria 123 Cuba 29 124 Czechoslovakia 125 German Dem. Rep. 126 Korea, Dem. Rep. 127 Mongolia 128 USSR a. Figures are for the South African Customs excluded. b. Includes Luxembourg. ungin and destination Origin Low-income economies China and India Other low-income I Ethiopia 2 Bangladesh 3 Burkina Faso 4 Mali 5 Bhutan 6 Mozambique 7 Nepal 8 Malawi 9 Zaire 10 Burma 11 Burundi 12 Togo 13 Madagascar 14 Niger 61 15 Benin 16 Central African Rep. 17 India 18 Rwanda 19 Somalia 20 Kenya 21 Tanzania 22 Sudan 23 China 24 Haili 25 Guinea 26 Sierra Leone 27 Senegal 92 28 Ghana 29 Pakistan 30 Sri Lanka 31 Zambia 32 Afghanistan 33 Chad 34 Kampuchea, Dem. 36 35 LAoPDR 9 36 Uganda 37 Viet Nam Middle-income economies Lower middle-income 38 Mauritania 39 Bolivia 40 Lesotho" 41 Liberia 42 Indonesia 43 Yemen, PDR 38 44 Yemen. Arab Rep. 45 Morocco 46 Philippines 47 Egypt. Arab Rep. 48 Cote d'Ivoire 49 Papua New Guinea 50 Zimbabwe 51 Honduras 52 Nicaragua 53 Dominican Rep. 54 Nigeria 55 Thailand 56 Cameroon 57 El Salvador 58 Botswana• 59 Paraguay 60 Jamaica 61 Peru 62 Turkey 63 Mauritius 64 Congo. People 's Rep. 65 Ecuador 66 Tunisia 67 Guatemala Note: For data comparability and coverage. 252 Origin 68 Costa Rica 69 Colombia 70 Chile 71 Jonlan 72 Syrian Arab Rep. 73 Lebanon Upper middle-income 74 Brazil 75 Uruguay 76 Hungary 77 Portugal 78 Malaysia 79 South Africah 80 Poland 81 Yugoslavia 82 Mexico 83 Panama 84 Argentina 85 Korea, Rep. of 86 Algeria 87 Venezuela 88 Greece 89 Israel 90 Trinidad and Tobago 91 Hong Kong 92 Oman 93 Singapore 94 Iran, Islamic Rep. 95 Iraq 96 Romania Developing economies Oil exporters Exporters of manufactures Highly indebted countries Sul>-Saharan Africa High-income oil exporters 97 Libya 98 Saudi Arabia 99 Kuwait 100 United Arab Emirates Industrial market economies IOI Spain 102 Ireland 103 Italy 104 New Zealand 105 Belgium" 106 United Kingdom I07 Austria 108 Netherlands 109 France 110 Australia 111 Finland 112 Germany. Fed. Rep. 113 Denmark 114 Japan 115 Sweden 116 Canada 117 Norway 118 Switzerland 119 United States Nonreporting nonmember economies 120 Albania 121 Angola ss 122 Bulgaria 123 Cuba 14 124 Cuchoslollakia 125 German Dem. Rep. 126 Korea, Dem. Rep. 127 Mongolia 128 USSR a. Includes unallocable data. b. Figures between the component territories is excluded. ungm and destination of merchandise imports Manufactured cxpons Origin 1965 Low-income economies China and India Other low-income IEthiopia (. ) 2Bangladesh 3Burkina Faso I 4 Mali (.) 5 Bhutan 6 Mozambique 3 7 Nepal 8 Malawi (. ) 9 Zaire 28 10 Burma I 11 Burundi I 12Togo I 13 Madagascar 5 14 Niger I 15 Benin I 16Central African Rep. 14 17 India 828 18 Rwanda (,) 19 Somalia 4 20 Kenya 13 21Tanzania 23 22 Sudan 2 23China 24 Haiti 25Guinea 26Sierra Leone 53 27 Senegal 4 28Ghana 7 29 Pakistan 190 30 Sri Lanka 5 31Zambia I 32Afghanisran II 33 Chad I 34 Kampuchea, Dem. I 35 LaoPDR (,) 36 Uganda 31 VietNam Middle-income economies Lower middle-income 38 Mauritania I 39 Bolivia 6 40 Lesothoh 41 Liberia 4 42 Indonesia 27 43 Yemen. PDR II 44 Yemen, Arab Rep. .' 45 Morocco 23 46 Philippines 43 47 Egypt, Arab Rep. 126 48 Cote d"Ivoire 49 Papua New Guinea 5 50 Zimbabwe 116 51 Honduras 6 52 Nicaragua 8 53 Dominican Rep. 54 Nigeria 17 55 Thailand 30 56 Cameroon 6 57 El Salvador 32 58 Botswanab 59 Paraguay 5 60 Jamaica 64 61 Peru 62 Turkey II 63 Mauritius ( ,) 64 Congo. People's Rep. 65 Ecuador 3 66 Tunisia 23 67 Guatemala 26 N01e: For data comparability and coverage. 254 Manufactured expons (millions Origin 1965 68 Costa Rica 18 ~ Colombia 35 70 Chile 28 71 Jordan 5 72 Syrian Arab Rep. 16 73 ubanon 29 Upper middle-income 74 Brazil 75 Uruguay 76 Hungal)' 77 Ponugal 78 Malaysia 79 Soulh Africab 80 Poland 81 Yugoslavia 82 Mexico 83 Panama 84 Argentina 85 Korea, Rep. of 86 Algeria 87 Venezuela 88 Greece 89 Israel 90 Trinidad and Tobago 91 Hong Kong 92 Oman 93 Singapore 94 Iran , Islamic Rep. 95 Iraq 96 Romania Developing economies Oil exporters Exporters of manufactures Highly indebted countries Sub-Saharan Africa High-income oil exporters 97 Libya 98 Saudi Arabia 99 Kuwait 100 United Arab Emirates Industrial market economies IOI Spain 102 Ireland 103 Italy 5,587 104 New Zealand 105 Belgium'· 106 United Kingdom 11,346 107 Austria 1,204 I08 Netherlands 3,586 109 France I 10 Australia 111 Finland I 12 Gennany, Fed. Rep. 15,764 I 13 Denmark 114 Japan 115 Sweden 2,685 I 16 Canada 2,973 117 Norway I I 8 Switzerland 2,646 I 19 United States 17,833 Nonreporting nonmember economies 120 Albania 121 Angola 36 122 Bulgaria 123 Cuba 27 124 Czechoslovakia 125 German Dem. Rep. 126 Korea, Dem. Rep. 127 Monio/ia 128 USS a. Includes unallocable data. b. Figures between the component territories is excluded. Annex 8 Antisubsidy and antidumping actions A 8.1 Antisubsuly actions, 1980-86 Agatnst export- ers 1980 Importers from tnt. aff. b neg. Australiad ALL 0 0 0 AICs 0 0 0 DCs 0 0 0 NMEs 0 0 0 Canada ALL 3 0 0 AICs 3 0 0 DCs 0 0 0 NMEs 0 0 0 EECC ALL 0 1 1 AICs 0 1 0 DCs 0 0 NMEs 0 ·o Japan DCs 0 0 USAf ALL 8 4 22 AICs 2 1 18 DCs 6 3 NMEs 0 0 Chileg ALL 0 0 AICs 0 0 DCs 0 0 Total ALL 11 5 23 AICs 5 2 18 DCs 6 3 NMEs 0 0 Abbreviations: AICs: Advanced industrial Note: Following the classification in for Greece, Portugal, and Turkey, whkh Developing countries are all countries a. 1986 data for Canada, Australia, the does not contain the actions taken against b. Cases are classified as affirmative withdrawn, it is included as a negative affirmative when there was an announced c. If the case was "Terminated" d. Australian data for 1980 t;ltrough Annual Report, 1983-84" since there 258 1984 1985 neg. '"'· aff. 6 1 0 3 5 1 0 3 1 0 0 0 0 0 0 0 2 2 1 2 2 2 1 1 0 0 0 1 0 0 0 0 1 1 0 0 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 50 18 21 40 14 2 8 12 34 16 9 27 2 0 4 1 18 0 18 7 4 0 4 0 14 0 14 7 77 22 40 52 25 6 13 16 50 16 23 35 2 0 4 1 e. Prom (1985) OTAP, SITC, June 1986 and (1980-1984) Annual Report of the Commission f. Prom Trade Action Monitoring System, Department of Commerce, various issues. product line rather than the Department for each product line, their number of g. Chilean trade data is obtained from cases filed by them, were terminated without to 35% in maximum if necessary. Since shown in the same year as the cases' Sources: Operations Of the Trade Agreements reported by signatories to the GATT Committee Antidumping and Subsidies Measures, 1980-1986. A 8.2 Countries frequently subject to Affected Total a Countries int. ajf.b neg.c Brazil 88 23 63 Spain 38 15 23 Argentina 32 5 27 Mexico 28 19 9 Peru 22 5 16 France 21 13 8 Rep. of Korea 21 8 13 Italy 18 9 8 New Zealand 16 10 4 Germany (FRG) 14 11 3 United Kingdom 12 10 2 Canada 11 6 5 EEC 11 3 0 Belgium 10 7 2 South Africa 9 7 2 Netherlands 8 6 2 Venezuela 8 5 3 Colombia 7 4 3 Taiwan (Prov. of China) 7 1 6 Luxembourg 6 5 1 Austria 5 3 2 Israel 5 2 1 India 4 2 2 Sweden 4 1 2 Turkey 4 1 2 China 3 0 3 Denmark 3 3 0 Portugal 3 2 1 Singapore 3 1 2 Thailand 3 3 0 Uruguay 3 1 2 Australia 2 0 2 Costa Rica 2 2 0 Iran 2 2 0 Japan 2 0 2 Malaysia 2 0 2 Pakistanh 2 1 1 Chile 1 1 0 Czechslovakia 1 0 1 East Germany 1 0 1 Ecuador 1 1 0 El Salvador 1 1 0 Finland 1 1 0 Greece 1 0 0 Indonesia 1 0 1 Kenya 1 0 0 Norway 1 0 0 Panama 1 0 1 Philippines 1 0 1 Poland 1 0 1 260 A 8.2 Countries Australia f Canada int. aff. neg. pend. int. aff. neg. 0 0 0 0 1 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 1 0 0 1 2 9 6 1 2 0 2 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 2 2 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 1 ·o 0 0 0 0 0 0 0 0 0 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 A 8.2 Countries frequently mbjecl lo Affected Total a Countries int. ajj.b neg.c Saudi Arabia 1 1 0 Sri Lanka 1 1 0 Switzerland 1 1 0 Trinidad & Tobago 1 1 0 USA 1 0 1 USSR 1 0 1 Yugoslavia 1 1 0 Zimbabwe 1 1 0 Total 460 206 240 Note: All decisions are based on the number include cases filed by nonsignatories a. 1986 data for Canada, Australia, the contain the actions taken against nonsignatories. b. Cases are classified as affirmative withdrawn, it is included as a negative affirmative when there was an announced c. If the case was "terminated" d. U.S. data from Trade Action Monitoring number of U.S.cases is based on the ITC's numbers of signatories to the subsidy code. e. EEC data from Third Annual Report of nities, 1983, 1984, 1986; Official Journal f. Australian data for 1980-82 are from Report, 1983-84 since there are no GATI g. Chilean trade data from GATI's them were terminated without imposing necessary. h. One of the CVD cases against Pakistan Sources: Operation of the Trade Agreements reports on subsidies and countervailing 262 A 8.2 Countries Australia f int. a.ff. neg. pend. int. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 .0 20 13 2 5 11 A lJ,3 Anlldumplng actions, 1980-86 Against export- ers 1980 Importers from int. a.ff. Ii neg. C Australiad All 58 14 5 AICs 28 6 4 DCs 23 4 1 NMEs 7 4 0 Austria AICs 0 1 0 Canada All 25 10 11 AICs 24 9 11 DCs 1 0 0 NMEs 0 1 0 EEC e All 25 53 12 AICs 12 17 7 DCs 10 6 2 NMEs 3 30 3 Finland AICs 2 2 0 Korea All 0 0 0 AICs 0 0 0 DCs 0 0 0 Spain Italy 0 0 0 Sweden All 0 0 0 DCs 0 0 0 NMEs 0 0 0 USA f All 22 3 27 AICs 18 3 25 DCs 3 0 2 NMEs 1 0 0 Total All 132 83 55 AICs 84 38 47 DCs 37 10 5 NMEs 11 35 3 Abbreviations: AICs: Advanced industrial Note: Following the classification in for Greece, Portugal, and Turkey, which Developing countries are all countries a. 1986 data for Canada, Australia, the does not contain the actions taken against b. Cases are classified as affirmative withdrawn, it is included as a negative affirmative when there was an announced c. If the case was "Terminated" d. Australian data for 1980 through 1982 264 1984 1985 tnt. a.If. neg. tnt. aff. 56 36 41 63 30 26 30 38 21 10 8 19 5 0 3 6 0 0 0 0 31 16 17 36 20 9 13 18 8 5 3 12 3 2 1 6 48 31 10 45 16 9 5 9 5 6 2 16 27 16 3 20 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 71 25 23 65 32 8 15 19 23 17 7 41 16 0 1 5 208 109 91 211 123 100 53 63 84 60 57 38 20 88 41 51 11 8 39 22 Annual Report, 1983-84" since there e. From (1985) OTAP, SITC, June 1986 and (1980-1984) Annual Report of the Commission f. From Trade Action Monitoring System, Department of Commerce, various issues. product line rather than the Department for each product line, their number of Sources: Operations Of the Trade Agreements reported by signatories to the GATI Committee Antidumplng and Subsidies Measures, 1980-1986. All.4 Countries frequently subject to Countries Total b Affected Int. aff. neg. Japan 112 61 39 USA 112 64 40 Germany (FRG) 77 36 38 Rep. of Korea 76 40 29 China 57 41 11 Taiwan (Prov. of China) 53 24 23 Italy 50 25 21 United Kingdom 50 24 20 Brazil 49 31 12 France 47 30 13 Spain 47 22 21 Czechoslovakia 38 22 8 Canada 35 19 14 New Zealand 33 13 19 Belgium 32 15 13 East Germany 32 24 4 Romania 30 18 7 Yugoslavia 30 12 7 Poland 29 17 6 Hungary 23 14 5 Sweden 22 13 6 USSR 21 11 5 Singapore 19 10 6 South Africa 17 12 4 Netherlands 16 7 7 Mexico 15 10 3 Venezuela 14 9 4 Austria 13 4 7 Israel 11 6 2 Finland 10 6 4 Argentina 9 5 3 Luxembourg 9 6 3 Hong Kong 8 5 2 India 8 5 3 1bailand 8 3 2 Portugal 7 2 4 Switzerland 7 3 3 Turkey 7 4 0 Norway 6 3 2 Philippines 5 2 3 Bulgaria 4 2 2 Colombia 4 1 2 Ireland (North) 4 2 2 Australia 3 2 1 Chile , 3 2 1 Malaysla 3 1 2 North Korea 2 0 2 Puerto Rico 2 2 0 Qatar 2 0 2 Trinidad & Tobago 2 1 2(,6 A 8.4 Countries frequently subject Australia b neg.pend. tnt. a.ff. neg. pend. tnt. 4 2 44 23 18 3 16 5 4 44 24 18 2 41 0 0 36 14 21 1 19 2 2 30 16 12 2 20 3 2 20 14 4 2 8 1 2 28 15 10 3 3 0 0 13 6 4 3 17 0 0 22 8 9 5 13 3 1 8 3 2 3 8 0 0 14 8 3 3 15 7 2 8 3 4 1 8 4 5 5 1 2 2 5 0 1 11 6 5 0 0 0 0 31 12 18 1 0 0 0 14 5 8 1 8 2 3 2 2 0 0 3 3 2 3 2 0 1 3 5 8 3 1 0 2 1 4 4 3 1 1 1 3 5 3 4 4 0 0 0 1 1 7 2 5 0 5 0 0 3 1 1 1 1 1 1 9 5 3 1 2 0 0 6 2 3 1 2 0 0 9 4 3 2 4 0 1 2 1 1 0 2 1 0 0 0 0 0 0 1 1 4 1 2 1 2 1 1 6 5 0 1 0 0 0 1 1 0 0 4 0 1 0 0 0 0 2 0 0 0 0 0 0 3 0 0 4 2 1 1 3 0 0 3 2 1 0 1 0 1 4 1 ·2 1 0 1 1 1 0 1 0 2 0 0 0 0 0 0 1 0 1 1 0 0 1 0 1 1 1 1 0 0 1 0 0 4 2 2 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 2 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 1 0 1 0 1 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 2 0 2 0 0 1 0 0 0 0 0 0 AB.4 Countries frequently subject to Countries Tota'!' Affected int. aff. neg. pend. Bahamas 1 1 0 Costa Rica 1 0 1 Denmark 1 1 0 Dominican Republic 1 0 1 Ecuador 1 1 0 Egypt 1 0 1 El Salvador 1 1 0 Greece 1 0 0 Iceland 1 1 0 Iran 1 1 0 Kenya 1 0 0 Peru 1 0 0 Suriname 1 0 1 Virgin Islands 1 1 0 Zimbabwe 1 1 0 Total 1288 699 442 Note: All decisions are based on the number same year as its initiation. USITC and a. 1986 data for Canada, Australia, and not contain the actions taken against 1986 only. b. Total number of cases also include Korea filed two cases against Japan and Japan and one negative determination Austria filed a case against Italy Finland filed three cases: two determinations. Sweden filed four cases two of others against Poland and Czechoslovakia Spain filed a case against Italy c. Cases are classified as affirmative withdrawn, it is included as a negative affirmative when there was an announced d . If the case was "Terminated" e. U.S. data Crom Trade Action Monitoring various issues. f. EEC data Crom Third Annual Report of nities, 1983, 1984 and 1986; Official g. Australian data for 1980-82 are from Report, 1983-84, since there are no GATI number and dates of cases notified and cases received , since ITC and GATI reports 268 AB.4 Countries frequently Australtah neg.pend. Int. aff. neg. pend. 0 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 66 54 416 202 168 46 o/,b9i1 LSD HF1721 .U83 1987 Eng n,990 Fir,ger, J. M. The Uruguay Round : a har,dbc,ok fc,r the multilateral trade DATt NAME AND EXTENSION ROOM NUMBER ROOM DATE NAME AND EXTENSION NUMBEP - I & IT r.r=NTER BA,QR Banlc for to the or to its of type us- Data policy. Uruguay 87-31708 trade liberalization the handmaiden of efficient development and growth. At Punta del Este I promised that developing countries participating in the Uruguay Round would have a strong information base and analyti- cal support. This handbook is part of our ongo- ing program to encourage informed developing country participation in the round. To ensure that developing countries receive the best advice available, we have asked a series of authors, many of them outside the Bank, to draft specific chap- to each nation Punta del Este participa- upcoming Bank anxious ters in their area of expertise. The resulting handbook is not a Bank document, but a wide- ranging collection of informative essays. Follow- ing the suggestions of many country delegations, the handbook reflects the World Bank's experi- ence in the economics of international trade. It does not take up matters of political strategy or negotiating technique--subject areas beyond the immediate scope of our expertise. We believe that this handbook will be useful, and we ask your suggestions on how it might be more so, as well as on other information and analysis we might supply in the future that would be helpful. The continuing usefulness of our program depends on this input from you. Barber B. Conable 1 GARDNER PAITERSON & ELIZ.A PAITERSON 7 MAKI1N WOLF 14 RICHARD COOPER 22 JAGD/SH BHAGWA11 29 Negotiations 37 45 J MICHAfi.L FINGER & PAUIA HO/MES 52 STERN & BERNARD HOEKMAN 59 and graduation BRIAN HINDLEY 67 HENRY R NAU :5 WILLIAM B. KELLY 81 the Uruguay Round SAMUEL /AIRD & ALEXANDER ~ 89 /AIRD & ANDRE SAPIR 101 ALEXANDER YEAT.S 110 121 PATRICK MESSERLIN 127 IAWRENCE EICHER 137 143 J MICHAEL FINGER 153 162 171 180 191 198 207 217 227 234 236 241 243 244 245 257 and Pacific (countries) Policy Telephone and Telegraph Consultative Committee Council Nomenclature and freight Mutual Economic Assistance more favorable Community Trade Association (or Area) Organization on Tariffs and Trade System of Preferences of Trade Preferences Bank for Reconstruction and Development (World Bank) Electrotechnical Commission Labor Office Monetary Fund Federation of National Standardizing Associations Organization for Standardization Telecommunication Union Arrangement trade negotiation country provision for Economic Cooperation and Development arrangement restriction Trade Classification to trade investment measure Conference on Trade and Development restraint expansion agreement Property Organization balances. Much more, they discussed ideas with other delegations, patiently modifying and ex- tending their proposals as they went. This behind- the-scenes leadership disseminated a sense of the value of the GATI system to smaller countries and developed a perspective that gave expression to their concerns. It is thus fitting that the agree- ment to undertake a new round was reached in a developing country •· and that the round is named for a developing country. Developing countries offer much more than new and energetic workers to labor in Geneva. They have a wealth of experience with trade liber- alization for the international community to draw on. And their policy reforms, often quite de- tached from the GATI rounds, have been an important part of the opening of the international trading system. Two perspectives The opening of national economies to world trade by the developed and the developing coun- tries reflects different economic and political per- spectives. For developed countries, the removal of trade restrictions has been shaped by a strong vision of an open international trading system •• and of that system's collective benefits to the community of nations. A concern to promote and maintain peace and stability through economic means has perhaps been clearer as an objective than has the economic benefit to a particular nation. The focus has been systemic, the approach multilat- eral. Indeed, the initial intent of major powers in the trade negotiations after World War II was to create an international trade organization. That organization was never agreed on. But secondary There are encouraging signs. The involvement of developing country leadership in organizing the Uruguay Round displays an appreciation for the value of the GATI system. Like an increasing number of governmental and nongovernmental reports in the developed countries, the recent GATI report, Trade Poltctes for a Better Future, draws attention to what an import restriction costs the economy that the restriction wants to "protect" - attention to the gains from trade beyond export expansion. There also are risks -- that the international community will come to share what is bad in each perspective as well as what is good. The effective technique of exchanging concessions builds on each country's (correct) perception that exports are a gain from trade. But it also fosters the misperception that exports are an individual country's only gain from trade, and imports its cost. GATI's current technology attempts to limit the use of import restrictions by specifying when a country may impose them. This technology does not ask a country to add up the domestic gains from an instance of import competition and weigh them against the domestic costs. It looks only at the domestic costs and authorizes import restric- tions when these domestic costs take a certain form or reach a certain degree. In so doing, it reinforces the idea that the importer bears the costs of trade while the exporter enjoys the gains. If the urge to get more exports and suffer fewer imports dulls the developed countries' sense of the value of the system •· and if asking developing countries to examine trade liberalization in a multilateral context brings them to the instinctive view that exports are the gains from trade and imports the costs -· the world will be moving in the wrong direction. The risk of moving in the wrong direction is real. In this technocratic age, countries often learn principle from techniques more quickly than they shape techniques in accord with prin- ciple. One hears more and more frequently that "The GATI allows it" in support of a requested trade restriction. Yet consistency with what is al- lowed by the current GATI mechanics is not, and was never intended to be, a test of consistency with the national economic interest of the coun- try that imposes the trade restriction. Allowing these mechanisms was part of the political price of trade liberalization -· to allow the possibility of sense of the benefits of one step backward in order to buy several steps forward. Introduction Part I of this handbook provides background •· on what the Uruguay Round might achieve, how liberalization is beneficial, and how a country's economic interests are compromised by its own import restrictions as well as by those of its trad- ing partners. Part II explains the principles and mechanics of the GATI approach to trade liberali- zation. Taken up in this part are the sequencing of topics, the meaning and function of reciprocity, the issues surrounding graduation, and the ways unilateral liberalization might fit into multilateral negotiations. Explored in Part III are the basic economics of individual topics - tariffs, nontariff barriers, safeguards, agriculture, textiles, and so on. For reference in the annexes are the text of the Punta del Este Declaration, the table of con- tents of the General Agreement, a glossary of the language of international trade, and a set of tables on trade statistics. The intent of this handbook is that it will foster an examination of the economics underlying the mechanics of the GATI system. Getting the un- derlying economics right and complete will help national governments and private economic inter- ests to regain confidence in the relevance of GATI to international trade problems. It will also help in reawakening the international com- munity's appreciation of the benefits of an open international trading system and in rekindling the international resolve to extend and defend such a system. 3 international accounts of many of the players are in serious and prolonged imbalance. Protection- ist forces are entrenched in many countries. Unemployment is high in some of the major coun- tries and endemic in others. Several countries are burdened by the largest international debts in their histories. Throughout the world there is an accumulation of past failures to adjust to foreign competition and a resistance to change. There is "suffering serious and also much excess capacity in such basic industries as steel, textiles, and automobiles. All these facts create unprecedented difficulties for the new round and constrain the negotiations. But it is precisely these (and related) facts that provide the impetus for launching the new round •· just as the chaos of the 1930s provided the impetus for negotiating the General Agreement in the first place. These facts also imply that the new round must deal with some fundamental aspects of the trading system and that success is by no means certain. As one negotiator said, "We are talking about tough stuff, basic issues, and changes in developmental and structural poli- cies." 2 Strengthening and broadening the GATT system bi- The many official statements at Punta del Este and the final mandate or "declaration" reflected agreement that the overriding goal of the negotia- tions is to strengthen and broaden the GATI system. More specifically, the overriding goal is to bring about further liberalization and expansion of world trade; to strengthen and improve the existing rules governing international commercial transactions; and to increase the responsiveness of the system to changes in the international 7 ment to limit or eschew their use must be seen as an essential task of the negotiations if the overall goal is to be achieved. That task will be difficult. These gray-area measures are weapons much treasured and ad- mired in the trade-restraint arsenals of trading giants, and they often meet powerful political and economic needs at home. (They are also valued by some of the exporting countries, notably those that have lost some of their earlier competitive advantage.) The protective effect of these meas- ures is reasonably fast and certain. They enjoy large vested interests, both in bureaucracies and in industries. To proscribe their use will often necessitate painful adjustments, even if the adjust- ments merely involve lifting the impediments to market forces. These sorts of measures are also appealing because the GATI safeguard rules and proce- dures deal with the problems of individual prod- ucts, not entire industries. And in recent years governments have often felt the need to take measures to protect an entire industry. They have found the liberal trade solution to industrywide problems exceedingly difficult when, as is often the case, there is worldwide excess capacity •· and when the solution requires scaling down produc- tion in several countries, often in developing countries. A renewed and firm commitment to honor (the present) GATI Articles XI and XIII and, except as provided therein, to replace quantitative restric- tions (in all forms) with nondiscriminatory tariffs would do most to support the objectives of the new round. But because of the several reasons just noted, this result is probably not attainable. If some use of quantitative restrictions for protec- tion is here to stay, the task of the negotiators is to find ways of making that use more responsive to market forces and more consistent with a lib- eral trade regime. Their job is to negotiate pre- cisely when quantitative restrictions, as distin- guished from tariffs, could be used for protection. To prevent discrimination, the new rules should provide that quotas be global. International sur- veillance should be provided and firm rules agreed on for limiting the duration of the restric- tive measures and tying their use to adjustment measures designed to remove the need for them. As a major step toward converting any authorized quotas to tariffs, an attempt should be made to agree on rules and procedures for auctioning quotas. None of this will be easy. Objectives of tbe Uruguay Round objectives met. Key among these are reductions in the tariffs on many of their exports, particularly processed goods.5 These reductions will not be easy because the tariffs that remain in the devel- oped countries really do give much-wanted pro- tection. But a failure this time to come to grips with tariff escalation will threaten the success of the new round. The contentious debate on graduation may be crippling if it is permitted to take the form of developing vs. developed, poor vs. rich, or south vs. north. This kind of debate fosters and encour- ages demagogic and confrontational tactics rather than serious negotiation. The chances of avoid- ing this sort of split are probably improved be- cause of the greater attention in recent years to the widely divergent economic development of the developing countries and the several divisions among them that emerged during the preparation for the ministerial meeting in Uruguay. In GATI, being a developing country is a matter of self-selection. No attempt has ever been made to set up rigorous conditions or criteria for a member's right to claim the exceptions to the GATI obligations permitted developing countries or the special and different treatment provided in the various articles. Preliminary discussion in the Tokyo Round indicates that to attempt to do so in these negotiations will create acrimonious debate. It should nevertheless be possible to have some countries graduate in certain areas by negotiating specific commitments with them. Among the developing countries are several that, although still poorer than the industrial countries, have so altered their economies that they are now major worldwide competitors in a wide range of manu- factured and sophisticated products. These newly industrialized countries (NICs) will be strongly pressed (by those feeling their competi- tion) to ease the access to their markets. The negotiations will be especially bitter if the industrial countries, as was hinted at the end of the Tokyo Round, ask the NICs to reduce their tariffs unilaterally. The NICs were earlier excused from making such reductions because they were less developed, even though the (MFN) rule en- abled them to benefit from all tariff cuts negoti- ated among the industrial countries. The benefits may then have been small or nonexistent, but they have become more valuable as these coun- tries have industrialized. To obtain greater participation by the NICs in any new code or agreement, the industrial coun- tries will resort to some form of conditional MFN 9 Negotiations Committee and be serviced by the GATI Secretariat. The separation may be more form than substance, but it does reflect the sharp divisions among the negotiators. Although ex- plicit tradeoffs between goods and services may not be possible, results in one area almost cer- tainly will be taken into account in the negotia- tions in the other. Differences are strong even over including serv- ices in the new round. And even for those who insisted on including services, there are differ- ences over the desired coverage and substance of the rules. The risk of failure to reach agreement is thus great. And failure here would be serious. The alternative is almost certainly a network of discriminatory rules negotiated bilaterally or regionally. Given the growing importance of trade in services and its increasing commingling with trade in goods, such discriminating rules could well bring the GATI system down. The stated goals of the General Agreement and the general goal of the Uruguay Round do not distinguish between farm and nonfarm goods. But a sharp distinction has been made in past rounds and in the application ofGATI's rules. To a large extent, trade in agricultural products has been treated as a class on its own and excluded from many of the general rules. As chapter 5 spells out in detail, restrictions on imports are pervasive, subsidies are rampant, inefficiencies are great, costs to governments and consumers are massive, and the causes for all this are deeply rooted in domestic, political, social, and eco- nomic phenomena. The U.S. Trade Representa- tive, Clayton Yeutter, spoke for many when he said that this round must "bring to an end the chaos that now characterizes the international marketplace" in agriculture (Yeutter 1986). End- ing this chaos will be as difficult as it is essential. After long and difficult negotiations, the minis- ters at Punta del Este agreed that the "negotia- tions shall aim to achieve greater liberalization of trade in agriculture and bring all measures affect- ing import access and export competition under strengthened and more operationally efficient GATI rules and disciplines." But an important procedural decision may adversely prejudice the likelihood of bringing agricultural trade under the same (or comparable) rules as manufactured products. The establishment of a "negotiating group having primary responsibility for all aspects of agriculture" may mean that the negotiations on agricultural products will once again be treated as different from the other negotiations •· and will in Objectives of tbe Uruguay Round will require a restoration of respect for the GATI system in the public mind and in political circles. Agreements on specific trade issues are not likely to be translated into the called-for action unless there is the perception that the system is relevant and in tune with current realities. This percep- tion will depend in large part on how much the broad objectives and specific agenda are satisfac- torily met. The key here is an improved mecha- nism for settling disputes. Compliance with the new rules will be greatly enhanced by an "enforcement" mechanism viewed as fair and effective. Respect for the sys- tem would be furthered if the General Agreement were reviewed article by article, and not just those parts whose review is inherent in particular topics on the negotiating agenda With such a comprehensive review, some provisions would be amended, some abandoned, and some left intact. The result would be that the GATI system would again be seen as up-to-date and worthy of respect and observance. It is, therefore, a very good thing that tucked away in the Punta del Este Declaration is the following: "Participants shall review existing GATI articles, provisions, and disciplines as requested by interested contracting parties and, as appropriate, undertake negotia- tions." Almost every chapter in the rest of this hand- book examines some aspects of improving the functioning of the GATI system. But this chapter seems to be the place to draw attention to the need for the negotiators to wrestle with holding firmly to the existing unconditional MFN rule or modifying it, at least for all new nontariff under- takings. This rule provides that each GATI member will grant -- automatically, uncondition- ally, and without compensation -- any privilege or favor of commerce that it grants to the products of any member country to like products from all other countries. The purpose of the MFN rule •· set forth in GATI Article I and commonly re- ferred to as its cornerstone -- is to proscribe dis- crimination among countries. Most observers believe the rule has contributed greatly to the world's political and economic welfare. But as noted earlier, the rule has been badly mauled in recent years by the spread of orderly marketing arrangements of one kind or another, by the Generalized System of Preferences, and by some of the customs unions and free trade areas. A review of the MFN rule is needed for two reasons. Repeated violations of the rule lead many to believe that GATI is no longer germane. 11 unrealistic and therefore damaging to the new round if the negotiations had to do much toward solving either of these problems. The solutions, though urgent, must come from other sources. The reason is that these problems do not origi- nate in trade policies or trade restrictions. The problem of current account imbalances is the result of a complex combination of interre- lated phenomena. In the United States, a huge domestic budgetary deficit contributed, through high interest rates, to an overvalued dollar for many years. In addition, a relatively high rate of domestic consumption (compared with domestic production) combined with consumer prefer- ences for many imported goods. Moreover, there has been strong resistance to making the struc- tural changes in patterns of production dictated by changes in comparative advantage. And pro- ductivity has been growing relatively slowly, hurt- ing international competitiveness. These phe- nomena, not trade policies, are the villains. The solution probably resides in reducing budgetary deficits, holding down consumption in relation to savings, and making greater efforts to increase productivity. In Japan, the primary sources of the large and persistent surplus with many countries, not just the United States, have been the undervalued yen, exceptionally high saving rates, and cultural preferences for domestic products -- as well as a language and internal business structure that for- eign producers have trouble coping with. Accom- panying these forces is what many regard as a rate of growth (and therefore imports) restrained by government policy. The most obvious action for Japan to resolve this problem is to foster faster rates of growth, especially domestic demand-led growth. This is not to say the negotiations are irrelevant to these problems. A successful round can in- crease access to foreign markets by debt-ridden developing countries and so increase the earnings they need to service their debt. But a successful round will also increase their imports •· so the net increase in exports from this source cannot be expected to make more than a minor contribution to resolving the debt problem. Similarly, any lowering of tariffs, strengthening of rules to en- sure a level playing field, and extending of inter- national rules to cover services may increase U.S. exports. But such action would also increase U.S. imports •· and the net effect on the current ac- count deficit would likely be small. The beneficial effect of a successful round on the economic Objectives of tbe Uruguay Round changing quantitative restrictions to tariffs will be found in Elliott and others (1987). 4. For an authoritative account of the role of the developing countries in the Tokyo Round, as well as the other important aspects of that undertaking, see GATI (1979). See also Srini- vasan (1982), Preeg (1985), and Golt (1978). 5. One of the best treatments of this often neglected subject is Grubel and Johnson (1970). 6. For excellent studies of several service sectors (telecom- munications, professional services, banking, insurance, ship- ping, aviation, and construction) written with the Uruguay Round in mind, see the forthcoming series of monographs in American Enterprise Institute (1987). For authoritative analysis of the policy aspects of the negotiations on agriculture, see World Bank (1986), Hathaway (1987), and Johnson (1985). levels References trade Aho,C.M.,andJ.D.Aronson. 1985. Trade Talks: AmericaBetter lJst,mf, New York: Council on Foreign Relations. American Enterprise Institute. 1987. Trade in Services. Wash- ington, D.C.: Balinger, for American Enterprise Institute. Camps,Miriam,andWilliamDiebold. 1985. TbeNewMultilater- alism: Can The World Trading System Survive? New York: Council on Foreign Relations. Elliott, K.A, Jeffrey J. Schott, and Wendy E. Takacs. 1987. Auction Quotas and U.S. Trade Policy. Washington, D.C.: Institute for International Economics. GATI Secretariat. 1979. The Tokyo Round ofMultilateral Trade Negotiations. Geneva. _ _. 1985. Trade Policies for a Better Future: Proposals for as knotty AclioH. Geneva. Golt, Sidney. 1978. Developing Countries in the GAIT System. London: Trade Policy Research Center. Grubel, H.G., and H.G. Johnson, eds. 1971. Effective Tariff Protection. Geneva: GATI and Graduate Institute of Interna- tional Studies. Hathaway, Dale. 1987. Agriculture and the GAIT: Issues in a New Trade Round. Washington, D.C.: Institute for Interna- tional Economics. Hufbauer, G.C., and J.J. Schott. 1985. Trading/or Growth. Washington, D.C.: Institute for International Economics. Johnson, D.G.,and others. 1985. Agriculture Policy and Trade: Adjusting Domestic Programs in an International Frame- worlr. Report to the Tripartite Commission 29. New York: New York University Press. Preeg, E.H., ed. 1985. Hard Bargaining Ahead: U.S. Trade Policy and Developing Countries. New Brunswick, N.J.: Transactions Books, for Overseas Development Council. Srinivasan, T.N. 1982. "Why Developing Countries Should Participate in the GATI System." The World Economy 5:85- for the concerned public, 104. and drawn on here Tumlir, Jan. 1982. "International Economic Order: Can the Trend Be Reversed?" The World Economy 5(March):29-41. Viravan, Amnuay, and others. 1986. Trade Route to Sustained Economic Growth. London: Macmillan, for the United Na- Trade Representa• tions. 26, 1986, p. D7. World Bank. 1986. World Development Report. Washington, issue, sec Tumlir (1982). D.C.: Oxford University Press. and others (1986). The Yeuttcr, Clayton. 1986. Testimony by the United States Trade the problems and possi- Representative for the Committee on Finance, Subcommittee of quotas as a step toward on International Trade, United States Senate. 14 May. 13 and taxes are stable, predictable, and nonprohibi- goods on the tive. The General Agreement on Tariffs and Trade and expensive. (GATT) is liberal in this sense. Its central idea is that protection should be by means of nondis- criminatory, bound tariffs •· the tariff being a rela- neutral, take the side of the producer against tively transparent instrument that is consistent with the market. operate, if not inten- Liberal trade differs from "fair trade." Trade is liberal when individuals and companies are free in everything (Bastiat to make contracts with foreigners as they desire. Fair trade, by contrast, means that the state is expected to alter the conditions of exchange (or even ban exchange) in the interest of otherwise unsuccessful competitors. Such action is held to be justified when some parties to the original contract benefit from subsidies from their govern- ments or engage in other supposedly unfair prac- tices. Interventions in liberal exchange across frontiers to make trade fair may be the political price of liberalism, but such interventions are themselves its antithesis. Equally illiberal are agreements to open mar- kets in favor of particular exporting countries, especially when such agreements involve commit- ments by importing countries to purchase a par- ticular quantity of imports. Indeed, such "volun- tary import expansions" are as inimical to liberal trade as are voluntary export restraints, or VERs (Bhagwati and Irwin 1987). From the economic perspective, trade liberali- zation increases efficiency in three ways. The first is through the exploitation of increasing returns to scale in a larger market, as Adam Smith empha- sized. The second is through specialization in accord with comparative advantage, as David Ricardo elucidated. The third is through fiercer competition, which encourages innovation and breaks down institutional obstacles to change, as Wby trade liberalization Is a good Idea percent in the European Community, and 5.4 percent in Japan (GATT Secretariat 1980, pp. 33· 37). Trade poltctes of developing countries the With few exceptions developing countries have stood aside from the multilateral bargaining. This reluctance has had two consequences. First, while the policies of the major developed coun- tries have tended to converge under the pressure of reciprocity, the policies of developing coun- tries, being largely unbound, have diverged from one another and from those of the developed countries. The second consequence has generally been a high level of protection (Krueger 1984, p. 526). Almost all countries ended World War II with extensive barriers to imports. But for the already independent developing countries, these barriers had been associated with successful import sub- stitution during the 1930s and 1940s. Those countries felt, therefore, that there was little rea- son to change them. Pressures to liberalize tended to remain wealc in the first twenty years or so of the postwar period. Intellectuals in developed and develop- ing countries propagated the view that there was little prospect for export-oriented development (Little 1982, chapter 4). Moreover, leaders of newly independent developing countries often condemned liberalism for its association with colonialism. In addition, the balance-of-payments crises that punctuated attempts at accelerated economic development were often dealt with by a combination of import and exchange controls. These controls, being unable to do more than suppress the symptoms, have tended to endure. The legitimacy of protectionist ideas in devel- oping countries weakened in the late 1960s and early 1970s, as the failures of inward-looking policies became more obvious (Little 1982, chap- ter 9). But by then it was often too late for change, largely because of the strength of well- established protectionist lobbies. And despite the many attempts at trade liberalization, few have been successful. tariffs What global ltberallzatton would provide If the world were one political unit, one would not expect deliberate fragmentation of its internal market to increase overall welfare. For any coun- try, therefore, the best environment would be one 15 vidually, taking the global environment as given. Accordingly, the right policy for the major players is concerted liberalization even if they could in• vent good arguments for protection by ignoring the effect of their policies on others. Reductions in protection in developed coun- tries are likely to generate another period of exceptionally rapid economic growth. Postwar liberalization has led the major developed coun- tries to open trade more than before World War I but •· surprisingly perhaps •· not startlingly more (table 1.2). Yet advances in communications and transport suggest that the potential for economi- cally productive integration should be far greater today than it was seventy years ago. Table 1.2 Proportions of merchandJsc trade to national product for major developed countries (percent) 4.9 Countries ranked 8.6 by economtc size tn 1984 Pre-World War I 1950s 1984 a United States b 11.0 7.9 15.2 Tables 3.2 and 3.7. Japan c 29.5 18.8 24.2 Germany d 38.3 35.1 52.8 France e 35.2 n.a. 40.2 United Kingdom b 43.5 30.4 47.0 Italy b 28.1 35.0 44.6 Canada b 32.2 31.2 47.3 now coin- n.a. Not available. protec- Note: Trade is the sum of merchandise exports and imports. debt a. The denominator for 1984 is gross domestic product (GDP). that are b. The denominator for the pre-World War I period and the 1950s is gross national product (GNP). c. The denominator for the pre-World War I period and the 1950s is GDP. d. The denominator for Germany for the pre-World War I period and the 1950s is the ratio to net total uses, defined as the sum of private consumption, government consump- tion, and net domestic capital formation. Note also that Germany's figures are shifted upward for the 1950s and for 1984, by comparison with earlier periods, because of the country's division after World War ll. e. The denominator for Prance in the pre-World War I period is net national product. Source: Simon Kuznets, Modem Economic Growth: Rate, Structure and Spread (New Haven and London: Yale Univer- sity Press, 1966), table 6.4; World Bank, World Development Report 1986 (Washington, D.C.: Oxford University Press for the World Bank, 1986), annex tables 3 and 9. Wby ITade liberalization Is a good lde8 combined to make protectionism increasingly respectable since the 1970s. Consequently, there is worrying evidence of a gradual but apparently inexorable increase in nontariff barriers to im- ports in the 1970s and 1980s (Nogues, Olechow- ski, and Winters 1986, pp. 29-30; OECD 1985, table 1.4). have plenty Costs of protection to developed countries As Richard Harris of Queen's University in Kingston, Canada, remarks in an important recent contribution: "It is well known that conventional calculations of the costs of protection give num- bers which are quite small; often on the order of Other 0.5 to 2 percent of GNP" (Harris 1984, p. 1016). Harris notes, however, that these estimates ex- clude the effects of economies of scale. Using a model allowing for economies of scale, he esti- mates that unilateral free trade by Canada might increase economic welfare by 4.1 percent and that multilateral free trade might increase Canada's welfare by as much as 8.6 percent (Harris 1984, table 2). Far more than economies of scale are excluded from most economywide estimates of welfare ef- fects of protection. Also excluded are the costs of lobbying for protection, the costs of diminished The other is the competition, and the costs of discretionary inter- ventionism. If all these were taken into account, the costs of protection would probably be even higher than Harris's estimates. Nevertheless, the general conclusion -- that the costs of protection to developed countries, especially the big ones, are modest -- would probably stand, simply be- cause their overall levels of protection are mod- est. For this reason the irrationality of policy be- comes most obvious when the costs of protection are set against the supposed benefits. Focusing just on VERs, a particularly popular and ineffi- cient instrument of protection, studies have esti- mated annual costs per job preserved to the United Kingdom at £ 7,500 for nonleather foot- wear, £ 13,000 for woven trousers, shirts and blouses, £ 31,500 for motor cars and at least £ 80,000 for video-cassette recorders in the early 1980s (Greenaway and Hindley 1985, table 1.1). In Canada, given the welfare benefits provided by the government, a policy of permanent protection of clothing through export restraints would cost one dollar for every cent or so transferred to workers (Wolf and others 1984, p. 126). For the VERs on steel into the United States, the present 17 Sjaastad 1984, chapter 3). This bias is often partly offset by a system of export incentives almost as chaotic as that for protection against imports. they Effects of liberalization on developing countries when The experience of developing countries pro- vides a natural laboratory for the effects of trade policy, perhaps the most extensively researched issue in development economics. The conclusion of that research is clear. Econ- omies with small biases against exports and modest dispersions in protection of individual import-substituting industries, like Hong Kong, Singapore, Taiwan (Province of China) and the Republic of Korea, have outperformed those not showing these characteristics. They have out per- formed others in the growth not only of exports but also of output, employment, and real wages (Bhagwati 1986, pp. 17-19). Even Chile experi- enced rapid growth and diversification of exports following liberalization in the 1970s despite the vitiation of its liberalization in the late 1970s and early 1980s by errors in macroeconomic and exchange rate policy as well as by a calamitous riders" deterioration in the terms of trade (Congdon 1985, pp. 36-45). By contrast, economies pursu- ing across-the-board protection (like Argentina or India) have suffered from low rates of economic growth, recurrent balance-of-payments crises, and high capital intensity and low employment growth in manufacturing (Balassa 1977). Success has not demanded anything like com- plete liberalization. The Republic of Korea has deployed many protectionist instruments, as had Japan. What matters most is the structure of incentives. That structure in Korea, for example, never deviated far from what would have been in effect under free trade (Frank, Kim, and Westphal 1975, chapter 10). Moreover, where such diver- gences did occur, as in the Korean promotion of heavy industries in the 1970s, the results were by no means successful. Ian Little •· in his examination of the perform- ance of Taiwan (Province of China) along with that of Hong Kong, Singapore, and the Republic of Korea •· has argued that: There can be no doubt whatever that the main cause of the acceleration (in Taiwan's economic growth] was the series of changes in trade and exchange rate policies. These changes started tentatively in 19SS with rebates strong bias of indirect wees for exports and a devaluation; and were further consolidated in 19S8-60 with the exchange rate unification, further devaluation, and a freeing of Wby trade llberali.zatlon Is a good Idea tive value added at world prices •· because the the creation of the foreign exchange cost of inputs exceeds the for- and eign exchange value of the output. At the other extreme, domestic production of an unprotected "essential" import (perhaps a machine) is heavily taxed by the protection granted to its inputs. Usually, such a dispersion in incentives is not planned. Moreover, the dispersion is often not merely inexplicable but, if anything, the inverse of what policymakers appear to want. Against such a policy background, across-the- board liberalization would promote efficiency. But selective or partial liberalization might not. For example, developing countries have some- times liberalized by easing quantitative restric- tions on imports of "essential" commodities where tariffs are also relatively low. Such liberali- zation can even increase the variance in incen- tives and thereby amplify distortions in resource allocation. How then do governments ensure that liberalization improves the efficiency of the protective structure, especially in the context of MTNs? Why ltberali.zation is the best approach One argument for correcting the anti-export bias by straightforward liberalization rather than by a program of offsetting export subsidies is that there are proscriptions against export subsidies both in GATI and, particularly, in the trade poli- cies of the United States. Such subsidies are increasingly likely to be countervailed. It may thus be wiser to think of a reduction in protection and associated adjustments in the nominal rate of exchange as the best ways of reducing the bias against exports. Furthermore, this would be the most efficient way to promote exports since any system of export incentives rarely bears equally on all actual and potential exports. Beyond this practical point are arguments in principle against the administrative discretion inherent in the "one step forward, one step back" approach to policy. An important issue is "rent-seeking." An econ- omy having discretionary protectionism as the norm is also one in which lobbying for protection will be an important, perhaps the principal, en- trepreneurial activity (Krueger 1984, pp. 534-35). Why should a businessman waste his efforts in producing efficiently for the world market when, by lobbying for protection in the domestic mar- ket, he can get rich much more easily? Under a secure liberal regime, however, such efforts 19 However strong the arguments for such planned liberalization, well-entrenched protec- tion is difficult to liberalize unilaterally. One reason is the power of the lobbies that protection creates. Another is the persistence of the bal- ance-of-payments difficulties that trigger protec- tion in the first place. Those difficulties, in tum, often reflect political stresses that reveal them- selves in inflation, unfinanceable public finance deficits, and dwindling foreign exchange reserves (Wolf 1986, pp. 5-7). International agreements can give a political impetus to liberalization, but there is a risk that the resulting liberalization will be economically inefficient. The policymaker has a dilemma. Unilateral liberalization to improve the structure of incentives may be politically infeasible. But multilaterally agreed liberalization may not im- prove the structure of protection even if feasible, which it may well not be for small countries. So, liberalization can bring two problems in a reciprocal framework. First, offers of liberaliza- tion may not, in fact, be reciprocated at all. In this case the liberalization will have to be for- gone, to the cost of one's own countrymen, or bargaining chips will have to be given up "for nothing." Second, the offers of liberalization may be only partly accepted. In this case, the result- ing liberalization could easily be highly inefficient. Both these problems are likely to be acute for small countries. Furthermore, the indifference of the rest of the world to one's policies means that it is difficult to use multilateral bargaining as a device for resisting protectionist pressure at home. With little "bought" by liberalization, a government can hardly "sell" retaliation abroad as an instrument for resisting protection at home. Major powers can reasonably hope to improve both their own policies and the international environment by offers to bargain over liberaliza- tion, but most countries cannot. For the lesser powers the MTNs are likely to prove most useful if they first decide what structure of protection they want and second decide to bind their trade policies in accord with that aim in return for whatever they can plausibly appear to be getting in return. it dif. Case for liberalization of the For individual economies and for the world, trade liberalization is a "good idea." For the major developed countries, liberalization is the only way of securing a satisfactory global environment, Wby lfflde liberaltzatton u a good Idea Bureau of Economic Research. Prank, Charles R. , Jr., Kwang Suk Kim, and Larry E. Westphal. 1975. Foreign Trade Regimes and Economk Develop- ment: South Korea. New York and London: Columbia University Press, for the National Bureau for Economic Research. GATT Secretariat. 1980. Tbe Tokyo Round of Multilateral Trade Negotiations: Supplementary Report. Geneva. . GATT Secretariat. 1986. International Trade 1985-86. Geneva. Greenaway, David, and Brian Hindley. 1985. Wbat Britain Pays for Voluntary Export Restraints. Thames Essay 43. rewarding. London: Trade Policy Research Center. Harris, Richard. 1984. "Applied General Equilibrium Analy- sis of Small Open Economies with Scale Economies and hnperfect Competition." Tbe American Economic Review 74,5(December):1016-32. Henderson, David. 1986. Innocence and Design: Tbe Influ- ence of Economic Ideas on Policy. Oxford: Basil Black- well. Krueger, Anne 0. 1983. Trade and Employment in Develop- ing Countries. Vol. 3. Synthesis and Conclusions. Chi- Protection in cago and London: University of Chicago Press. Tbe World Economy _ _ . 1984. "Trade Policies in Developing Countries." In Ronald W. Jones and Peter B. Kenen, eds., Handbook on in Developed Coun- International Economics. Vol. 1. Amsterdam: North Peter B. Kcnen, eds., Holland. Little, Ian M.D. 1979. "An Economic Reconnaissance." In Walter Galenson, ed., Economic Growth and Structural Change in Taiwan . Ithaca: Cornell University Press. _ _ . 1982. Economic Development: Theory, Policy, and International Relations. New York: Basic Books, for the Twentieth Century Fund. Nogues, Julio, Andrzej Olechowski, and L. Alan Winters. 1986. Tbe Extent of Nontariff Barriers to Imports of In• of the Recip- dustrial Countries. World Bank Staff Working Paper 789. Tbe World Econ- Washington, D.C. Olson, Mancur. 1982. Tbe Rise and Decline of Nations: Economic Growth, Stagflation and Social Rigidities. New Haven and London: Yale University Press. Organization for Economic Cooperation and Development. 1985. Costs and Benefits of Protection . Paris. Tarr, David G., and Morris E. Morkre. 1984. Aggregate Costs to the United States of Tariffs and Quotas on Imports: General Tariff Cuts and Removal of Quotas on Automo- biles, Steel, Sugar and Textiles. Washington, D.C.: Bureau of Economics Staff Report to the Federal Trade Commis- sion. Wolf, Martin. 1986. "Timing and Sequencing of Trade Liber- alization in Developing Countries." Asian Development Export Restraint in Review 4,2:1-24. Wolf, Martin, Hans Heinrich Glismann, Joseph Pelzman, and and Anne 0. Krueger, eds., Dean Spinanger. 1984. Cost of Protecting jobs in Textiles and Clothing. Thames Essay 37. London: Trade Policy Research Center. 21 A less obvious but probably more important effect is that restricting some imports makes ex- ports more difficult -· or stimulates nonrestricted imports -- through an overall mechanism of ad- justment that works through the exchange rate or through the domestic costs of labor and capital. Reducing particular imports will not, in general, improve the trade balance of a country (that bal- ance is the difference between the country's na- tional savings and domestic investment.) Exports will also decline (or nonrestricted imports will rise) following the imposition of new restrictions on some imports. The exceptions are restrictions that raise national savings (as tariff revenue de- voted to reducing a government's high budget deficit might do) or reduce domestic investment. The foregoing proposition does not hold merely for some economies some of the time. It follows from a consistent set of national eco- nomic accounts that applies to all countries all the time. It is, in the jargon of economists, an accounting identity, not a behavioral relationship. So, to be effective, proposals to restrict imports with a view to improving a country's trade bal- ance must be dear about how the other compo- nents of the national accounts -- national savings and domestic investment -- are going to adjust to achieve the desired result. Often they will not adjust to achieve the desired result. resi- Protecting agatnst Imports from low-wage countries There is another "common sense" view that is used to justify protection against import competi- tion. It is that a country cannot compete against the low wages offered in other countries. This view, widespread in several highly developed Wby liberalization meets resistance economic change in general. And that is to resist growing economic prosperity. Protecting Infant industries countries A celebrated argument for restricting imports, used for 150 years, is the "infant industry" case for protection. In essence, this argument assumes that a country can eventually become internation- ally competitive in an activity that it does not now have, but that becoming competitive will take sev- eral years. In the meantime, the argument runs, the infant cannot compete effectively with already established foreign firms, and therefore it needs protection against import competition in its early years. There are several points that should be noted about this argument. First, the presumption is that the industry will eventually become competi- tive, so that the required protection is strictly temporary, covering the period of infancy. Sec- ond, if the industry will eventually become profit- able without protection, why would private entre- preneurs not borrow to cover the early, loss- running period, repaying their loans from future earnings? After all, few businesses do earn posi- tive returns from the outset; a period of initial in• vestment, learning, and market development is necessary during which the activity is not self. financing. The infant-industry argument therefore re- quires something in addition. Either private en- trepreneurs are for some reason unable to bor- row the required startup expenses •· that is, there is some imperfection in the capital market. Or some social benefits accrue to the activity in question that will not be fully reflected in the expected return to private investors. The typical example is the training of a skilled but mobile labor force. Ultimately, the industry must not only become competitive, in the sense that it can run in the black without import protection. The industry must earn a rate of return on the initial investment at least as high as could be earned elsewhere in the economy. Even if all these conditions are met, import protection is an inferior policy to direct assault on the "imperfection" that inhibited entrepreneurs from undertaking an investment themselves. For example, by improving the workings of the capital market or by publicly subsidizing the training of labor. Too often, the infant-industry argument is applied rather casually to all industrial activity that someone wants to undertake, without inquiry 23 ing, and they cannot borrow to cover the current account deficit. To stop the hemorrhage, they introduce import restrictions. These restrictions are typically selective, since certain imports are crucial to continue to feed the population or to sustain agricultural and industrial production. Temporary relief for the balance-of-payments can often be achieved in this way. But for reasons given above, it will not be a durable change un- less it durably affects the country's savin~-invest- ment balance •· for example, by increasing overall business profits relative to investment or net government revenues relative to government spending. Import restrictions will often accom- plish these results in the short run. But the ef- fects are typically dissipated over time as private investment or consumption increases or as gov- ernment spending increases. Sometimes the overall balance-of-payments policy involves a currency devaluation that pre- serves some of the protection against import competition, and the selective import restrictions are removed. But too often the import restric- tions outlive the balance-of-payments crisis. The protected sectors come to enjoy the protection provided, and they resist its removal. Unemployment. Governments are also tempted to introduce restrictions on imports when unem- ployment is high or rising rapidly, with a view to generating added employment by substituting domestic production for imports. This policy is even more likely if imports are thought to cause the rising unemployment, the point covered above. But the reaction can be also found when the origins of the unemployment lie elsewhere •• such as in a business recession or in an excessive increase in wages or other labor costs. Again, the country may succeed in adding some employment in the short run, though at the expense of em- ployment in other countries. This represents a beggar-thy-neighbor policy, as occurred on a large scale in the 1930s. Whether such a policy succeeds in the long run is a complicated question, depending partly on the labor intensity of import-substituting indus- tries relative to export industries, partly on whether real wages are inflexible downward, and not least on whether other countries respond in kind, either for reasons of retaliation or emula- tion. What can be said is that even if employment is created, there generally are better (more effi- cient) ways of increasing employment. And as before, once import restrictions are in place, they are hard to remove. Why liberalization meets resistance both an import fee and quotas on imports of sugar, increase greatly the costs of sugar to Ameri- can consumers. Yet over half the estimated S3 bil- lion gain to U.S. sugar producers in 1984 under this program went to seven producers alone: five large corporations in Hawaii and two large farms in Florida. Moreover, the high domestic price supports provided an incentive for the develop- ment and spread of high fructose com syrup, a substitute sweetener, that now provides more than 42 percent of the U.S. market for sweeteners, up from less than 10 percent twenty years ago. It would be far cheaper to give direct budgetary support to the small sugar-beet farmers. But inter- ested parties probably consider budgetary sup- port more vulnerable to future cuts than import restrictions, so they prefer the restrictions. One form of redistribution is not usually em- phasized: the opportunity that restrictions pro- vide customs or other officials associated with import licensing to seek and receive bribes •· for bending the formal rules in one way or another, or merely for speeding the administrative process of clearance. This undoubtedly is important in many countries (though not in others). And where officials are poorly paid, this form of redis- tribution is likely to be especially important. Generating government revenues Two forms of redistribution do not necessarily represent transfers from one group of citizens to another. The first is the import tariff motivated by a need to raise government revenue. Taxes are unwelcome everywhere •· and often subject to serious evasion. Import duties have the great administrative advantage of being levied only at ports of entry on foreign goods, often a choke- point for logistical reasons. Note, however, that where revenue is motivation, the preferred instru- ment of restriction is a tariff duty. And the duty should not be so high as to reduce imports sub- stantially, for that would defeat the purpose. In short, there is a conflict of aims between a reve- nue duty, where it is desirable that domestic demand for imports be inelastic, and a protective duty, where the purpose is to substitute domestic production for foreign goods in the domestic market. Improving the terms of trade limit con- A second form of redistribution that may at least partly avoid transfers from one group of residents to another arises when a country can effectively induce foreigners to reduce their 25 legitimate, economic interests wrap themselves in the national flag and try to persuade the broader public that their activities are necessary for na- tional security. American economic interests have done this for oil, Japanese for rice, Korean for chemicals, Brazilian for computers, and so on. Most such claims do have a grain of truth, but only a grain, since they do not specify the circum- stances under which dependence on foreign supplies, including that from near neighbors, would weaken national security. Also, these claims usually implicitly assume that the alterna- tive without import restriction is no industry at all, which for advanced industrial countries is rarely the case. There are other noneconomic reasons fO£ re- stricting imports. Some observers are offended by conspicuous consumption, manifest in im- ported consumer goods. Others want a certain level of industrial production as a demonstration of status and modernity, even at considerable cost in national income. Still others want to protect traditional agriculture to maintain the charm of the countryside. Such arguments often have some general ap- peal, but most of them conceal the economic interests of those putting them forward. The estimated economic cost to society of these non- economic aims are rarely put forward so that the decisionmakers and their public supporters can make a conscious choice between economic and noneconomic factors. Nor are alternatives ad- vanced, such as the imposition of a general luxury tax to avoid protecting domestic production of the conspicuous consumption goods. European arguments for the Common Agricultural Policy -- with its high price supports on grounds of na- tional beauty -- sound disingenuous in view of the fact that Britain had a perfectly charming country- side even before it joined the European Commu- nity, when its food imports were almost unre- stricted. Moreover, charm is a question of taste. Much of New England has returned to hardwood forest with the abandonment of its farms, not an obvious deterioration of the countryside. Overcoming the resistance concerns If these are the sundry and diverse motivations for restrictions on imports, what lessons may be relevant for trade negotiators charged with liber- alizing trade? To put it bluntly, what actions can they take to overcome the resistance to trade liberalization? Wby llberaltzatwn metm resistance eign import barriers are already low, so little can be promised. This situation leads ir. some coun- tries to the paradoxical argument that they must retain or even raise their import barriers to gain negotiating leverage for trade liberalization. It also underlines the likelihood that the General- ized System of Preferences (GSP) for developing countries was not the unambiguous good thing that its proponents claimed it was twenty years ago. Duty-free treatment by developed countries removes a potentially powerful argument at home for undertaking trade liberalization that would be desirable in any case. For this reason, the erosion of the GSP and the strong and valid push for graduation from the GSP as incomes rise in devel- oping countries are not necessarily undesirable, even when they are motivated mainly by protec- tionist pressures in the GSP-granting countries. There should, of course, be a strong appeal to consumers of imported goods for removing re- strictions. For a variety of reasons, political mobilization of consumers has been difficult in most countries. Many of these consumers also are employed in producing tradable goods, and they worry more about their jobs than about the purchasing power of a given wage. But most goods that move in international trade are not consumer goods. They are capital goods or inter- mediate products, and it should be easier to appeal to buyers of these intermediate products for import liberalization, because such buyers would enjoy a reduction in their costs. Finally, it is necessary for officials to focus harder on the arguments advanced for introduc- ing or retaining restrictions on imports. Some of the arguments are valid in some circumstances but not in others. Advocates of restriction natu- rally exaggerate the arguments for their case. Are the required conditions actually met in a given instance? Even if they were met a decade or two ago, are they met now? Import restrictions im- posed for an indefinite duration •· say, for na- tional security or to secure a given level of indus- trial production •• should be periodically reexam- ined to discover whether the protection is still needed in the light of current conditions. And import restrictions motivated by shorter-term fac- tors •• such as a crisis in the balance of payments, an adjustment to import surges, or a desire to nurture an infant industry -· should be limited in duration at the time of their introduction. That way, a heavy presumption is created for removing the restrictions with time, and a new burden of proof should have to be met for their extension. 27 costs? Postwar developments in the theory of commercial policy have shown that the costs of protection have several components: deadweight losses, inefficiency losses, and other ancillary losses. 2 First, protection imposes what economists, in their jargon, call a "deadweight loss." This is the loss from distorting production and consumption decisions from what they would be if the eco- nomic agents taking these decisions faced interna- tional prices. The simple reason for heeding in- ternational prices is that they represent the prices at which a country can exchange goods and serv- ices. That exchange reflects the opportunity costs of acquiring goods and services •· costs an effi- cient country must allow the trade regime to translate into domestic prices, which guide do- mestic production and consumption decisions. A protective regime prevents that translation. The cost of protection is therefore customarily broken into the "consumption cost" and the "production cost." The first reflects the distor- tion of consumption decisions that arises from having protected import-competing goods too expensive. The second reflects the distortion of production decisions that arises from having the production of protected goods too remunerative. Are there exceptions to this argument? The answer is a subtle "yes." Economists make an exception when trade restrictions improve the terms of trade for the country. Thus, if a restric- tion of jute supplies can improve jute prices on the international market, it would pay the country to restrict its exports suitably below the free trade level. Economists call this the "monopoly power in trade" argument for a tariff. This argument presupposes genuine monopoly power in trade. Time and again, however, such tariffs have at- 29 percent of GNP, the estimated costs of directly unproductive profit-seeking activities associated with protection are larger. 6 especially to- Quantitative restrictions When import QRs are imposed instead of tariffs, the foregoing analysis holds broadly, with some differences. One central difference is that tariffs generate revenues for the government, whereas quotas generate premia for those who get the import licenses. This redistribution of income under quotas is perverse if the government needs the revenue and spends it beneficially •· and benign if the government does not relative to those who get the licenses. For this reason, among others, economists have at times recommended the use of import (or exchange) auctions, an idea that has recently gained ground in the U.S. Congress. Quotas are not really equivalent to tariffs on many other grounds. 7 For instance, different agencies of the government frequently levy QRs and tariffs, thus implying different degrees of flexi- bility and durability. QRs seem to provide pro- tected industries with greater assurance of pro- tection against unforeseeable shifts of competi- tiveness abroad than tariffs that permit imports at an albeit increased price. Often, in developing countries, tariffs and quotas are simultaneously used in the same sector. QRs (relative to tariffs) can also lead to "quality upgrading." Where an industry produces items of different quality (large and small cars, or fancy and regular shoes), an import quota for the indus- try creates a differentially favorable incentive for the import of higher-quality items. This phenome- non has been observed and analyzed in the con- syndrome that can affect a text of QRs imposed on exporters through VERs on shoes, autos, and other products (Feenstra 1984, 1985, 1986; Aw and Roberts 1986; Boor- stein 1986). costs Voluntary export restraints , VERs differ from quantitative restrictions on im- ports levied by the importing country in that the exporting country levies VERs. But this does not mean that VERs are not a consequence of import- ing-country protectionism. They almost always are. A key difference is that where the quantitative trade restriction creates scarcity premia, or rents, these rents accrue under VERs to the exporting Economic costs of trade restrlcttons the exporting nations? Do the efficient suppliers get hit first, or do those who are politically vulner- able but not necessarily the more efficient? If the politically vulnerable are also the more efficient exporters, their acceptance of VERs is a political phenomenon that may impose costs on them (in the form of reduced gains from trade) -· costs that may well outweigh any possible rent transfer to them.9 They would then be expected to oppose the VER regime that has proliferated and to favor a return to the original GATT conception of nondiscriminatory import tariffs. In turn, these analyses of the effects of VERs -· as against nondiscriminatory import duties as in• tended by Article XIX of GATT -- bear directly on how Article XIX ought to be revised in the Uru- guay Round of negotiations. Should Article XIX be modified to permit discrimination -- to legalize the existing VER regime but to bring it under the GATT umbrella? Would this simply confer legiti- macy on VERs without any real benefits in terms of surveillance, or would it help regulate, moder- ate, and refine their use? Is there any other "reform" of Article XIX that would dampen the rush to VERs, given that VERs may be considered by several exporting countries to be a desirable alternative to nondiscriminatory use of import tariffs if the rent-transfer model or the porous- protection model is considered by them to apply to their case?10 arises that Voluntary import expansions Trade policy is continually prey to innovative protectionist devices. In an outbreak of export protectionism, VERs on imports have now been matched by VIEs on exports. The central reason for this phenomenon is the growing sentiment for full reciprocity, for level playing fields, combined with the increasing po- litical view in the United States that Japan has unfairly closed access to its markets.11 Unfortu• nately, the aggressive pursuit of Japanese markets in this fashion is not without peril. Although opening foreign markets is preferable to closing one's own in response to protectionist pressures, the exporting lobbies are likely to use this ap- proach to increase their exports to Japan by enacting VIEs rather than asking Japan to liberal- ize on a nondiscriminatory basis. (Under such nondiscriminatory liberalization, the United States might actually lose exports!) Enhancing the lob- bies' efficacy in getting this perverse outcome is the ease with which several U.S. congressmen 31 Notes trade bal- 1. Not dealt with here arc such matters as the use of countervailing duties (CVDs) and antidumping actions to harass successful foreign competitors so that they become de facto instruments of trade protection. See the interesting analysis of this question in Finger and Nogues (1987). 2. These components are discussed here for import tariffs. Other instruments of trade control, such as import QRs and VERs, have different effects, treated in later sections. 3. Many of these recent estimates have been collected and reviewed in OECD (1985) and Hufbauer, Berliner, and Elliott (1986). 4. Economists, following l.dbenstein (1966), call the latter the "X-inefficiency" effect. Unfortunately, it has proved elu• sive to plausible measurement. 5. See Bhagwati (1982). DUP activities include rent-seek- ing (Krueger 1974). The latter concept is a narrower one and relates to lobbying addressed to seeking QRs and licenses that carry scarcity premia, which economists call "rents." See also World Bank 1987, chapter 4 and box 4.7). 6. Krueger (1974) has estimated them as 7.3 percent for India and 15 percent for Turkey in 1969. 7. There is an immense theoretical literature on the none- quivalence of tariffs and quotas. For a synthesis and review, see Bhagwati and Srinivasan (1983, chapter 30). 8. See Hamilton (1986) and Bark and de Melo (1987) on the methods and economic consequences of VER allocation in the exporting countries. 9. This question has been explored in an examination of the rent-transfer issue in a general equilibrium framework by Dinopoulos and Kreinin (1986) who extend to a necessary three-country model the earlier two-country analysis of Bre- cher and Bhagwati (1985). 10. Hindley (1987) has raised these types of issues. 11. Whether Japan really is asymmetrically closed and practicing inscrutable protection is a contentious matter for which many knowledgeable academic economists, and much econometric evidence, provide no support to the political perceptions. References Aw Bee Yan and Mark J. Roberts. 1986. "Measuring Quality Change in Quota- Constrained Import Markets: The Case of U.S. Footwear." Journal of International Economics 21:45-60. • Bark, Taeho, and Jaime de Melo. 1987. /Jxporl Mix Adjust- ment to the Imposition ofVERs: Alternative License Alloca- tion Schemes. World Bank Discussion Paper DRD214. Washington, D. C. Bhagwati, Jagdish N. 1971. "The Generalized Theory of Distortions and Welfare." In J.N. Bhagwati, R.A. Mundell, R.W. Jones, and J. Vanek, eds., Trade, Balance of Pay• ments and Growth: Papers in International Economics in Honor of Charles P. Kindleberger. Amsterdam: North-Hol- land. . 1982. "Directly Unproductive Profit-Seeking (DUP) Activities." Journal of Political Economy 90,5(0cto- ber):988-1002. Dinopoulous, E., and M. Kreinen. 1986. "Effects of the U.S.· Japan Auto VER on Eurpoean Prices and on U.S. Welfare." East lansing: Michigan State University. Processed. . 1987. "VERs, Quid Pro Quo DFI, and VIEs: Political• Economy-Theoretic Analyses." International Economic Journal 1,l(Spring):1-14. , and Douglas Irwin. 1987. "The Return of the Recip- rocitarians: U.S. Trade Policy Today." The World Economy 10,2Qune):109·30. Bconmnl& costs of , , . . rmncllolu °" 11'1.,.,.atkmal Pinger, Michael, and Julio Nopes. 1987. "lnta1111do111IIII in the Steel Control of Subsidies and Countemliling Duties." B-11 lkoltOIJflc RftMW U(Sepcember):701-25. "°"" New York: Co- Hamilton, Carl. 1986. "ASEAN s,.tema for Alloc:adon of Export Ucenses under VERs." In C. Findlay and R. o.r- naut, eds., 71M Polilkal P.col,omy of M--.fllCIWilfB P,. tecti<m: ~ of AS/JAN and A.lalrolu,, London: Kierzkowki, ed., Essays Allen and Unwin. Hindley, Brian. 1987. "GATT Sa(quarda and Volunca,y Export Restraints:What are the Inceresta of the Devdopina Chan,e In U.S. Autos, Countries?" World Bau lkoltOIJflc RftMW 1,.f(Septem- Effects." Ad- ber):689-705. Hufbauer, Gary, Diane Berliner, and Kimberly Elliot. 1916. U.S. Tr"Olk Pol~ Tr"Olk Protecti<m In ti# U.S.: 31 C - Sttulla. Wuhinau,n, D.C.: Institute for International l!conomics. Krueger, Anne 0. 197.f. "The Political Economy of the Jent- MIT Press, forthcom- Seeking Society." Am•rlcon Jiconomlc Rftliftll 64,30une):291-303. and Protection: The U.S.- Leibenstein, 1-faney. 1966. " A l ~ l!ffidenq Venus X• Efficiency." Amfflc- l1conomk RftMW 560une):392◄ 15. Organization for Economic Cooperation and Development. 1985. Costs and &nefils of Prot«:timl. Paris. University of World Bank. 1987. World Develop,,Nnt R.po,t. New York: Oxford University Press. how they have liberalized trade. The final section summarizes the main conclusions. a multilateral Unilateral versus bilateral or multilateral liberalization countries Most economists argue that unilateral trade liber- alization generally raises a country's income by eliminating economic inefficiencies and stimulat- ing competition among private producers. As more imports flow into the country, domestic firms producing goods that compete with imports are forced to cut prices and output (unless the domestic market is growing rapidly), and their profits decline. But domestic users of affected products can then purchase these goods at lower cost and increase their spending on other goods. There is thus an increase in demand in other industries where productivity is higher, and prof- its in these sectors increase. This shift, in tum, draws capital and labor into these sectors, and the country's real income tends to rise as re- sources are allocated more efficiently. Not only is there a short-run rise in income, but long-run growth rates tend to rise as economic agents in the private sector respond to the increased eco- nomic opportunities from greater openness and competition. There nevertheless are some circumstances in which liberalization may not increase a country's economic welfare. For example, some countries are such important importers or exporters of a product that they have monopoly power on the buying or selling side. For them, reducing an import or export barrier on the product may increase the price, if it is imported, or lower the price if it is exported, so much that their real in- come declines. The existence of imperfectly com- 37 These capitalists and workers are likely to pres- sure their government not to undertake trade liberalization in their industries. In contrast, political pressure for liberalization is likely to be much weaker, since consumers of the products subject to lower rates of protection usually are not well organized for lobbying. And by usually spending only a small part of their incomes on these products, consumers find their real income affected little by the liberalization. Furthermore, some consumers are likely to regard support for continued protection as a form of insurance against losing their jobs. The negotiating techniques in previous GAIT rounds also make governments reluctant to re- duce trade barriers without similar reductions by their trading partners. Reducing one's trade barriers in an industry as part of a multilateral negotiation is regarded as granting a concession to foreign countries •· something to be balanced by an equivalent concession from other countries. So, by cutting protection unilaterally, a govern- ment may forgo the possibility of receiving from other countries a trade concession that would increase the country's exports and thereby please workers and capitalists in export-oriented indus- tries. In addition, the government may run afoul of i.ts political opponents for seeming to give something away for nothing. Countries do usu- ally receive negotiating credit in subsequent GAIT rounds for previous unilateral reductions in pro- tection below bound levels. But it is not clear that the concessions they receive credit for are as large as they would be if they had reduced their import barriers as part of negotiations with other countries. Negotiating with one or more countries for reciprocal reductions in trade barriers helps to overcome the public perception that a country loses by reducing protection. It also blunts the opposition of import-competing industries to trade liberalization. If people believe that trade negotiations will increase exports as much as imports, they are usually willing to support liber- alization for the income-increasing reasons of economists. Political support from exporting sectors also tends to offset the opposition of import-competing industries. These sectors bene- fit directly from greater access to foreign markets for their products, and they often are well organ- ized as lobby group. Bilateral or multilateral liberalization also yields benefits beyond those from unilateral liberaliza- tion. The opening of foreign and domestic mar- Multllateral liberalization more liberalization than the entire GATT member- ship is likely to want. In the late 1950s, for ex- ample, the European countries that formed the European Economic Community (EEC) wanted to move toward a system of free trade in goods and factors of production within Europe and a com- mon structure of external tariffs. Those that es- tablished the European Free Trade Area (EFTA) wanted free trade in goods within Europe but separate structures of external tariffs. The many other regional trading arrangements (such as the Andean Pact and the Association of Southeast Asian Nations) and the various bilateral schemes (such as the U.S.-Israeli Free Trade Agreement and the U.S.-Canadian Free Trade Agreement now being negotiated) also show that two nations or small groups of countries often wish to liberalize more than their other trading partners. The bilateral and plurilateral approaches never- theless have disadvantages. Under GATT's rules (Article XXIV) countries can reduce protection among themselves while still maintaining the protection against other countries only if they eliminate duties and other restrictive measures on "substantially all trade" and establish a formal customs union or free trade area. Otherwise, they must extend any trade concession granted to one member of GATT to all members: that is, they must follow the most-favored-nation (MFN) prin- ciple. The MFN principle makes it difficult to achieve a balance of trading concessions when only two countries (or a few) wish to liberalize trade among themselves but not go so far as to form a customs union or free trade area. Even if, for example, two countries import the same value of goods from each other so that reciprocal duty cuts on these goods increase imports from each other by roughly the same amount, imports from other suppliers not involved in the duty reduc- tions will also increase because they also benefit from the lower import barriers. In other words, the nonparticipants have a free ride on the tariff concessions of the participants. The larger in- crease in imports than exports that is likely in each of the duty-cutting countries gives rise to the kind of domestic political pressure that sometimes makes unilateral duty reductions difficult. One procedure to overcome this problem has been for countries to negotiate only on products for which they are each other's principal import suppliers (see chapter 7 for more details). This principal-supplier procedure tends to minimize the increase in imports from foreign suppliers that 39 markets. These other countries could refuse to complete the negotiations unless those holding back contribute their full share to the liberaliza- tion process. But they often would rather accept less than equivalent concessions from some coun- tries (if not too significant) than risk the negotia- tions' failure. Figure 6.1 Principal-supplier scenarios B of goods Two countries $200 50 percent than A's and B against offer the $100 Three countries which A is if it with coun- or multi- over bilat- country, (see figure supplier to is multilaterally Because of such asymmetry, some argue that the negotiations should be conducted under the conditional most-favored-nation principle •· un- der which each nation extends its reduction in import protection only to countries that make equivalent cuts in protection on its exports to these countries. But following the principle raises a new set of problems. A balanced set of concessions between two countries (or a small group) is likely to become unbalanced when these countries conclude a new set of balanced concessions with other countries. And that would require renegotiation by the initial partici- pants. MultUateral ~ of participants on different issues to enable the members of GATI to achieve more liberalization faster and more cheaply than they could through separate bilateral or plurilateral negotiations. Bilateral negotiations are nevertheless increas- ing for such concerns as "unfair" trade practices. GA1T rules covering such practices as dumping, export subsidies, and patent and trademark in- fringements permit discriminatory actions against the offending country. So, the injured country need not be concerned about the consequences if it were to raise its trade barriers against all countries when retaliating against the unfair trad- ing country; the injured country can single out the other and apply pressure to eliminate the unfair practice. In some instances, bilateral nego- tiations involving the threat of selective retaliation are proving to be more effective in changing behavior than have multilateral forums to negoti- ate general rules for unfair practices. There is one obvious danger with this ap- proach. Large countries may be able to exert pressure on and gain concessions from small countries that are highly dependent on them for export markets -- something perhaps unfair in the sense of a large rich country's increasing its in- come at the expense of a small poor nation. Of course, the small country's trade practices or restrictions may be outside its interests and their removal under pressure from large countries might raise the incomes of all countries. From bilateral to multilateral negotiations in GATT Most advantages and disadvantages of the various negotiating approaches to trade liberalization surface in the modem history of such negotia- tions. The GATI negotiating mode can be traced to the Trade Agreements Program of the United States in the 1930s. The Trade Agreements Act of 1934 gave the president the power to reduce U.S. tariffs by up to 50 percent in return for reciprocal cuts by other countries. The negotiations that followed were bilateral. Once a country agreed to negotiate duty reductions with the United States, teams of trade experts from each country determined the items on which each country was the principal supplier (or at least a very important supplier) for the other. Each team then drew up request-and-offer lists that outlined the duty re- ductions desired from the other country on each item and the amounts by which it was willing to cut its duties on each product in return for the 41 The negotiating technique remained un- changed through the first five negotiations: First Round, Geneva, 1947; Second Round, Annecy, 1949; Third Round, Torquay, 1950-51; Fourth Round, Geneva, 1955-56; and Fifth Round (called the Dillon Round), Geneva, 1960-61. But duty reductions from the second through the fifth rounds were disappointing: average U.S. import duties were cut only about 2.5 percent in each of these four negotiations. de- From item-by-item negotiations to the formula approach sub- As the rounds progressed, two features of the negotiations were increasingly limiting further significant cuts in protection. First, much of the excess protection in some industries had been eliminated, and the cuts were beginning to re- duce profits and employment in import-compet- ing industries. These industries responded by re- sisting further cuts in protection more vigorously. Negotiators were vulnerable to these lobbying pressures because of their procedure for estab- lishing -- through informal negotiations with vari- ous domestic interests - the percentage limits for cutting each tariff-line item. And because these pressures were not offset by political support for international behav- reducing duties, it became increasingly difficult to reduce protection. This was true despite the sig- nificant opportunities to raise incomes through continued import liberalization. Second, the item-by-item method of negotia- tion, using the principal-supplier rule, also slowed the rate of trade liberalization. Bringing many countries together at one time helped the liberalization process somewhat, but the negotia- tions between country teams still were essentially bilateral. Lacking high-speed computers, negotia- tors simply were unable to take account of the multilateral balancing possibilities on thousands of items for dozens of countries. To counter the two constraints behind this slackening, the European Community proposed a new negotiating technique in the Dillon Round -- and it was implemented in the Kennedy Round (1963-67). The technique is simply to adopt a common tariff-cutting formula for all but a bare minimum of protected products. The tariff-cut- ting formula in the Kennedy Round, for example, was to reduce duties on all manufactured goods by 50 percent. Under this approach, the pre- sumptions are that tariffs on all products are to be reduced according to the tariff-cutting rule and Multtlateral liberalization frees trade on all civil aircraft and engines and on most parts. And it commits the signatories to limit trade-restricting actions with regard to standards, government purchasing policies, quantitative re- strictions, financing, and inducements. A commit- tee on trade in civil aircraft was established for surveillance, consultation, and the settlement of disputes. In agriculture, agreements were reached on dairy products and bovine meat. These estab- lished councils for exchanging information about production and marketing conditions and for consultations among member representatives concerning world conditions and policies in these product areas. The codes approach has not been as successful as many had hoped. The optimistic early view- point was that a body of "case law" would be established under the panel system for settling disputes. That body of law would gradually lead to a detailed set of agreed-on rules in the area of nontariff trade measures. More complaints were filed in the early 1980s under the provisions of the new codes, but most of them fell short of satisfactory resolution. In some cases the panel would fail to reach agreement on the key issue of the case; in others one of the countries would block adoption of the panel report in the code committee. One outcome of this experience has been a greater reliance by a number of nations to deal with nontariff measures bilaterally rather than multilaterally through GATT. Special and different treatment for developing countries In addition to more favorable treatment of their tariffs (through tariff preferences and exclusion from the full reciprocity requirement in negotia- tions) the developing countries have special privi- leges under the various NTB codes. In the subsi- dies code, for example, developing countries are excluded from the ban on export subsidies •· as long as they agree "to reduce or eliminate export subsidies" when these are inconsistent with their "competitive and development needs." If a de- veloping country agrees to this provision, other countries cannot take countervailing duty action against its export subsidies under Article VI of GATT. But developing country signatories must also agree that their export subsidies will not be used to cause adverse effects to the trade or production of another signatory. Action against such use of subsidies can still be taken by using the panel procedures of GATT. Similarly, the 43 by permitting greater specialization. Further- more, they tend to promote better international economic relations. Bilateral and plurilateral approaches do not bring as many of these bene- fits to liberalization. They suffer flaws from prob- lems of trade-balancing and free riders. But bilat• eral or plurilateral negotiations usually can be successfully concluded more rapidly than multi- lateral ones - and they have on occasion proved effective in dealing with country-specific NTBs and certain unfair trade practices. The multilateral approach has been successful even while allowing some differences among par- ticipants in their rights and responsibilities. The developing countries, for example, are expected to make concessions only as the development of their economies progresses. The multilateral ap- proach has also fostered the adaptation of differ- ent negotiating techniques to its format. When the item-by-item negotiating technique ran out of steam in reducing tariffs, negotiators were able to shift to a formula approach for reducing import duties and thereby achieve further significant lib- eralization. In recent years, the focus of trade negotiations has shifted from reducing tariffs to curtailing the use of the many nontariff measures by which nations restrict or artificially promote trade. Negotiators in the Tokyo Round dealt with this issue by agreeing on a series of codes of good international behavior that covered a wide variety of NTBs. But the codes approach has not been as successful as many had hoped for, and the use of NTBs continues to increase. Consequently, the ministerial declaration of the Uruguay Round calls for efforts to improve, clarify, and expand these codes. It also includes nontariff measures as a subject for direct negotiations aimed at reducing or eliminating such measures. Major challenges facing negotiators in the Uruguay Round are to achieve more international agreement on the appropriate use of nontariff measures that have significant trade effects -- and to begin reducing and eliminating those that seriously distort inter• national trade. larger interest in removing those of its trading basis for the commer- partners. It is thus as relevant to the negotiation (1782). 'lbeSborter of "optimum tariffs" (see below) as it is to today's neomercantilist protectionism. Today's protectionism is neomercantilist in that it stresses output and employment more than consumption and leisure. It typically concen- trates on the effects of international trade on competitive producers of an imported product rather than on the users of the product, be they final consumers or other industries. The main reason for this is that competitive producers' interests are less diffuse and more readily quanti- fiable than other interests, and thus tend to be more powerfully represented in policymaking. Moreover, actual producers carry more weight than merely potential producers. Thus the politi- cal pressures on governments are toward main- taining or increasing the output of existing goods and firms rather than toward wider objectives even on the production side. The result is that most of the public discussion of trade policy is about the injury to producers and the mercantilist notions of market loss and market access •· not about the economists' notions of the consumer gains from cheap imports and the efficient use or resources. The economists' view almost invariably leads to the prescription of free trade, but even the mer- cantilist view can lead in that direction once a role is admitted for reciprocity. A country may liberalize its imports if other countries, by liberal- izing theirs, allow it to increase its exports in line. This was clearly expressed in the discussions surrounding the U.S. Reciprocal Trade Agreement Act of 1934. The preceding slump and protec- tionism had cut U.S. exports substantially, and Cordell Hull argued that U.S. negotiators would 45 If any concession that country A obtained from country B in bilateral talks was to be thrown open to all B's other partners, A's benefit from the concession relative to B's cost would be greatest if A were B's principal supplier of the good con- cerned. This clearly suited A, but it also suited B, for by these means B obtained the greatest lever- age over A per unit of its own "cost." Similarly, A would offer concessions on B's principal ex- ports, and so talks would concern only mutual principal-supplier trade. With this mercantilist definition of costs and benefits, principal-supplier negotiations maximized the benefit-cost ratio for each bilateral commitment. Finger refers to the benefit-cost ratio as the internalization ratio (1979). It measures the ex- tent to which the countries that make conces- sions are also the countries that receive conces- sions. It thus reflects the extent to which the benefits of improved market access are kept inter- nal to the negotiations rather than allowed to spill over to other, external, nonnegotiating countries. Unless internalization ratios are kept high, there is little incentive for countries to negotiate con- cessions. And as with any other activity in which the actors cannot appropriate a high proportion of the gains, the amount of negotiation will be suboptimal from a global point of view. Principal-supplier negotiations occurred under the U.S. Act of 1934, but the negotiating rules of the early GATT Rounds (1947-62) gave them a special status (see below). Moreover, to the ex- tent that there were spillovers to free riders, GATT also helped to internalize their gains. The reason is that GATT allowed all bilateral negotia- tions to be conducted and agreed on simultane- ously •· and ensured that each set of negotiators had details of the requests and offers made in the other sessions (Curzon 1965). So, by maximizing internalization and seeking to internalize any ex- ternalities that did arise, GATT maximized the incentives to negotiate and so hitched the mer- cantilist tractor to the welfare-maximizer's plow. Internalization ratios, calculated for each set of bilateral negotiations, reflect a dimension of simple bilateral reciprocity: the extent to which a country granting concessions gains from the re- ciprocal concessions offered by its negotiating partner. As noted above, given the modes of measurement adopted, these gains appear largest for a principal-supplier country. For the first six GATT rounds, Finger (1979) showed that the average bilateral internalization for U.S. conces- sions reached as high as 74 percent in Geneva Reciprocl,Y vention. Witness, for example, the use of volun- tary export restraints (VERs), the use of protec- tion by very small countries in very competitive markets, or the prominence of output and jobs in the public debate about protection. But even if optimum tariffs were widespread, the techniques of tariff negotiation would be much the same as now. Although the optimum tariff raises the importer's real income, it cuts the exporter's by more, so reciprocal reductions would be attrac- tive. Moreover, since the welfare gains from changes in the terms of trade are roughly propor- tional to the amount of trade and the change in price, deals would naturally be assessed by refer- ence to their trade coverage, internalization, and depth of cut. of low The Kennedy Round intent was Because the world has so many trading countries, internalization is difficult to achieve -· the more so bilaterally than multilaterally. The proportion of total imports the successive GATI rounds covered fell from 78 percent in 1947 to between 7 and 12 percent in the 1950s and early 1960s. Moreover, as the number of countries participating in nego- tiations grew, it became progressively more com- plex to conduct bilateral trade talks while still keeping track of the implications for multilateral reciprocity. Thus in the Kennedy Round a gen- eral tariff-cutting formula was adopted -- the lin- ear rule, by which all tariffs were to be cut by the same proportion. In principle, a linear cut makes multilateral reciprocity both certain and automatic. If all countries cut all tariffs by, say, IO percent, each participant receives a IO percent concession on both its total exports and total imports. As it happened, however, zero tariffs upset this symme- try Oust as they would any scheme based on re- ciprocity in tariff cuts rather than levels). So did the absence from the table (or the exemption from reciprocity) of most trading countries. Even more seriously, nearly all countries submitted long lists of exceptions to the linear cut. These lists defined the agenda for subsequent negotia- tion. And although the lists were initially dis- cussed multilaterally, all the crucial bargains were made bilaterally. During the negotiations countries added to and subtracted from their exception lists to achieve internalization and reciprocity. The clearest ex- ample of internalization concerned the U.S. ex- ception of petroleum imports. "The Americans, 47 it entailed granting concessions on S8.5 billion of 1964 imports (S6.4 billion from major partici- pants) and receiving concessions on S8.1 billion (S6. 7 billion) of exports (United States 1967). Moreover, U.S. concessions affected 70 percent of U.S. imports from other major negotiating part- ners, 49 percent of those from other industrial countries, 33 percent of those from fully partici- pating developing countries, and just 5 percent of those from other developing countries (Finger 1979). Of the concessions to fully participating developing countries, 77 percent were on goods for which these countries were the United States' principal supplier (United States 1967). These figures suggest substantial returns to reciprocal participation. 1 sector. The Tokyo Round in The tariff negotiations of the Tokyo Round also adopted a general rule with exceptions. Consid- erable debate surrounded the choice of rule. The major participants sought advantages not so much in the coverage of concessions (as before, the exceptions lists took care of this) but in the depth and variance of the cut. The EEC had long ex- pressed concern over the dispersion of U.S. tariff rates, which coupled a low average with occa- sional very high rates. The issue had been promi- nent in the early stages of the Kennedy Round and lay behind some of the bilateral exceptions negotiations. But in the end, the EEC made little headway with it. In the Tokyo Round, therefore, the EEC proposed a nonlinear formula that in- volved small average cuts but that reduced high rates much more than low ones. The United States preferred a substantial proportionate cut •· and Japan, a linear rule. Japan, however, had recently reduced its tariffs unilaterally, and it also argued that the Kennedy Round's bound rates (not actual rates) should provide the base lines for the formulas. After two years a compromise was struck: the Swiss formula (between the U.S. and EEC proposals) was applied to Kennedy Round rates. The ensuing exceptions and sectoral negotia- tions followed a pattern similar to that of the Kennedy Round. For example, the EEC withdrew concessions that it felt the Japanese had not justly reciprocated. The final reductions and bindings covered some S155 billion in world trade and entailed average costs on industrial goods (rela- tive to the Kennedy Round's bound rates) of 29 percent, 31 percent, and 49 percent for the EEC, ReclJ1rocUY In these cases, reciprocity is a means not an end, and the formality and binding nature of GATI agreements become an important pan of the process. was its set The Uruguay Round in specific Toe stamp of reciprocity already marks the Uru- guay Round. The ministerial declaration makes explicit mention of property rights, agriculture, tropical products, tariff escalation, and textiles and clothing. And negotiations on services will proceed in parallel with those on goods. This scope is broad enough to permit qualitative recip- rocity. Even from the initial statements, it is clear that some progress on textiles and tropical prod- ucts will be necessary if developing countries are to concede anything on services and property rights. Similarly the United States is suggesting that developing countries should make conces- sions on services in return for rollbacks and standstills on goods. Such deals require, how- ever, that reciprocity be viewed over the whole range of products and trade barriers. In this respect, clause B(ill) of the Punta del Este Decla- ration -· "balanced concessions should be sought wttbtn broad trading areas and subjects" (empha- sis added) •· is potentially dangerous. Even within groups, there is scope for qualita- tive and quantitative reciprocity. Toe former might arise, for example, over the provision of services. Industrial countries are requesting the "right to establish" service outlets in developing countries. And this might be balanced by grant- ing developing country nationals the "right of (Cline 1983). like any temporary immigration" to provide certain serv- ices in industrial countries. Given the likelihood that some code on services will emerge, develop- ing countries will do better to offer and request concessions and join the negotiations than to sit on the sidelines and wonder why the resulting deal excludes or disadvantages them. Moreover, as noted above, developing countries may well perceive domestic advantages to a services code independent of the concessions it causes indus- trial countries to grant them. Reciprocity will also be important in the goods markets. As an illustration of its potential, I have examined the possible outcome of principal-sup- plier negotiations between developing and indus- trial countries over commodity-specific quantita- tive restrictions on imports (W'mters 1987). GATI defined these restrictions as including quotas, licensing, state-trading and minimum price ar- 49 can be concluded, however. Some bilateral dis- parities may be troublesome - for example, Hong Kong has no quantitative restrictions but is a prin- cipal supplier of several Big Three imports. And occasionally a principal supplier may not wish to remove a discriminatory quantitative restriction in one of its markets. These problems could be cured by relaxing the definition of the principal supplier or by having developing countries pre- senting joint requests for concessions. Moreover, both changes would bring this exercise closer into line with past GATI practice and increase the reported internalization ratios. Methods for bind- ing quantitative restrictions will also have to be found, and countries will have to overcome their scruples at negotiating GAIT-consistent and GAIT-inconsistent barriers together. (They are, after all, equally deleterious from either a mercan- tilist or a welfare point of view.) Nonetheless, the figures in table 7.1 and 7.2 do suggest that if no better modes of negotiation for quantitative re- strictions can be devised, significant progress could be made by falling back on the well-tried Table 7.1 Potential Industrial country concessions a if the Btg Three imports (1981) wttb a developing country principal supplier that faces a quantitative restriction them at As a percentage Btllions of total Item of dollars affected imports of Big Three Imports from principal suppliers 2.67 27 b,c billion of Imports from other developing countries 5. 77 58 C Imports from all other countries 1.56 16 Total imports 10.00 a. 1983 quantitative restrictions applied to 1981 imports. b. Bilateral internalization ratio for developing country nego- tiator. c. The sum of these items is the developing country group internalization ratio. d. Column does not add up to 100 due to rounding. Source: Author's estimates. Rl!clproclty European capitals suggest that reciprocity pro- vides by far the most promising route for improv- ing market access for developing countries' ex- ports. principal Note 1. Strictly, these figures show only that participating de- veloping countries gained something, not that participanlS gained more than they would have done without participa• tion - or that nonparticipanlS gained less than they would have done with participation. But unless the participation decision was '¥el')' highly correlated with potential pins, the latter is a reasonable conclusion. (See chapter 10 for more on the interpretation of these results.) 54 a,b References Cine, William R. 1983. "Reciprocity: A New Approach to 29 C World Trade Policy?" In W.R. Cine, ed., TraM Polky hi the 1980s. Washington, D.C.: Institute for International Economics. Curzon, Gcran:I. 1965. Multil«eral Com,-,dal Diplomacy. London: Michael Joseph. Deardorff, Alan V., and Robert M. Stem. 1986. The Mkblg- Model of World Production and TraM. Cambridge, Mass.: MIT Press. Dell, Edmund. 1986. "Of Free Trade and Reciprocity." The Big Three negotiators. World Economy. 9, Oune):125-40. group internaliza• Finger, J. Michael. 1979. "Trade liberalization: A Public Choice Perspective." In R.C. Amacher, G. Habcrlcr, and T.D. Willet, eds., Cballengn to a Libwal Inlff'nalional &onomk Order. Washington, D.C.: American Enterprise Institute. GATT Secretariat. 1980. The To.tyo Round of Multil«eral Trade Negotiations; SUJlPl-tary R.ptm. Geneva. Prccg, Ernest H. 1970. Tradffs and Dlplomals. Washing- ton, D.C.: Brookings Institution. United States Office of the Special Representative for Trade Negotiations. 1967. Report on United Statn Negotiations. Vol. I, General Summary. Washington, D.C. Winters, L. Alan. 1987. "Negotiating the Remonl of Non- tariff Barriers." Oxford Economic Papers, forthcoming. 51 moved import licensing requirements for about 85 percent of imports by 1985. • Costa Rica has taken the lead in the Central American Common Market to rationalize pro- tection by shifting import duties from specific to ad valorem, adopting the Brussels tariff nomenclature, eliminating import duty exon- erations, and in general making protection more even. Costa Rica's tariffs have on aver- age been reduced by a third. • Mexico has initiated a far-reaching program of trade liberalization that emphasizes a shift from quantitative restrictions to import duties as the main instrument of protection. • Panama has eliminated almost all import quo- tas, has switched to the Brussels tariff no- menclature, and over five years will reduce its higher tariffs on industrial goods. The international financial institutions have supported many such reforms. For example, the World Bank, through its policy-based lending programs, had by October 1986 committed S12 billion to forty-three countries. Three-fourths of these programs include significant elements of trade liberalization, in countries that in 1985 had total imports of more than S140 billion. Although international lending has helped fi- nance the expansion of these countries' more productive sectors and facilitate the movement of resources to these sectors, the decisions to liber- alize have been essentially unilateral -- made because the country's government decided it was in the national economic interest to take such actions. As Martin Wolf explains in chapter 3, several considerations may lie behind such a decision. One is frustration with the higgledy- piggledy protection that has accumulated An- other is awareness of the successes of countries Unllaleral ltberaltzatton and tbe MTNs sense for what other parties to the negotiation might want or value, and a cleverness in present- ing what one has to sell as accommodating these corresponding wants or values. Thus the impor- tance of bargaining or negotiating skills should be underlined. Although the exchange of tariff con- cessions is the most familiar part of the GATT process and a convenient vehicle for illustrating the mechanics of the process, the reader should keep in mind that tariff exchanges are simply an illustration, not the definition, of the negotiating process. Concessions exchanging Tariff bindin~ are the most familiar form of GATT concession. Indeed, at the time of the meetings now lcnown as the first GATT round, the major international forum for trade issues was the ongo- ing negotiation for an International Trade Organi- zation. The separate GATT round was intended for one purpose: tariff-bargaining. To handle the mechanics of tariff-bargaining, each contracting party attached a schedule to the agreement is "No!" (GATT) listing the tariff items (and the tariff rate for each) to be bound under the agreement. Al- though these schedules provided the mechanics to implement a reduction of tariff rates •· by speci- fying on the annexed schedule of bindings a rate lower than the previous one •· bindings in the early rounds were primarily at existing rather than reduced rates. Table 8.1 reports that two-thirds of the U.S. concessions at the first round •· and four-fifths at the second round •· were bindings at current rather than at reduced rates. As the early rounds succeeded in binding most of the items in the tariffs of the major industrial countries, the mix of tariff concessions by these countries shifted to reductions. At the Kennedy Round, for example, more than 90 percent of major industrial countries' tariff concessions in- volved reductions of rates (table 8.2). At the same time, bindings at current rates by smaller industrial countries and by developing countries continued to be accepted as concessions. For example, trade reforms bound at the Kennedy Round by Argentina, Brazil, and Chile were parts of trade policy or general economic reform that had been put in place earlier. India's concessions consisted primarily of reducing official rates of duty to the levels actually being collected (United States, pp. 132-43). For smaller industrial coun- tries, fewer than a quarter of the tariff conces- sions (measured by import value) were reduc- 53 ters); more than 90 percent of the concessions by developing country participants were bindings rather than reductions. Even so, the figures in table 7.3 suggest that a dollar of concessions by "other" developed country participants "bought" 40 percent more from the United States than a dollar of concession by the major participants. Toe arithmetic of this, based on numbers from table 8.3 is ((49/26) / (70/52)) = 140 percent Similarly, a dollar of concession by developing country participants bought three times as much as a dollar of concession by major participants. There are ways to bind a tariff rate other than simply freezing the existing rate. Indonesia, at the Tokyo Round, bound several items at prevailing rates, bound one tariff at a ceiling rate higher than the prevailing rate, and bound several others at ad valorem rates roughly equivalent to the prevailing specific rates. Morocco, in its recent Table 8.1 the United States at GAn' tariff negotiations Kennedy Annecy Torquay Geneva Dillon 1964-67 1949 1951 1956 1960-61 (1964 data) (1948 (1949 (1954 (1960 Major All data) data) data) data) participants participants 7 9 12 n.a. 46 12 0 5 7 7 15 20 19 n.a. 64 26 15 20 n.a. 44 A Public Choice Perspective, in R. C. Amacher, G. Haberler, T. D. Willett (eds.), Economic Order, Washington, D. C., American Enterprise Institute (1979) tables 1 and 6. UnUateral Uberaltzatlon and tbe MTNs Table 8.2 Kennedy Round tariff concessions (based on 1964 import values) Concession tmports (bindings and reducttons) Reducttons as a percentage as a percentage of total Imports of total concessions 46 93 66 90 30 100 50 75 63 91 50 63 61 62 80 84 58 67 83 70 86 87 49 91 n.a. 29 n.a. 27 n.a. 37 n.a. 72 n.a. b n.a. 100 n.a. 0 n.a. 28 n.a. 98 n.a. 99 n.a. 51 26 23 n.a. 0 n.a. 0 n.a. 82 n.a. 0 n.a. 0 n.a. 89 n.a. 4 n.a. 98 n.a. 0 8 7 adopted by the contracting parties for the Kennedy Round tariff negotiations. from GAIT contracting parties by at least 7 percent a year. 55 Table 8.3 made at the Kennedy Round compared with received from the United States Group's imports from U.S. U.S. concession subject to concessions a imports a from group (percentage of total (percentage of total imports from U.S.) imports from group) 52 70 26 49 8 33 0 5 To repeat a point made earlier, bargaining skill is an important input in the creation of a conces- sion that has value in exchange. A few examples: Indonesia agreed at the Tokyo Round (in addi- tion to the tariff bindings cited earlier) to make explicit notifications on changes in customs for- malities and to unify several different registration fees on processed food and beverage imports. In return, the United States made tariff concessions on several items for which Indonesia was a major or principal supplier, including a rate reduction on palm oil from 7.1 percent to 1.2 percent. (In 1976 U.S. imports of palm oil from Indonesia were $8.2 million.) Morocco's accession agreement covered sev- eral trade policy reforms put in place as part of a program to restructure external imbalances, a program supported by the IMF, the World Bank, and Morocco's industrial country trading part- ners. Initially, all items in Morocco's tariff sched- ule were subject to import quotas. The reform package included replacing quotas with tariffs on 85 percent of tariff items. Colombia, which acceded to GATI at the end of the Tokyo Round, used the same package of concessions for its accession package and its MTN package. Colombia bound thirty-six items at rates ranging from 15 percent to 80 percent and pro- vided for automatic issuance of import licenses on all products included in the offer. Four of those bindings were concessions to the EEC, and Unilateral ltberallzatlon and tbe MTNs change in binding. In Part IV of GATI, the con- tracting parties agree that full reciprocal compen- sation will not be expected from developing countries. Article XVIII.A provides for a develop- ing country to modify or withdraw a concession in order to establish a particular industry (the infant-industry section). The section requires the country that proposes such action to notify the GATI membership to negotiate possible compen- sation with affected countries. Article XII and Article XVIII.B (which applies only to developing countries) govern the use of import restrictions to safeguard the balance of payments. Generally speaking, a country is al- lowed to introduce quantatitive restrictions for this purpose and to modify or withdraw previous concessions. The intent of GATI and the 1979 Declaration on Trade Matters Taken for Balance- of-Payments Purposes is that such measures be temporary and across-the-board, though priority may be given to certain categories of imports. There is no compensation requirement, nor is a country implementing a balance-of-payments measure required to negotiate it with affected countries. All such measures are, however, sub- ject to periodic consultations in the GATI Com- mittee on Balance-of-Payments Restrictions •· a committee open to membership by all contracting parties that wish to serve on it. Article XIX permits modification or withdrawal of a concession if imports of a specific item cause or threaten injury to a domestic industry. In this case, there may be consultations and withdrawals of reciprocal concessions by the affected party. Conclusion Behind their screen and their language of legal technicality, the GATI negotiations are a bazaar, not a fixed-price store. Everyone in the bazaar trades in market access and each is simultane- ously a buyer in the market for export opportuni- ties and a seller of access to the home market. What adds to or subtracts from the value of a concession a party offers for exchange in this bazaar depends in part on how that concession is presented. For example, a tariff reform already in place might be viewed as having little value in exchange because it is already in place. On the other hand, the fact that the reform is in place can be presented as evidence that the govern- ment is serious about keeping it in place •· and that a concession received in exchange for keep- ing the reform in place would strengthen the 57 partner to throw a little something extra into the pot As in any bazaar, it is important to bargain in good faith and good humor. When one party says, "I'll take it," the seller should accept that he, too, has gained from the bargain. And when a potential buyer says, "Perhaps another day on this," attention can move constructively to other matters. that have Rererence United States Office of the Special Representative for Trade Negotiations. 1967. General Agreement on Tariffs and Trvuk, 1964-67 Tariff Conference, Geneua, Swit:urland Volume 1, part 1. Washington D. C.: U. S. Government Printing Office. ent restrictive measures, sanctioning of measures against unfair trade, and surveillance and consul- tation regarding restrictive actions -- also apply generally to the codes. But the codes go a step further, in that procedures and provisions are more detailed and specific. Although they bind only signatories, the codes are intended to be nondiscriminatory. The United States, however, decided to apply the codes on subsidies, stan- dards, and government procurement only to sig- natories, and in practice the application of all the specific NTB agree- codes is discriminatory to some extent. The codes are essentially exercises in interna- tional rule-making. The primary goals of the codes are to reduce trade barriers and increase certainty and transparency through the formula- tion of rules on the use of the NTBs that they address. The codes often do not forbid the use of particular NTBs, but aim at harmonizing their use and reducing their trade-impeding effects. The codes guide (and constrain) governments regard- ing acceptable national policies relating to code matters. Regular meetin~ of code signatories, detailed procedures for handling disputes, and explicit provisions requiring reports of relevant national measures and regular exchanges of infor- mation are crucial to the functioning of the codes •• and especially important in monitoring compli- ance with code rules. Administering each code is a committee of rep- resentatives from the signatory nations. These committees meet regularly in Geneva to discuss the implementation of code provisions. Disputes can also be tabled at these meetings, but only if bilateral consultations have not resolved the problem. Most codes have their own dispute settlement mechanism through which specific, code-related disputes may be addressed and to 59 the comparable price of the like product charged by the firm in its domestic market (net of trans- port costs and other charges). The antidumping code involved a renegotiation of an earlier Kennedy Round agreement. The objective was to provide symmetry between the new antidumping and subsidies codes and to clean up some legal problems concerning U.S. implementation of the previous antidumping code. The new antidumping code is aimed at establishing uniformity and discipline on anti- dumping practices of signatory nations to reduce the trade-impeding effects of antidumping laws and procedures. The code outlines the investiga- tion procedures and requires that both the dump- ing and injury investigations be carried out simul- taneously and normally be completed within one year. Between 1980 and 198S the main users of anti- dumping actions were Australia, Canada, the EEC, and the United States, together initiating more than 1,100 investigations. The majority of the U.S. actions related to steel. Chemicals have been important in the EEC, manufactured goods in Australia, and consumer goods and high-technol- ogy products in Canada. Most of these actions have been directed at firms from other OECD countries, and around a fourth of them at firms in newly industralizing countries. The consensus among the signatories is that the antidumping code has been working reasonably effectively. Certain technical problems arising from the code were addressed by a special tech- nical group, whose recommendations were for the most part accepted by the code committee. The comparatively smooth operation of the code can be attributed in some measure to the preci- sion of its wording, and perhaps more to the wide agreement on its interpretation. Each signatory closely monitors the application of the code through the code committee meetings, and knowledge of this review process apparently encourages signatories that use antidumping pro- cedures to keep in compliance with the code. The general conclusion is that transparency and harmonization of antidumping procedures have increased substantially since the Tokyo Round. In Canada and the United States investigating agencies have dismissed a substantial proportion of the antidumping cases, and there has been extensive use of domestic judicial review proce- dures by both importers and exporters. This could be interpreted as attesting to the fairness and transparency of procedures -- and indicating The codes approach The subsidies code does not try to eliminate all subsidies. Instead, its goal is to create interna- tional discipline for government subsidy practices that distort trade. As for the antidumping code, the injury test is a fulcrum of the subsidies code's intention to reconcile presumably legitimate na- tional government subsidy policies with the inter- ests of nations, affected by those policies. The United States has been by far the largest user of the countervailing duty (CVD) mechanism, initiating more than 250 investigations since 1980. Many of these cases were terminated, in large part due to the introduction of trade-restricting bilat- eral agreements, particularly for many steel and textile products. Neither Japan nor the EEC has made much use of the CVD mechanism, appar- ently because other policies for dealing with the disruption of producers' interests may be avail- able and easier to implement. The· subsidies code has been characterized by numerous disputes and lack of agreement be- tween signatories on various issues. In contrast to the other codes, the dispute settlement mecha- nism has not proved effective. Note, however, that most disputes have related to agriculture, a sector largely excluded from GATI discipline. Further, the United States has viewed the subsi- dies code as a vehicle to effect changes in the subsidy policies of its trading partners. The United States has therefore reserved the right to refuse to apply the code to a signatory that does not commit itself to alter its subsidy policies. This has been a very contentious issue. Another difli. cult issue has been the procedure for notifying GATI about llui>sidies. Countries have disagreed over which domestic programs should be classi- fied as subsidies, and there has been resistance to providing information on subsidies when other signatories request it. Finally, several technical disagreements (such as how to calculate a sub- sidy) have proven difficult to resolve. The subsidies code has nonetheless had some positive effects, in large part because it has made CVD procedures more transparent and thus con- strained governments from abusing them. Fur- thermore, the application of the injury test by the United States is an important change since this was not required before the Tokyo Round. But developing country signatories will have access to the U.S. injury test only if they make a bilateral commitment to the United States to reduce their subsidy practices. Noteworthy in this regard is that around half of all recent U.S. CVD actions were directed at nonsignatories and thus were 61 Experience with the standards code suggests that, except during a relatively short start-up period, compliance with code provisions and procedures has generally been effective. Al- though the code was not meant to bring about a rapid harmonization of existing standards, it can be credited to some extent in increasing the inter- nationalization of product, health, and safety standards. It has also contributed to the reduc- tion of various trade-distorting applications of standards and in general has made more difficult imposing technical barriers to trade for signato- ries. There have been some disputes on the required use of certain production methods, in- spection procedures, and delays in notifying pro- posed new regulations. But many potential prob- lems have been resolved either in committee meetings or by means of bilateral consultations between signatories. The details of these bilateral consultations are usually made available to major industrial countries that are not involved, and efforts are under way to require that the details be communicated to all signatories. The useful- ness of the bilateral and code committee discus- sions has been an important element in determin- ing the perception of most signatories that the code is working as intended. To improve further operation of the standards code, attention is being directed to increasing transparency by achieving greater code compli- ance from regional standards-writing bodies and by obtaining greater acceptance of self-certifica- tion procedures and foreign-generated test data by signatories. The United States has also sought to strengthen the application of the code to high- technology sectors, such as telecommunications. Success of the standards code can be attributed largely to the consensus among the signatories on a variety of technical issues and procedures con- cerning proposed new standards. There has been marked improvement in transparency as a result of the functioning of inquiry points, notification procedures, information exchanges, and resolu- tions of potential difficulties in bilateral consulta- tions and committee meetings. code and Government procurement The government procurement code is among the most far-reaching of the Tokyo Round agree- ments since it brings into the discipline of the GATT system a subject previously exempted from GATT. Before the Tokyo Round a large part of the market for government procurement was Tbe codes approacb substantiated. Bidding can seldom be reopened, thus depriving the aggrieved party of a fair chance at the contract. The code provides for the annual exchange and review of statistics on procurement by signatories. It appears that some signatories made extensive use of noncompetitive procurement procedures and frequently relied on contracts below the minimum threshold of the code. Partly as a re- sult, the commercial impact of the code has been considerably below what might have been ex- pected. Decentralized procurement systems and relatively small procurement budgets in some countries also explain this blunted impact. Fre- quent use of single-tendering procedures, espe- cially in Japan and the EEC, and inadequate infor- mation on available procurement opportunities have been other important factors. The success of the procurement code should not be judged solely on its commercial impact in the first years of its implementation, however. It is of considerable importance that previously closed procurement markets are now open to foreign bidders. And the evidence suggests that the number of bidding opportunities has risen substantially because of the code. In addition, the use of single-tendering has diminished -- and Japan, for example, has added sixteen entities to its schedule since the Tokyo Round. The poten- tial commercial effects of the code thus remain substantial, given that the proportion of govern- ment procurement covered by the code is rela- tively high for many signatories. Negotiations to broaden and improve the code and to add to the lists of entities were begun in late 1983 an~ concluded in November 1986. The amended code, to take effect in January 1988, includes rental and leasing contracts, lowers the threshold requirement to SOR 130,000, increases the time allowed for bid submission, and requires the publication of information on winning bids. Plans are also in progress to extend the coverage of entities to include telecommunications, heavy electrical and transportation equipment, and government purchases of services. Given con- tinuing efforts to expand the code and improve implementation, its trade-creating potential may well increase. Many developing countries took part in the negotiations for the procurement code, which reflects this input. An example is that offsets and licensing of technology may be used as a basis for awarding contracts. It is thus somewhat surpris- ing to find membership to be so limited. But 63 Recognizing fears voiced during the Tokyo Round about fraudulent invoicing, especially be- tween related parties, a code protocol gives de- veloping country signatories slightly greater regu• latory flexibility in their customs procedures. Also, technical assistance in implementing code procedures is available. Nevertheless, developing country participation remains limited, implying perhaps a wish to maintain discretion in valuing imports or a concern for the administrative bur- den of implementing code provisions. Because signatories do not discriminate against nonsigna- tories, the primary incentives for additional coun- tries to join the code are the provisions them- selves -- the impetus that code membership pro- vides a country to resist interest group pressures to apply discretionary import valuations. code is to Import licensing The objective of the licensing code is to reduce the use of import licensing procedures as an obstacle to trade by simplifying and harmonizing the procedures that importers must follow to obtain licenses. The code specifies that signato• ries must publish rules for submitting license requests, clarify procedures for obtaining li• censes, and not refuse licenses for minor, cos- metic reasons. The major features of the code are thus nondiscrimination and transparency. Code activities consist mainly of exchanging information, monitoring implementation, and compiling data on licensing systems maintained by signatories. So far there have been no signifi• cant licensing-related problems between signato- ries, and the code appears to function smoothly. The main problem regarding licensing procedures is perceived to lie with nonsignatories, mostly developing countries, that use licensing require- ments as a discretionary form of protection. Aircraft The aircraft code is aimed at reducing tariffs and NTBs that affect world trade in civil aircraft. It was the only sector agreement negotiated in the Tokyo Round. The code provided that tariffs on a specific list of civil aircraft products, parts, and repairs were to be eliminated as of 1 January 1980, and that certain NTBs were to be reduced as much as possible. Domestic subsidies to air- craft industries and the use of special incentives to influence buying decisions were targeted when the code was being negotiated. Tbe codes approacb basis for discussing and often resolving troublesome trade issues. 4. Dispute settlement. The dispute settlement procedures for some of the codes appear to have begun operating in a reasonably effective manner. The problem with the subsidies code reflects the lack of agree- ment on fundamental policy issues that remain unclarified in the code rather than difficulties with the dispute settlement pro- cedures. 5. Harmonization and consistency of na- tional trade regulations. The harmoniza- tion of varied national regulations affecting trade can have salutary effects. When di- vergences in these regulations are dimin- ished, the perceptions of businessmen and the public that the trading system is fair to and reciprocally balanced are increased. Predictability is also increased and transac- tion costs are likely to be reduced when traders can perceive greater uniformity among the various national practices. This has been true particularly for the customs valuation and standards codes and to some extent for the antidumping and procure- ment codes. 6. Framework for future progress. An impor- tant element of the codes is the establish- ment of a framework for generating infor- mation and the exchange and explanation of sometimes contradictory viewpoints. The procurement code is designed ex- pressly to apply a remarkably stringent set of rules to a limited scope of activity that can subsequently be enlarged through re- ciprocal negotiations. Although the subsi- dies code is perhaps now seriously flawed, it is an important first effon to achieve some international discipline in domestic and expon subsidies. Issues of subsidies touch immediately on the prerogatives of sovereign nations, and it is not surprising that the issues are so troublesome. Simi- larly, as with other codes, there is evidence of movement toward greater international discipline in national trade policies and its benefits to the world community. 7. Serotng national or regional interests. For a signatory, code rules constrain both its policies and those of its (signatory) trading partners. Although the main focus here has been on the discipline won from others, the membership of a code can also help a 65 to exercise discipline over national poli- cies, especially in agriculture. Despite these reservations, if a meaningful sys- tem of international discipline is to be advanced both for the unfinished business of the Tokyo Round and for the new issues to be addressed in the Uruguay Round, the codes approach repre- sents a significant tool of multilateral diplomacy. The limited experience with the existing codes suggests that, in revising these codes and con- structing new ones, areas of disagreement among the negotiating parties be recognized explicitly and left open for continuing negotiation. There is a danger of papering over problems in an effort to resolve an impasse and to hope that the problems can be dealt with later by means of consultation and dispute settlements. The subsidies code shows the futility and frustration that may ensue when there is no clear consensus on the wording and interpretation of negotiated agreements. The Tokyo Round negotiators may thus have been wise in their decision to leave the negotiation of a safeguards code to the next GATI round. By the same token, if a codes approach is taken in the Uruguay Round for such new issues as counterfeiting, intellectual property, investment requirements, and international transactions in services, the successes and failures of the Tokyo Round codes should be kept in mind. whether the Notes Some ob- 1. The texts of the nontariff agreements are in individual GATI documents published in 1979 as well as in GATI (1980). 2. This section and the next are based on Stem and others (1987). References Third, there GATI Secretariat. 1980. Basic Instruments and Selected Documents, 26th Supplement. Geneva. Stem, Robert M., John H. Jackson, and Bernard M. Hoekman. 1987. An Assessment of the GATT Codes on Nontariff Measures. Thames Essay 55. Aldershot, New York and Sydney: Gower, for the Trade Policy Research Center. (4) Exempts developing countries from the requirements of Article XXIV (which deals with customs unions and free-trade areas). (5) Makes developing countries eligible under the Generalized System of Preferences (GSP) for lower rates of duty on their ex- ports to developed countries than apply to similar exports from other developed coun- tries. These various measures mean that developing countries have very few obligations in GATI. They do possess a considerable number of rights, however. The various elements of DMF treatment have a different legal status, different economic conse- quences, and different political costs and implica- tions. Each element therefore calls for separate consideration. in Article XVIII other con- Article XVIII, entitled "Governmental Assistance to Economic Development," deals with the prob- lems of contracting parties whose economies "can only support low standards of living and are in the early stages of development." The article has four sections, three of which deal with the protection of infant industries. Section A permits a developing country to modify or withdraw a concession if it "considers it desirable, in order to promote the establish- ment of a particular industry with a view to raising the general living standard of its people." Sec- tions C and D provide procedures by which a developing country may protect infant industries by measures that are not "consistent with the other provisions of this Agreement." Such meas- ures typically are quantitative restrictions (QRs). 67 - and graduation Seen this way, the effect of Article XVIII, and of Article XVIII.Bin particular, is to deter developed countries from entering normal GATI reciprocal bargaining with developing countries. It also supplies a disincentive to developing countries to seek or formulate bargains that might reduce the level of protection against their exports in devel- oped countries. Part IV of GATT Part IV is a long addition to GATI. For the most part, however, it is couched in the language of exhortation rather than of contract. Article XXXVI(8), the original commitment by developed countries not to seek reciprocity from developing countries, might be regarded as the central element in Part IV. A commitment of nonredprodty does not, however, have a clear meaning. It might be legislated that shopkeepers can sell their goods to members of some group in the community only at half price. If that is all that is legislated, however, it is likely to mean simply that members of the favored group will have great difficulty in buying anything. Further, the legal force of the Part IV commit- ment to nonredprodty is unclear. Suppose that two alternative sets of plans for tariff changes were presented to a developing country, one to go into effect if the developing country did noth- ing, and the other if the developing country made specified reductions in its level of protection. Would this violate nonreciprocity? If it were held to do so, what legal recourse would be open to the developing country? At the moment, the answers to such questions are not operationally significant because of the effects of Article XVIII. As long as Article XVIII opens the door to an essentially uncontrolled use of QRs and tariff increases by developing coun- tries, the strictures on nonreciprocity in Part IV and elsewhere play a limited role. They are merely explicit confirmation of the situation that Article XVIII would create even if Part IV did not exist. gain. But The NTB codes A major part of the business of the Tokyo Round was the negotiation of codes dealing with nontar- iff means of protection (see chapter 9). These codes deal with dumping, subsidies, standards, customs valuation, government procurement, and import licensing. Each code provides for some Different and more ftMIOW.lble treatment - and graduation To put the GSP into effect, it was necessary to release developed countries from the MFN obliga- tion to extend a tariff reduction given to one contracting party to all other contracting parties. A 1971 waiver of the MFN clause of GATI was valid for ten years only. In 1979 the enabling clause provided a legal basis for extending the GSP beyond the original ten years. The GSP schemes themselves, however, are in legal form unilateral acts of the donor countries. The waiver and the enabling clause made their offers of GSP schemes legally possible. Neither obliged them to offer such a scheme. Any donor can abandon its GSP scheme, or modify it, with- out reference to GATI and without breaking any legal obligation to any other government. It follows that the GSP as such will not be a subject of negotiation in the Uruguay Round, but it is likely to play a crucial role behind the scenes. There are two primary reasons for this. The first is that the enabling clause provides for the eventual graduation of countries from the GSP and from different and more favorable treatment in general: that is, that successful developing countries should give up GSP preferences and accept the same obligations in GATI as developed countries. The second is that the GSP gives substantial economic benefits to developing countries as a group. Moreover, these gains are heavily concen- trated on just those countries that developed if they wish to countries regard as potential graduates. Brown (1986) surveys the results of GSP studies. A re- cent assessment (Karsenty and laird 1986) pro- vides a typical finding. The top three beneficiaries - Hong Kong, the Republic of Korea, and Taiwan (Province of China) - are esti- mated to receive 44.2 percent of the total gains of the present system ... and each receives some three times the benefits of the next largest beneficiary, Brazil ... (p . 13.). Graduation from the GSP will result in losses for at least some graduates. That other fonns of DMF treatment give rise to gains for their redpi• ents is not clear, however (for reasons to be dis- cussed later). Hence, potential graduates may find graduation from other forms of DMF treat- ment more acceptable than graduation from the GSP. Whatever the differences in the legal status of these elements, potential graduates are likely to believe that there is a connection between gradu- ation from one and graduation from the other. 69 - and graduation doubtful in practice. More recent analysis, how- ever, has demonstrated that the argument does not yield a satisfactory case for protection: under conditions that were once taken to imply that protection of the nascent domestic industry against imports would be a welfare-improving policy, it must be true that better policies are available (Bhagwati and Ramaswami 1963, Johnson 1965). Moreover, there is as yet no empirical evidence that the conditions necessary for the argument to apply exist in fact (Krueger and Tuncer 1982). Similarly, the notion on which the rest of Ar- ticle XVIII is based •· that trade policy measures are an appropriate and effective means of restor- ing payments balances •· once seemed much eas- ier to sustain than is now the case. The develop- ment of the absorption approach to the balance of payments Oohnson 1961, McKinnon 1981) suggests that trade policy measures are a dubious means of achieving payments balances. They are unnecessarily costly and in a wide variety of cir- cumstances ineffective. In addition to casting doubt on the value of DMF treatment (other than the GSP), conclusions of this type open to question the meaning of much GATI language regarding developing coun- tries. For example, developing countries are as- sured in the Punta del Este Declaration that they will not be pressed to make "concessions that are inconsistent with [their J development, financial, and trade needs." This clearly has the intent of assuring developing countries that they will not be pressed to reduce their levels of protection in the negotiations to the same degree as developed countries. Yet whether any reduction in protec- tion is inconsistent with the trade and develop- ment needs of any developing country is at the very least open to question. Apart from the reduction in tariffs achieved through successive MTNs, a major achievement of GATI for developed countries has been to in• crease the cost to governments of pursuing poli- cies that win some domestic political advantage but that are nevertheless economically costly. This is not true for developing countries. The effect of DMF treatment has been to remove developing countries from this benign effect of GATI membership. Whatever the merits are of the arguments for DMF treatment, a major impetus to the accep- tance of such treatment in GATI came from the finding in the 1950s and 1960s that developing countries were receiving only limited benefits Different and more favorable treatment - and graduation ing countries. The displacement of such goods •· for example, garments and footwear •• from devel- oped country production raises acute political difficulties and therefore acute problems for those negotiating on behalf of competitive export- ers of such goods. The failure of the developed countries to resist more strongly the movement to DMF treatment no doubt had many reasons (Hudec 1986). An countries important element, however, is likely to have been a feeling that if the developing countries cotton prod- wanted DMF treatment •· if they preferred the freedom to take the course of political expediency rather than that of long-term economic advantage of those duties, espe- -· why should developed countries incur political of some of these costs by resisting the demand? In the conditions of the 1950s and 1960s, the freedom of develop- ing countries to change their structure of protec- to their goods) often tion at will did not impose substantial economic or political costs on the developed countries. (Indeed, a cynic might suggest that the developed countries welcomed the opportunity to "give" made in considered to something to the developing countries in lieu of a relaxation of the protection by developed coun- tries against goods from developing countries.) Whatever the history of the developing coun- tries in GATI, the relevant issue is the likely out- come of a return to reciprocal bargaining. In the 1960s, it was widely accepted that developing countries had no worthwhile concessions to make. Whatever the truth of that in the 1960s, it is not true of the Uruguay Round. develop- The graduation issue The leading developing economies are now a significant force in world trade. In 1984 eight of them ranked among the world's twenty leading merchandise exporters. They were Saudi Arabia (11), Taiwan (Province of China) (12), Korea (14), Hong Kong (15), Brazil (16), China (18), Mexico (19), and Singapore (20). In 1973 only two of them were included in the top twenty exporters (Saudi Arabia at 14 and Brazil at 19), and none were in the top twenty importers. Of these, all except Brazil and Mexico were also among the top twenty merchandise importers in 1984. Even excluding Saudi Arabia, these developing econo- mies account for a share of world exports (9.9 percent) comparable with that of the United States (11.4 percent) and Japan (8.9 percent) (GATI 1985). DMF treatment given to countries of this impor- tance is not politically costless. Exchanges of 71 - and graduation until criteria have been agreed on multilaterally is not very different from a situation in which there are no criteria and from which no beneficiary ever graduates. In principle, however, the sug- gestion of the Arusha Program opens the possibil- ity of discussing what the conditions of gradu- ation might be and what graduation might mean in operational terms. What graduation might mean in practice In principle, graduation in GATI could either be complete or in stages. Complete graduation is straightforward from a technical point of view. It merely requires that some countries now treated as developing should henceforth be treated as developed. Even now, however, the structure of GATI membership is more complicated than this. In particular, there is a category of "least developed of the developing countries" for which, as in clause B(vii) of the Punta del Este Declaration, even more favorable treatment is demanded. Staged graduation would build on this precedent to create a category such as "most developed of the developing countries whose members would accept more GATI obligations than developing countries but fewer than developed countries. Staged graduation implies that members of the class of "most developed of the developing coun- tries" receive some but not all elements of DMF treatment. That is consistent with several permu- tations: any of the five elements of DMF treat- ment could either be granted to, or withheld from, members of the intermediate category. It seems clear, however, that any meaningful measures of GATI graduation (as distinct from graduation from the GSP) must limit the access of graduates to Article XVIII. Conversely, any meas- ure of graduation that does not limit such access is unlikely to have any substantial impact. IJmiting access to Article XVIII The most obvious way to limit the access of some developing countries to Article XVIII is by the negotiation of a code. • The code format has a major advantage in the GATI context. A change in the legal text of GATI requires the assent of two-thirds of the contracting parties. Codes do not Signatories to a code commit only themselves to stricter behavior. The code in this case would deal with the inter- pretation of Articles XII and XVIII of GATI (Ar- Different· and more favorable treatment - and graduation Act of 1984 provides for the automatic graduation from beneficiary status in the GSP of countries with a per capita income greater than $8,500 a year. In 1984 the GNP per capita of Singapore was S7,260, that of Hong Kong S6,330 (World Bank 1986). The use of per capita GNP as a criterion of graduation is not without its critics in the devel- oping countries (UNCTAD 1982, p.3). Moreover, some developed countries might not be entirely happy with a criterion that placed Algeria (1984 per capita income $2,410), Argentina {$2,230), and Yugoslavia ($2,120) ahead of the Republic of Korea ($2,110) as candidates for graduation. There is, however, an alternative to the establish- ment of formal criteria for graduation. It is for developed countries seeking a developing country's graduation to negotiate directly with the chosen candidate, obtaining its consent to its graduation. That would make formal criteria for graduation not essential. ex- The cost of graduation A difference between these two courses lies in the price that developed countries will pay for gradu- ation. Potential graduates are greatly outnum- bered by other GATT members. Amending GATT to include a definition of a developing country that forces graduation on the most successful developing countries therefore is possible •· at least formally. A coalition of noncandidate developing coun- tries and developed countries could remove the obligation of developed countries to offer DMF treatment to countries no longer defined as "developing." The obligation would be removed, moreover, without the need to obtain the consent of the graduates, and therefore without the need to offer them concessions. So, graduation by this route probably would have a low cost to devel- oped countries, in concessions offered. To persuade each candidate individually to graduate, however, each candidate must be per- suaded that it will be as well off as a graduate as with continued DMF treatment. That is likely to be much more expensive for developed countries. As noted earlier, the link between graduation from the GSP and from other forms of DMF treat- ment is likely to be a major factor determining the potential graduates' attitude toward graduation. as "developing" The unilateral nature of the GSP schemes means that donors are in a position to threaten with- drawal of the schemes if candidates fail to gradu- 73 - and graduation Hudec, Robert. 1986. Tbe Participation of Developing Countries in the GA1T Legal System. London: Trade Policy Research Center. Johnson, Harry G. 196S. "Optimal Trade Intervention in the Presence of Domestic Distortions." In R.E. Baldwin, ed., Trad.6, Growth, and the Balance of Payments. Chicago: Rand McNally. . 1961. "Towards a General Theory of the Balance of Payments. " In H.G. Johnson, International Trade and Economic Growth. Cambridge: Harvard University Press. Karsenty, Guy, and Sam Laird. 1987. "The GSP, Policy Options, and the New Round." Weltwirtschaftliches .Archiv (forthcoming). Krueger, Anne 0., and Baran Tuncer. 1982. "An Empirical of Payments and Related Test of the Infant Industry Argument." American Eco- nomic Review, 72,S(December):1142-52. the Interests of the McKinnon, Ronald I. 1981. "The Exchange Rate and Macro- economic Policy: Changing Postwar Perception," Journal of Economic Literature 19,20une):531-57. Trad.6 Stml- Stem, Robert M., John H. Jackson, and Bernard M. Hoekman. 1986. An Assessment of the Implementation and opera- tion of the Tokyo Round Codes. Discussion Paper 174. Distortions, University of Michigan Research Seminar in International Subsidy." Journal of Economics. Ann Arbor. United Nations. 1979. Arusba Program for Collective Self for Deve/opi"g Reliance and Frameworltfor Negotiations. TD/236. New York. UNCTAD. 1982. Report of the Special Committee on Prefer- fflCes on its Eleventh Session. TD/B/C.5/85. Geneva. . 1985. Ninth General Report on the Implementation of ~ Generalized System of Preferences. TD/B/C.5/96. Geneva. of Balance-of-Payments Wolf, Martin. 1986. "Aid with Everything? Differential and The World Economy More Favorable Treatment for Developing Countries and the International Trading System." Paper presented at the Conference on the Role and Interests of Developing Coun- tries in the Multilateral Trade Negotiations. Bangkok, Thailand, October 30 • November 1. World Bank. 1986 and 1987. World Development Report. New York: Oxford University Press. probably along the sterile north-south lines char- acteristic of previous rounds. The critical test for the Uruguay Round there- fore is to find a politically creative way to handle the long agenda and encourage the aggressive and sustained involvement of developed and developing countries. The obstacles are numer• ous. Among others covered elsewhere in this handbook, they include the bargaining patterns of previous trade rounds in GATI. Approaches in previous rounds All the various negotiating approaches •· product• by-product, sector-by-sector, barrier-by-barrier, across-the-board, and framework •· have been tried in previous trade rounds. Some lessons can be drawn from this experience, especially with respect to the treatment of developing countries' issues. The earliest trade rounds adopted a product- by-product approach to trade liberalization. 111is approach involves negotiating agreements be- tween two countries on individual products and then seeking to combine and balance such agree- ments among a number of countries in a ·multilat- eral setting. The approach is effective in dealing with extremely difficult issues. In the Dillon Round, it achieved overall an 8 to 10 percent reduction in tariffs and laid the groundwork for the subsequent Kennedy and Tokyo Rounds. But the process is slow and cumbersome. As one student of trade negotiations noted, the Dillon Round "tended to result in a lowest common de- nominator of achievement" (Preeg 1970, p. 42). Toe Kennedy Round ushered in a new tech- nique, the across-the-board approach to tariff cutting for manufactured goods. At the start of 75 to galvanize political momentum will thus have to set salient objectives as well as a sequence for the issues and the negotiations. The Tokyo Round, after opening in September 1973, languished for four years until July 1977, when agreement be- tween the United States and the European Com- munity set not only a tariff-cutting formula but also four phases in which the subsequent negotia- tions would proceed (Glick 1984, p. 13). Tariff negotiations were given highest priority, with agriculture and nontaritI measures taken up in later phases. Once these across-the-board deci- sions were taken, negotiations proceeded rapidly to a pronouncement in July 1978 that outlined the basic elements of the final Tokyo Agreement. Toe pronouncement was made by several of the principal negotiating parties, including Japan, Norway, Sweden, Denmark, Canada, Australia, New Zealand, the United States, and the Euro- pean Community. The Uruguay Round must not wait four years to reach a broad agreement on politically salient ob- jectives and on the sequence of issues •· an agree- ment needed in any case if the round is ultimately to succeed. Considering the elections in 1988 in France and the United States and the unpredict- able world economic outlook, the new round may have its best opportunity to move forward in 1987. Thus, an early agreement is needed at the highest political levels to set broad negotiating goals and the sequence of the numerous agenda items. Trade ministers acting alone may not have enough authority to reach such an agreement. Initial negotiations in December 1986 and Janu- ary 1987 suggest a slow, short-sighted start. Fourteen negotiating groups have been estab- lished under the Trade Negotiating Committee, but they share no visible priorities among them. Finance ministers may have to help set such pri- orities. Above all, the highest officials in key developing countries must be involved. The sequencing of issues for negotiation would have to establish in each phase a rough balance of interests among the major participants •· the United States, the EEC, Canada, Japan, the NICs, and the middle-income and the poorest develop- ing countries. The sequence might tilt progress in the direction of developing countries but it will have to generate interest in the domestic politics of all participants if it is to overcome widespread skepticism toward the present trading system. The Commonwealth Secretariat has proposed one such possibility for sequencing the agenda of Bargalnlng "' tbe Uruguay Round too exclusively toward the interests of developing countries, thereby paradoxically reviving north- south divisions. In the first phase of the Com- monwealth proposal, there is little of significant interest to the United States, even less to the EEC. The United States and EEC are not eager to ac- cept more discipline (safeguards, dispute settle- ment, and surveillance) without some prospect for gains in graduation (reciprocal participation by advanced developing countries in tariff nego- tiations and codes) and in such new issues as Table 11.1 Secretariat proposal Phase II, Phase Ill, ending ending June 1989 December 1990 RoUbaclcs Services Tariff negotiations Intellectual property Trade-related investment Agriculture measures Strengthening GATI articles services. The first phase may have to aim for more, addressing at least one difficult issue and seeking to resolve it in I~ time, by the end of 1987 or at the latest early 1988, before the U.S. elections. A second sequencing proposal calls for only two phases but assumes that a significant high- level political initiative is needed in the first phase to attack at least one difficult issue on the new round's agenda (table 11.2). In this proposal, that issue is agriculture. The best preparatory work has been done on agricul- ture in both the OECD and the GATI Committee on Trade in Agriculture. Political sentiment in the United States, in the EEC, and (most recently) in Japan may be shifting toward greater willingness to compromise on this issue as costs to budgets and consumers become increasingly unsupport- able. High-level political attention is already fo- cused on agriculture -- an issue that holds signifi- cant potential benefits for developing countries. The issue clearly crosses north-south lines and exploits the more flexible negotiating coalitions evidenced in the preparations and decisions at Punta del Este. 77 Table 11.2 An .alternative proposal Phase II, ending December 1990 Rollbacks Tariff negotiations Services Intellectual property Trade-related investment measures Strengthening GATT •· safeguards, disputes settlement, and other issues reduction in these production subsidy equiva- lents, with the understanding that subsequent rounds would permit further reductions. Negotiations on a safeguards clause might have to be postponed until the second phase, to ease the costs to the EEC in the first phase. Moreover, the United States might agree to cooperate selec- tively with the EEC in further opening Japanese industrial markets. The EEC reserves the right to exercise selective safeguards against industrial products primarily from Japan. But it might agree to relinquish this measure in the second phase in parallel with concrete progress toward opening Japanese import markets. The United States has always resisted the idea of ganging up on Japan but in a multilateral round may find this option a more acceptable negotiating tactic. In the second phase, Japan can then be partly compensated by rollbacks of some of the restrictive measures against Japanese exports. The developing countries have much to gain in agriculture, but is it enough to draw them enthu- siastically into the first phase of the new round? The inclusion in the first phase of a strong pack- age of issues of interest to the least developed countries •· tropical products, natural-resource- based products, and strengthening of special and different treatment -- would help. A big political step by the industrial countries on surveillance would also help. The industrial countries might reaffirm their commitment to nondiscrimination in the context of the standstill agreement. The Punta del Este Declaration prohibits any future trade actions inconsistent with GATT. Removed in the final negotiations was original wording that defined such actions as "not based on the prin- ciples of GATT" -- casting some doubt on the Bargaining In tbe Uruguay Round momentum, and buy time to put in place other necessary support systems for the new round. Developing countries enter this trading round under severe financial stress. If the round is to invite their aggressive participation, they will re- quire support mechanisms to include technical assistance and financial backup. Three possibili- ties come to mind: First, the GATI Secretariat must be given the authority to play a more aggressive role in gather- ing information and producing analyses for par- ticipants in the new round. GATI is often prohib- ited from reporting information that has not been formally reported to it. These limitations should be lifted. Second, the IMF encourages unilateral meas- ures to reduce trade barriers in developing coun- tries, as does the World Bank under its structural adjustment loans. Such encouragement is based on the sound economic principle that gains from trade liberalization do not depend on reciprocal concessions. Politically, however, unilateral measures are difficult. Import-competing inter• ests resist such measures, while export interests offer little support because they see no opening of foreign markets. So, unilateral reductions of tariffs in developing countries might be supple- mented by negotiating in the Uruguay Round to bind these reductions in return for reciprocal concessions from industrial countries. (See chap- ter 8, "Unilateral liberalization and the MTNs. ") Third, if developing countries do participate in the GATI talks and negotiate reciprocal reduc- tions and bindings of tariffs, the multilateral de- velopment banks might consider further direct financial support for these countries (that is, in addition to existing structural adjustment loans). This support might take the form of loans to provide temporary financing to developing coun- tries that incur subsequent trade deficits in prod- ucts for which they have negotiated reciprocal concessions (larger imports than exports in the products negotiated over a certain base line prior to liberalization). In this way, developing coun- tries would be protected against additional bal- ance-of-payments risks, on top of already heavy debt burdens, if their imports of negotiated prod- ucts temporarily increased more rapidly than their exports of negotiated products. Phasing the negotiations would allow time to set up these support mechanisms, because recip- rocal bargaining between developed and develop- ing countries on manufactured goods would not begin until the second phase. 79 ral resource products, and the treatment of least developed countries, the first phase would offer significant benefits to developing countries. Moreover, in this first phase, modest steps toward reaffirming nondiscrimination in future trade agreements could reinforce confidence for more far-reaching steps in the second phase, such as rollbacks of past discriminatory agreements and reciprocal tariff' and nontariff' negotiations. 1bis confidence, in tum, might facilitate later compro- mises on a new safeguards clause -- permitting framework negotiations and then sector negotia- tions on such new areas as services. References Commonwealth Secretariat. 1986. 71,e llnlll"'JI RO#ffd Mllltilat-1 TroM Negotiations: Commo,,weold, J,u.,,. nts and oppo,tunllia. London. Glide, Leslie Alan. 1984. M"""'11-1 TroM N ~ s : World TroM AJttw th. Taiyo Rotmd. Totowa, New Jersey: Rowman and Allanheld. Nau, Herny R. 1985. "The NICs in a New Trade Round." In Ernest H. Preeg, ed., Hard Bargalnmg Abedd: U.S. TNM Policy and D«leloph,g COfRflrift. New Brunswick, New Jersey: Transaction Books. Preeg, Ernest H. 1970. Tradtws and Diplomats. Washing- ton, D. C.: Brookings Institution. stake in the success of the enterprise. And in some national administrations, a neutral and sometimes even hostile attitude toward all inter- national organizations has become popular. Toe membership of GAIT today is vastly differ- ent from that of 1948, and this has affected the way it works. At its origin, GATI was largely a product of developed countries. Although several developing countries were among the original twenty-three members, they played a minor role in its operation. Even in the Kennedy and Tokyo Rounds, the developing countries kept a rather low profile. Consequently, active GAIT participa- tion of a small number of essentially like-minded developed countries greatly facilitated the smooth functioning of the system. But today, GAIT has ninety-five contracting parties, with very different economic and political systems. Furthermore, two-thirds of the contracting parties are develop- ing countries that are no longer quiescent. Toe recent lack of cooperation and goodwill, however, is not a north-south phenomenon. Most of the substantive disputes dealt with in GATI concern developed countries, particularly the United States and the EEC. Rarely have cases been brought against developing countries. De- veloping countries have, however, brought sev- eral successful cases against developed countries. In 1980, for example, Chile won a case involving EEC restrictions on imports of apples. Hong Kong won a case in 1983 involving French quotas on imports of watches and other products. Although there have been occasions when some contracting parties have based trade actions on political considerations, GATI has not become an organization of competing political blocs. GATI functions effectively only when countries pursue their national economic interests irrespec- 81 nated a forty-year program of negotiated tariff re- ductions that, at least in averages, have reduced the duties in developed countries to very low levels. For example, U.S. average duties on indus- trial products (more than 50 percent in the 1930s) are now less than 5 percent. These duty reductions have helped the developing countries to almost double their share of world exports of manufactured products since the mid-1970s. The tariffs of developing countries, however, remain very high. Preferential tradtng an-angements One of GAITs basic principles is nondiscrimi- nation, or most-favored-nation (MFN) treatment. Under this principle, a country must charge the same import duty on the same product whatever its country of origin. Exception is made for cus- toms unions and free trade areas that cover "substantially all" the trade among the countries involved. Originally, this was regarded as a neces- sary exception to accommodate existing arrange- ments. But it has subsequently been used exten- sively by the EEC and the European Free Trade Association (EFTA). Many of the preferential trad- ing arrangements established by them have ques- tionable legality or are clearly illegal. Further- more, the Generalized System of Preferences for Developing Countries, even though it received a waiver from GATI in 1971, constitutes a massive deviation from the MFN principle. About half the world's trade is preferential. To prevent a further erosion of the MFN principle, the GATI "wise men" report of 1985 recom- mended that the rules permitting customs unions and free trade areas be clarified and tightened. This report also questioned the value of special treatment for the developing countries and fa. vored greater integration of these countries with the trading system (GATI 1985, pp. 41 and 44). offers Quantitative restrictions Quantitative restrictions for balance-of-pay- ments purposes, widespread in Europe in the prewar and postwar periods, have been elimi• nated for many years. Developing countries, however, continue to maintain such restrictions. Tokyo Round codes cuts ne- The Tokyo Round nontariff codes relating to customs valuation, technical standards, antidump• Functioning of tbe GATT system tioning of the GATT system. That is why a satis- factory negotiation on safeguards is an essential element in restoring the efficient functioning of the GATT system. (Safeguards are discussed in chapter 19.) Dispute settlement An improvement in the GATT mechanism for settling disputes is needed if GATT is to function more effectively. Much attention to this subject has focused on procedures. But at the heart of the problem are differences in interpretation by the contracting parties of the provisions of the General Agreement and the codes. The text of these provisions is sometimes unclear and impre- cise. Some of the ambiguous language is a natural result of the negotiating process and of the politi- cal necessity to obtain ratification in congresses, parliaments, diets, and other legislative bodies. This is particularly true when the texts in question relate to subjects of great political as well as economic importance. On agriculture, for ex- ample, there has been a wide range of views on what constitutes an "equitable share" of world trade, a "previous representative period," and "special factors" -- all of which are key concepts in disputes involving agricultural subsidies. (Agri· culture is discussed in chapter 21.) No dispute settlement mechanism can work unless there is a clear understanding and agree- ment on the rules to be respected. A recent study ofGATT dispute settlement concluded that "thor- ough, tough negotiations on improving the sub- stantive provisions of the GATT were what was really needed" (United States 1985, p. xiii). Procedures are not the central problem in dis- pute settlement, but they are important. When a complaint alleging a violation of GATT provisions is brought before the contracting parties, the first step is to encourage a bilateral settlement. If this effort fails, the practice is to establish a panel of three or sometimes five individuals to consider the matter and to make findings and recommen- dations. These individuals, most often members of delegations stationed in Geneva, are to act in their personal capacities and not reflect the views of their governments. The practice of obtaining agreement of the disputants to the composition of panels has led to long delays in their establish- ment, delays that often exceed the time require- ments laid down in GATT procedures and the codes. One proposal to remedy this deficiency would be to establish "a small permanent roster 83 as antidumping and countervailing duties. In addition, participants undertake not to introduce trade measures to improve national negotiating positions. Under rollback, participants have com- mitted themselves to phase out all trade measures that do not conform to GATI. In addition, a surveillance body has been estab- lished to ensure implementation of the standstill and rollback commitments. The surveillance body, open to all participants, will examine any actions or measures notified by a participant as being contrary to the standstill commitments. The body will also monitor the implementation of rollback commitments. Reports on the implemen- tation of standstill and rollback will be made to the Trade Negotiations Committee, the body that will be charged with carrying out the negotia- tions. In the early months of the Uruguay Round, Aus- tralia proposed that all contracting parties make annual reports on the protective effects of their policies, which would be reviewed by a special session of the GATI Council. Periodically, the larger countries, developed and developing, would be subjected to a more extensive review by a smaller group of contracting parties. At the heart of the second objective -- to im- prove decisionmaking -- is the GATI practice of consensus. Although GATI specifies that votes be taken on some questions, most decisions are reached by consensus. Consensus does not re- quire unanimity, but no contracting party may object, including those involved in a trade dis- of the multi- pute. In recent years, there have been instances where countries found in violation of GATI obli- gations by a dispute settlement panel have dis- sented from the panel findings and thereby blocked any GATI action. At the ministerial meeting in 1982, there was an attempt to elimi- nate the parties to a dispute from the requirement global eco- ng for consensus -- that is, consensus minus two. This could not be agreed on, and the language of the ministerial decision "reaffirmed that consen- sus will continue to be the traditional method of resolving disputes." Rather weakly, the text added that "obstruction in the process of dispute settle- ment shall be avoided" (GATI 1982, p. 8). GATI ministerial meetings, unlike those of many other organizations, have been rare, occur- ring only irregularly every few years -- for ex- ample, in 1973, 1982, and 1986. Greater involve- ment of ministers in the Uruguay Round is con- templated through the Trade Negotiations Com- mittee, chaired by Enrique Iglesias, the foreign J1vncllonlng of tbe GA1T system anangcments, and subsidies and countervailing measures. JJ already indicated, the GATI system docs not function as well as it might because of problems in these and other areas. All these is- sues arc interrelated But the real issue in the Uruguay Round is whether the multilateral trading system of GATI is going to be preserved. This preservation is what the Uruguay Round is really all about. And if the system is to be preserved, it must work better than it docs now. The ministerial objectives of enhancing surveillance, involving ministers, im- proving dedsionmaking, and strengthening rela- tionships with other organi2ations arc worth- while. But they will not suffice. The major issues discussed in this handbook must be addressed and successfully negotiated. This will require a return to a spirit of cooperation based on the common perception that a stable trading system is a precondition for economic growth and prosper- ity. GATI is such a system, serving the interests of all countries -· developing, newly industrialized, and developed in the prepa- Referenc:a adjust- GATI Secretariat. 1982. Millhtmal D«:lamlion, aJoplM mt 29 N-,,.,,.1982. L/5-424 (29 N09e!Dber). Geneva. . 1985. Trrut. Polkiff for a &n.,- ~ Proposals for Adicm. Genew.. . 1986. Mimstmal D«:lanltion mt ti# Un,pay ~ r u l , MIN. DEC. 20 (September). Genew.. United States International Trade Commission. 1985. RftMW of the BffectiWMU of Trrut. Disp,,ls Sdt'--' __,. the GAIT arul the Taiyo RO#Nl ~ - Wuhington, D.C. 85 (table 13.2). In Japan, Sweden, Switzerland, and the United States, MNF tariffs now average less than four percent •· or less than half the corre- sponding rates for. Austria, Australia, and New Zealand. Even greater diversity is reflected in the developing country tariff statistics, where the average MNF tariff ranges from 1.3 percent in Singapore to more than 40 percent in India, Pakistan, and Bangladesh. 1 Sizable differences often exist between MFN and "applied" tariffs, indicating the departures from the MFN principle. These departures contain positive elements •· they normally involve freer trade, at least among a specific group of countries. They also have nega• tive elements •· they involve departures from MFN principles and generally discriminate against countries not covered by the arrangements. And because many such departures involve conces• sions to specific countries or country groups, vested interests will work against further MFN tariff reductions which would lower margins of preference. In previous rounds the developing countries adopted a position of nonreciprocity, arguing that their economic and industrial problems would not permit bargaining for reciprocal trade conces- sions. Since no quid pro quo was extended, it is not surprising that developed countries' tariff cuts on roducts of interest to developing countries were lower than average. Greater gains might be realized by offering reciprocal reductions in trade barriers, especially on the part of the more ad- vanced developing countries. So, the developing countries might best serve their interests by re- viewing their traditional stance on this issue. (Complicating the position of developing coun- tries in the Uruguay Round is that they have previously agreed to negotiate a Global System of 89 Table 13.1 relating to MFN tariffs in the Uruguay Round Negotiating problems In some sectors many MFN tariffs are not legally bound and can be raised easily. The uncertainty associated with the threat of higher tariffs may have detrimental trade effects. Many products are covered jointly by a tariff and a hard-core nontariff barrier. In these cases, a tariff cut would not increase imports as expected due to the NTB. Tariffs cuts on raw materials, semifinished goods, and manfac- tures should be balanced since higher-than-average reductions on production inputs would increase effective tariff protection for processed products. Developed country tariffs contain extensive departures from the MFN principle, especially in Europe, where multiple preference schemes have been established. These MFN departures are likely to pose major problems for the tariff negotitations. Developing countries are officially committed to negotiate tariff preferences for intratrclde as a key element of the Global System of Trade Preferences (GSTP). The fact that the Uruguay and GSTP negotiations overlap will probably cause major problems. Developing countries should individually review their tradi- tional stance on nonreciprocity in MTNs since greater gains might be achieved by offering reciprocal concessions. More ad- vanced developing countries may benefit from more active par- ticipation in negotiations. MFN tariffs cuts on items receiving GSP or Lome Convention preferences will reduce developing countries' competitive ad- vantage and cause some trade diversions. Compensations for these losses will be an issue. Specific tariffs, expressed as a fixed monetary change per unit of import, generally have far higher nominal equivalents on devel- oping country exports than on goods originating in developed countries. These duties should be eliminated or converted to ad valorem legally bound tariffs. (conttnued) Tariff-cutting formulas - and complications Table 13.1 ( continued) Negotiating problems While f.o.b. procedures are employed in Canada, Australia, and the United States for assessing tariffs, other developed countries incorporate transport charges in the valuation base. These c.i.f. procedures have discriminatory effects on "geographically dis- advantaged" developing countries and should be modified to eliminate these discriminatory features. Many developed countries tariffs permit the duty free re-entry of domestically produced components that are assembled abroad. Reductions in MFN tariffs would reduce the competitive edge af- forded developing countries by these provisions and divert trade unless offsetting arrangements are negotiated. In the Tokyo Round, alternative general tariff-cutting formulas were proposed that produced distinctly different tariff cuts. Countries should tablulate detailed statistics on tariffs facing their exports and determine what procedures best meet na- tional objectives. To avoid unecessary negotiations on unimportant tariffs, a gen- eral agreement should be sought to implement a blanket elimi- nation of all "nuisance" duties -- say, those of under 5 percent. Paratariffs pose two problems: the need to agree on which will be included in tariff negotiations and the need to ensure that all relevant features of these charges are covered. For example, in the case of tariff quotas, agreement would be needf d on the quota's size as well as on the high and low tariff rates. NTBs like quotas or variable import levies have more detrimen- tal trade and welfare effects than legally bound MFN tariffs. The Uruguay Round might convert some existing NTBs to tariffs and set a time schedule for their reduction. tics shows that the major factor accounting for these differences is an EEC-EFTA protocol that allows duty-free trade in most manufactured goods and some agricultural products between countries in these groups -- as well as duty-free trade between EFTA members. The differences between these MFN and applied rates are impor- tant since they suggest that major reductions in the former could result in the diversion of a sig- nificant value of intra-European trade to non- European countries, like Japan and the United 91 compllcallons Table 13.2 MFN and appllecl tariffs in selected developed and de\'eloping countries Trade-wetg_bted tariff averag_e Developing country Developed country World trade wetg_bts trade wetg_bts trade wetg_bts MFN Applied MFN Applied MFN Applied 8.3 4.8 14.0 9.4 12.4 8.2 S.5 5.6 10.5 1.5 9.9 2.0 6.1 4.6 6.6 4.5 6.5 4.5 3.2 2.1 4.8 2.8 4.2 2.5 6.7 4.6 4.7 0.7 4.8 1.0 3.0 2.4 4.2 4.0 3.5 3.0 5.2 3.3 16.0 13.0 13.6 10.9 3.2 2.8 4.9 0.8 4.8 1.0 3.1 2.5 3.6 0.7 3.5 0.8 2.7 2.5 · 3.0 0.9 3.0 1.0 4.9 4.5 3.4 3.4 3.9 3.8 11.0 11.9 11.9 11.7 69.3 68.3 68.3 68.8 7.7 18.7 18.7 17.0 12.5 18.3 18.3 17.2 3S.5 22.8 22.8 24.2 26.9 60.2 60.2 44.8 20.2 24.7 24.7 23.0 37.3 33.6 33.6 34.9 37.5 31.8 31.8 34.0 6.9 16.2 16.2 13.0 6.6 14.3 14.3 11.6 19.3 20.2 20.2 20.0 33.2 36.7 36.7 35.7 29.3 22.1 22.1 23.1 30.3 54.7 54.7 43.4 • 17.5 21.5 21.5 19.9 S.5 11.9 11.9 10.9 0.4 2.1 2.1 1.3 19.7 23.8 23.8 21.8 12.5 15.9 15.9 15.1 6.1 20.5 20.5 14.5 14.5 18.9 18.9 18.5 4.5 12.1 12.1 10.0 of developing countries that have exchanged tariff preferences (like the Association of Caribbean Common Madcet (CARICOM), and the Customs and Economic Union of than the MPN averages shown. Difficulties encountered by UNCTAD in tabulating developing countries pre,fflted the calcuJation of applied tariff averages. The tariff averages of the Community and do not reflect duty-free lntratrade. A further point is that some In the averages may be lower than the legally bound MPN rates. These divergences are Japan, which has recent major unilateral reduction in MPN tariffs. These reduced tarifl's can, (ceiling) rate without restrictions. the year for which the tariff data wa-e drawn. Since the UNCTAD data base did not preferential arranaements, an applied tariff average could not be computed. the external trade of the EEC. have been computed &om data in the GATI tariff study. Developing counuy tarifl's Trade Information System. Tarljf-cuttlng fonn,,,las - IMd complications known to have limits. Under this approach, re- quests were often made for tariff cuts on impor- tant items in international trade, but the offers of cuts that followed were generally concentrated on items of less significance. Furthermore, the approach provided opportunities for interest groups to exert pressure against meaningful tariff reductions. In recognition of these limits, interest in the Tokyo Round centered on general tariff. cutting procedures (formulas) that would make broad cuts in import duties for a wide range of products without focusing on detail. But because alternative general formulas may produce mark- edly different tariff cuts, the selection of a specific formula consistent with national objectives has been crucial to the countries participating in the negotiations. Many tariff-cutting formulas were considered in the Tokyo Round, and some examples will indi- cate how the issue may be raised in the new MTNs. One of the simplest formulas would achieve a linear cut in which all tariffs are low- ered by the same percentage. If T0 is the initial tariff rate and T1 is the duty after the cut: In Nor- 20 percent, 3 percent. where (1 - a) indicates the percentage reduction in import duties and a is a constant between zero and one. As an alternative to equation 1, however, sev- eral proposals sought to achieve tariff harmoniza- tion (that is, to have the highest tariffs experience the largest percentage cuts). These included a proposal for linear reduction with harmonization: rates of pro- metal ores generally where b is a fixed percentage amount and where the parameters a and b would be negotiated. Given the fact that equation 2 might raise some very low tariffs (due to the effect of b), a "floor" of 5 percent was proposed for tariffs to which it would be applied. Another harmonization formula that would achieve even deeper cuts in high tariff rates was also considered: It was suggested that equation 3 be reapplied three successive times. Finally a Swiss proposal was considered and generally applied: 93 ons re- and Product group AMstralia Austria tariff of 10 All Food Items 4.9 8 .0 Food and live animals 2.8 5.9 Oilseeds and nuts 4.1 1.9 Animal and vegetable oils 2.0 0.8 Agricultural Raw Materials 5.1 2.3 Ores and Metals 10.2 5.6 Iron and steel 17.2 8.4 Nonferrous metals 3.9 6.1 Fuels 0.0 2.1 Chemicals 5.4 6.3 Manufactures excl. chemicals 17.7 14.1 Leather 17.8 5.3 Textile yam and fabrics 15.3 18.2 Clothing 49.3 30.2 Footwear 43.9 25.9 Other Items 0.2 3.3 All Products or reduc- All Food Items 3.1 6.8 Food and live animals 1.7 4.9 Oilseeds and nuts 2.0 1.5 Animals and vegetable oils 2.4 0.8 Agricultural Raw Materials 0.7 1.6 Ores and Metals 4.3 0.3 Iron and steel 7.3 0.5 Nonferrous metals 2.4 0.2 Fuels 0.0 1.5 Chemicals 4.0 0.5 Manufactures excl. chemicals 11.5 2.0 Leather 10.9 0.9 Textile yam and fabrics 11.3 2.0 aothing 35.6 5.1 Footwear 27.9 1.2 Other Items 0.1 1.1 All Products 8.3 2.0 in the negotia- All Food Items 1.3 9.0 Food and live animals 1.0 8.9 Oilseeds and nuts 0.7 0.1 Animal and vegetable oils 0.3 0.3 Agricultural Raw Materials 0.1 u Ores and Metals 1.6 D.9 Iron and steel 4.9 2.9 Nonferrous metals 0.3 1.1 Fuels 0.0 1.5 Chemicals 4.2 4.0 Manufactures excl. chemicals 11.4 18.9 Leather 9.6 6.6 Textile yam and fabric 6.3 17.5 Clothing 35.1 27.2 Footwear 25.6 24.4 Other Items 0.0 5.2 All Products 4.3 4.9 Source: Calculations on the basis of the GATT Tariff Study and UNCTAD Series D Trade Tapes. Tariff-cutting formulas - and complications Table 13.3 -d GSP tarlfti, In aelected ~loped countries New United All Zealand Sweden Switzerland States Developed MFN tariff rates 9.7 1.6 10.0 4.1 6.4 5.7 1.4 9.0 3.8 6.5 0.9 3-3 7.5 1.4 5.3 0.0 0.0 0.2 0.9 0.1 1.0 1.7 1.9 0.3 0.8 6.0 2.5 1.4 1.9 2.3 8.8 4.8 2.0 4.3 5.1 4.0 1.0 1.2 0.7 2.3 0.2 0.0 0.0 0.4 1.1 6.7 5.0 0.9 3.7 5.8 22.6 5.4 3-3 5.6 7.0 20.9 4.1 1.8 4.2 5.1 16.2 10.6 6.0 10.6 11.7 93.0 13.6 8.6 20.3 17.5 40.3 14.3 9.6 11.7 13.4 1.2 1.8 0.4 applied tariff rates 7.8 0.8 9.1 3.5 5.3 3.9 0.8 8.4 3.2 5.3 0.7 2.2 7.4 1.0 4.0 0.0 0.0 0.2 1.0 0.2 0.7 1.4 0.7 0.3 0.5 4.2 0.2 0.1 2.2 1.5 6.4 0.4 0.1 5.0 3.4 2.1 0.1 0.1 0.7 1.3 0.0 0.0 0.0 0.4 0.6 4.9 0.4 0.1 3,9 3.1 18.3 1.4 0.4 4.9 4.7 21.4 0.3 0.1 2.7 3,1 10.9 1.7 0.6 12.1 7.9 75.6 4.8 1.7 18.1 11.9 28.4 2.8 0.6 9.5 9.0 0.9 0.1 0.2 3.6 3-3 11.0 0.8 1.0 3.4 3,0 tariff for GSP beneficiaries 6.2 0.4 6.3 3.6 5.5 0.8 0.4 6.5 3.4 5.6 0.0 1.7 9.0 0.3 4.5 0.0 0.0 0.1 0.1 0.4 0.0 2.1 0.3 0.1 0.5 0.2 0.1 0.4 1.1 0.9 2.3 1.0 0.4 3.5 3,0 0.5 0.1 0.9 0.3 1.1 0.0 0.0 0.0 0.3 0.6 1.1 0.6 0.4 1.0 3,7 14.3 6,9 2.7 6.6 6.7 18.0 1.2 1.1 1.4 3.2 8.5 6.8 2.7 9.0 8.4 82.8 13.2 7.6 17.8 14.6 22.1 13.4 4.4 9.4 10.1 1.7 0.0 0.4 0.4 3.8 3.3 2.3 2.3 3.6 2.7 95 . Figure 13.1 effects of alternative tariff reduction formulas Parameters a = 0.4, a =0.5 Linear 40 percent cut t, = 0.510 + 2.5 for I 2c 5 t, = 0fort0 :,; Sand t,=20fort0 2c20 Linear 50 percent cut t., - (t//100) t, =16t.,f(16 + tol ---------------- --------- ----- Initial tariff (lo) 20 25 30 35 40 45 50 55 60 better position (through nonparticipants) to ar- gue that they should receive some compensation for the erosion of these preferential margins. In particular, the erosion could be considered as part of their concession for which they would be entitled to some form of compensation. ff this compensation were in the form of legal bindings of the tariff margins, it could assist developing countries in the more effective use of these pref- erence schemes. the equal Spcclftc problems of developing countries Once again, the developing countries will en- counter special problems in coping with two separate tariff negotiations •· those involving the GSTP and the Uruguay Round. But the Uruguay Round should address other tariff problems of primary concern to these countries. One such problem is the tendency for developed countries to shift from nominal tariffs, in which the import duty is expressed as a percentage of product value, to specific tariffs in sectors where develop- ing countries have a competitive advantage. Specific tariffs differ from nominal duties in that they are expressed as a fixed monetary charge per Tarl/f-adtlng jon,a,las - and complications Table 13.4 and fflue of Imports cOftl'ecl by spectftc tarlfl's trade cluslil<-adon product groups: selected lndustrtal countries [atxm Norwal!._ Sweden United States Items Value Items Value Items Value Items Value , 4.6 14.1 56.9 46.0 60.3 65.0 45.0 42.6 ;43.8 16.9 41.4 32.6 82.7 • 70.8 93.7 99.9 5.6 9.7 14.7 3.5 7.5 7.1 33.7 23.5 9.4 18.2 71.0 17.1 4.3 8.1 0.5 39.7 89.1 4.8 56.2 51.4 55.2 65.0 59.8 74.2 1.1 0.8 11.9 4.6 4.0 1.7 38.5 37.9 1.6 8.2 34.4 30.5 6.5 5.9 32.3 30.2 0.2 0.1 9.1 3.8 1.4 1.1 7.3 1.3 5.8 2.7 28.3 28.9 4.2 3,3 30.9 21.7 42.7 a 24.4 42.6 6.7 a 8.1 22.9 13.4 21.1 27.9 28.9 13.9 9.7 34.7 28.3 breakdown could not be computed from the GATI trade and tariff tapes. Pacing n.wloping C°""'1"Jff (London: Maanillan Press, 1979). the United States, about 28 percent in Norway. Although there is much variation from country to country, the highest overall application of these duties is in foods, beverages, and animal-vege- table oils. Japan and the United States rely heav- ily on specific duties on fuel imports, but in most cases these charges are concentrated on sectors of special importance to developing countries. The overall averages show this clearly, as the percentage of developing country products im- ported under specific tariffs is higher than that for developed country imports in all cases but the EEC. It would be in the interest of developing countries if efforts were made in the Uruguay Round to eliminate specific tariffs -- or to convert them to legally bound nominal tariffs. Aside from the adverse effects of specific tariffs, some developed country valuation procedures often have discriminatory effects on developing countries. Canada, Australia, New Zealand, and the United States assess tariffs on the f.o.b. value 97 these quotas, dates, or other nontariff limitations would almost certainly force the adoption of the more difficult product-by-product approach for a liberalization. So, unless these nontariff elements are also subject to negotiation, simply liberalizing the tariff elements may have, at best, only limited trade effects. In two important respects, the problems associ- ated with nontariff barriers (NTBs) are so closely linked with tariffs that they cannot be dealt with independently in the negotiations. First, in some sectors (agriculture and textiles) many tariff-line items are covered jointly by import duties and hard-core nontariff restraints •· such as variable levies, the Multifiber Arrangement (MFA), global and bilateral quotas, voluntary export restraints, or restrictive licensing systems. In these cases, the expected trade expansion from a tariff liberali- zation probably would not be realized unless some complementary agreement were negotiated to relax the nontariff measures. It is also conceiv- able that changes in the NTB might offset the effects of a tariff reduction. That would be the case, for example, where an increase in a variable import levy accompanies a tariff reduction. To be effective in these cases, tariff cuts will also have to secure some agreement on a liberalization of these jointly applied NTBs. 7 A second important point relating to the tariff negotiations should be the realization that they provide a unique opportunity to address certain long-term structural adjustment problems that have proved extremely difficult for the interna- tional community to resolve. Specifically, restric- tions imposed as part of the MFA have been shown (1) to be extremely costly for consumers in the developed countries, (2) to be a very ineffi- cient way of preserving jobs in the textile and clothing sector, (3) to involve substantial losses in export revenues for developing countries (many of which are heavily indebted), (4) to involve a major loss of transparency, and in their discrimi- natory effects on developing countries, and (5) to run counter to the spirit of GATT. Similar conclu- sions apply, in varying degrees, to agriculture, iron and steel, and some other labor-intensive sectors, like footwear. Consideration should be given to converting NTBs that are now extensively applied in these sectors to MFN tariffs. 8 At the same time, agreement should be sought on a schedule for the progressive liberalization of these duties to prevent them from becoming permanent. Adopting such a schedule for reduc- ing these tariffs could be an important quid pro Tarljf~tttng Jor,m,,1As - and complications advanced implementation of tariff cuts for prod- ucts of special export interest to developing coun- tries? Past experience says that it would be useful to formulate some objective standards for making these commitments operational in the Uruguay Round. In the broadest sense, this might involve formulating measures that reflect the value of concessions received as opposed to concessions made by developing countries. Another point, which has been touched on only briefly, but which deserves major considera- tion, has to do with the technical needs of devel- oping countries in participating effectively in the tariff negotiations and other aspects of the Uru- guay Round. Such key policy matters as testing al- ternative tariff-cutting formulas, assessing likely trade losses due to the erosion of tariff prefer- ences, determining the impact of MFN tariff cuts on offshore assembly operations, evaluating the potential gains associated with developing coun- tries shifting from their traditional stance of non- reciprocity •· all these are issues that require much technical expertise for proper evaluation, expertise that is often lacking in the developing countries. the Uru- Notes 1. It is clear that the "own" trade weights used to calcu- late the developing country tariff averages incorporate a bias in the resulting statistics. Very high tariffs greatly restrain (or prohibit) imports, with the result that products covered by these duties enter the calculation of an overall average with low (or zero) trade weights. It has not proved possible to quantify this bias, but the authors have found considerable evidence of prohibitive tariffs (over several hundred percent) in many of the developing countries that have relatively low overall trade-weighted averages in table 13.2. before the 2. For an excellent nontechnical discussion of the impli- cations and policy applications of effective protection, see Grubel (1971). 3- The depth of tariff cuts is only one (imperfect) criterion to be examined when evaluating effects of alternative general formulas. A better measure is the likely expansion of trade. High tariff cuts on products with low import-demand elastici- ties may produce a smaller trade expansion than lower cuts on products with high import-demand elasticities. To esti• mate the likely trade effects of tariff cuts, some nations have employed partial equilibrium trade projection models to as• sess the results of alternative formulas and determine how well they matched national objectives. For a discussion see Stem (1976). 1n recognition of the need for such empirical information in the Uruguay Round, the UNCTAD Secretariat developed a trade projections model to assist developing countries. For a description of the approach and possible applications, see laird and Yeats (1986). 4. An UNCTAD analysis of the Tokyo Round results con- cluded that developing countries suffered major losses due to the erosion of tariff preferences. 1n part, these losses were due to the disproportionate number of MFN cuts on products covered by the GSP and the greater depth of these cuts in 99 compllcat#ons for all products. References it has been Baldwin, Robert. 1970. Nontarilf Dlstottkms of Jr,t.,,.. lional Tradl,. Washington, D.C.: Brookings Institution. tariffs facing develop- Finger, J. Michael. 1975. "Tariff Pro9isions for Off-Shore Assembly and the Exports of DC9Cloping Countries." Bco- nomic Joumal 85Ounc): 365-71. GAIT Secretariat. 1979. Tlw Taiyo R-4 of Mflltilat-1 and structural Tr""- N ~ s . Geneva. "inventory" of Grubel, Herbert G. 1971. "Efkclive Tariff Protection: A in almost all developed Non-Specialist Introduction to the Theory, Policy Implica- tions and Con~es. "In Herbert G. Grubel and Harry at the level of the G. Johnson, eds., Bffi,ctiw Tariff Prot«:don. GenC9ll: on tariffs and GAIT Secretariat. Laird, Samuel, and Aleicander Yeats. 1986. "The UNCTAD negotiations, such as the Trade Policy Simulation Model." UNCTAD Discussion Paper 19. Geneva. _ _ . 1979. "Hidden Preferences for Den:loping Coun· tries: A Note on the United States Import Valuation Proce- dure." Quarterly Review of Economics and Businns 19,3(Autumn): 71-79. almost certainly pro- Stem, Robert. 1976. "Evaluating Alternative Formulae for Reducing Industrial Tariffs." Journal of World Tradl, Law l0Qanuary-February):50-64. UNCTAD. 1980. Effects of MTN Concnskms of th. I!scala- tion of Tariffs in Three M a j o r ~ Country Marltm. eJClllllination of initial offers UNCTAD/MTN/CB.18/Rev.1/Part m/.Add.3). Geneva. _ _. 1983. Non-Tariff Barriers AJ/«:tmg th. Tradl, of Developing Countriff and T ~ in World Trading Conditions. TD/B/94. Geneva. the application of _ _ . 1982. Assessing th. Results ofth. Mflltilaterol Tradl, that time benefit from Negotiations.TD/B/778/Rev. 1. New York: United Nations. covered teictile Yeats, Alexander. 1979. Tradl, Baniws Facing Developing significant suppli• Cotllltriff. London: Macmillan. leather goods, _ _. 1976. "An Analysis of the Incidence of Specific Tariffs on Developing Country Exports." Bconomk In- quiry XIV,l(Man:h):67-71. tioning of the GSP, and the extent of MFN tariff cuts finally agreed on during the Uruguay Round Evaluations of the present GSP schemes and of the likely impact of the MFN reductions are complicated by nontariff barriers (NTBs). But given the current limits on preferential treatment of most GSP schemes, the gains from MFN cuts are likely to outweigh the losses. Rationale for the GSP During the past forty years, developing countries have consistently rejected the two fundamental GATI principles of nondiscrimination and recip- rocal trade liberalization, arguing that "equal treatment of unequals is unfair." Rather than "participating fully in a multilateral nondiscrimi- natory system with the lowest possible levels of [trade) restrictions" (Dam 1970, p. 225), they have sought discrimination in their favor in the form of special and different treatment-· or, more recently, different and more favorable treatment. The most tangible result of these efforts is the GSP. The concept of generalized preferences came about in the early 1960s when developing coun- tries began to press hard for changes in the inter- national trading system to expand their manufac- tured exports and encourage industrialization. As Langhammer and Sapir (1987) have noted, prefer- ential tariff concessions help expand developing country exports in two ways: (1) through re- duced tariffs and (2) through preferential treat- ment over developed country competitors. Al- though developing countries recognized the low- ering of tariffs as important, especially in view of the escalating tariff structure in developed coun- tries, the arguments in favor of the GSP tended to 101 clause, this principle establishes an exception to the MFN clause and provides the legal basis for extending the GSP beyond the initial ten-year period, without the need for further waivers of Article I. At the same time, the enabling clause envisages that developing countries would partici- pate more fully in the framework of rights and obligations of GATT with the progressive develop- ment of their economies. This provision has generally been interpreted as implying the pro- gressive graduation of developing countries: that is, the phasing out of their GSP treatment along with the improvement in their economic status. An important legal point is that the GSP is not contractual under the terms of GATT. Unlike tariff rates that have been negotiated under GATT and therefore bound, preferences are considered to be granted unilaterally and can in principle be withdrawn at will. This ability of preference- granting countries to deny preferences for prod- ucts or beneficiary countries creates great uncer- tainty in the operation of the GSP schemes, not- withstanding their tendency to have improved product coverage over time. ns, Implementation of the GSP because of Although efforts at international coordination have been made in UNCTAD's Special Committee on Preferences, the implementation of GSP schemes has proceeded mainly at the national level. As a result, each preference-granting coun- try applies a somewhat different scheme. Far from being generalized, nearly all GSP schemes are subject to restrictions affecting country cover- age, product coverage, depths of tariff cut, safe- guards, and rules of origin. Preference-granting countries principle The countries or groups of countries granting preferences and the years of implementation of the respective schemes are as follows: Australia (1966), Austria (1972), Bulgaria (1972), Canada (1974), Czechoslovakia (1972), European Com- munity (1971), Finland (1972), Hungary (1972), Japan (1971), New Zealand (1972), Norway (1971), Poland (1976), Sweden (1972) , Switzer- land (1972), the USSR (1965), and the United States (1976). (Australia and the USSR had intro- duced preferences in favor of developing coun- tries before the agreement on the GSP). The German Democratic Republic has no tariffs and hence no GSP, but it applies other trade measures Tarljf p,e.fenmc:es Ltmtts on preferential treatment All GSP schemes include specific or general safeguard limits. In the United States, a country can lose GSP duty-free treatment in a given year for a product on the basis of "competitive need limitations." In Japan and the EEC, preferential imports are subject to annual quantity limits, such as tariff quotas, ceilings, or maximum country amounts. 1 In recent years, specific temporary limits have turned into graduation measures: competitive countries are permanently denied preferential treatment for certain products. The schemes of other countries generally do not in- clude specific safeguards. Nonetheless, their GSP imports are subject to general GAIT escape- clause rules relating to the injury or threat of injury to domestic producers. In addition, donor countries apply rules of origin whereby a GSP-eligible product is granted preferential access only if it is (1) directly im- ported from the beneficiary country and (2) sub- stantially produced or processed in the benefici- ary country. These rules vary considerably across GSP schemes. To conclude, GSP schemes generally fall far short of granting generalized preferences. Exten- sive country and product coverage are offset by various limitations, as in the EEC. Or country• and product-coverage are limited outright, as in the United States. The administrative complexity, diversity, and uncertainty of GSP programs further reduce their potential usefulness for developing countries. products Impact of the GSP on trade flows importance The trade potential of the GSP in any donor country market depends first and foremost on the amount of dutiable imports •· that is, the amount of imports under items with nom:ero duties. For this reason the greatest benefits occur in the larg- est markets •• the EEC, Japan, and the United States (table 14.1, column 3). Apart from the amount of dutiable trade, the product coverage of each GSP scheme determines the level of imports eligible for GSP treatment. For OECD countries, the average ratio of GSP-eligible trade to dutiable trade is about 50 percent. There is considerable variation across donor countries, from 93 percent in Austria to 34 percent in the United States (column 6). The largest amounts of GSP-eligible imports in 1984 occurred in the EEC, the United States, and Japan (column 4). 103 Table 14.1 countries from beneficiaries of their schemes, 1984 Imports (I mtllton) MFN- GSP- Shares <%1 dutiable Eltgtble Preferential (4)/(3) (5)/(4) (5)/(3) (3) (4) (5) (6) (7) (8) 1,689 1,689 60.4 100.0 60.4 1,732 320 93.4 18.5 17.3 1,728 1,295 59.3 74.9 44.4 23,719 8,667 77.9 36.5 28.4 330 285 50.8 86.3 43.8 10,042 6,037 65.8 60.1 39.5 260 260 87.7 100.0 87.7 . 132 68 45.0 51.3 23.2 390 266 50.5 68.4 34.5 1,277 453 44.7 35.5 15.9 22,600 13,000 34.4 57.0 19.7 63,899 32,341 51.5 50.6 26.1 are l'or fiscal year 1983/84. a preferential tariff reduction similar to a customs union, but it operates unilaterally rather than mutually. Llke a customs union, the GSP gives rise to two effects: trade creation and trade diversion. The trade creation results from the displacement of donor country production in favor of imports from beneficiary countries. It corresponds to the first of the two trade-expanding GSP channels identified earlier •· reduced tariffs. The trade diversion results from the substitution by the donor country of imports from beneficiary coun- tries in place of imports from nonbeneficiary countries. It corresponds to the second GSP channel: preferential treatment over developed country competitors. The sum of the trade crea- tion and trade diversion provides an estimate of the (static) impact of the GSP on developing country exports. This estimated impact depends on three factors: (1) the depth of tariff cut, (2) the preference margin, and (3) the responsive- ness of demands and supplies to tariff changes (that is, price elasticities). Studies •of the trade creation and diversion of GSP schemes use a variety of approaches (Bald- win and Murray 1977, Sapir 1981, MacPhce 1984, and Karsenty and Laird 1986). For surveys, see Bormann and others (1985), Brown (1986), and Langhammer and Sapir (1987). The review here Tariff p,efere,tces erable potential gain is forgone because of vari- ous restrictions that donor countres impose on the GSP. In value, the United States is by far the largest GSP donor (with U. l billion), followed by the EEC with (S 1.3 billion) and Japan with just under (S0.5 billion) (table 14.2, column 3). In relative terms, measured against MFN-dutiable imports, the greatest benefits are in Australia (16.5 percent), the least in Switzerland (0.5 percent) and Austria (0.8 percent) (column 4). Clearly, this ranking is closely correlated with the ranking of donor countries (table 14.1, column 8). As expected, the less that GSP schemes are restrictive in product coverage and limits on preferential treatment, the more likely they are to benefit developing countries. For as many as thirty three-digit SITC items (excluding textiles and clothing items), the gains from the GSP for the combined benefici- ary countries in the OECD market were S50 million or more in 1983. Yet, there is a striking concentration of GSP benefits in favor of a few items. The top twelve items account for half the GSP benefits. The key products are relatively labor-inten- sive manufactured items in which developing Table 14.2 under GSP schemes of OECD countries, 1983 ($ mJWon) GSP benefits excluding textiles Share(%) and clothing (3)/(2) (3) (4) 440 16.5 13 0.8 220 9.5 1,269 4.2 19 3.2 493 3.6 25 9.3 16 5.9 48 6.8 15 0.5 2,082 3.2 4,640 3.8 MFN-dutiablc imports are for fiscal year 1982/83. (1986b). The GSP estimates of Karscnty and Laird have been adjusted to for discussion). 105 are considered here. The first is a 100-percent cut in MFN tariffs. Although full MFN liberaliza- tion is not likely in the Uruguay Round. It pro- vides a useful benchmark for comparison with other results. The second alternative is the Ken- nedy Round tariff-cutting formula: a linear cut of 50 percent in all tariffs. The third is the "Sv,iss formula," subject to a maximum cut of 60 per- cent, the compromise reached at the conclusion of the Tokyo Round (see chapter 13). Under all three alternatives, the gains from MFN tariff liberalization far outweigh the losses due to GSP erosion (Karsenty and Laird 1986). Under full MFN tariff liberalization, GSP-benefici- ary countries would receive U 7.8 billion in addi- tional trade benefits over and above the benefits derived under the present GSP. (The additional trade benefits would amount to about S9 billion and S7 billion, respectively, under the Kennedy Round and Tokyo Round tariff-cutting formulas.) The comparison of the additional benefits result- ing under full MFN liberalization (SI 7.8 billion) and full GSP liberalization (S20.6 billion) is inter- esting. It shows that 86 percent of the benefits from full GSP liberalization would be due to the tariff-cutting element of the schemes and only 14 percent to the preferential element. This explains why the losses from the erosion of GSP margins (the trade diversion effect) are much smaller than the gains from MFN cuts (the trade creation ef- fect). Clearly, what matters for developing coun- tries is to obtain lower tariffs, no matter whether on a preferential or an MFN basis. Since their affected exports are ones they already have a strong competitive advantage in. These results are similar to assessments of the Tokyo Round, when the conflict between MFN cuts and GSP margins emerged as a major issue for the first time in multilateral trade negotiations. Baldwin and Murray (1977), Cline and others (1978), and Sapir and Baldwin (1983) show sub- stantial net gains for the developing countries as a result of the Tokyo Round. A dissenting view by Ginman, Pugel, and Walter (1980) has been criti- cized on methodological grounds, notably by Balassa (1980). As noted earlier, the estimates of the effect of MFN tariff reductions in the Uruguay Round as- sume that all products will be covered in the negotiations and that NTBs will be reduced enough to allow trade to expand freely. This caveat is crucial. Up to and including the Dillon Round, negotiations were item-by-item. Only products specifically included in the exchange of Tariff preferences products. What, for example, would happen if, instead of excluding textiles, clothing, and foot- wear from the MFN tariff negotiations, the devel- oped countries agreed to make tariff cuts for such products but did not at the same time dismantle the MFA on textiles and clothing and other quota restrictions on footwear? For developing devel- oping countries the trade effects for these prod- ucts could even be negative because of trade diversion in favor of other developed countries not subject to MFA restraints. Overall, the failure to dismantle the MFA quota system, in particular, is estimated to reduce by nearly 50 percent the potential trade expansion effect of full MFN tariff cuts. If quantititive restric- tions on footwear made the tariff cuts ineffective, the potential gains would be reduced by a further S1. 7 billion. But there has been some relaxation of such restrictions in recent years, particularly in the U.S. market. The lack of action on NTBs on sugar would reduce the potential gains from tariff cuts by some S265 million. These figures show that NTBs could greatly restrain the benefits of the tariff cuts. They are not indicators of the full trade-restraining effect of the NTBs, which is rather greater than their impli- cations for tariff cuts. 3 Clearly, however, the developing countries need to insist, during the new round, on eliminating or reducing the re- straining effect of nontariff barriers against their major exports. If these barriers are not reduced or eliminated, the developing countries will enjoy no spillover effect from MFN reductions for their major export items. The trade gains for these products will go exclusively to other developed countries, which are not subject to discriminatory NTBs, such as those under the MFA. Conclusion on The full potential of the GSP for increasing the manufactured exports of the developing countries has not been achieved, much to the disappoint- ment of developing countries. On this, there is a wide consensus. In principle, the GSP was to be generalized, nondiscriminatory, and nonrecipro- cal. In reality, it has involved a rational protectionist's view of preferences aimed at cur- tailing the benefits that developing countries could obtain. The erosion of preferences was the • result not so much of MFN cuts negotiated in the Tokyo Round as of restrictive administrative rules. Given the limits on preferential treatment un- der GSP schemes, MFN tariff reductions in the 107 reduced from S2.4 billion to Sl.3 billion. For other countries the difference is about 10 percent. Karsenty and Laird draw attention to this in their study, pointing out that MPArestric• tions in the EEC make the GSP largely inoperative. The exclusion of textiles and clothing items will lead to a slight underestimation of the wlue of the GSP in some countries. 3- UNCTAD (1986a) estimates that the potential trade cle- pins from MPN liberalization of NTBs and tariffs would expand imports from the deftloping countries by about S37 billion a year on the basis of 1983 trade flows. Of this, more than half is associated with eliminating NTBs. Referenees trade ~ Bela. 1980. "The Tokyo Round and the Developing Countries." JotlnUll of World TmM Law. 14(March• April):93-118. Baldwin, Robert E., and T. Murray. 19n. "MPN Tariff Reduc- tions and Developing Countiy Trade Benefits under the OSP." Bamomic]Oflmal 87, 345:30-46. Bormann, A., and others. 1985. n. Sfgmjiconce of ti# BEC's G ~ Syst- o f ~- Hamburg: Verlag Weltarchiv. Brown, Drusilla. 1986. "Trade Preferences for Developing Countries: A Survey of Results." Discussion Paper 190. UniYerlity of Michigan: Research Seminar in International Economics. Ann Arbor. Cline, William, and othen. 1978. TmM N ~ s in ti# Toqo R-4: A Qtumlitatiw Assa-,. Washington, D.C: Brookings Institution. Dam, Kenneth. 1970. n,. GA1T: Law and Intt1malional is a hypoc- &:offomk Org-'-tion. Chicago: University of Chicago Press. Pinger, J. Michael. 1974. "GAIT Tariff Concessions and the Exports of Developing Countries - United States Conces- sions at the Dillon Round." Bcotunnk}Oflmal 84(Septem• ber):566-75. . 1976. "Efl'ec:ts of the Kennedy Round Tariff Conces- --.ions on the Exports of Developing Countries." Bconomk ]Ollmal 86(March):87-95. GAIT Secretariat. 1986. "Ministerial Declaration on the Uruguay Round." Press Release of 25 September. Ge- neva. Oinman, P., Thomas Pugel, and Ingo Walter. 1980. "Tokyo Round Tariff Concessions and Exports from Developing Countries." TmM and !Hwlopm-1 -An UNCTAD Re- l/NW 2:83-95. Karsenty, Guy, and Sam laird. 1986. "The Generalized Sylltem of Preferences: A Quantitative Assessment of the Direct Trade Efl'ec:ts and of Policy Options." UNCTAD Discussion Paper 18. Geneva. IAnghammer, Rolf, and Andre Sapir. 1987. Economic Impact of G-11:Md Tariff Prwf-n. London: Gower, for the Trade Policy Research Center. MacPhee, Craig. 1984 .. "Eftluation of the Trade Effects of the Generalized Sylltem of Preferences." TD/B/C.5/87. Geneva: UNCTAD Secretariat. Prebisch, Raul. 1964. Towards a NflW TmM Policy for De- wlop,Mnt. New York: United Nations. Sapir, Andre. 1981. "Trade Benefits under the EEC Gener• alized Sylltem of Preferences." I ! ~ Economic Rftlkw 15:339-5'- Sapir, Andre, and Robert E. Baldwin. 1983. "India and the for specific· productt. Tokyo Round." W o r l d ~ 11,7:565-74. UNCTAD. 198(,a. ~ • of Prot«:tiomsm t11td Strvctuml Adjust,nMt • I ~ and Ptm /: Rntrictions on mainly affects the TmM. TD/B/1081 Part I, Geneva. _ _ . 1986b. Tffltb .4n,.eu,J R.port on die lfflJJl-talion Tariff preferences of Prefff'fflees. TD/B/C.S/lOS. and the International Trading System." Paper presented at the Conference on the Role and Interest of the Develop- Differential and ing Countries in the Multilateral Trade Negotiations. Bangkok, Thailand, October 30 • November 1. 109 stating that "prompt attention should be given to the problem of escalation of tariffs on products with a view to effective action toward the elimina- tion or reduction of such escalation where it in- hibits international trade, taking into account the concerns relating to exports of developing coun- tries." The Punta del Este Declaration also stated that: "Negotiations shall aim to achieve the fullest liberalization of trade in natural-resource-based products, including in those processed and semi- processed forms. The negotiations shall aim to reduce or eliminate tariff and nontariff measures, including tariff escalation." UNCTAD (1979), Commonwealth Secretariat (1982), World Bank (1981), and World Bank (1987, p.138) have also treated tariff escalation as a major problem for de- veloping countries. Tariffs and the structure of developing country exports in pri- A problem to be resolved before any analysis of tariff escalation issues can be undertaken con- cerns the identification of commodities at differ- ent levels of processing. Although there are ac- knowledged difficulties with aggregation and leak- ages, previous escalation studies have often used an UNCTAD classification scheme based on the CCCN system. Since a correspondence between this and the Standard International Trade Classifi- cation (SITC) is available, tariff and trade data can be matched for most countries. Primary and processed commodity stages are identified in the UNCTAD scheme, and in some chains intermedi- ate stage items are also broken out. The com- modities covered in the processing chains ac- count for about 80 percent of developing country exports. Table 15.1 provides an abbreviated The escalation of trade barriers veloped country tariffs (table 15.2). Almost 85 percent of the processing chains register tariff increases as one moves from the primary to proc- essed stages - with more than 96 percent of the chains escalating in Japan, the EEC, and the United States. Products for which escalation is most pronounced include tobacco, rubber, leather, paper, cotton, jute, and iron•· since tar· ifis increase with processing in all ten developed countries. In some chains - like wool in Austra- lia, New Zealand, and the United States •· the average spread between primary and processed commodities' tariffs is about twenty-five percent• age points. The largest differences recorded are for tobacco products, where tariffs increase by as much as 200 points in Austria and by more than sixty points in Japan and the EEC. Tariffs in some processing chains, fail to in- crease from primary to processed commodities (phosphates in Austria and paper in Switzerland). These situations may reflect cases where protec- tion declines with processing or one form of protection is substituted for another. On the second possibility, Balassa (1986, p. 195) has advanced the proposition that "at higher levels of transformation commodities often require a con- siderable degree of technological sophistication which is not found in developing countries. In other words, there is less need for tariff protec- tion if there is 'technological' protection." Other possible explanations include the substitution of nontariff for tariff protection, the ability of domes- tic firms to exercise monopoly power with the result that tariff protection is not required, or the offsetting of the decline in tariffs by higher trans- port costs. 3 Although such factors have not pre- viously been dealt with in multilateral negotia- tions, their existence (where documented by appropriate analytical studies) is certainly rele- vant to the nature and size of the reductions in trade barriers sought in the Uruguay Round. Most escalation studies have centered on the effects of developed country tariffs (and NTBs) on retarding the processing of commodities in devel- oping countries. But a further point should be considered when dealing with tariffs in the Uru- guay Round. Provisions in some developed coun- try tariff schedules permit the duty free re-entry of domestically produced commodities that have undergone processing in foreign locations. For example, if cloth produced in the United States is exported to (say) Mexico, tailored into clothing, and shipped back to the United States, tariffs will be applied only to the value-added component of 111 Table 15,1 structure of developing country commodity ,t;&ports NJB 1982Cl>Orls Awnlp -... From World val,,. _,,,,, Dwelof,h,g DftiJ- tariffs D«iJ; ratio DMl- D«iJ; (I billion) Peramt sban, op«l a op11tgb op«l opl,,g 15,294.8 87.0 13.4 6.2 6.6 34.0 11.0 2,290.0 13.0 23.9 8.4 21.9 41.3 3.0 17,584.8 100.0 11,114.4 81.6 42.6 4.3 10.9 56.9 11.0 2,513. 18.4 37.9 4.1 30.1 7.0 n.a. 13,638.3 100.0 7,785.3 71.1 34.6 6.9 16.6 42.6 12.0 3,168.2 28.9 24.4 13.2 26.9 16.4 5.0 10,953.5 100.0 9,444.2 70.2 41.1 7.4 17.0 27.6 24.0 4,000.5 29.8 36.2 17.1 11.1 9.1 15.0 13,444.7 100.0 9,269.4 75.8 12.9 0. 18.1 1.9 11.0 2,966.0 24.2 83 4.4 26.5 5.8 13.0 12,235.4 100.0 4,258.2 40.9 46.3 1.2 126.0 14.0 12.0 6,157.9 59.1 6.5 18.1 662.1 30.0 25.0 10,416.1 100.0 11,168.2 93.1 69.0 1.0 23.5 51.0 2.0 831.6 6.9 16.4 20.0 24.3 19.0 3.0 3,247.5 67.1 76. 1.0 11.6 0.0 1.0 1,592.4 32.9 5.9 3.0 29.7 1.0 3.0 4,839.9 100.0 6,048.2 40.4 55.2 0.0 7.2 0.0 3.0 8,924.5 59.6 8.2 3.9 19.4 3.3 11.0 14,972.7 100.0 2,649.4 38.3 13.2 0.1 4.8 0.0 6.0 Tbe ~ of lnlM barriers Table 15.1 (continued) NTB 1982 exports ..4wraS• cowrag• n.v.Jo/Ji"I. Ptom ·vaJu. 'IVoili:l 1Hwlopi7tg COU1'lry tariffs n.wl- n-1- ratio Dewl-n.wl- Peramt (I hillionl Pff'CMII sban '!J!!d a '!J!!."8.. b op.d '!1!!."8 64.0 3,326.6 48.2 33.6 2.9 17.5 1.7 7.0 936.2 13.5 29.8 7.2 33.9 11.7 14.0 6,912.2 100.0 39.0 5,501.8 24.5 48.4 0.0 8.0 0.0 5.0 25.1 9,234.5 41.0 18.6 0.2 13.1 0.2 5.0 25.1 4,537.1 20.2 37.7 1.7 23.5 6.6 6.9 10.8 3,225.6 14.3 22.9 3.5 27.6 2.7 29.4 100.0 22,499.0 100.0 43.3 6,632.2 41.2 40.0 0.0 3.2 0.0 3.0 22.5 3,031.6 18.8 45.4 3.0 29.7 2.2 5.0 34.2 6,430.3 40.0 32.7 5.8 32.1 62.1 8.0 100.0 16,094.1 100.0 42.3 7,280.6 15.8 44.3 0.0 2.6 4.9 3.0 12.7 3,573.0 7.8 27.1 2.2 7.4 8.7 13.0 5,800.8 12.6 13.5 2.2 12.1 8.7 55.0 34.7 29,440.8 63.8 8.9 3.4 19.9 18.7 31.0 100.0 46,095.2 100.0 44.5 9,303.0 28.9 61.5 0.0 4.1 4.9 3.0 55.5 22,926.5 71.1 31.2 2.4 18.2 1.0 4.6 100.0 32,229.5 100.0 55.9 2,050.9 22.4 55.5 0.0 12.8 0.0 2.0 44.1 7,092.8 77.6 12.6 3.2 9.4 13.7 6.0 9,143.7 100.0 83.8 250,807.0 72.5 84.1 0.5 5.1 11.1 n.a. 16.2 95,214.7 27.5 42.7 1.0 12.8 10.7 n.a. 100.0 346,021.7 100.0 Htmdbool, of Jm.,.,,ammal Trad. tmd INwlopmmt Statistics, Supph,me,,t 1985 (United data taken from the UNCTAD Data Base on Trade Measures. GSP on special preference tariff rat.e actually applied. CARICOM, CEUCA, Egypt, India, Indonesia, Cot.e d'Ivoire, Kenya, Rep. of Korea, Malaysia, Saudi Arabia, Singapore, Sri Lanka, Tanzania, Thailand, Tunisia, and Yugoslavia. tariff and non-tariff measure data for paper pulp and paper manufactures. and lead. 113 Table lS.2 or the escalation lo poet-Tok)'O Round applied tuil& In selected developed countries New United EEC Finland japan NonJJay Zealand Swedo, Swil%erland States 6 .6 0.0 10.1 8.3 4.3 0.0 4.2 1.6 17.9 12.6 22.5 8.1 7 .0 0.0 5.2 2.3 6.3 0.8 5.3 0.0 2.6 0.0 0.4 0.5 1.2 10.7 1.6 1.2 0.1 1.4 1.1 6.7 14.0 9.0 3.4 0.1 5.1 4.9 7.6 15~1 14.6 17.5 6.6 5.7 6.2 11.4 11.0 7.7 10.7 21.5 1.0 0 .0 0.6 7.4 1.1 8 .5 21.8 3.1 11.1 0.7 13.7 20.3 3.8 3.5 0.0 0 .1 0.0 0.0 8.5 0 .0 0.0 17.4 0.2 31.1 0.0 6 .0 0 .0 0.0 0.7 0.3 0.0 0.0 0.0 0.1 1.0 6.1 9.3 6.2 4.5 0.0 1.0 8.2 0.7 0 .0 3.3 3.6 0.0 0 .0 42.3 0.6 0.0 16.9 82.5 2.7 0 .7 1.1 34.1 9-9 1.9 0.0 0.0 0.0 0 .0 0 .0 0.0 0.0 9.0 0.0 2.9 0.0 7.6 0.3 0 .3 0.1 0.1 0.1 24.3 0.1 27.1 0.2 14.3 0 .1 0.0 0.0 0.0 0.0 9.6 0.0 0.0 8.8 2.1 82.1 5.1 31.6 1.9 17.6 9.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.2 0.2 5.5 0.5 12.0 0.8 0.1 6.4 3.0 2.3 3.8 0 .7 13.4 1.3 0.2 3.9 0.0 0.0 0.0 0.0 0.0 0 .8 2.4 2.8 8.5 0.2 17.3 0.2 0.1 3.7 5.5 4.1 12.4 3.1 28.3 2.9 1.0 9.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 1.1 0.0 0.0 0.0 0.1 0.1 4.2 0.1 1.2 0.2 11.2 0.6 0.4 4.7 0.0 0.0 0.0 0.0 10.5 0.0 0.8 0.0 2.3 0 .2 5.7 0 .0 5.3 0 .2 0 .3 0.3 6.0 0.6 3.6 0 .1 25.3 0.3 0.3 3.8 0.0 0.0 0.0 0.0 0.0 0.0 0.1 5.2 Tbe escalation of trade barriers Table lS.2 (condnued) New United Austria EEC Finkuul Japan Norway Zeakuul Sweden Srmb:tJriaHd Stales 0.0 2.4 0.0 0.0 0.0 0.0 0.0 0.0 11.1 0.0 1.4 0.0 3-9 0.1 19.7 0.0 0.0 12.9 0.1 2.7 0.0 11.0 0.2 33.4 0.2 0 .0 37.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.5 0.2 0.2 0.3 0.0 0.0 0 .0 0.2 0.0 5.0 2.6 2.3 0.8 3.8 2.3 1.3 2.6 1.2 8.7 3.2 5.6 1.4 5.9 4.0 1.3 3.6 0 .7 10.4 0 .0 0.0 0.. 0 0.0 0.0 0 .0 0.0 0.0 0 .0 0.7 5.5 0.0 0 .0 0.0 1.4 1.3 2.9 4.8 0.1 5.4 0.0 0 .0 1.2 0.4 0.0 4.7 1.7 5.5 0.3 1.4 1.0 0 .5 1.0 0.2 0.0 0.0 0.0 0.0 0.0 0 .0 0 .5 0.1 1.0 4.3 2.1 3.4 0.9 17.4 0.8 0.2 0.3 0 .0 0 .0 0.0 0.0 0.0 0 .0 0.0 0 .0 0.1 0.1 2.3 0.1 3.7 0.0 0.0 0.0 0 .1 1.6 0.6 2.2 0.1 2.3 0.2 6.5 0.5 0 .1 5 .3 0.0 0.0 0.0 1.5 0.0 0.0 0.0 0.0 0.8 0.1 1.8 0.1 5.9 0.0 2.2 0.2 0.1 1.8 0.3 0.8 0.0 6.6 0.0 0 .2 0.0 0.2 0.6 0.2 2.1 0.0 9.0 0.3 7.0 0.4 0.1 3.2 0.2 0.6 0.0 3.0 0.0 0.3 0 .0 0.1 3.5 0.0 5.8 0.0 6.8 0.0 6.4 0.0 0.0 1.6 0.1 0.9 0.0 3.0 0 .0 0.0 0.0 0.0 1.7 0.6 4.1 0.0 6.6 0.0 0.8 0.0 0.0 2.3 0.0 0.0 0.0 0.0 0.0 0.0. 0.0 0.1 0.0 0.1 1.8 0.0 2.0 0.0 0.7 0.0 0.0 4.4 0.0 0.0 0.0 0.0 0 .0 0.1 0.0 0.0 5.2 0.0 0.0 0.2 0.1 1.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 1.4 0 .0 0.0 1.4 0.0 0.0 0.0 0.0 0.3 0.0 2.2 0.0 0.0 0 .0 0.0 1.1 96 68 96 68 88 76 68 96 1.9 12.5 1.0 9 -7 0.7 1.8 4.7 the GATI tariff study. 115 Table 15.3 blrlft's on mafor pNKl~ ■-ed co-odldes In cleftloplns counlrles Pff'Ctllltage o[ c ~ s witb a tariff u'""1r b 5% 10'1(, 25% 50'1(, 100'1(, 150'1(, 8.7 8.7 26.1 47.8 73.9 87.0 8.7 13.0 26.1 39.1 73.9 87.0 8.7 8.7 21.7 34.8 73.9 91.3 8.7 13.0 21.7 60.9 95-7 100.0 13.0 17.4 21.7 39.1 78.2 87.0 4.3 4.3 21.7 34.8 60.9 82.6 21.7 26.1 30.4 69.6 82.6 91.3 4.3 4.3 17.4 35.8 69.6 78.2 30.4 30.4 52.2 82.6 100.0 30.4 30.4 47.8 82.6 95-7 100.0 26.1 26.1 52.2 2.6 100.0 30.4 65.2 91.3 100.0 26.1 56.5 87.0 87.0 100.0 17.4 30.4 78.2 87.0 100.0 43.4 52.2 87.0 95.7 95.7 100.0 17.4 26.1 65.4 87.0 100.0 39.1 56.5 87.0 100.0 8.7 13.0 65.2 87.0 100.0 34.8 47.8 78.2 91.3 100.0 17.4 17.4 60.9 87.0 100.0 30.4 47.8 82.6 91.3 100.0 17.4 21.8 69.6 87.0 100.0 30.4 39.1 82.6 91.3 100.0 17.4 26.1 73.9 87.0 100.0 8.7 17.4 43.5 78.2 95-7 100.0 4.3 8.7 17.4 43.5 73-9 95-7 8.7 17.4 47.8 78.2 100.0 8.7 8.7 8.7 56.5 82.6 95.7 8.7 13.0 52.2 82.6 95.7 95-7 8.7 8.7 16.0 65.2 91.3 100.0 8.7 8.7 52.2 87.0 95,7 100.0 8.7 8.7 26.1 73.9 91.3 91.3 8.7 8.7 17.4 69-6 91.3 95.7 8.7 13.0 39.1 78.3 95.7 100.0 4.3 8.7 21.7 60.9 91.3 100.0 60.9 73.9 91.3 95.7 100.0 21.7 52.1 82.6 87.0 95.7 95.7 In cases, the processing stage item may be defined in terms of one or more of the the three-digit SITC group. to the following twenty-three developing countries or country groups: Algeria, Indonesia, Ivory Coast, Kenya, Rep. of Korea, Malaysia, Mexico, Morocco, Nigeria, Sri Lanka, Tanzania, Tunisia and Yugoslavia. tariffs on almost all processed commodities listed in the table, Singapore and Saudi Arabia lower end of the range in import duties for each processed commodity. of developing countries that registered an increase in nominal tariffs from the prerious the processed commodity. Developing countries have used these offshore processing provisions P.-catopof effectively: Finger (1975) estimates that their cOMntrlff trade-creation effect has been at least equal to -:::;;-, that of the Generalized System of Preferences (GSP). Most-favored-nation or even preferential tariff cuts may reduce the competitive edge for 73.9 countries using these provisions to the extent that 73.9 the processing operations could be shifted to 69.6 alternative locations. 60.9 ,(3.4 91.3 Tariff escalation in developing countries 63,6 82.6 40,9 Although the post-Tokyo Round tariffs in devel- 52.2 oped countries normally escalate up to the proc- 47.8 essing chain, important policy questions also re- late to the structure of developing countries' tar- 52.2 iffs. Specifically, recent initiatives by third world 56.5 governments have stressed the need for develop- 73.9 ing countries to expand trade among themselves 47.8 and particularly to remove barriers to trade in 69.6 30.4 processed commodities. If developing country 87.0 tariffs generally escalate, they could be an impor- 39-1 tant barrier to commodity processing and to 82.6 south-south trade in these items. 47.8 69.6 For practical policy purposes in trade negotia- 43-4 tions, it is important to distinguish between two 78.3 points often confused: tariff escalation, which refers to the increase in nominal tariffs with fabri- 69.6 cation, and the influence of tariffs on the struc- 87.0 ture of trade. To account properly for the latter, 87.0 consideration must be given to the changing 82.6 conditions of demand at different levels of proc- essing. Since empirical studies show that import 87.0 demand elasticities normally increase with fabri- 78,3 cation, constant nominal tariffs will have relatively 82.6 82.6 larger trade restrictive effects on fabricated as 52.2 opposed to primary commodities. 87.0 This point can be clarified through the use of 82.6 an example. .As indicated overleaf the leather processing chain is composed of three distinct 30.4 stages (hides and skins, leather, and leather 69.6 manufactures), while estimates of import demand elasticities range from 0.6 for hides to over 2.0 for leather manufactures in developed countries. For illustration it is assumed that the important coun- try applies a constant nominal tariff of 10 percent and imports $20 million in each processing stage. .As shown, there is no tariff escalation, yet the constant nominal tariff has more of a retardation effect on leather manufactures due to the more "sensitive" demand for these products (see the right hand column). Specifically, reducing the tariff for hides to S percent would increase im- 117 developing countries often choose not to escalate tariffs in this situation. Second, where the domes- tic raw material base existed and tariffs failed to escalate, nontariff barriers were applied to more than half the products. These results suggest that nontariff protection may be substituted for tariffs in some processed commodities. 4 But it cannot be established that total protection from tariffs and NTBs escalates since ad valorem equivalents for the latter are not available. Also to be noted are the large differences in tariffs for some commodities. For example, import duties for processed meat range from 15 percent in Yugoslavia to 225 percent in Morocco, and even wider differences are recorded for proc- essed fish, fruit, coffee extracts, and chocolate. Although the tariff range is smaller, differences of 100 percentage points for processed metal prod- ucts also occur. Such disparities for common items could greatly complicate negotiating a tariff liberalization in multilateral forums if they accu- rately reflect underlying production cost differ- ences. Put differently, if the differences in effi- ciency are as great as the tariff differences re- flected in table 15.3, a meaningful trade liberaliza- tion would certainly make some developing coun- tries' processing industries uncompetitive in their own domestic markets. Effective protection for processed statistical as- commodities 40 per- The concept of effective protection provides use- ful insights on the effects of the structure of tariffs over processing chains. It measures the influence of protection on value added in a production process. The higher the effective rate of protec- tion afforded by tariffs and other trade restraints, interrelation between import demand elasticities the structure of tariffs and trade Projected import Value of change given a imports Import demand 50-percent tariff cut (S million) elasticity (S thousand) 20 -0.62 558 20 -2.28 1,152 20 -2.11 1,899 use of a partial equilibrium trade model in which the estimated change in imports is involving the initial level of imports, the import demand elasticity, and the change in the reduction. This procedure, or some variation of it, has been used extensively for barriers. See Stem (1978) for a discussion. Tbe escalallon of trade barriers Table lS.4 effective rate of pN>tectlon for selected processed commodJtles New Switzer- United All devel- EEC Finland Japan Norway Zealand Sweden land States oped 51.7 50.4 59.6 7.6 15.2 0.0 8.3 4.4 15.0 26.5 2.1 23.2 5.3 -2.1 0.3 3.7 2.5 3.7 40.8 2.7 21.6 8.8 41.0 1.0 30.7 72.5 43.4 37.9 16.2 40.2 15.2 21.0 5.2 29.0 20.2 30.6 45.5 • 76.6 0.4 136.8 0.0 -2.4 0.0 42.6 • 4.8 82.6 0.5 78.6 -0.1 51.5 0.1 -3.3 9.2 0.2 1.3 0.4 24 .6 1.3 0.8 10.3 7.4 5.5 0.5 13.7 0.0 :!.2 0.5 -0.4 0.7 4.3 12.6 1.1 0.7 0.2 53.1 0.4 0.3 8.7 7.6 4.5 6.0 1.1 1.0 16.1 2.2 0.4 -0.4 5.0 7.6 2.1 13.7 8.3 4.7 6.8 4.3 18.3 9.0 1.1 0.0 14.0 0.4 70.9 0.0 0.0 18.1 7.8 7.2 2.5 19.8 0.0 0.0 0.0 5.0 4.7 8.7 11.8 2.5 10.0 7.2 1.3 5.4 -0.4 13-5 11.0 5.1 0.0 25.3 0.4 60.1 0.6 0.0 85.8 34.0 10.0 -1.0 5.3 0.0 0.0 3.5 -1.6 • 0.3 6.0 7.0 21.2 0.5 43.2 0.5 0.2 8.1 7.0 9-9 6.1 18.6 7.4 45.3 7.0 2.4 17.5 13.7 50.6 71.6 49.6 37.4 0.0 8.3 67.2 -1.5 36.1 117.4 4.0 156.0 9.7 50.6 3.6 33-4 9.4 47.0 calculated from the procedure described in the appendix. since the ratio of the input to final product tariff could not be computed . proposals. First, the distinction is important be- tween the escalation of trade barriers and the bias that tariffs and other restraints pose for processed commodity trade. Due to changing conditions of demand over specific processing chains, a trade bias against processed commodities may occur without escalation •· and that the bias may even exist when tariffs decline (Yeats 1984). The nego- tiators in the Uruguay Round must therefore adopt a more complex framework for analyzing the effects of proposed changes in trade barriers than has previously been used if they are to en- sure that the MTNs have their intended maximum possible effect in reducing trade barriers. Merely calculating nominal or effective tariffs at different stages of fabrication, as has been done in earlier analyses of escalation, may convey misleading information on the relative importance of existing trade barriers. The optimal approach would be to use trade projection models that approximate tl:e actual effects and importance of tariffs before and after the Uruguay Round. Attention must also be given to the final struc- ture of Uruguay Round tariff cuts, because these duties will determine effective rates of protection. If, for example, percentage-point tariff reductions are lower for processed commodities than for primary inputs, this would raise the effective rate of protection for processed commodities. Such a 119 ing Country Tariff Escalation," Tl1. Developing Economies Factors cited as (forthcoming). shipping costs were the Roemer, Michael. 19n. "Resource Based Industrialization in what the traffic: ~ n g Countries: A Survey of the Literature." Dis- and more difficult handling cussion Paper 21. Cambridge: Harvard. Institute for Inter• national ~lopment. (food) com• Stern, Robert. 1976. "Bvaluating Alternative Formulae for (1977) for empirical Reducing Industrial Tariffs." Joumal of World Trad4, Law. l0Oanuary-February):50-64. there are important UNCTAD. 1968. Tl1. Kennedy Round Estimated Effects on tariff escalation in indi• Tariff Barrlffs (TD/6/kv. 1). New York: United Nations. Tunisia, Republic of 1979. Tl1. Processing &fore Export of Primary -ZommodlUfl: Atvas for Further /ntet"Pl4lkmal Coopera- tion. TD/229/Supp2. Manila. . 1980. Tl1. lnjlt#JfU of Protectionism on Trade in --i;;:;mary and Processed Commodities. TD/B/C.1/207/ see laird and Yeats Add.2 Geneva. United States International Trade Commission. 1975. Protec- tion ;,. Major Trading Countries. Washington, D.C. World Bank. 1982 and 1987. World Development Report. New York: Oxford University Press. Yeacs, Alexander. 19n. "Do International Transport Costs Increase with Fabrication? Some Empirical Evidence." Tariff Protection: A Oxford Economic Papers 29,3 (Novcmber):458-71. Theory, Policy Implica• . 1979. Trad4, Barriers Fadng Developing Countries: Herbert G. Grubel and Harry ~1Mf"Clol Policy Measures and Shipping. London: Macmillan. . 1981. "The Influence of Trade and Commercial Bar· of Tariff Structure with ~ on the Industrial Processing of Natural Resources." World D«Jelop,nenl 9,5:485-94. . 1984. "On the Analysis of Tariff Escalation: Is There .- Methodological Bias Against the Interest of Developing "Empirical Evi• Countries?" Joumal of Development Economics 15(Spring):n-88. • Probibitions. Prohibitions may be total, may admit exceptions at the discretion of the competent authority, or may operate only un- der certain conditions. • Discretionary import autborlzattons. Granted at the discretion of competent au- thorities, such authorizations to import are also used for the administration of quantita- tive limits. • Contlttional import autborlzattons. Authori- zations to import are subject to the importers undertaking commitments in areas other than importation •· for example, to purchase an equivalent quantity of domestic products. Or they are subject to specified conditions, such as export performance, or the unavailability of supply from domestic sources. Voluntary export restraints (VERs) are agree- ments between an exporter and an importer on the maximum amount of exports in a given pe- riod. Such agreements arc often concluded for trade negotiations under a threat of more stringent unilateral restric- tions. VERs include bilateral agreements on tex- tile trade reached in the framework of the Multi- fiber Arrangement (MFA). Price controls are measures to enforce decreed prices. They include: • Variable levies. Import charges are set peri- odically to equalize the c.i.f. import price with a decreed price. • Mtnimum prices. A minimum import price is set by the importing country, and import prices below the decreed minimum trigger an additional duty or some other penalty. • Voluntary export price restraints. Under these restraints, the exporter undertakes to observe the minimum import price set by the importer. 121 nomic interests of particular groups. A wide array of detailed economic or social concerns •· ranging from employment in ailing industries to protec- tion of underprivileged social groups -- is fre- quently given precedence over the national eco- nomic interest. Nontariff measures appear to be a preferred tool for protecting these interests. NTBs are not new in world trade. Quotas, prohibitions, and price controls have been used for centuries. Even such an apparently new device as the voluntary export restraint was used by Japan before World War II. Nor is their extent particularly dramatic when seen in historical per- spective. In 1937, for example, 58 percent of the imports in France, 52 percent in Switzerland, 26 percent in the Netherlands, and 24 percent in Belgium were subject to quotas and licensing requirements (League of Nations 1940, p. 189). "A higher degree of direct controls and discrimi- nation than that associated with the partial trade recovery in 1948 can scarcely be conceived" (Zinman 1953, p. 34). The present preference for NTBs over tariffs appears to be due to two reasons. First, since World War II tariffs have been the centerpiece of an international process to liberalize trade. Cur- rent tariff rates in industrial countries are low because of the remarkable progress in the last forty years in liberalizing tariffs through multilat- eral trade negotiations. The average tariff of industrial countries was reduced from about 40 percent in the mid-1930s to 4 to 8 percent after the Tokyo Round. Such a level is much too low to satisfy the needs of interest groups requesting protection from imports. Second, tariff decisions are subject to strict domestic and international control and high po- litical visibility. Due to their fiscal implications, matters related to tariffs often require parliamen- tary debate and approval. And since most tariff rates are bound under GATI rules, changing them necessitates new negotiations with foreign suppli- ers. So, tariff rates are difficult to manipulate quickly and discreetly. How prevalent arc NTBs? The many recent studies on the extent and nature of NTBs relate to the extent of NTBs, not to their restrictiveness (UNCTAD 1984, 1985, and 1986; Nogues and others 1986; Finger and Olechowski 1986; and Laird and Finger 1986). The studies measure the proportion of trade where govern- mental considerations, as opposed to normal Nontarlff barriers to trade predominantly concerned with the quantity of imports, it seems that quantitative interventions do outweigh price interventions in use of NTBs. There are also some marked country differ- ences. Japan resorts exclusively to traditional NTBs •· to quotas, prohibitions, licensing, and so on. But the United States is the largest user of VERs and antidumping and countervailing meas- ures. And the European nations (particularly Switzerland and the EEC) are the main users of administrative controls. Another interesting dif- ference is that Japan and the United States almost exclusively use duties and volume restrictions, while the EEC relies much on various price con- trols. For example, minimum (or reference) prices and variable duties cover some 29 percent of the agricultural imports to the EEC, and the price controls and price undertakings cover 37 percent of the iron and steel imports. Disproportionately imposed against developing countries, NTBs are also disproportionately im- posed by developing countries. These countries "suffer on both accounts -- probably more on the latter than on the former" (Finger and Olechow- ski 1986, p. 1). In looking at import categories subject to NTBs applied by developing countries, the pattern is similar to that of tariffs employed by developed countries (tables 16.2 and 16.3). NTBs are high on food products, relatively low on materials and fuels, moderately high on manufacturing. Another way of looking at the extent of NTBs is to group developing countries' import regimes in four categories: (1) those where all or most import transactions require an authorization and (2) those where such control pertains to many products, (3) to only some products, and (4) to none at all. lbis categorization better approxi- mates the extent of NTBs because many of the measures are across-the-board (and thus not in- cluded in product categories). In about half the developing countries, all or almost all import transactions require prior au- thorization. In a quarter of them, this require- ment is applied to only a limited number of prod- ucts, and in only 5 percent is it not required at all. As for tariffs, government control appears to be related to the level of income and development. This relationship reflects the changing role that governments play in the economy, as well as use of trade policy instruments to manage balance-of- payments difficulties. In many of these countries, imports are allowed only if they complement rather than compete with local production. 123 Table 16.1 markets' NTBs on imports &om developed &om developing countries, 1984 Percentage covered bf NrBs Value o[ Imports from Number o[ categories from Developed Developing Developed Developing countries countries countries countries 17 19 11 21 44 33 42 35 18 10 13 11 14 21 7 18 25 62 20 58 50 46 21 21 2 4 14 14 10 7 5 8 30 3 6 10 the EEC (10), Finland, Japan, Norway, Switzerland, and the United States. (World Development Report, 1984), except that Greece was transferred from devel• Agricultural: 0101-2402; Fuels and Ores: 2600-2799; Industrial: 2500-2599 and 2800- Iron and Steel: 7300-7399; Footwear: 6401-6406; Electrical Machines: 8501-8528; Table 16.2 developing countries, by product category Percentage of four-digit CCCN categories affected In 1982 by: All NTBs QRs and prohibitions 40 9 53 16 34 8 33 4 38 5 37 9 34 4 36 5 43 14 Barbados, Trinidad and Tobago, Costa Rica, Ecuador, Mexico, Nicaragua, Bangladesh, Sri Lanka, Thailand, Egypt, Ubya, Morocco, Tunisia, Romania, Yugoslavia, Brazil, Ghana, Nigeria, Sudan, United Republic of Tanzania, Zaire, Zimbabwe, Bahrain, Iraq, United Arab Emirates. Agricultural Materials: 2-22-27-28; Ores and Metals: 27+28+67+68; Fuels: 3; 5; Machinery and Transport Equipment: 7; Other: 6+8-67-68. exchange allocations, other financial requirements, price controls and technical require- Nontariff barriers to trade Table 16.3 developing countries, by country category Percentage of countries where government's controls of imports in 1984 covered: All or most Large number Some products of products products None 63 26 11 46 26 24 4 37 21 37 5 20 40 40 48 24 23 5 countries included in the Exchange Arrangements and Exchange Rescriccions, IMF, World Development Report, 1984. Eliminated measures subtracted only 0.6 percent- age points, so there was a net increase in the share of imports covered by NTBs. A more detailed balance sheet of the change in NTB protection (in 1981 dollars) in major devel- oped countries was as follows : US$136 billion carried forward from 1981 to 1984, PLUS S14 billion due the net expansion of the NTB coverage, MINUS Sl2 billion due to the contraction of imports subject to NTBs, EQUALS growth of imports subject to NTBs proportionally less than other imports. If NTBs had kept up, the NTB index would have increased by 1.8 percentage points. Because they did not, it rose only 0.3 points. There are no comparable results for NTB pro- tection in developing countries. It is enough, however, to open any business newspaper and note almost daily that some developing country has introduced nontariff controls on imports, often massive ones. Rare are eliminations of such controls, even though developing countries are the only ones that still "practice" unilateral liber- alization of imports, often in the framework of programs of structural adjustment supported by the World Bank or the IMF. growth of Eliminating NTBs Reducing or eliminating NTBs, among the most important objectives of the Uruguay Round, could be achieved by three means: (1) standstills on all new trade restrictions, (2) rollbacks of all restric- tions inconsistent with the provisions of the 125 As for tariff-cutting formulas, there is an enormous number of possible solutions •· all with advantages and disadvantages and none ensuring full reciprocity. Each would require one party to make larger concessions than the other •· for example, converting country-specific quotas to tariffs would transfer quota rents from exporters to the importing country government. It is pointless for economists to formulate pro- posals for ideal solutions since trade negotiators rarely operate on the basis of ideal economic criteria. Economists would submit, however, that any formulas that would significantly reduce NTBs would move the world toward freer interna- tional trade. The gains from such a change would be large enough to benefit every part of the world economy. There should thus be less concern about how equal those benefits would be. If they are References Dickey, W.L. 1979. "The Pricing of Imports into the United States." Journal of World Trade Law 13 (May-June):238- 56. Finger, J. Michael. 1981. "The Industry-Country Incidence of 'Less than Fair Value' Cases in U.S. Import Trade." Quar- terly Review of Economics and Business 21,2 (Sum- mer), 26-79 _ , H.K. Hall, and D.R. Nelson. 1982. "The Political ~nomy of Administered Protection." American Eco- partici- nomic Review 72,2:452-66. , and Andrzej Olechowski. 1986. "Trade Barriers: Who Does What to Whom." Paper presented at the con- ference on Free Trade in the World Economy - Toward an Opening of Markets, Kiel, Germany, June 23-26. Johnson, Harry G. 1974. "Mercantilism: Past, Present, Future." In HarryG.Johnson, ed., TbeNewMen;antilism. New York: St. Martin Press. Laird, Sam, and J. Michael Finger. 1986. "Protection in Developed and Developing Countries." Paper presented at the Conference on the Role and Interests of the Devel- oping Countries in the Multilateral Trade Negotiations. Bangkok, Thailand, October 30-November 1. League of Nations. 1940. World Economic Survey, 1938/39. Geneva. Nogues, Julio, Andrzej Olechowski, and L. Alan Winters. 1986. "The Extent of Non-Tariff Barriers to Imports of In- dustrial Countries." The World Banlt Economic Review. 1,1:181-99. United Nations Conference on Trade and Development. 1984. Antidumping and Counteroailing Duty Practices. TD/B/979. Geneva. UNCTAD. 1985. Problems of Protectionism and Stn4ctural Adjustment. Patt I, Restrictions to Trade and Structural Adjustment. TD/B/1039. Geneva. _ _. 1986. Problems of Protectionism and Structural Adjustment. Patt I, Restrictions to Trade and Stn4ctural Adjustment. TD/B/1081. Geneva. Zinman, Bernard. 1953. "Import Quotas in Western Europe: A Study of the Trade Liberalization Program, 1949-51." Chicago: University of Chicago, European Regional Staff, Foreign Operations Administration. direct subsidies to increase (or decrease) output, investment, or employment. Less direct instru• ments include tax rebates and exemptions, inter- est rate subsidies (soft loans), and subsidies to support some predetermined consumption prices. In addition, there are such nonmonetary measures as public procurement, public firms, technical standards, and all kinds of public regu- lations. These measures may give some advan- tages to domestic producers by granting them an easier access to the domestic markets. All the NBMs just listed are to assist specific industries, at some cost •· generally ignored or hidden •• to some other industries. Other NBMs such as macroeconomic policies, may not have such intentions but may nevertheless have similar effects. For example, a macroeconomic policy of credit restrictions that push interest rates up are likely to affect various domestic industries differ- ently depending on their business cycles, techni- cal progress, and other factors determining their demand for capital. Recent illustrations of such unintentional but powerful effects are inflation in the U.S. tax system or credit regulations in France during the 1970s. In both cases, households invested too much in housing and too little in industry. coop- Domestic costs and benefits of NBMs between The variety of NBMs does not prevent a simple analysis, for any NBM can be reduced to two components. First, by granting some aid to some domestic producers, an NBM is equivalent to a subsidy. Second, by favoring some producers, the same NBM necessarily imposes costs on some other domestic producers or on some domestic consumers and taxpayers. 127 For instance, if labor is subsidized in an industry, the decreasing wage-profit ratio will induce entre- preneurs to use more labor-intensive techniques. But if another NBM simultaneously introduces a subsidy for capital, the wage-profit ratio will be modified less. 2 The possibly small net effects of NBMs for as- sisted industries does not mean there are small costs for the economy creating and implementing the NBMs. Any increase in the number or impor• tance of NBMs is likely to reduce the net effects of NBMs on favored industries. It also increases the global cost of implementing them for the whole economy. With the assisted industries aided less and less while the economy suffers more and more, the motives for negotiations on NBMs become increasingly powerful. And Why negotiate on NBMs? The contracting parties of the Uruguay Round are willing to negotiate on NBMs for two main rea- sons. The first originates in the potential effects of the subsidy component of NBMs on trade flows. This subsidy component normally tends to in- crease output (or reduces it less than without NBMs) for the domestic beneficiaries. This can increase (decrease less) the exports of these firms and reduce (increase less) the imports from for- eign firms. As a result, foreign governments may be willing to offset these potential trade effects of NBMs by imposing some countervailing actions. This external control motive for negotiating NBMs gave ground to the antidumping and subsidies codes during the Tokyo Round. The second basic reason for negotiating NBMs originates in their cost to the domestic economy. Governments increasingly have recourse to inter- national disciplines because of their progressive inability to resist pressures from domestic interest groups. When benefiting from NBMs, such groups are induced to expand them beyond the point at which the benefits of these measures to the national economic interest exceed their costs. To be able to invoke GAIT-negotiated obligations on NBMs may offer precisely the countervailing power and relief that governments are looking for when under pressure from excessively powerful domestic lobbies. This is the internal motive for negotiating on NBMs. Commitments to the trans- parency of tendering procedures and opportuni• ties for foreigners to comment on proposed stan• dards illustrate this internal motive. Nonborder ,ner.uvres lo assist industry given its concern for state sovereignty, is reluctant to introduce binding rules on NBMs that could be seen as the expressing the collective choices of each country. This concern is perceptible in the subsidies code, which notes that subsidies "other than export subsidies are widely used as impor- tant instruments for the promotion of social and economic policy objectives." For these reasons, GATI focused on tariffs and quantitative restric- tions and said little about subsidies and NBMs. The first revision of Article XVI, in 1960, intro- duced the obligation of notification, but with two restrictions: the subsidy should have some im- pact on trade, and the notification could contain the circumstances "making the subsidization nec- essary." The obligation of discussing the "possi- bility of limiting the subsidization" was condi- tional on the request of trade partners. The upsurge of NBMs in the 1970s Morever, During the 1960s, many NBMs were progressively put in place in developed countries, ready to be implemented widely during the 1970s and the 1980s. Many of these procedures were created to cope with capital markets that were too small and inefficient. Indeed, the combination of massive and continuous macroeconomic manipulations during the 1960s and credit regulations, enforced since the 1950s, prevented the renewal of capital markets in many developed countries, especially in Western Europe. Public authorities became accustomed to channeling funds for specific pur- poses through financial repression. Soft loans of all kinds were created. 4 Because these proce- dures were already part of a familiar environment, nobody questioned their usefulness when they became used on a greater scale. Their cost re- mained widely ignored. These procedures were generally sectoral. Developed countries began to target some indus- tries, mainly by using two criteria: improving the trade balance of the assisted industry, or increas- ing value added of the industry's output. Eco- nomic analysis shows that neither criterion makes sense. Imposing trade balances by industry im- plies that the exports of the relatively inefficient domestic industries are increased at the expense of the exports of industries enjoying comparative advantage. The value-added criterion favors high value-added industries by making investment in these industries artificially attractive. If high value-added industries are as capital-intensive as they presumably are, the economy will suffer 129 during the Uruguay Round? During the Tokyo Round, they were generally unconcerned with such negotiations. The subsidies code granted them provisions consistent with the different and more favorable treatment - excusing them even from the flat prohibition on export subsidies on nonprimary products. (Only twelve developing countries were signatories of the subsidies code in 1986, and none was involved in the three dis- pute settlements between 1980 and 1986. Twelve developing countreis were signatories of the Stan• dards code, and three of the government pro- curement code.) The burden of NBMs on the public budgets of developing countries suggests that the internal motive for negotiating might give them stronger incentives during the Uruguay Round than during the 1970s (table 17.2). 6 The nonweighted aver- age of the subsidy ratios rose during the early 1980s, but the evolution is less clear than for developed countries. In addition, the developing countries subsidy ratios show some ability to fall substantially, even after significant increases. Would these features suggest that developing countries might not negotiate on NBMs? No, because two additional arguments should be considered for a proper assessment of the devel- oping countries' position. One is the political economy of subsidization. The other is the threat of trade wars. y NBMs and tbe political economy of subsidization all devel- NBMs have magnified effects on factor markets: by modifying relative prices, they modify relative factor incomes. For instance, if an NBM increases the relative price of a good that is labor-intensive, economic theory shows that it increases the wage relative to the rate of return earned by capital. Factor markets are crucial for political decision- makers who daily face workers and capitalists rather than consumers or taxpayers. So, seen from viewpoint of political decisionmakers, the factors of production are assisted •· industries are not. The granting of NBMs thus tends to be the result of conflicts between private interests •· with interests that can expect higher incomes from NBMs pitted against the others. The higher the rents and the higher the expectations to get them, the more powerful and active are the pressure groups •· and the more likely that governments will succumb to them. The experience of thirty Nonborder ffletlnlla to IUrisl Industry oped countries can be crucial only for producers of cheap, standardized microcomputers. Export- promoting developing countries thus have the choice of joining multilateral negotiations on general rules of conduct for NBMs or undertaking bilateral ad hoc negotiations on some unfair NBMs that some developed countries impose. Clearly the bargaining power that the Uruguay Round offers to export-promoting developing countries under the first choice is greater that under the second. Second, export-promoting developing coun- tries do not trade much among themselves. They compete with each other in third markets, mainly developed country markets. This growing (indi- rect) rivalry should make them more concerned about the NBMs that each of them implements. To avoid mutually harming strategies, export-pro- moting developing countries -- now seen as indi- vidual countries -- are becoming more interested in solving the problem of the trade impact of NBMs in third markets, a problem not solved during the Tokyo Round. Indeed, the discipline created by the Tokyo Round enables each govern- ment to reduce -- through trade flows -- the effect of a foreign NBM in its own market by imposing a countervailing duty. But it does not enable the same government to offset the trade effects of the same foreign NBM in third markets of some im- portance for its domestic firms. Because of this failure, developed countries undertook unilateral actions under national laws, such as Sections 301 and 337 of the U.S. Trade Act of 1974 and the EEC's New Trade Instrument. But these unilat- eral actions either are costly in retaliations or are relatively inefficient. As a result, the problem is likely to be on the agenda of the Uruguay Round. And the export-promoting developing countries clearly have great interest in this part of the nego- tiations. tend Conclusion on NBMs. It has sometimes been fashionable to be pessimis- tic about international negotiations, and that may be so for the Uruguay Round. But international negotiations are based on needs, not moods. And a demand exists for negotiations on NBMs: it arises from financial problems in the developed countries and from financial and structural prob- lems in the developing countries. The instru- ments that both groups of countries are looking for have the same two aspects. They should protect countries from foreign NBMs without 131 Industry Table 17,1 to F.aterprl8es In the OECD Countrle. 196S-198S) 1968 1969 1970 1971 1972 1973 1974 1975 1.4 0.9 0.8 1.2 1.3 1.8 2.6 2.S 4.7 4.8 4.9 4.7 4.2 4.4 S.2 6.8 1.6 1.3 1.7 1.6 1.3 1.4 2.S 2.3 0.9 0.7 0.9 1.1 1.0 0.9 0.9 1.1 0.7 1.0 1.1 0.9 0.7 0.6 o.s o.s 0.8 0.6 0.7 1.2 2.S 2.3 2.6 2.6 0.8 0.9 0.9 1.0 1.1 1.1 1.2 1.2 2.0 1.9 1.7 1.8 1.6 1.7 2.1 2.9 2.9 2.9 2.9 2.9 3.1 3.S 3.1 3-4 0.9 0.9 0.9 0.9 0.9 1.0 1.9 2.S 2.8 2.7 2.7 2.8 2.9 3.1 3.5 2.8 2.8 3.0 2.8 2.7 2.7 2.3 3.1 3.8 2.6 2.4 2.0 2.0 2.0 2.2 2.1 2.4 2.4 1.9 1.7 1.7 1.9 2.0 1.9 2.0 S.1 3.3 3.0 4.3 3.7 3.6 4.3 4.6 1.7 1.7 1.S 1.9 2.3 2.0 1.9 2.7 1.1 1.1 1.1 1.1 1.2 1.0 1.6 1.S 2.4 1.S 1.3 1.3 1.S 1.6 1.9 2.9 1.3 1.S 1.7 1.3 1.S 1.8 1.8 1.8 0.4 o.s 1.0 1.6 1.6 1.8 2.4 3.4 4.5 S.1 S.2 S.3 5.3 5.3 S.8 6.2 2.1 1.9 1.7 1.8 1.9 1.9 2.4 3,1 1.2 1.0 0.8 0.9 1.0 0.9 1.2 1.2 2.0 1.8 1.7 1.6 1.8 2.0 3.6 3.S 0.5 o.s o.s o.s 0.6 0.4 0.3 0.3 2.0 1.8 1.8 1.9 2.0 2.0 2.4 2.7 impossible. and Development, National Accounts (Volume 1), 1986. Nonborrler Ml!IL.Ues IO tllUlst lndust,:y 1983 1984 1985 4.7 4.4 '5.7 7.0 7.7 8.3 7.0 7.6 4.3 2.6 3.0 2.6 3.0 2.S 0.0 2.S 2.6 1.7 1.7 1.S 3.1 3.0 2.7 4.2 4.2 4.0 2.'j 2.8 2.S 3.3 3-3 3.0 3.2 3.2 3.1 2.8 3.0 3.0 1.9 2.1 2.0 3.S 2.9 3.4 3.3 3.'j 3.4 1.4 1.3 1.3 S.4 4.S 4.2 2.9 3.2 3-3 1.9 1.S 0.8 6.1 5,7 5.4 5.2 5.0 4.9 1.4 u u 2.1 2.4 2.2 0.7 0.6 0.6 3.3 3-3 3.1 133 Table 17.2 economy as a percentage of GDP-GNP, 'l'lllious countries, 197o-8S 1973 1974 1975 1976 1977 1978 1979 1980 6.1 3-4 3.0 2.7 2.8 3.2 3.8 6.1 3.7 3.5 3.4 4.4 4.7 4.6 5.4 21.0 16.5 16.2 14.2 15.4 12.9 2.3 0.4 0.7 0.4 1.3 0.8 1.2 1.8 2.8 3.1 3.7 4.1 4.4 4.8 4.7 2.7 3.5 1.6 1.7 1.1 1.5 2.6 3.6 7.5 12.0 13.8 16.0 14.0 12.9 13.3 15.3 1.1 2.5 3.2 1.8 2.1 0.9 2.1 0.5 1.3 0.9 0.7 0.8 0.7 1.1 0.8 5.6 6.4 6.7 3.6 4.3 3.1 4.2 4.6 2.6 3-4 '3.8 3.5 3.8 3.7 3.4 4.1 3.0 3.0 1.9 1.0 1.0 2.6 2.2 2.3 2.2 3.1 3.4 2.5 2.1 1.8 3.6 0.3 0.8 0.8 2.0 0.2 0.4 0.2 0.2 1.2 0.4 1.0 0.9 0.5 0.6 0.3 0.8 4.1 4.5 6.2 5.1 5.4 6.6 8.0 2.9 (2.7) (3.4) 4.4 4.1 3.8 3.6 4.0 4.1 2.6 2.7 2.8 3.2 3.1 3.1 3.2 3.2 7.6 8.0 8.7 9.1 9.3 10.5 10.4 10.0 5.8 5.6 6.3 6.3 6.7 6.7 6.8 6.0 7.9 8.5 7.1 7.6 7.2 11.9 13.3 2.9 3.8 2.8 2.8 2.6 2.6 2.7 3.0 5.5 6.4 8.0 8.1 8.2 8.1 8.6 8.3 4.4 4.5 4.9 4.9 5.1 5.2 5.0 4.7 2.5 3.5 4.8 4.5 4.3 4.4 4.3 4.2 1.3 1.8 2.3 2.4 2.7 2.3 2.5 4.3 4.1 5.6 5.7 4.1 3.7 3.7 4.9 3.7 9,2 10.1 11.0 10.9 10.0 10.1 10.3 10.6 3.6 3.1 3.5 3.7 3,7 3.2 3.5 5.5 1.6 1.7 1.7 1.7 1.7 1.7 1.8 1.9 2.9 3.3 4.9 5.1 6.1 5.5 6.1 6.3 2.1 2.1 2.4 2.7 2.7 2.8 2.7 2.7 7.3 7.6 9,5 7.2 7.9 9.2 8.5 8.4 7.0 7.3 5.2 5.7 7.1 7.6 6.7 5.4 1.2 1.3 1.4 1.5 1.9 2.5 2.5 2.5 10.6 11.8 12.1 14.1 15.8 16.7 17.5 17.2 3,9 4.1 4.4 5.1 5.2 5.2 5.1 5.0 2.9 2.5 3.6 4.1 6.6 6.8 5.6 4.6 5.1 6.9 7.3 6.5 6.6 7.1 6.7 8.3 2.3 2.3 2.8 2.9 2.7 2.7 2.8 4.6 0.0 0.9 1.6 1.0 4.7 5.2 5.2 5.5 5.7 5.7 5.9 impossible. Transfers of Central Government excluding Social Security Funds (CSOCT-CSSF )} of State Government excluding Social Security Funds (+SSOCT-SSSF)} National Government of both Central & State Governments (CTONG+STONG)} Government (CTA)} are non-existent for some of the countries. Also note that some of the parameters are not case subsidies are calculated only if the non-available parameters form a small percentage ratios drop significantly when local government subsidies are not included. Finance Statistics and International Financial Statistics). Nonborder maura-es to 4Ulsl industry endangering the world trade system. And they should protect governments from strong pres- sures from special interest groups. Given today's economic situation, the second aspect •• with its 4.8 focus on domestic problems •· is perhaps the more important. Notes 1. Antisubsidy investigations compute only the subsidy 10.0 · component of NBMs - not the net effect, as they should. 1.8 Because of this feature, it can be argued that antisubsidy investigations tend systematically to overestimate trade im- 6.5 pacts. For detruls on the problems of computing subsidy 3.0 equivalents, see chapter 18. 2. Another case of offsetting occurs when industries feel 2.7 the effect of NBMs at different times. 3. The only NBM issue of some importance during this 1.2 period was fiscal : it concerned the impact of direct and indi- 4.6 rect taxes on trade. According to traditional theory, all taxes are passed on to consumers. But some argued that it was not always true and that countries relying on direct taxes were at a disadvantage. Although this point was an issue between the United States and the European Community (when the European Community introduced the VA1), it remained 7.9 largely a technical matter. For details, see Malmgren (1977, 5.5 pp. 18ff.). 4. Not astonishingly, a similar upsurge can be obseived for border measures, like export credits. It was during the 6.5 1960s that all the crucial innovations in export credits - such as the buyer and mixed credits - were introduced. France in- 3.1 troduced buyer credits in 1965; France and Japan introduced 1.8 mixed credits (the combination of export credits and aid) at 5.1 the end of the 1960s. The last innovation - credits in foreign 10.0 currencies - was introduced in Great Britain around 1977. 5. The figures here need to be used with great caution. 1.4 Comprehensive estimates of the costs of NBMs are c:xtremely 3.4 difficult - if not impossible - to get. They would require the 2.2 · knowledge of a host of often unknown prices: for example, 6.8 the market interest rate applied to a domestic producer in the 6.6 absence of state intervention, the price of the good in the 1.4 absence of public procurements, and the price of lands freely granted to export processing zones. Instead, table 17.1 3.9 shows the subsidies granted to domestic firms as estimated 2.6 by the national accounts. These figures underestimate the 5.8 cost of the NBMs. 6. Budget structures are linked to political institutions, accounting rules, and structures of the domestic economy. All these elements differ a between countries. So data in table 17.2 (based on the IMF's Government Finance Statis- 4.8 tics) can be used not for comparing countries but only for giving a proxy to assessthe trend in each country. 7. A good illustration of these points is in a recent study on South Korea (Nam 1987). Export-promoting countries were piling export-promotion policies on import-substitution measures instead of simply dismantling import-substitution schemes - mainly for political reasons. The export-promo- tion-plus-import-substitution strategy was felt to be less costly than a straightforward dismantling of import-substitu- tion policies for convincing import-substitution industries to accept trade liberalization. And the export-promotion poli- cies were seen as a firm commitment to freer trade. References Bhagwad, Jagdish N. 1986. "Export Promoting Trade Strat• egy: Issues and Evidence." Development Policy Issues Series. Washington, D.C.: World Danie. 135 tudsl Industry Nam, Chong-Hyun. 1987. Trade Policy and Economic Devel- opment in Korea. Development Policy Issues Series. Klaus-Werner Schatz, Washington, D.C.: World Bank. OECD. 1986. Natio#al Aecotmts: Th Mai" Aggregates. Vol. 1. Paris. Stern, Robert, John Jackson, and Bernard Hoekman. 1986. OrMr for Public Sub- "An .Assessment of the Implemen1ation and Operation of the Tokyo Round Codes." Seminar Discussion Paper 174. Ann Arbor: The University of Michigan. results of the normative process of establishing marketwide agreements on technical require- ments for traded goods. Their main differences are in being mandatory or voluntary -- and in the processes by which they are established: • Technical regulations are established, moni- tored, and enforced by governments. So, they are often difficult to harmonize interna- tionally because of national sovereignties. • Nonregulatory standards, being voluntary, become effective in a market because the parties concerned agree to use them, usually through a consensus administered by na- tional standards organizations or profes- sional engineering associations. It is nor- mally less difficult to achieve international harmonization of standards. In many developed countries, technical regula- tions and voluntary standards are complementary. For example, voluntary standards that manufac- turers and users develop to cover the essential characteristics or performance of products, to- gether with the test methods needed to assess them, can also be used by government authorities to set acceptable limits. Take the U.S. automotive industry, and more specifically pollution limits. As soon as it became apparent in the 1950s that car exhausts were causing problems of air pollution, manufacturers studied the problem and agreed in principle that concerted action was needed. Research pro- duced reliable test methods, but due to difficul- ties (such as antitrust concerns) inherent in con- and "standard" certed action among competitors, no voluntary agreement was reached on what level or limit of pollutants was acceptable. Action by government authorities in the form of technical regulations brought some order to the situation. The City of 137 • active in protecting the population against fraud and against dangers arising from the use of prod- ucts. That led to the various national regulations on weights and measures, public health, safety of workers, protection against fire and electric shock, and so on. stringent. International harmonization Earlier technical regulations and standards were often developed with local interests in mind, and international harmonization was seldom recog- nized as an immediate need. But the pressure of expanding markets gave rise to various attempts to reach international agreement. At first, these efforts were isolated, and their slow progress matched that of trade. Because different coun- tries had already developed different solutions to the same problem, nuts and bolts were not inter- changeable, the characteristics of electric motors were not compatible, and railtracks were not unified. Bringing together national standards and trying to reconcile their differences was therefore not an easy process. Changes would mean large capital investments, and it often seemed prefer- able to market goods on the basis of a country's reputation. For example, as telegraphy began to cross the oceans, the need for intergovernmental involve- ment in international standardization grew rapidly in the telegraph and telephone fields •· and later in the field of radio communications. This need led to the formation in 1865 of the International Telegraphic Union, which in 1932 became the International Telecommunication Union (ITU). The two permanent bodies of the ITU •• the Inter- national Radio Consultative Committee and the International Telegraph and Telephone Consulta- tive Committee •· are the main intergovernmental forums for standardizing telecommunication.1 International harmonization in most sectors was somewhat uncoordinated, however. An at- tempt was made in 1926 to bring the nongovern- mental nonelectrical work together by creating the International Federation of the National Stan- dardizing Associations (ISA). But it took until 1947, when the International Organization for Standardization (ISO) replaced the ISA, for a non- governmental international organization devoted to standardization to come into being. Today, the ISO and the International Electrotechnical Com- mission (IEC) make up the nongovernmental sys- tem for international standardization and account for about 85 percent of the published interna- Technical regulations and standards know that a reduction in customs duties would permit them to market their products at a lower price in foreign markets -- thus increasing their competitiveness. Often their products could not enter these countries because they did not meet local requirements. And the cost of having their products retested and approved often offset the advantages of tariff reductions. These technical barriers were sometimes a natural consequence of isolated developments in traditional sectors: electrical safety, for example, was achieved in different countries by different methods, but the resulting safety level was consid- ered satisfactory in most countries. This explains Table 18.1 ISO KWIC Index of International Standards Number of documents for Standardization 5,692 1,571 275 and Telephone Consultative Committee 224 114 110 of Legal Metrology 81 for Conformity 62 53 45 43 35 29 on Radiation Units and Measurements 28 on Radiological Protection 27 22 the Standardization of Manmade Fibers 14 Scientific and Cultural Organization 14 13 Committee on Radio Interference 11 11 of Library Associations and Institutions 7 Weights·and Measures 4 3 2 1 1 1 1 8,494 139 ties to base their work on international standards whenever possible. It follows that the authorities concerned should participate actively in "the preparation by appropriate international stan- dardizing bodies of international standards for products for which they either have adopted, or expect to adopt, technical regulations or stan- dards." This aspect of the code strongly supports international standardization, seen as a major instrument in the harmonization of what has been done and what will be done at the national level. Progress under the standards code has been slow but steady. The code is administered by a permanent Committee on Technical Barriers to Trade, whose secretariat is at GATT's headquar- ters in Geneva. And a "technical watch" system to notify all parties of proposed national regula- tions implying possible barriers to trade is being implemented through the work of the "GAIT Enquiry Points" by each of the parties. In slightly over six years, there have been some 1,400 noti- fications from twenty-six countries. One major strength of the code is that its pro- visions tend to settle disputes without formalizing them. A simple reference to the possibility of making use of the dispute settlement procedures of the code is incentive enough for the parties to arrive at a gentlemen's agreement. For example, the U.S. Trade Representative reported that be- tween 1983 and 1985 standards-related trade confrontations were negotiated in GATT between the United States and several of its important trading partners, including Canada, France, Japan, Germany, and the EEC (U.S. Department of Commerce 1986). A recent example shows the benefits of this approach. In 1982 Japan introduced a certifica- tion system for the safety of ski equipment. It soon appeared that this system was an obstatle to imports of skis into Japan. The standards on which the certification was based included re- quirements that were not aligned with the corre- sponding ISO international standards, the basis of the national standards of most other countries. Manufacturers voiced complaints through their respective country's trade representative on the Committee on Technical Barriers to Trade. And the constructive position that their Japanese counterparts adopted made it possible to prog- ress rapidly to a gentlemen's agreement. Japan agreed to align the relevant Japanese standards to ISO standards -- and to accept skis conforming to the ISO standards as conforming to Japanese requirements. Technical regulations and standards clear evidence, even in countries belonging to a common market, that there is still much harmoni- zation to be done before test results and certifica- tion marks can be mutually recognized. Regional markets. The resolution of the trade problems resulting from nonharmonized stan- dards and technical regulations has been given high priority in most regions of the world. This is particularly true in Europe, where the Council for Mutual Economic Assistance (CMEA) countries and the European Free Trade Area (EFTA) coun- tries have taken steps to promote harmonization. But the most aggressive approach is the EEC in connection with its objective of achieving the "internal market" by 1992. In this respect, non- European trading partners are concerned that this intense activity may only push technical trade barriers to the edge of the EEC and undermine international efforts to harmonize standards. Deregulation and privatization. The current trend toward deregulation and privatization of industries in several countries will shift some of the trade-related standards issues toward the pri- vate sector, where their resolution will increas- ingly depend on the success of nongovernmental standards bodies. The rapidly evolving field of information technology might prove exemplary in this connection. The major partners in world- wide standardization are here •· the CCITT, the ISO, and the IEC. On the nongovernmental side, the ISO and IEC have recently announced an important policy decision to join forces in re- sponding to the exponential demand from indus- try. This demand is reflected, for example, in various initiatives from manufacturers, users groups, and regional governmental bodies. 4 These joint efforts should result in the interna- tionally agreed-on standards needed to permit worldwide interworking of electronic data proc- essing equipment for specific applications. tory Notes will have to 1. The explosion in technological development has broad- ened (more elements to be standardized) and deepened (more details to be specified) standardization in telecommu- nications. The broadening of standardization results from the linking of national telecommunications networks (geo- graphical broadening) and from the development of such new products as computer-controlled exchanges, satellites, and optical fibers (technological broadening). The deepen- ing of standardization results from the demand of new tech- nologies for a much higher degree of specification. At the same time, a more dynamic approach is needed to setting standards - taking into account the rapid pace of upgrading products. As an illustration of what these changes have meant for standardizers, the CCrIT had 6,300 pages of stan- 141 an increase of 84 per- fying members, including China, Japan, and the United States. IEC set up a technical 4. On the technical side, a major step has been ta1cen with preparation of ISO standards for open systems interconnec- tion. Without going into details, the basic reference model presents seven layers ranging from the transmission medium a worldwide plug and (data links and networks) to user elements (banking and insurance). This model is already permitting the rapid and flaible development of standardization at a pace compatible with that of the products and their trade patterns, as several large equipment manufacturers are committed to producing equipment that implements these international standards. The party invoking Article XIX was entitled to the benefit of any reasonable doubt, and the export- ing country had to establish that no serious injury had been sustained or threatened. This result came from the conclusion that the government of an importing country was best placed to decide whether there was injury •· and from also presum- ing that signatories met their GATI obligations. It was therefore not necessary for the government in the importing country publicly to prove serious injury at home and abroad. Further, the rather extraordinary determination was made early on (in a GATI working party in 1948) that the injury from increased import com- often only "ex- petition could be serious even if there were no increase in imports. The prerequisite of an in- crease in imports was considered to be either an absolute or relative increase. Thus, if consump- tion of the product in the importing country were declining and imports took a relatively larger share of the total, the existence or threat of injury would have been established. Dissatisfaction with Article XIX in its current form is rife, and the need for reform is well ac- cepted. The article has been largely bypassed as countries do what the article does not permit them to do: selectively discriminate against sup- plying countries in the application of trade barri- ers, avoid compensating foreign suppliers ad- versely affected by their actions, and stay out of the limelight of national and international scru- tiny. Despite the general agreement on the need for its reform, Article XIX has proven to be the Achilles heel of multilateral trade negotiations for the past fifteen years and will continue to be so for the years to come. This outcome is unfortu- nate. With recent technological and other devel- opments, international competitiveness is chang- 143 chapter proposes a different role for GAIT: help- ing governments make more rational choices among alternatives. key to the Background barriers Not all trade of GAIT contracting parties is sub• ject to treatment under Article XIX. In the late 1950s and early 1960s, for example, many coun- tries did not need to resort to Article XIX as they applied balance-of-payments restrictions (under Article XII) that served the same purpose. In the 1950s, other countries sought to restrict imports of textile products from such new suppliers as Japan and Hong Kong. Article XIX was not ac• ceptable because normal GAIT action would require nondiscriminatory import protection, something the importing countries did not want. Bilateral export restraint arrangements were therefore negotiated with the major suppliers outside the jurisdiction of GAIT. Restraining one such source of supply opened the door to others, restrictions spread, and a multilateral solution was sought in GAIT (Sampson 1986). Given the unwillingness to take the appropriate route under Article XIX (that is, to apply nondiscriminatory restrictions), an alternative to Article XIX was sought. The "solution" came by way of a new concept of market disruption •· a phenomenon that only occurs with imports from low-cost sup• pliers, a group that originally included Japan but now covers only developing countries. For major importing countries and more than thirty export• ing countries, textile products have been outside the normal workings of Article XIX. Here are some additional bits of background to the treatment of trade under Article XIX: • Trade in agriculture has also been largely outside the purview of Article XIX. • The proliferation of voluntary export re- straints and other measures illegal in GATI terms has greatly weakened Article 00. (Export restrictions are generally prohibited under Article XI, and measures limiting ex- ports to specific countries are in any case contrary to the provisions of Article XIII). • Although it is difficult to compile comprehen- sive information on bilateral export restraint arrangements, the GAIT Secretariat has iden• tified ninety-six such arrangements operating in the second half of 1986 and inconsistent with the General Agreement (GAIT 1986). Of these, fifty-three protected EEC markets and thirty-two the U.S. market (table 19.1). Safeguards Table 19.1 arrangements in force in September 1986 Agricultural products Footwear Textiles products Other Total 5 1 3 15 4 53 3 16 2 2 15 28 1 1 4 9 1 4 32 1 2 4 29 1 3 4 1 11 2 1 3 16 4 11 15 5 96 4 18 2 1 9 15 1 65 3 2 4 12 apply respective of arrangements concluded by the Community. Developments in Intemalional Trading System, 28 November 1986. and U.S. imports of clover seed, safety pins, and clothes pegs. Australia has invoked Ar- ticle XIX most frequently. It has been re- sponsible for thirty-eight actions, the United States for twenty-eight, and Canada for twenty-two (table 19.3). • The duration of Article XIX actions has varied greatly. Some cases have lasted less than a month (Swiss imports of grapes from the EEC in 1982), some more than ten years (Spanish imports of cheese from Norway in 1966). Table 19.3 shows the average duration of Article XIX actions, but the figures should be read with these extremes and other impreci- sions in mind. • It is striking how little trade is affected by Article XIX action. In March 1982 the GATI Secretariat circulated a list of measures taken and notified under Article XIX. There were nineteen such actions listed for 1980, and 145 Table 19.2 and exporting countries, September 1986 Importing United EEC States Other Total 18 5 2 25 0 4 0 4 0 0 0 0 11 10 9 30 5 2 7 14 11 6 0 19 12 7 0 19 apply irrespective of arrangement concluded by the Community. Developments in the International Trading System, 28 November 1986. there were serious differences among them on some important issues. Some favored an ap- proach that permitted unilateral, selective action •• with ex post facto review by a Committee on Safeguard Measures. Others insisted that any selective action be preceded by agreement on the part of the exporting country. Little progress was made. The decision at the close of the Tokyo Round merely stressed the need for agreement on an improved multilateral safeguard system and set up a committee with the aim of elaborating supple- mentary rules and procedures to provide "greater uniformity and certainty" in implementing Article XIX (GATI 1980, p. 42). Although the committee has met several times, work has not moved much beyond the stage of uncertainty reached in the MTNs. Before the GATI ministerial session of November 1982, there was intense activity on safeguards in the preparatory committee for that meeting, but agreement on an interpretative agreement was not reached. In their declaration the ministers directed that a new understanding be prepared by the GATI Council for adoption by the contracting parties not later than their 1983 session. It proved impossible to meet this dead- line, and at their November 1983 session the contracting parties decided that work should continue toward an understanding for adoption at their 1984 session. In the Punta del Este Declaration, governments considered agreement on safeguards to be "of particular importance to strengthening the GATI system, and to progress in the MTNs ... the agreement on safeguards ... shall ... contain objective criteria for action" (GATI 1986). Safeguards Table 19.3 Article XIX actions, 19S0-86 Average duration Countries (months) Compensation Tariffs affected 85 6 10 38 117 10 3 10 47 0 5 35 43 0 4 16 16 22 99 8 0 0 3 45 2 6 32 33 0 2 40 18 0 2 3 2 10 78 0 2 2 73 1 0 3 20 0 0 18 31 0 0 9 1 2 32 1 0 3 73 1 3 15 22 0 0 5 17 1 0 22 3 3 45 29 3 3 4 101 2 5 12 27 0 2 6 • 6 5 16 22 not been included. latter, the practical implications of which would be to weaken greatly the discipline of the interna- tional trading system, something at variance with the objectives spelled out in the Punta del Este Dfclaration (GATI 1986). Instead of focusing on tlie merits and demerits of legitimizing illegal ac- tions, it would be better to focus on the most effective manner to strengthen the discipline of the trading system. It could be argued that this is 147 nate against them further. This opposition is rather paradoxical, given the weight of opinion (among those outside the negotiating process) for nondiscrimination and for the exemption of de- veloping countries from safeguard action. A further key issue relates to coverage. This term implies that gray-area measures, now outside the purview of Article XIX but having much the same effect as Article XIX measures, be brought within the ambit of a revised article. This pros- pect has, from the beginning of the Tokyo Round, been associated with the United States. The U.S. Trade Act of 1974, for example, makes an explicit call for "the revision of Article XIX of the GATI into a truly international safeguard procedure which takes into account all forms of import re- straints countries use in response to injurious competition or threat of such competition." Here, as in most cases, the emphasis is on instru- ments rather than decision processes. Voluntary export restraints and orderly market- ing arrangements negotiated by the United States (and such other countries as Canada) are almost invariably a matter of public procedures. But there is a perception in the United States that comparable export restraint arrangements (obvi- ous surrogates for Article XIX actions) are less transparent and well-known in other jurisdic- tions, and are implemented with a greater ease than in the United States. European govern- ments, for example, have the power to regulate trade without meeting the same elaborate admin- istrative requirements that constrain the power of the executive branch in the United States. Fur- thermore, in European countries, private bodies have reached understandings on export levels with industry representatives in exporting coun- tries (such as the private arrangements limiting the import of Japanese motor vehicles). The perception is that such arrangements, which would violate U.S. antitrust legislation, deflect restrained imports to the U.S. market (such as the Japanese motor vehicles deflected from European markets to the U.S. market in the early 19805). In dealing with such problems, the U.S. admini• stration has two choices. The first is to increase the flexibility of domestic procedures that permit the restraining of imports. The second is to impose some discipline on other countries in their use of safeguard-like procedures. Pursuing the second option requires bringing gray-area measures within the disciplines of GATI. Some countries consider Article XIX proce- dures to be titled against them. Australia, for Safeguards term "degressivity" embodies the idea that Article XIX measures might more easily be terminated if countries accepted that safeguard measures were to be progressively liberalized. Here, too, there may be a perverse effect in that the initial restric- tion is more severe than necessary in the early period because the parties know that the restric- tion will be progressively reduced. imports under The way forward to the There is wide agreement on the need to move forward, less agreement on the way forward. There have been numerous proposals to improve Article XIX (for example, Leddy 1981 and Wolff 1982). One important report of almost fifteen years ago (the Rey Report) was that of an OECD High Level Group on Trade and Related Prob- lems. This report considered in some detail the complex of "structural adjustments and safeguard provisions" and proposed a new set of multilat- eral safeguard rules (OECD 1972, paragraphs 254- 58). Most reports since then have restated the recommendations of the Rey Report in one form or another. The essence of the two main propos- als in the Rey Report were that "adjustment must be the prime objective" and that their new and detailed procedures should be agreed on, includ- ing a "panel of mediators." The report also ar- gued that export restrictions should be treated the same as import restriction. As for introducing the concept of discrimination, the report noted that it would be "undesirable" and that if it "were not to be prohibited entirely, it should be limited to exceptional cases and subject to very strict conditions." Few recommendations appear to assign a high priority to the economics of safeguard protection and almost none assign priority to an econo- mywide evaluation of the effects of protection in Article XIX actions. One exception to the neglect of economic considerations is Meier (1978), who made the important observation that it is "neces- of the industry sary to attain more closely the conditions of eco- nomic efficiency. We should attempt to rational- ize the use of safeguard measures and strive for optimal intervention ... In protecting home mar- kets, policies have been adopted that are 3rd, 4th, or n-th best policies." Speaking of the Tokyo Round, he noted that "the current multilateral trade negotiations therefore provide a propitious time to reexamine what we want." The same could be said of the Uruguay Round of negotia- tions: putting some economics into Article XIX 149 against compensation, it would appear a rational decision could only follow from determining whether the gains from trade exceed the losses for the whole economy. Public scrutiny. Trade liberalization and in- dustrial restructuring can be politically painful. As the OECD observed, trade's costs and benefits for the political actors are crucial for the spread of protection; it is important to break the nexus between the political actors and their access to and control over the process of government. Thus, if political considerations are not to swamp the process of improving the structure of produc- tion, it is important to find a counterweight to the mismatch of power between the well-organized few (interest groups) and the disparate many (uncoordinated consumers and purchasers of intermediate goods). The appropriate counter- weight is public awareness. By informing the public of who gains and who loses from protec- tion, those currently outside decisionmaking pro- cesses can become political actors (Finger 1982). Creating new groups of political actors strength- ens the possibility that government will resist those seeking favors not in the public interest. Several countries have, in their domestic law and practice, arrangements for public hearings by independent bodies of requests for public assis- tance (such as increased protection under Article XIX). In Australia, the Industries .Assistance Com- mission holds public inquiries into requests for all public assistance. The participation in these in- quiries is open to all interested parties (something also proposed by Leddy [1981], p. 25). In formu- lating its proposals to the government, the com- mission publishes its analysis and the relevant evidence in some detail. The result is to give every interested party a day in court and to reach conclusions that make it clear whether import relief is in the interests of the whole economy. For the reform of Article XIX, it is clear that the public inquiry procedure of the foregoing ex- ample provides an acceptable basis for effective multilateral surveillance. At issue in rewriting Article XIX is whether the economywide perspec- tive should, as a general rule, be made an overt and articulated aspect of safeguard systems. Such a criterion might be added, in an interpretative note, to the structure of Article XIX. "share the But while The poltcy tools arrange- If market disruptions in the importing country are the result of increased market penetration by -- Safeguards ports through improved cost competitiveness flowing from a better distribution of national resources. The complexity of the conflicts of in- terest in erecting and removing trade barriers argues for administering policies in the frame- work of institutions operating under clear guide- lines. If public assistance to industry generally is to be impartially administered and primarily con- cerned with serving the community's general well- being, it must be subject to public scrutiny and accountability to the greatest possible extent. Bhagwati Notes public assis- 1. This chapter avoids taking an unduly legal perspective of the safeguard-related issues that will be discussed in the policy inter- Uruguay Round. Plenty of excellent texts do that and more (see Curzon 1965, Dam 1977, Jackson 1969, McGovern 1982, and Long 1985). It does, however, attempt to address the principal issues - many of them legal - that will be addressed in the Uruguay Round. 2. This case has been made on equity grounds - particu- larly for developing countries (see Bhagwati 1976). 3. GATI (1986) considers as significant the U.S.-Japan semiconductor pact and the U.S. requests for voluntary re• straints on exports of machine tools from Japan, the Federal Republic of Germany, Switzerland, and Taiwan (Province of China). According to GATI Secretariat, these developments show "that gray-area measures can expand into high technol- ogy and possibly limit competition in some of the decisive growth sectors of modem economies." References the costs Bhagwati, Jagdish N. 1976. "Market Disruption, Export Market Disruption, Compensation and GATI Reform," World Development 4,12 (December):989-1020. , V.K. Ramasuami, and T.N. Srinivasan. 1969. "Domes- ~Distortions, Tariffs and the Theory of Optimum Sub- sidy: Some Further Results." Journal ofPolitical Economy 77,6(November):1005-10. Carmichael, W.B. 1986. "National Interest and the Interna- tional Trade Negotiations." The World Economy 9(Decem- ber):341-57. "domestic distri- Carden, W.M. 1974. Trade Policy and Economic Welfare. Oxford: Clarendon Press. . 1986. "Policies Towards Market Disturbances." In ~ - Snape, ed., Issues in World Trade Policy: GAIT at the Crossroads. London: Macmillan. Curzon, Gerard. 1965. Multilateral Commercial Diplomacy: The GAIT and its impact on national commercial policies and techniques. New York: Praeger. Dam, Kenneth W. (1970) 1977. The GAIT: Law and Inter- national Economic Organization. Chicago: The Univer- sity of Chicago Press, Midway Reprint. Finger, J. Michael. 1982. "Incorporating Gains from Trade into Policy," The World Economy 5, 4(December):367-77. GATI Secretariat. 1974. Basic Instruments and Selected Documents: Twentieth Supplement. Geneva. _ _ . 1979. The Tokyo Round ofMultilateral Trade Nego- tiations. Geneva. . 1980. The Tokyo Round ofMultilateral Trade Nego- tiations: Supplementary R.,po,t. Geneva. 1985. Trade Policies for a Better Future: Proposals 151 -- Agency for International Development. Olson, Mancur. 1982. The Rise and Decline of Nations: Economic Growth Stagflation and Social Rigidities. New Export Restraints and the Haven, Conn.: Yale University Press. Organization for Economic Cooperation and Development. 1972. Policy Perspectives for International TraM and Economk Relations. Report by the High uvel Group on Tratk and Related Problems (Rey Report). Paris. "Case for Evalu• . 1985. Costs and Benefits of Protection. Paris. Perspective." The - - . 1986. Economic Relations Between Developed and Developing Countries: Situation and Prospects. Paris. Sampson, Gary P. 1986. "Market disturbances and the MFA." In R. H. Snape, ed., Issues in World TraM Policy: GATT at the Crossroads. London: Macmillan. United Nations Conference on Trade and Development. 1983. Protectionism and Structural Adjustment: An Im- proved and More Efficient Safeguard System . TD/B/978 (6 February). Geneva. Negotiations and Devel• Wolff, Alan William. 1982. "The Need for New GATT Rules to Govern Safeguard Actions." In William Cline, ed., TraM Washing• Policy in the 1980's. Washington, D.C.: Institute for Inter- national Economics. that would benefit from import restrictions are given legal substance by antidumping and CVD procedures, but the interests that might bear the costs of these restrictions are not. There is noth- ing in the GAIT treatment of antidumping and countervailing duties that opposes the imposition of these trade restrictions except its legal preci- sion -- its statement of the degree of unfair pricing and injury that must be established before an import restriction is imposed.1 The first section of this chapter reviews the international community's attempt (through GAIT and its supporting codes) to bring discipline to the national use of antidumping and antisubsidy duties. This has been an attempt to increase the legal precision of the concepts of dumping, sub- sidization, and injury, without regard for the narrow economic scope or even to the implicit economic content of the specifications being elaborated. The second section presents an alter- native view of the GAIT approach to bringing discipline to the use of antidumping and antisub- sidy duties. The third section reviews possible modifications and suggests that expanding the Similarly, a economic scope of national antidumping and antisubsidy procedures might be an effective way to bring discipline to their use. proce- The GATT approach the ef- The general goals the contracting parties hope to advance through GAIT are "the liberalization of international trade, the reduction of international tension and conflict, and ultimately the avoidance of war" Oackson 1986, p. 5). Of course, GAIT relevant parties in does not cover all the dimensions of international affairs. Its subject is trade, particularly the policy actions of a government that affect the country's 153 The process the code provides for implement- ing its rules about the use of subsidies is not a process of "enforcement" as one would think of enforcement in the context of a penal code and a police force. There is no police force. The inter- national track is a process intended to develop and promote a "mutually satisfactory solution." Its basic parts are "consultations," " conciliation," "dispute settlement," and "authorized counter- measures.'' Consultation is perhaps the major part of this track. The code provides that a signatory may request consultations with another signatory when it has reason to believe that the other sig- natory is providing an export subsidy, or any subsidy with negative effects for the first signa- tory. The stated objectives of such consultations are to clarify the facts and to arrive at a " mutually acceptable solution." If such a solution is not reached in a specified number of days, either party may refer the matter to the entire member- ship of the code (the "committee") for concili- ation. The committee will review the facts and use its "good offices" to encourage the signato- ries involved to reach "a mutually acceptable solution." If none is reached, any involved signa- tory may request that a "panel" be established. A panel would be composed of three to five members, not nationals of the countries involved. It would review the facts and present to the committee its findings on the rights and obliga- tions of signatories, both under the code and under the General Agreement. Again, the objec- tive of the process is to generate a mutually satis- factory solution, and the details of the process are structured toward promoting such an outcome, rather than toward a formal finding of who is or is not in violation of the relevant provisions ofthe General Agreement and the code. If agreement is not reached, the panel may submit a legal finding to the committee, which may (but is not obliged to) make recommendations and may, if its recom- mendations are not followed, authorize appropri- effects" to ate countermeasures. Neither the panel nor the committee has any formal power to enforce its determinations •· to fine or otherwise punish a government for violat- ing its code obligations or for imposing "un- authorized" countermeasures. Their power is the power of persuasion and of appeal to an agreed international standard. Countervailing duty rules. The code recog- nizes the right of a country to impose countervail- ing duties on subsidized imports that cause injury Antidumptng and anti.subsidy ~ the circumstances under which a country may not "illegal subsidy" impede trade are specified, the frequency with which it does so will be lower. Formulators of the code hoped that this codification would make national procedures to impose CVDs the same in one country as in another •· and that standardiza- tion of countervailing duty procedures would in tum push toward standardization of subsidy prac- tices. Facilitating this standardization, of both The "shalls" national subsidy and CVD practices, would be periodic reviews by the code membership of subsidy and countervailing duty practices that and of "injury." individual members had brought to the group's attention. As precedents built up, each national government would have effective means for han- dling pressures for subsidies and pressures for protection based on the allegation that the com- peting imports were subsidized. Petitioners would be assured that their cases were decided on the same grounds as anyone else's (and that these grounds were the right grounds) and would thus be brought toward accepting a possibly negative decision. The logic of the antidumping code is similar but less complicated. Because no beneficial effects are ascribed to dumping, the antidumping code has only to achieve an acceptable legal definition of dumping, not the coordinated normative bal- ances for each of subsidies and CVDs, which is the subsidy code's objective. Effectiveness than its normal A generally sympathetic review that described the Tokyo Round codes as a "major accomplish- ment" concluded that the subsidies code "is generally perceived to have been working poorly" (Stem and others 1986, p. l and p. 25). There are significant differences between the United States and the EEC over what constitutes a subsidy and over how the magnitude of a subsidy would be determined (Beseler and Williams 1986, ch. 5). A reflection of the differences is that a large part of the most difficult dispute settlement cases involve subsidy disputes between these two contracting parties (U.S. International Trade Commission 1985, ch. 2). Negotiators of the code realized when it was signed that it was not an agreement on what constituted a subsidy, but they accepted it in the hope that an agreed-on meaning would evolve in practice. Through standardization of national CVD procedures on the code's guidelines, the international dispute settlement process, and the 155 code definition of "sale" (Stem and others, p. 13). There has been a considerable degree of "bal- ance" in the extent to which the United States and EEC have been implementers and receivers of and by "accept- antidumping actions (table 20.2). During 1980-86 there were 350 anti.dumping cases by and ll2 cases against the United States; and 280 cases by and 214 against the EEC. Of the 1,288 cases by the twenty-four antidumping code signatories, two- thirds were against another signatory. This give- and-take pattern of application contrasts with the pattern of CVD cases in table 20.1 -- where the United States is almost always the "giver" and someone else almost always the "taker." Whether this balance in the pattern of antidumping cases is cause or effect, there has been, as the code's proponents hoped, movement toward interna- tional standardization of national anti.dumping practices and an increased acceptance of one nation's antidumping actions by another -- or at least, the handling of differences at a technical level where they are less likely to spill over to and complicate other international matters. are almost An alternative view "To the The economics of the antidumping code deserves lesser marks. Simply the number of cases -- 1,288 in seven years, 7..75 of which led to antidumping duties or a restrictive arrangement -- is alarming. Although there has been considerable progress toward the immediate objective -- the acceptance by one country of the trade-restricting actions of another -- the ultimate objective (remember) is to preserve the openness of the international trading system, not to bring order and agreement to the process of closing it down.7 The continuing con- troversy over countervailing duties may be the better outcome. This section presents an alterna- tive view of the GATI approach to bringing disci- pline to the use of antidumping and antisubsidy duties. 8 This view includes the following three hypotheses about the GATI approach: (I) In design, the approach is the wrong eco- nomics. (2) As it actually works, it is even worse eco- nomics. (3) Constrained to work as designed, it would not work. and timing of Wrong economics Import restrictions -- economists demonstrated more than two centuries ago -- almost always Anttdumping and andnlbridy metUlll'eS Table 20.1 Countervailing duty cases Number of counteroatltng duty cases, 1980-86 Against Excluding Cbtlean By Total cases 28 11 140 0 0 20 2 2 11 11 11 7 ll 6 I 2 I 460 28 21 100 6 7 0 88 32 0 38 22 0 32 6 0 28 27 0 22 7 0 21 21 0 21 13 0 56 54 0 432 299 94 93 only for the community: member states do not have CVD mechanisms. Both member that have been the object of CVD investigations in other countries. cator that importing a product will not add more to the national economic interest than it takes away. Toe test of whether the imports in question are dumped or subsidized is extraneous to the relevant economic question: Are the gains to buyers from this import competition larger or smaller than the costs to competing domestic pro- ducers?9 Posing a different question is bad do- mestic economics that leads a country away from a correct assessment of national economic inter- est. It is also bad international politics, suggesting conflict of economic interests that does not exist between countries. Both importing and exporting countries will enjoy net gains from trade. Toe exception to the generalization that import restrictions are contrary to the imposing country's 157 Table 20.2 by parties to the antidwnping code Number of antidumping cases, 1980-86 By Against 416 3 350 112 0 77 0 50 0 50 0 47 0 32 0 33 230 35 12 457 1,288 831 0 457 institutions; member states are not allowed to take such actions. of the most frequent users of such procedures •· have found that antidumping enforcement im- poses conditions on foreign sellers that parallel - that parts of domestic trade regulations do not impose on domestic firms. Christopher Norall demon- strates this for EEC practice (1987), William Dickey for U.S. practice (1979). A similar finding led Professor F.H. Gruen, in his report for the Austra- lian Minister of Industry, Technology, and Com- merce, to recommend that Australia's system be changed to "reduce the discrepancy between the concept of 'unfair trading practices' as it is ap- plied within Australia and as it is applied by Aus- tralia to its imports ... (This Jaim is to be achieved by returning the antidumping system to its origi- nal role of combating dumping as opposed to combating low prices" (Gruen 1986, p. iv). Although the reason behind antidumping meas- ures is the elimination of discriminatory pricing between national markets, these studies conclude that, in practice, antidumping tends to enforce customary or full-cost pricing. This seriously compromises the only economic argument for antidumping •· that it is a defense against preda- tory pricing. Large investments in several coun- tries to serve an export market might, if they must compete with each other, be unprofitable. Firms that realize this might be less aggressive: that is, one producer's defense against the aggressive practices of a second is the realization that com- Antidumping and antlsubsldy mer&s'llnS remain matters of political balance between home producers and foreign exporters. Complexity brings with it the risk of harassment •· that the cost of defense against invalid charges of im• proper trade practices will become a barrier to "fair" trade. IO Even if complexity could achieve precision, it would not likely be an effective control on the imposition of trade impediments. GATI has no enforcement authority other than the peer pres- sure generated by appeal to an agreed-on interna- tional standard. But the more complex the stan- dard, the smaller is the circle of peers who under- stand and are influenced by it. If the circle of people with authority to make policy sees or understands the underlying matter differently from the experts, they will reach different conclu- sions on the correct course of action. Their reac- tion to this difference is not likely to be to defer to the experts, but to discredit the experts and the subject of their expertise. For example, trade committees of the U.S. Congress are often very critical of GATI. Realization that the determina- tions of GATI panels have little force in national capitals has led to suggestions that panels be made up of internationally respected statesmen. In the end, however, it is more likely that the stature of the panelists would be compromised than that national capitals would defer to their determinations. Finally, there may be an irreconcilable differ- ence. On the one hand, there is the antidumping and subsidies codes' intention to constrain, not encourage, the use of antidumping and CVDs. And on the other hand, there is the codes' insis- tence that such actions be petitionable •· initiated on request by the affected industry. The provi- sions of the codes, when given enforceable sub- stance in the laws and regulations of individual nations, become statements of the rights of inter- ests in the country to protection from import competition •· statements of the circumstances under which an industry may call on its govern- ment for action to impede imports. These circum- stances might, in theory, be very narrow. But they are, in fact, specified in national law and interpreted in national processes. The obvious pressures will be to expand rather than to narrow their specification and their interpretation. Directions of change The two views presented in this chapter of how the GATI approach works lead to different sug- 159 import restriction to be a plus to the national economic interest, this will appear a formula for autarky. It is not. Economic analyses routinely demonstrate that the domestic costs of import restrictions exceed the domestic gains. An ex- ample is David Tarr's analyses of the effects of United States and EEC restrictions (mainly VERs) on steel imports (1978). 11 The United States and the EEC are both net losers from the restric- tions. 12 If the procedures for decision got the underlying economics right, the decision in most instances would be against the proposed import restriction. This does not mean that econometric models would replace processes of public inquiry. The gains from protection have one representation in econometric models, in the language of output effects, producer surpluses, and so on. These gains have an equally substantive but different representation in the process of public inquiry •· in the language of (avoided) injury to competing domestic production. The costs of protection have a representation in econometric models (buyer effects, efficiency losses, and so on) but not in the public inquiry. The task is to translate this analysis into the language of the public in- quiry. The result might also be a more cooperative attitude among nations. Under present arrange- ments, a decision not to impose an import restric- tion has the appearance of a decision made in the interest of another country against interests at home. Building national decision processes on better economics would reduce this source of animosity. A final point: major trade differences between nations should be negotiated directly. The GATI approach implements liberalization, it does not motivate it. The same community of nations that could not agree on the rules for an international trading system, the International Trade Organiza- tion, agreed to cut tariffs and to eliminate most of the other post World War II trade restrictions. The rules that have served this community were rules that came afterward •· to implement agree- ments to liberalize. Notes I. Interests that bear the costs of import restrictions (to users and exporters) are not taken into account as an offset- ting factor. Interests that bear these costs (users and export• ers) may however examine and comment on the evidence de- veloped to demonstrate dumping or subsidization and injury to domestic producers that compete with imports. 2. In economics, a countervailing duty is an import charge imposed by one country to isolate itself from the effects of Antldumplng llnd ands1lbridy mer&no& Dickey, William L. 1979. "The Pricing of Imports Into the to counay B, and B, United States." Journal of World TMM Law 13(May· June):238-56, effect on trade. One Ethier, Wilfred J. 1982. "Dumping." Journal of Politk4l for the implicit trans- Economy 90,3:487-506. which is usually taken to be mi- Finger, J. Michael. 1987. "Protectionist Rules and lntema• tionalist Discretion in the Making of National Trade Pol• just as trade liber- icy." Paper prepared for a symposium on New Institu• To politics or law, that tional Arrangements for the World Economy. Konstanz, Germany, July 1-4. Finger,}. Michael, H. Keith Hall, and Douglas R. Nelson. 1982 those of farm, forest, or "The Political Economy of Administered Protection." American Economic Revkw 72,3 Qune):452-66. Finger, J. Michael, and Julio Nogues. 1987. "International Control of Subsidies and Countemuling Duties" 77» injury and the code World Bank Economic Revkw 1,4 (September):707-25. "not exhaustive" list of Gruen, P.H. "Review of the Customs Tariff (Antidumping) output, sales, and mar• Act of 1975." Canberra, Commonwealth of Australia, 27 March 1986. to the antidumping agree- Jackson, J.A. 1986. "The Role of GATT in Monitoring and subsidies agreement. The Promoting Adjustment: The Safeguards System." Discus- to the subsidies agree• sion Paper 170. Ann Arbor: University of Michigan, Re- is hereinafter used to search Seminar in International Economics. The code also provides the Hudec, Robert. 1987. Developing Countries in ti# GA1T Legal System. London: MacMillan, for the Trade Policy Research to nullify or Center. Lerner, A.P. 1968. "The Symmeay Between Import and Export Taxes.'' l!conomu:a 3, ll(August 1936). Reprinted In private in R.E. Canes and H.G. Johnson, eds., Readings in Inter- have said that a major national Economics. Homewood, Illinois: Irwin, for the to abandon the use of CVDs American Economic Association. partners against whom Low, Patrick. 1982. "The Definition of 'Export Subsidies' in GATT." Journal of World Trade Law 16,5(September-Oc- tober): 375 _90 _ for governments to Messerlin, Patrick. 1986. "Public Subsidies to lndusay and Agriculture and Countervailing Duties." Paper prepared for the European Meeting on the Position of the European Community in the New GATT Round." Spain, October 2-4. Norall, Christopher. 1986. "New Trends in Antidumping in intermediate goods, Practice in Brussels." The World Economy 9,l(Man:h):97· Ill. Stem, Robert M., J. Jackson, and Bernard Hoekman. 1986. "An Assessment of the Implementation and Operation of the Tokyo Round Codes." Ann Arbor: University of Michi- gan, Research Seminar in International Economics. Tarr, David G. 1987. "Effects of Restraining Steel Exports from the Republic of Korea and Other Countries to the the VERs defend higher prices United States and the European Economic Community." The World Bank Economic Revkw l,3(May):397-418. the restricting counay Van Bae!, Ivo, and Jean-Francois Bellis. 1985. lntemalional reported for restrictions Trade Law and Practice ofthe European Community: EEC Antidumping and Other Trade Protection Laws. Oxford- shire: CCH Editions, Ltd. Viner, Jacob. 1923. Dumping: A Problem in International Trade. Chicago: University of Chicago Press. World Bank. 1986. World Development Report. New York: Oxford University Press. United States International Trade Commission. 1985. Revkw of the Effectiveness of Trade Dispute Settlement under the to the Gruen Review Can- GAIT and the Tokyo Round Agree,nfftts. USITC 1793. Washington, D. C. December. 161 (4) The annual transfers from consumers (through higher dairy product prices) and taxpayers to dairy farmers in the EEC repre- sent $410 per cow; in the United States, S835 per cow. (5) American grain stocks are equivalent to around two years' world trade in grain; EEC beef stocks about 30 percent of one year's world trade. Moreover, the effects of these domestic policies have a penchant •· often unanticipated or inadver- tent, and probably in most cases unavoidable •· for spilling over onto international markets. In these circumstances, governments have sought to insulate their domestic commodity markets from the instability and uncertainty they perceive as reigning on international commodity markets. Paradoxically, these narrowly defensive efforts appear to have made markets even more unstable (World Bank 1986a). Varieties of agricultural policies Developing and developed market economies appear to pursue six objectives in their agricul- tural policies: (1) Stabilize and increase farm incomes. (2) Provide abundant food supplies at stable prices. (3) Improve external trade balances. (4) Support the development of other sectors of the economy. (5) Spur technological progress in commodity production and processing. (6) Keep a lid on the fiscal outlays needed to reach the first five objectives. As with most sets of objectives, the parts of this list may not be mutually consistent, and tradeoffs Agriculture through foreign aid, restitution payments accord- ing to legislatively mandated or bureaucratically administered target prices, and so on. Finally, state trading organizations in the developed and developing countries can be used as instruments to implement protectionist policies. Nontariff barriers (NTBs)' also represent an important weapon in the protectionist armory against agricultural trade. According to one study (Nogues and others 1986), 19 percent of nonfuel imports by sixteen developed countries were subject to NTBs in 1983. The share of agricul- tural imports subject to NTBs was 36 percent, second only to the 45 percent for textiles. Of the developed countries' imports of developing coun- tries agricultural exports, 31 percent were subject to NTBs. (An even higher share of such imports from developed countries were subject to NTBs. In part this may stem from the complementarity rather than competition of developed country agricultural imports, such as tropical beverages.) Quantitative import restrictions -- the ultimate form is a total ban on imports -- are the most prevalent NTBs used to insulate domestic markets from world prices. Such restrictions permit ex- traordinary income to accrue to those fortunate enough to obtain an import permit of the com- modity in question. NTBs are most frequently raised against sugar, animal, and dairy products (table 21.1). These border measures in the developed coun- tries are designed to decouple external market conditions from those governing domestic mar- kets, affected by a variety of instruments to pro- tect the prices and incomes received by farm producers. There are target prices and the asso- ciated deficiency payments, production loan pro- grams with guaranteed commodity forfeiture val- ues, favorable tax treatment of some farming ac- tivities, subsidies or tax exemptions on such in- puts as fuel , energy, fertilizers and irrigation wa- ter, and so on. These measures have led to an overcommitment of domestic resources to agricul- ture and progressively larger production sur- pluses. The various governments are then pro- jecting the results of these domestic policies onto international commodity markets as they attempt to dispose of these quantities. The recent disar- ray in international commodity markets thus rein- forces the need to harmonize and rationalize domestic agricultural policies in the OECD coun- tries. The developing countries are no less ingenious in the instruments they have mobilized to inter- 163 Table 21.1 of application of various nontarlft' barriers in industrial countries, 1984 (percent) Minimum Quantitative price policies restrictions All Variable levies Total (2) (3) (4) (5) 41.0 26.0 23.8 52.2 29.6 28.6 25.6 54.6 18.8 4.9 0.8 33.1 21.7 58.0 58.0 70.0 10.9 21.7 21.7 29.0 16.3 13.5 13.2 27.0 4.0 2.5 2.5 6.6 22.9 18.4 0.6 42.3 7.5 0.3 0.3 7.8 17.2 11.5 8.2 29.7 6.7 0.6 0.0 9.4 subject to the nontariff barriers shown as a percentage of the total number of considered are Australia, Austria, the EEC, Finland, Japan, Norway, Switzerland, and of columns (1), (2), and (3) if some imports are subject to more than one barrier. to take advantage of OECD liberalization meas- ures for agricultural trade. These same develop- ing countries must also correct the domestic pol- icy distortions inhibiting the development of their agricultural sectors. Estimates of the cost of agricultural protection Nominal protection coefficients for commodities in industrial countries are presented in table 21.2. These coefficients represent only a rough meas- ure of protection, because they are sensitive to variability in product prices, exchange rates, and product quality. Observe, for example, that dairy farmers appear to be heavily protected in most countries. In addition, Japanese and European farmers tend to be more heavily protected than farmers in countries relying more on agricultural exports. The notable differences in protection suggest that relative internal prices may vary considerable from one country to the next. Esti- mates of nominal protection coefficients for a dozen or so African countries demonstrate the negative protection (producer taxation) effec- tively imposed on farmers (table 21.3). Table 21.2 for producer and consumer prices of selected in Industrial countries, 1980-82 Rice Beef and lamb Producer Consumer Producer Consumer NPC NPC NPC NPC NPC 1.00 1.00 1.15 1.75 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.40 1.40 1.40 1.40 1.90 1.90 1.45 1.45 1.00 1.00 2.10 2.10 4.30 1.30 3.30 2.90 4.00 4.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.30 1.00 1.00 1.00 1.11 1.16 2.49 2.42 1.47 1.51 Sugar Wetgbted average Produ- Consu- Produ- Consu- cer mer cer mer Country or NPC NPC NPC NPC Region 1.00 1.4 1.04 1.09 Australia 1.30 1.30 1.17 1.16 Canada 1.50 1.70 1.54 1.56 EC b 1.80 1.80 1.84 1.81 Other Europe c 3.00 2.60 2.44 2.08 Japan 1.00 1.00 1.00 1.00 New Zealand 1.40 1.40 1.16 1.17 United States 1.49 1.68 1.40 1.43 Weighted average of production and consumption at border prices. and Switzerland. These last findings show the danger to the developing countries of standing back from the agricultural trade negotiations and considering the interests to be primarily those of the United States and EEC farm lobbies. Oearly, if the agri- cultural trade negotiations are constrained to merely the interests of these two trading blocs, some increasingly important developing country interests may lose out. And the OECD agricul- tural exporting interests may attempt to protect their domestic producers further and to carve up export markets. The developing countries should recognize the OECD's gains from such a strategy; the efficiency gains to the OECD countries from their own trade liberalization are estimated at S48.5 billion in 1980 prices (table 21.5). Given the rising fiscal costs of current OECD farm support programs (some S50 billion in 1986) and a growing consumer awareness of the ten- 165 Table 21.3 cocfflclents for cereals and export crops in selected countries, 1972-83 (1969-71 = 100) Export crops 1981-83 1972-83 1972-83 Real Nominal Real Nominal Real index index index index index index 140 108 83 61 95 75 98 119 87 92 66 99 71 73 49 88 71 101 66 115 98 101 83 98 84 106 100 102 94 106 97 177 122 101 83 98 70 225 166 82 59 113 84 160 66 108 60 149 63 104 89 83 60 75 64 184 143 101 93 92 68 229 164 90 63 105 75 188 95 86 62 103 52 146 125 97 84 93 80 151 109 93 71 102 73 in the nominal protection coefficient with border prices converted into local real index measures the change in the nominal protection coefficient with border real exchange rates. Data for Ghana are not available. • Import restrictions may be introduced where they are necessary to the enforcement of domestic marketing or production control programs or the removal of temporary do- mestic surpluses. 1 • Import and export restrictions may be used if necessary for the application of standards of commodity classification, grading, or market- ing. Further special treatment for agriculture in GATT derives from the exception, in Article XVI, to the general prohibition of export subsidies for primary products (agricultural or nonagricultu- ral). In the subsidies code an attempt was made to further restrain the Article XVI admonition that the use of such export subsidies on primary prod- ucts was to be limited -- so as to not give the subsidizing party "more than an equitable share of world export trade" of the commodity in ques- tion. (Subsequently, there has been much argu- ment about what is a "primary commodity" and what is an "equitable share.") On domestic Agrlculture Table 21.4 of liberalization of selected commodity markets, 1985 Coarse Beef and Pork and Datry grains Rice lamb poultry products Sugar 3 1 10 2 12 3 0 4 4 1 3 1 -3 0 0 -1 5 1 1 5 16 2 27 5 3 -12 0 -4 36 3 4 -8 16 -2 67 8 following liberalization 4 0 107 3 34 -5 3 30 57 -8 28 1 14 -2 14 7 50 3 19 32 195 18 95 2 12 75 68 260 330 60 30 97 235 295 190 60 the rates of protection in effect in 1980-82. Data for the EEC exclude Greece, Table 21.S of selected commodities, by country group, 1985 (billions of 1980 dollars) Industrial and Industrial Developing developing country country country ltberaltzatton ltberaltzatton ltberaltzatton -11.8 28.2 18.3 48.5 -10.2 45.9 -11.l -13.l -23.1 25.6 4.9 41.1 the rates of protection in effect in 1980-82. number of GATI panels have been convoked in the past decade •• largely at the request of OECD complainants against the practices of other OECD member countries •· to address and recommend resolution of agricultural trade disputes coming under the provisions of GATI provisions (IMF 1985). In past rounds, discussions of agricultural trade - except for such special issues as tropical bever- 167 Table 21.6 merchandise trade and production, 1960-SS percentage change in volume) 1970-79 1980-83 1984 1985 5.5 0.5 9.5 3.0 3.0 1.5 4.0 -1.0 2.5 -5.5 2.0 -2.5 7.5 2.0 12.0 6.0 4.0 0.0 5.5 3.0 2.5 2.0 5.0 2.0 3.5 -3.5 0.0 -2.0 4.5 1.0 7.0 4.0 nontariff barriers fall outside the GSP. And their formal and informal application and extension (such as voluntary restraint agreements and or- derly marketing arrangements) may impede devel- oping countries' access to developed country markets for agricultural commodities. As already discussed, the developed countries tend to raise nontariff barriers against agricultural commodities more frequently than against manufactured im- ports. agri- Background to the Uruguay Round The ink was barely dry on the Tokyo Round when initiatives were under way for convening a new round of trade talks. The concluding declaration of a GATT ministerial meeting in Geneva in 1982 stressed the need "to bring agriculture more fully , into the multilateral trading system by improving the effectiveness of GATT rules .. . and to seek to improve terms of access to markets and to bring export competition under greater discipline" . (Congressional Research Service 1986). Concern was expressed over subsidies affecting agricul- ture, especially export subsidies, and the need to avoid subsidization seriously prejudicial to the trade interests of GATT members. Following on the recommendations of the 1982 l ministerial meeting •· and perhaps spurred by the . crescendo of concern over world agricultural , Agriculture appeared during the past decade to contest the markets and relative positions of long-standing principal suppliers of sugar, grains, and oilseeds. Domestic agricultural policy initiatives in the developed countries, in an attempt to cope with rising supplies of what now appear to be rela- tively costly commodities, have typically moved to adopt or intensify existing price and income sup- port measures. These measures have projected the disarray onto world commodity markets. The initiation of the Umguay Round as vol- The Punta del Este Declaration highlighted sev- eral issues of agricultural trade that would be subjects of the negotiations (GATI 1986c): • Improving market access for international trade in agricultural commodities through, among other things, reducing of import bar- riers, whether they be tariffs or nontariffs. • Improving the competitive environment by the increasing discipline •· including phased reduction -· in the use of direct and indirect subsidies and other measures affecting di- rectly or indirectly agricultural trade. • Minimizing the adverse affects that sanitary and phytosanitary measures can have on in- ternational trade. There was acknowledgment of an urgent need to correct existing restraints and prevent further ones on agricultural trade to reduce the uncer- tainty, imbalances, and instability in world agricul- tural markets. The declaration directed that the work by the Committee on Trade in Agriculture was to be important in the negotiations. Several other topics on the primary negotiating agenda of the Uruguay Round are intimately re- lated to agricultural trade. • Subsidies and countervailing measures, as provided for under Articles VI and XVI of GATI and the MTN codes on these matters. • Safeguards, as new protectionist initiatives seem to have proliferated outside the GATI framework. • Dispute settlement procedures under GATI, which for complaints about agricultural trade have been a subject of some criticism. That the main source of all GATI dispute settle- ment cases has been agricultural trade attests to the timeliness of these topics. Similarly, actions against unfair trading practices under Section 301 of the U.S. Trade Act of 1974 have been primarily on agricultural trade issues (Council of Economic Advisors 1987). The time appears ripe for devel- 169 broaden both domestic and international com- modity markets •· rather than cause domestic policy distortions to spill onto international mar- kets in a disorderly way, as so many national programs do today? That is the main challenge of liberalizing agricultural trade over the next several years. Note 1. A special dispensation has in the past been accorded to the United States so that it may impose quantitative restric• tions (fees or quotas) on certain agricultural products for which domestic commodity price support programs are in operation, regardless of the presence or absence of domestic production or marketing controls. the surplus References distri- Anderson, Kym, and Rodney Tyers. 1986. "International Effects of Domestic Agricultural Policies." In R. H. Snape, ed., Issues in World Trade Policy: GAIT at the Crossroads. New York: Saint Martins. Council of Economic Advisors. 1987. Economic Report oftbe President. Washington, D.C.: Government Printing Of• fice. Congressional Research Service. 1986. Agriculture in the GAIT: Toward the Next Round of Multilateral Trade Ne- gotiations. Washington, D.C.: Government Printing Of• lice. Economic Research Service, U.S. Department of Agriculture. 1987. Government Interoention in Agriculture: Measure- ment, Evaluation and Implications for Trade Negotia- tions. Staff Report AGES861216. Washington, D.C. GATI Secretariat. 1985. Trade Policies for a Better Future. Geneva. . 1986a. The Text on the General Agreement on Tariffs and Trade. Geneva. . 1986b. International Trade, 1985-1986. Geneva. - -. 1986c. Focus 4l(October): 2-5. Hathaway, Dale E. 1986. "Trade Negotiations: They Won't Solve Agriculture's Problems." Choices (Fourth Quarter): 14-17. Johnson, D. Gale, Kenzo Hemmi, and Pierre Lardinois. 1985. Agricultural Trade Policy: Adjusting Domestic Programs in an International Framework. New York: New York University Press. Miller, Geoffrey. 1986. The Political Economy of Interna- tional Agricultural Policy Reform. Canberra: Australian Government Publishing Service. Fur- Nogues, Julio J. 1985. "Agriculture and Developing Coun• tries in the GATI." The World Economy 80une): 119·33. Nogues, Julio J., Andrzej Olechowski, and L. Alan Winters. 1986. The Extent of Nontariff Barriers to Imports of In• dustrial Countries. World Bank Staff Working Paper 789. Washington, D.C. World Bank. 1986a. World Development Report. Washing• ton, D.C. . 1986b. Poverty and Hunger. Washington, D.C. Zietz, J., and A. Valdes. 1986. The Costs of Protectionism to Developing Countries: An Analysis for Selected Agricul• tural Products. World Bank Staff Working Paper 769. Washington, D.C. countries are likely to be dominated by the con- cerns of the major NICs and caught up in the arguments surrounding graduation and recip- rocity. In manufacturing, six developing econo- mies account for three-quarters of developing country manufactured exports, and the leading fifteen account for more than 90 percent. The Group of 100 accounts for barely 3 percent, even though they export around half the developing countries' exports of tropical products.3 Tropical products should provide a focus in the Uruguay Round for detailed attention to the struc- ture of protection on particular products: for example, the relationship between nominal and effective protection for processed products, and the combined effects of tariffs and nontariff barri- ers (NTBs). This attention is particularly relevant for the many countries with limited negotiating resources •· countries that need to pursue special- ized product issues and not diffuse their efforts across numerous and prolonged negotiations. at least to the What are tropical products? The developed and developing countries disagree over the coverage that negotiations on tropical products should have. Developing countries have sought concessions for all access barriers affect- ing primary products, processed and unproc- essed, produced in a tropical area. Developed countries favor narrower coverage and have re- stricted their concessions to tropical agricultural items in seven groups: (1) Tropical beverages (tea, cocoa, and coffee). (2) Spices, cut flowers, and plants. (3) Certain oil seeds and vegetable oils (caster, palm, coconut, oilcakes, and some minor seeds and oils). 171 snapshot shows, first, that tariff cuts were uneven. The cuts were negligible in important areas (to- bacco, many fishery products, oil seeds and oils, sugar and sugar products, and some processed and unprocessed fruit and vegetables). Second, tariffs remain very high in some areas, especially for tobacco and processed fruits and vegetables. For example, tariffs are more than 80 percent on molasses and natural honey in Japan and 52 per- cent on fruit juices in the United States. In the aftermath of Tokyo Round tariff cuts, the increases in export revenues by developing coun- tries were tiny, less than half a percent (UNCTAD 1980). The tariff cuts were mostly very small. Much of the trade already was duty-free. And the benefits from tariff cuts were offset by the effects of tariff escalation on processing, the erosion of preference margins, and the existence of NTBs that prevent export expansion in response to the demand-stimulating effect of reduced tariffs. Tariff escalation discus- A major objective of developing countries in negotiations on tropical products is to reduce barriers to raw materials processing. The reason- ing behind this objective is that the scope for expanding export earnings of processed goods is considerably greater than that for unprocessed commodities •· for two main reasons. First, im- port-price elasticities of demand are significantly greater for finished manufactures than for semi- finished manufactures -- and they are greater for semimanufactures than for crude materials. A classic study shows that elasticities in six devel- oped country groups varied from around -2 to -4 for finished manufactures to -1 to -1.6 for sem- imanufactures and to -0.2 to -0.4 for crude mate- rials (Balassa and Kreinin 1967). Thus the de- mand-stimulating effects of a given reduction in protection on finished manufactures can be about ten times those on crude material. Second, pro- tection is generally higher the further the goods proceed up the processing chain. Table 22.1 shows the progression up some of these process- ing chains. The degree to which tariff escalation reflects higher protection is captured by the concept of effective protection: that is, the protection of value added rather than gross output. There are wide differences in published estimates of effec- tive protection (Yeats 1984). Generally acknowl- edge, however, are the problems of tariff escala- tion facing a wide range of developing country Tropical products Table 22.1 escalation In selected tropical products of ten markets a Percentage reduction, average Applicable Tariffb applicable Changes in CCCN before MTN after MTN tariff escalation c 08801-9,0812 6.0 4.8 20.0 0810-11,0813 14.6 12.2 15.9 increased 2001,2003-7 19.5 16.6 14.9 increased 0901 10.0 6.8 32.0 2102ex: 13.3 9-4 29.3 increased 1801 4.2 2.6 38.1 1803-5 6.7 4.3 35.0 no change 1806 15.0 11.8 21.3 increased 1202-2 2.7 2.7 0.0 1507 8.5 8.1 4.7 reduced 2401 56.1 55.8 0.5 2402 82.2 81.8 0.5 no change 4001 2.8 2.3 11.9 4005-6 4.6 2.9 37.0 reduced 4011-14,4016 7.9 6.7 15.2 increased 4101 1.4 0.0 100.0 4.2 4.2 0.0 increased 4202 8.5 8.5 0.0 no change 4203-5 9-3 8.2 11.8 reduced 6401-5 11.6 10.9 6.2 reduced 4.0 2.9 27.5 5.6 4.7 16.1 increased 5710 9.1 8.3 8.8 increased 2.6 1.8 30.8 4415 10.8 9.2 14.8 increased 4420-28 6.9 4.1 40.6 reduced 9401,9403 8.1 6.6 18.5 increased Australia, New Zealand, Canada, Austria, Switzerland, Finland, Norway, and Sweden. in each market (unweighted, GSP or MFN rates, including duty free tariff lines. by dividing the tariff on the higher stage by that on the lower stage. rates. Developing countries sought to combat this problem in the Tokyo Round by requesting reductions in tariff escalation and by seeking adoption of the Swiss formula, under which higher tariffs would be cut proportionately more (generally liberalizing access for more-highly processed items). The attempt was largely unsuccessful. More- highly processed tropical products had increases in tariff escalation after the Tokyo Round rather than reductions (table 22.1). GATl"s analysis shows that tariff reductions were proportionately greater for raw materials (by 64 percent to an 173 literature on the GSP and the MFN principle treat developing countries as an undifferentiated whole. There will, however, be considerable resistance, justifiable or not, to extending nonre- ciprocated tariff and nontariff offers on tropical products in the new round to the NICs. A dis- criminatory, preferential approach may be the only one feasible. It is not possible to be dogmatic about the rela- tive merits of approaching liberalization through the GSP or MFN routes. The answer depends in part on technical assumptions •· about the elastic- ity of substitution between competing groups of importers and the import price elasticity of de- mand for the product. It also depends in part on political assumptions •· whether importing coun- tries are more likely to make concessions on an MFN or GSP basis. When tariff concessions are being negotiated case-by-case rather than across- the-board, judgments have to be pragmatic. One preferential arrangement that limits the scope for tropical products' liberalization is the Lorne Convention. The African-Caribbean-Pacific (ACP) countries enjoy almost tariff-free access •· and reduced levies on Common Agricultural Pol- icy items in the EEC market (see annex 6 for a list of these countries.) So, they may have an interest in resisting both MFN and GSP liberalization by the EEC. Doubts have been cast on how useful these preferences are (Agarwal 1985). But the ACP countries' perception of their value has been a major factor in preventing tariff liberalization in some important areas: processed and unproc- essed coffee or cocoa (Africa competes with Bra- zil); Vrrginia flue-cured tobacco (Zimbabwe and Malawi compete with Brazil, India, and the Re- public of Korea); palm oil (West Africa competes with Malaysia); wood products (West African ply- wood and veneer producers compete with the Republic of Korea and Taiwan [Province of China]) ; bananas (the Caribbean and Africa com- pete with Latin America}; pineapples (several Afri. can countries compete with the Philippines); and sugar, where ACP producers have privileged ac- cess. In most of these cases, the ACP interest acts to protect least developed countries from NIC exporters. But in some others, the advantage is achieved at the expense of other low-income countries (the 12-percent preference margin en- joyed in cloves, as against Sri Lanka). It can also be expected that beneficiaries of the Caribbean Basin Initiative will seek to preserve their prefer- ences in the United States (as in the similar Cana- dian scheme). Tropical products Table 22.2 &om developing countries of selected tropical products, and processed 1983 Raw and processed Percentage processed value tn processed form (mtlltons of dollars) form 1.8 9,124.7 4.1 13.7 5,194.7 27.2 25.8 3,630.6 55.4 2.6 2,822.5 22.9 22.0 2,487.9 22.3 15.6 2,230.1 29.7 45.1 1,948.0 53.4 24.9 1,623.2 32.1 47.6 1,412.4 84.7 41.8 529.2 87.5 67.8 306.9 91.0 34.0 235.4 92.9 all MFN-dutiable goods exported by least devel- oped countries to the OECD are treated preferen- tially (UNCTAD 1985, para. 06). Other reasons are, for example, the failure to satisfy rules of origin criteria and GSP notification procedures. The least developed countries thus have good reason to use the Uruguay Round to find ways of enlarging access, through expanded preferential coverage or MFN cuts, rather than to protect the margins they now enjoy. The case for this is even stronger when NTBs are considered. as Nontarljf barriers in MFN In many respects, NTBs have replaced tariffs as the main obstacles to developed country market access by developing countries. Where it has been possible to quantify the difference between world and domestic prices created by NTBs on tropical agricultural items, the tariff equivalents are often extremely high •· well over 100 percent for rice and sugar in Japan and the EEC (Karun- asekera 1972, p. 60). The evidence also suggests that NTBs generally increase in severity along the processing chain, thus increasing the effective protection on processing (UNCTAD 1979). In taking the main NTBs in isolation, variable levies are important for agricultural goods, since they enable the authorities in the protecting economy to ensure that imports do not undercut 175 imports of cut flowers and a wide range of fresh fruit and nuts. Eastern European state trading agencies have been accused of using such regula- tions as pretext for restricting coffee imports, which are actually being curbed for balance-of- payments reasons. The U.S. Food and Drug Administration lays down exacting requirements for spices - they have to be analyzed in an inde- pendent laboratory, with importers paying for the tests. Imported tropical fruits (such as mangoes) are also subject to strict control in the United States. The wide differences in national standards on the aflato:xin content of oil seeds and prod- ucts, while originating in a genuine dietary con- cern, may also have led to unnecessary restric- tions on trade. Internal taxes are large, widespread, and grow- ing for many major tropical products: unroasted, roasted, and instant coffee (in the EEC and Ja- pan); tea (in the EEC); cocoa (all forms in the EEC, as powder in Japan, and as butter and powder in Norway); bananas (in the EEC; and spices, tobacco, and sugar (in almost all industrial countries). The primary reason for imposing these taxes is to raise revenue •· but for tobacco, health factors are advanced for high duties. As far as can be established, the price elasticity of demand of the products concerned is low (es- pecially when the three major beverages are con- sidered together rather than independently). Nonetheless, in some cases, the tax rates are so high -- more than 100 percent on tea in Germany (Morris 1982) -- that there is likely to be a signifi- cant effect on demand. In recognition of this point, Germany and France (and Denmark and Italy with qualifications) have undertaken, in the context of negotiations on tropical products, not to raise taxes further. Export subsidies by some developed country governments are another obstacle to exports of tropical products. For example, the United States and the EEC subsidize exports of oil seeds and oil products. This subsidization may in part explain the considerable decline over time in the devel- oping countries' share of the world market in groundnut oil. Sugar export subsidies by the EEC, regarded by GATI official panels as contrary to GATI Article XVI, undoubtedly are seriously damaging to developing country cane sugar ex- porters. Although MTNs have concentrated much more on tariffs than on NTBs, the restrictions that used to exist on jute •• QRs as well as tariffs -- have now been almost entirely dismantled as a result of Tropical p,odw:1$ to assist modities exported by the fifty-six most populous developing countries, Valdes and Zietz (1980) suggest that almost half the increased exports would come from liberalizing sugar and meat products -· neither of them tropical products in a GAIT context. Less than 10 percent of the in• creased exports would come from liberalizing trade in tea, coffee, cocoa, and bananas; the other major gains are in vegetable oils. A broader and more recent study by UNCTAD (1986) suggests that of all the gains to developing countries (in- creased exports) from total tariff and nontariff liberalization, half would come from textiles and clothing. A third would come from tropical prod- ucts widely defined (agriculture, fishing, food products, beverages, tobacco, leather and prod- ucts, wood products, and rubber products), mostly products falling outside the existing defini- tion of tropical products. So, if these negotiations are to carry the burden of hope being placed on them, some enlargement of the negotiations would seem to be called for. For example, tropical products negotiations might consider the obstacles developing countries face in exporting sugar (in raw and processed forms), all vegetable oils, and a wider range of fruit and vegetables. There are also some loose ends to incorporate: for example, for hides, skins, leather, and leather goods, there are problems of tariff and NTB escalation and strong interests among low-income developing countries. with Prlorlttes and obstacles should Negotiations within the current tropical prod• ucts agenda break down into two main sets of items. On one hand, there are some well-trodden trade policy battlegrounds where important inter- ests, or issues of principle, are at stake and where much political will would be required to make progress. On the other, there are the product areas where the progress of liberalization has already gone quite far, as for jute, spices, rubber goods, fresh fruit, and wood products. In these and other areas, there remain unresolved prob- lems involving specific products or markets, but there is little further scope for major initiatives. And many of these problems relate to the limits of particular GSP schemes (the treatment of GSP wood product imports by the United States; or Colombian cut flowers in the United States) rather than questions for the MTNs. What, then, could be the priorities? One prior- ity should be to give detailed attention to the pro- 177 tariff issues are involved, the GSP can be used to discriminate in favor of low-income beneficiaries, though it must be acknowledged that the track record of the GSP limitations as redistributive devices is not good. More generally, the Group of 100 countries will be obliged to pursue their interests in a wide variety of negotiating groups: on textiles; on agriculture, especially sugar; and even on such new issues as countertrade (becoming common in Africa) and services (tourism and services in- volving overseas contract labor). Negotiations on tropical products are likely to be of only some value to them unless their scope is enlarged. The United Notes and 1. The GAIT Action Program of 1963 called for early, duty- free entry for these items. 2. Among the few general reviews is Adedeji (1983). 3. These estimates were made from 1982 data and reflect commodity prices at that time. 4. Baldwin and Murray (1977) capture the main viewpoints. 5. Brazil accounted for 34.5 percent of the increase in manu- factured foodstuffs exported by developing to developed countries in the 1970s; the main NICs, around 50 percent together (UNCTAD 1986, table 12). References as the main Adedeji, Adebayo. 1983. "Special Measures for the I.east Developed and Other Low Income Countries." In E. Pregg, ed., Hard Bargaining Ahead: US Trade Policy and Developing Countries. Washington, D.C.: O.D.C. Agruwal, Jamuna P., Martin Dippl, and Rolf Langhammer. 1985. EC Trade Policies Towards Associated Developing Countries: Barners to Success. Tubingen, West Germany: J.C.B. Mohr. Balassa, Bela, and M. Kreinin. 1967. "Trade Liberalization under the Kennedy Round: The Static Effects." Review of Economics and Statistics 49:125-37. . 1968. "The Structure of Protection in the Industrial Countries and its Effects on the Exports of Processed Goods from Developing Countries." World Bank Eco- nomic Report EC152. Washington, D.C. Baldwin, Robert, and Tracy Murray. 1977. "MFN Tariff Reductions and Developing Country Trade Benefits under the GSP." EconomicJournal 87(March):30-40. GAIT Secretariat. 1979. The Tokyo Round of Multilateral Trade Negotiations. Geneva. Golub S.S., and J.M. Finger. 1979. "The Processing of Pri- mary Commodities: Effects of Developed Country Tariff Es- n culation and Developing Country Export Taxes." Journal of Political Economy 87 ,3(May-June):559-77. Karunasekera, M.V.D.J. 1982. "A Note on Tariff Escalation in Protectionism: Threat to International Order." Common- wealth Economic Papers 17. London: Commonwealth Sec- retariat. Morris, D.C. 1982. "Measures of Agricultural Protection: An Analysis of Selected Products." In D.C. Morris, ed., Protec- tionism Threat to International Order. London: Com- monwealth Secretariat. UNCTAD. 1979. The Processing Before Export of Primary Commodities; Area for Further International Cooperation. Tropical p,odflCU Valdes, Alberto, and Joachim l.ietz. 1980. Agricultural Pro- tection in OECD Countrla: Its Cost to Lns IAwlopt,d Coulll'rlff. Washington, D.C.: International Pood Policy Research Institute. World Bank. 1981. World/JftJelopmfflf Repo,t. Washington, D.C. Yeats, Alexander. 1984. "On the Analysis of Tariff Eacalation. Is There a Methodological Bias Against the Interest of De- veloping Countries?" Journal o f ~ Economics 15 (Spring):n-88. 179 Restrictions agreed on multilaterally date from 1962 (Keesing and Wolf 1980). The Long-Term Arrangement (LTA) regarding International Trade in Cotton Textiles allowed developed countries to introduce restrictions on imports from developing countries considered to be a source of actual or potential market disruption. The restrictions were either bilateral, through a negotiated voluntary restraint agreement, or unilateral. The alternative of safeguard action under GATT Article XIX would have allowed them to restrict the considerable trade in textiles among themselves (and allowed retaliation). 2 The LTA was renewed twice before 1974 when the MFA replaced it, extending restric- tions to noncotton textiles. The MFA was renewed in 1977, again in 1981, and once again in 1986 (table 23.2). The MFA cannot be evaluated in a historical vacuum. Those who agreed on the original text could reasonably claim to have introduced multi- lateral discipline to a sector with high levels of protection and extensive bilateralism. And a bal- ance was struck between the interests of export- ers and import-competing producers. But the last decade has seen the strengthening of the MFA's protectionist features. Bilateral agreements have become more restrictive. Annual growth rates of goods under quotas have generally been below the minimum specified 6 percent. More product categories have been controlled. Flexibility has been reduced. Evidence offered to prove that market disruption has become minimal. Very small suppliers have been subject to quotas. The "basket extractor" and "anti surge" mechanisms have been introduced to trigger new or tighter quotas semiautomatically within existing restraint agreements. And an essentially temporary ar- rangement to provide some breathing space to Textiles and clotbtng Table 23.1 and clothing, 1985 trade flows (billions of dollars) To Developtng Developed and eastern trading area 44.5 12.2 29.5 18.2 One major result of spreading controls has been a diversion of trade from restrained to less restrained sources. This would explain the in- creased market share of developed country (mainly EEC) exports in U.S. imports after 1981 and (mainly U.S. exports) in EEC imports in the late 1970s. In the EEC, trade diversion was also substantial to some preferred low-cost suppliers, mainly in Southern Europe (Spain, Portugal, and Turkey), and Italian exports to the rest of the EEC benefited considerably from EEC protection against low-cost imports. In the United States, the major Far Eastern suppliers have been held to lower growth than other developing countries and China. Has the MFA curtailed low-cost imports overall? At first sight, No. Taking the MFA period as a whole, the average growth in penetrating devel- oped country markets by developing countries was more rapid than the growth in textiles or clothing imports (table 23.4). Furthermore, the rate of growth of market penetration by develop- ing countries in clothing is one of the highest of all manufacturing industries. But as loopholes are plugged and trade diversion is prevented, the MFA's protectionist bite is matching its bark. The evidence of full (or overfull) use of many quotas and the size of quota premia suggest that import growth is being held below its economic poten- tial (Koekkock and Mennes 1986). States Approaches to the 1986 renegotiations more rap- The MFA is supposedly concerned with regulating the pace of long-term structural adjustment. In practice, the terms of each successive MFA, and of its bilateral agreements, have also been influ- enced by other factors. In the run-up to MFA4, EEC industry was recovering after a decade of 181 Table 23.2 affec:t1n1 cnde la te:Dila and clothing Prod#ds Regulations Cotton products Short-term quantity restriction on specific suppliers in case of "market disruption." Textile and 1. New restrictions permitted clothing products where "market disruption" with 50 percent of 2. Conaols either unilaterally cotton (in value) (Article 3 or bilaterally negotiated (Article 4). 3. Quota levels not below imports in preceding period. 4. Minimum annual volume growth of S percent within quotas. Coverage extended 1. As in LTA but with more to all teniles specifications of real or and clothing of threatened market wool, cotton or disruption. synthetic fibers. 2. New provisions for base levels, annual growth rates (not less than 6 percent) and flexibility of quotas. 3. Special provision for small and new suppliers and cotton textile aports. 4. Textile Surveillance Board to monitor bilateral agreements. Same as MFA 11 1. As MFA 1. 2. A provision for "jointly agreed reasonable departures" which permitted derogation of MFA requirements (base levels, growth rates, and flexibility provisions. Same as MFA 1 1. As MFA 1 ("reasonable departures clause" deleted). 2. Introduction of "anti-surge" procedure to prevent 'sharp and sustained' import growth within quotas. Coverage extended 1. As MFA 1 ("reasonable to cover vegetable departures" restored, fibers (Bax and albeit modified). ramie) and silk 2. Some tightening of blends. MFA now article 3. excludes only hair 3. Special treatment for 'least fibers and other developed• and wool textile minor fibers (such aporters. as coir, sisal, and 4. Commitment to scrap under- jute) already ttad- utilized quotas. ded in substantial quantities. Textiles and clothing Table 23.3 imports to the EEC and United States annual percentage rate) United States Imports from All Low-cost developed All imports imports countries imports 20.6 5.0 -13.3 -3.5 2.1 4.6 -4.2 2.9 4.5 11.0 31.0 16.2 Mediterranean preferential countries (Spain, Portugal, and so on). In a U.S. Europe and Japan. U.S. growth figures use 1971 as the base year. expanding their market shares). Some of the less competitive Latin American and Eastern European exporters saw the MFA as providing a guaranteed market share. The main opponents of MFA con- trols were populous low-income Asian producers whose long-term potential as exporters is under- developed. On this occasion India and China led the calls for the MFA's abolition. Some major producers, notably in Hong Kong, expressed a philosophical objection to the MFA But such producers manage to live with it by taking maxi- mum advantage of current quota flexibility and by organizing themselves to maximize unit values (and quota rents) from existing opportunities. Unless developing countries reconcile these contradictions, their opposition to the MFA will be -- as it was then - unconvincing. In mid-1986 the fifty-four developed and devel- oping country participants in the MFA did reach agreement. There was no concession to the central demand of developing countries for a commitment -- expressed in the form of a time- table and end date -- to phase out the MFA Indeed, it is extended for five years, rather than four like its predecessors. But there is a qualified commitment to the "final objective" of an "appli- cation of GATI rules to trade in texiles." In other respects, the basic objectives of the MFA were retained, subject to changes, some of which are more restrictive: 0 At the insistence of the United States, fiber coverage was extended from cotton, wool, and synthetic fibers to all vegetable fibers -- such as ramie -- and silk blends. The excep- tions are some goods "traded in commer- cially significant quantities before 1982, such as bags, sacks, carpet-backing, cordage, lug- 183 Table 23.4 of Import penetradon radCNS In selected developed countries (197W7) Marltet Belgium/ Fin- Ger- Nether- Nor- Swe- bou,g land ~ many Italy lands way den UK (average -nual incrvase in percent) s .66 0.30 4.87 4.78 4.99 2.49 0.11 3.12 3.40 3.49 2.79 22.00 S.02 4.33 1.37 0.40 3.97 1.07 1.44 7.00 9.03 6.29 10.31 057 3,39 4.9() 4.79 0.66 1.90 7.SO 9.S6 o.66 0.34 3.10 4.02 1.91 7.00 8.09 24.79 7.9() 5.37 S.13 3.77 4.01 0.02 3.02 11.14 11.24 0.14 21.41 2.49 1.20 S.02 3.60 &ia & MCs) 7.02 7.18 9.3s 6.54 10.lS 6.04 2.9() 0.33 2.40 8.0S 12.32 26.40 8.09 S.4S 9.40 7.99 8.48 1.88 4.23 9.89 13.70 0.74 28.93 3.74 2.45 6.9() 3.04 0.34 8.34 11.95 6.lS 10.24 7.45 9.84 9.5S 6.01 -1.10 13.59 26.41 5.16 -0.91 1.02 6.79 8.78 1.Sl -0.16 4.32 lS.14 8.47 16.05 1.22 0.10 4.70 0.9() A.fV (b). manufacture of tatiles; 322 manufacture of wearing apparel except footwear. and Statistics, "Compatible Trade and Production Data Base. 1970-1983 working World Bank Import Penetration Project Oassification and Data. 0 The antisurge formula -· introduced by the EEC to MFA3 to prevent rapid surges within quota limits -- has been retained at U.S. insis- tence, albeit with "equitable and quantifiable , compensation." In other respects, there are modest improve- ments from the exporters' standpoint: 0 Least developed countries should be ex- cluded from controls or else given "signifi- cantly more favorable treatment" (Haiti, Bangladesh, and the Maldives are the main beneficiaries). 0 Special treatment is prescribed for wool tex- tile exports (such as Uruguay's). 0 The powers of the Textiles Surveillance Board are to be strengthened, somewhat. 0 clause •· which Consistently underused quotas "will be re- . moved on request." The severity of the new MFA has to be judged . from the bilateral agreements that it legitimizes. tighter flexibility pro- The U.S. agreements generally incorporate much lower growth rates than were achieved under Te:xliles and clothing garment production should shift elsewhere. The shift would be toward the main remaining coun- tries with low labor costs (especially South Asia) and toward some countries with advantages in market proximity (the Mediterranean for the EEC and the Carribean and Central America for the United States). It would also be toward countries that can marry high technology with relatively low labor cost and with fashion sophistication (Italy and Hong Kong). On developed countries that of The liberalization of imports should reduce prices in developed countries. One recent study suggested that average U.K. retail prices of both imported and domestically produced textiles and clothing would be 5 to 10 percent lower than those of other goods if the MFA were abolished (Silbertson 1984). liberalization has significant distributional implications for consumers and producers. Protection permits producers in pro- tected industries to enjoy higher profits and wages •• through higher prices •• than in a free trade situation. Their rents from protection, and those of exporters under the VERs, are earned at the expense of consumers in industrial countries. An increase in competing imports does, how- ever, also create adjustment costs. The Silbertson study estimates that complete liberalization of quotas over the period of the forthcoming MFA4 would •· depending on the assumptions •· dis- place 10,000 to 50,000 jobs in the U.K. textile and clothing industries (from around 500,000). But the cost to the U.K. economy of saving a job is considerably more than the average wage. Other studies also suggest that the annual cost per job protected ranges from two to eight times the annual wage in the industry (Hutbauer and others 1986, and Tarr and Morlcre 1984). Looked at more broadly, the liberalization of textile imports should reduce the equilibrium exchange rate, offsetting the disinflationary im- pact of liberalization but increasing output and employment in other traded good sectors. A loss of quota premia accruing to exporters has the effect of reducing outlays on imports with the opposite effect on the exchange rate. A reduction in prices (increasing real wages) or in aggregate unemployment can then affect the other to the extent that there is a link between employment and wage bargaining. Model simulations, on plausible assumptions, show that textiles liberali- zation can increase economywide output and 185 and variety, and tighter control of stock, energy, raw material, and waste. Clothing firms are using laser-cutting, computer-aided design, and auto- mated handling -- at least for long production line intervention in items and in larger firms where heavy capital investment is economic (Disher 1986). The main operation in garment-making, however, is sewing. And despite a steady increase in machine speeds, sewing remains a generally labor-intensive opera- tion. That may be changing, too. Efforts are being made to automate sewing: Courtaulds has a prototype, fully automated system, and sewing is also being sidestepped by machine-welding seams. One defect of automation as an adjustment strategy in textiles was that the cost-cutting ap- proach to standardized output was relatively in- sensi-tive to demand considerations, particularly to opportunities for new products and high-qual- ity lines. But new technologies, using flexible machines, permit qualitative improvements too, as in the "quick response" approach. For example, new technology (allied to low-cost overworking) has been the hallmark of successful Italian knit- wear producers. 1bis technology includes com- puter-aided design, robotic cutting, and computer systems to monitor stock and sales and to pro- duce individual items for order. This discussion raises the question of how emerging trends in technology and capital invest- ment interact with trade policy. Some argue that at least some of the investment now being made in the garment industry owes its origin to the "breathing space" afforded by (partly) protected national markets •· or for Italy by the EEC market. In addition, the economic rents earned in the industry have facilitated the financing of new investment. Others argue that competitive pres- sures have acted as the main stimulus. In truth, not enough is understood of the dynamic eco- nomic effects of protection to be dogmatic on the issue. What is more certain is that it will be much more difficult to achieve for garments the major reversal of comparative advantage that could be said to have occurred for the main textiles pro- cesses. Instead, new technology should help to consolidate the position of producers in devel- oped countries and in high-wage NICs in a rather limited number of areas that lend themselves to economic forms of automation and, eventually, flexible manufacturing. In no sense do the new technologies provide a reputable case for indefinite protection. Either there is a genuine infant-industry phenomenon at Texttles and clolblng Table 23.S in the textiles and clothing industry Examples Textiles Clothing New blends of Fashion (incl. yarn and fabric; shortening nonV110vens cycle) High-value fabrics Upmarket niche household and car (Scottish textiles knitwear) of manmade companies to and special- chemicals Some subcontract- Offshore ing of standard- garment ized fabrics and assembly yam Some foreign investment companies Manufacturer Manufacturer importing importing and retailing Extension of high Laser-cutting speed open-ended spining and shut- Computer-aided tleless weaving. Micro-electronics, Some automated especially in sewing finishing. Some scrapping Seam-welding Better factory layout (auto- Integrated weav- matic handling) ing spinning Shift working Use of out- by mills worker for labor-intensive tasks 187 protection more transparent and remove discrimi- nation. There is evidence, however, that such an ap- proach would be impossibly difficult to execute through multilateral agreements. {The evidence is the past experience of converting specific restric- tions to ad valorem equivalents in the Tokyo Round.) Nonetheless, it seems reasonable to assume that fairly high tariffs will have to be re- tained if quotas are to be removed. A reformed safeguards clause would also be a prerequisite to the removal of the MFA. This would permit quota action in cases of demon- strated market disruption. The feasibility of nego- tiating a safeguards clause that is nondiscrimina- tory (as developing countries insist) •· and that provides developed countries with an adequate last-resort measure -- is discussed in chapter 10. On the MFA, developed countries have raised the issue of reciprocity from developing countries in return for more favorable treatment for their textile and clothing exports. Hong Kong (in the United States) and Singapore (in the EEC) have been accorded special status on these grounds in recent bilateral agreements. An issue parallel to reciprocity is different treatment of trade part- ners, already a feature of the MFA. 5 Pressures for reciprocity from more advanced textile exporters and more favorable treatment for low-income or small exporters will be an important feature of discussions on textiles and clothing, and more widely in the Uruguay Round. In addition, reciprocity may be sought in trade- offs between different issues. Developing coun- tries have rejected the idea of bargaining away restrictions that represent a fundamental depar- ture from GATI principles. In practice, however, some linkage, even if only implicit, may be the only way to advance in liberalizing textiles. protection The reformed arrangements The Uruguay Round offers an opportunity to recast world textile arrangements in a way that has not been possible in the narrow context of MFA negotiations. They can put in place an alter- native regime -· relying on tariffs and a strongly policed GATI safeguards clause. And they can provide, through phased negotiations, for politi- cally acceptable tradeoffs. If the MFA system is to be replaced, however, change will almost certainly be evolutionary rather than sudden. In the short run to 1991, the main scope for liberalization lies in measures that Textaes and clotblng remarkable longevity. But there seems to be a growing recognition that protectionism and man- agement of trade, along the lines of the MFA, is corroding the economic efficiency of the indus- trial economies, frustrating the export potential of liberal trade under GATI. If so, the Uruguay Round could be the beginning of the end of the MFA .. (women's/ Notes 1. The term "textiles" refers here to both textiles and clothing unless there is a specific need to separate the two sectors. 2. The use of GATI Article XIX also differed from the LTA in that it required proof of "serious injury" rather than "market disruption." 3. Quota rents can account for significant slice of textile exporting countries' GDP. For example, around S percent of GDP for Hong Kong in one estimate made in the late 1970s (Morkre 1979, Hamilton 1984, and Jenkins 1970). 4. There is a discussion of industry and firm level adjust- ment strategies in Cable 1983. S. In general, this has involved the largest and most estab- lished suppliers being given the lowest quota growth rates with the (stated) objective of redistributing some of the market share to other countries. For example, under MFA 4 the EEC has proposed 0-1 percent annual growth for the four dominant suppliers, 6-7 percent for the least devel-oped, and 4-6 percent for other suppliers. References Cable, Vincent. 1983. Protectionism and Industrial Decline. London: Hodder & Stoughton. , and Martin Weale. 198S. "The Economic Costs of --"sectoral Protection." The World Economy. 6:421-38. Disher, M. 1986. "High Technology in the Clothing Industry." Textile Outloolt International. London: Econo- mist Publications. GATI Secretariat. 1984. Textiles and Clothing in the World Economy. Geneva. Hamilton, C. 1984. Voluntary F.xporl Restraints on Asia: Tariff Rents and Trade Barrier Formation. Paper 276. Stockholm: Institute for International Economics Studies. Hufbauer, C. G., D.T. Berliner, and K. Elliott. 1986. Trade Protection in the United States • 31 Case Studies. Washing- ton, D.C.: Institute for International Economics. Jenkins, G. P. 1970. Costs and Consequences of the New Protectionism: The Case of Canada's Clothing Sector. Ot• tawa: North-South Institute. Keesing, Don, and Martin Wolf. 1980. Textile Quotas against Developing Countries. London: Trade Policy Re- search Center. Kirmani, N., P. Molajoni, and T. Mayer. "Effects of Increased Market Access on Exports of Developing Countries." IMF Staff Paper (December). Washington, D.C. Koekkock, K., and L Mennes. 1986. "Liberating the Multi Fiber Arrangement." Journal of World Trade Law 20(March/April): 142-67. Morkre, M. E. 1983. "Rent Seeking and Hong Kong's Textile Quota System." The Developing Economies 17, l(March): 110-18. OECD. 1983. Textiles and Clothing Industries. Paris. Shepherd, G. 1981. Textile Industry Adjusmumt in Devel- oped Countries. London: Trade Policy Research Centre. 189 Commission. UNCTAD. 1986. "Protectionism and Structural Adjustment." TD/B/1081. Geneva. Wolf, M. 1986. Handmaiekn under HarrassmftSI: Tbe Mufti. Fiber An'angement as an Obstacle t o ~ - Lon- don: Trade Policy Research Center. Unless a firm can somehow keep the knowledge it acquires completely proprietary, investment in knowledge is a public good that generates bene- fits not fully appropriated by the firm that carries it out. The combination of increasing returns, which imply imperfect competition, and the strong like- lihood of important external economies means that both the positive and normative analysis of trade policy must be different for technology-in- tensive industries than for more ordinary sectors. Trade policy will have different effects on technol- ogy-intensive trade flows •· and will have different welfare implications •· from what conventional trade models might suggest. And government actions outside the province of what is normally considered trade policy, such as sponsoring tech- nology development programs, may impinge on technology-intensive trade more than they do in other sectors. In some cases, the special features of technology-intensive goods may make them subjects of greater conflicts of national interest, and hence of trade friction, than other industries. This chapter is in three parts. The first part discusses the effects of economic policy on trade flows in technology-intensive sectors, with em- phasis on the unconventional possibilities. The second part examines one source of potential trade conflict in technology-intensive sectors •· international rivalry over the excess returns gen- erated by imperfect competition. The third part turns to the trade issues that the external econo- mies in technology-intensive goods raise. Government policy firm has To assess the impact of government policy in technology-intensive industries is more difficult 191 is that it is difficult to establish rules of the game for technology-intensive goods that would avoid trade conflict. Tariffs, export subsidies, and im• port quotas are clearly market-distorting meas- ures. And it is in the mutual interest of countries to agree to forgo their use. Government support of technology is, however, a desirable thing up to some point. It is a judgment call when it pro- ceeds beyond that point and becomes a distor- tion of the international market. Unconventional effects of trade policy dynamism make In industries with large dynamic economies of scale, the effects of trade policies can be quite different from those in industries characterized by constant returns to scale. The unconventional trade policy effect that has received most attention is the potential role of a protected domestic market in promoting exports of technology-intensive goods. Suppose that a firm must incur large development costs to pro- duce a good -- and perhaps accept losses on its production for a time to acquire experience. The firm will be more willing to introduce the product if it is assured of a protected domestic market, free from foreign competition, that will assure it of a base of sales. Conversely, its potential for- eign rivals will be deterred from introducing competing products if they know that they will be excluded from part of the world market. The result can be that the assurance of a protected market gives domestic firms an advantage that not only allows them to produce for that home mar- ket but to export as well. In other words, import protection can be an export-promotion strategy. 2 This market-access effect on exports has re- ceived much attention in the case of Japanese semiconductors. Although explicit import restric- tions on Japanese semiconductors were mostly removed in the 1970s, there is circumstantial (and disputed) evidence that the Japan's semiconduc- tor market remained tacitly closed to imports through the early 1980s. U.S. semiconductor firms have charged that this closed market gave Japanese firms a major advan- tage, not only in their protected domestic market but in exporting. These charges received at least some support from a recent simulation study, which indicates -- subject to the validity of its assumptions -- that a protected home market was crucial to Japan's ability to export semiconduc- tors in the late 1970s and early 1980s (Baldwin and Krugman forthcoming). Tecbnology-lnlenslve goods expect to be repaid in full •· that Airbus will in the end tum out to have received no subsidy at all. Compedtlon for excess returns sales Because of the increasing returns associated with investment in knowledge, technology-intensive industries inevitably are imperfectly competitive, and often highly concentrated. As a result, firms may be able to earn substantial excess returns - profits over and above the return that capital earns in alternative uses. (In some circumstances a part of these excess returns may also be appro- priated by labor.) Excess returns provide a potential source of policy conflict between governments. Other things equal, a country can raise its national in- come by shifting its mix of output toward high- return industries. Recent theoretical work has shown that carefully targeted government policy can increase a country's share of high-return technology-intensive sectors, raising its welfare at other countries' expense. This view is known as the strategic trade policy argument.4 The strategic trade policy argument A numerical example can convey the essence of the strategic trade policy argument. Suppose that there are two countries, the United States and Europe, and that there is an industry in which each country has one firm •· Boeing and Airbus. Suppose further that both firms are considering the development of a new good, which will be exported but not consumed domestically. (By assuming away domestic consumption, the entire focus is on the conflict over returns earned by the firms.) Finally suppose that, because of increas- ing returns, either firm could earn excess returns if it were to produce the good alone, but that both firms will lose money if both develop the product. The competition in this industry can be repre- sented by a matrix like that in figure 24.1. Boeing has the choice to produce (P) or not to produce (N); Airbus similarly can produce (p) or not (n). In each cell of the matrix, the lower entry repre- sents Boeing's excess returns, the upper, Airbus's excess returns. The values of these entries are arbitrary, but reflect the assumption that the market is profitable for one but not for two. Suppose that Boeing has a head start that en- ables it to commit itself to production in advance of Airbus. Then the outcome of competition is 193 Figure 24.1 payoffs In International competition: market for Boeing but not Airbus Airbus n 0 100 0 0 Figure 24.2 payoffs In International competition: for both, with a subsidy to Airbus Airbus n 0 100 0 0 Teclmology-tntennve goo4s domestic firms in one industry will raise the prices of these scarce factors, placing domestic factors in other industries at a strategic disadvan- tage. To determine the net effect of a strategic trade policy on national welfare, then, requires knowledge of the returns from other applications of the scarce resources. Finally, strategic trade policy is a beggar-thy- neighbor policy. A country that embarks on it risks provoking a trade war that leaves it worse off in the end. These criticisms make the immediate practical application of the concept of strategic trade pol- icy seem doubtful at best. But strategic analysis does show that conventional economic views about the unambiguous desirability of free trade are invalid for technology-intensive industries, in which dynamic scale economies lead to imperfect competition and the possibility of excess returns. External economies st Technology-intensive industries are more likely than other industries to generate valuable spill- overs among firms. This creates a potential for trade conflict, because each country may come to view certain technology-intensive sectors as key generators of technological progress. And they may seek to establish or maintain a domestic presence in these industries. At present, for example, semiconductors are widely regarded as the "crude oil of technology." And there is a widespread belief that national production of semiconductors accelerates the pace of techno- logical change in such related sectors as comput- ers. As emphasized earlier, measuring external economies is inherently difficult, but there is no reason to doubt the presence of important spill- overs from investment in technology. There is unfortunately some truth to the view that competition for these spillovers is an inevi- table source of conflict in technology-intensive trade. But the dimensions of this conflict are smaller than one might expect. Even where tech- nology-intensive industries do generate important external economies, this need does not always produce conflicts of national interest. The con- flict depends on the scope of the external econo- mies. National versus international sptllovers A key distinction is between external econo- mies that are national and those that are interna- 195 Not necessarily. If factors of production arc elastically supplied to the industry from other sectors of the country, it will not offer higher wages or profits than alternative uses of labor and capital. Instead, the external economies will be passed on in a low price, which benefits the countries where semiconductors are not pro- duced as well as the country where they are. A national advantage from even localized exter- nal economies, then, is not guaranteed It must arise from one of two channels. First is the pres- ence of inelastically supplied factors, such as land, whose price will be higher in the country with the external-economy-generating sector than elsewhere. Thus, national benefits to the United States from external economies in semiconduc- tors are measured by the premium in Santa Oara Valley real estate values (not a trivial sum). Alternatively, a technology-intensive industry will generate national advantage if it generates important interindustry spillovers. Suppose that the diffusion of information from a national semi- conductor industry raises the efficiency of many other industries above what it would be if semi- conductors were imported. Then, even if the factors of production employed in semiconduc- tors earn only normal returns, there will be a national interest in having domestic production. So, there are some cases in which external economies produce a true conflict of national interests over who gets to produce technology- intensive goods. But the extent of this conflict is narrower than is generally perceived. A nation has a stake in producing its own technology-in- tensive goods only if the external economies are national rather than international •• and even then only to the extent that there are either inelasti- cally supplied factors or interindustry spillovers. Conclusion The heavy investment in knowledge, and the re- sulting combination of dynamic increasing returns and external economies, give the industries pro- ducing technology-intensive goods distinctive fea- tures that pose difficulties for trade policy. One such difficulty is that rules of the game for trade policy are difficult to devise. The line be- tween legitimate government support for research and market-distorting policies is hard to draw, and the effects of trade policies are hard to quan- tify. Another difficulty is that conflicts of national interest are more prevalent than for other goods. Strategic trade policies may attempt to secure Tecbnologp-lntenriue goods d)'namic increasing returns in some aecton does not irmdi- date the general equilibrium point that a country cannot import less and export more of everything. 3. On the effects of military purchases in extending the production runs on aircraft, see "Eternal Triangles: A S\lffey of the Aircraft Industry," The F.conomist, 1 June 1985. 4. The concept of strategic trade policy was introduced by Brander and Spencer (1983). See Krugman (1986) for a set of papers discussing and critiquing the concept. in tech~ References Baldwin, Richard, and Paul Krugman. 1987. "Market Access and International Competition: a Simulation Study of 16K Random Access Memories." In R. Feenstra, ed., Empirical RffWR"Cb ;,. l"'ff"fUllimtal Trot:k. Cambridge: MIT Press (forthcoming). Brander, James, and Barbara Spencer. 1983. "International R&D Rivalry and Industrial Strategy." Review of Eccmomic Studia 50:707-22. Grossman, Gene. 1986. "Strategic Export Subsidies: A Critique." In Krugman (1986). Krugman, Paul, ed. 1986. Strategic Trade Policy a,ul the of semiconductors NftW /"'er,u,tio,eal Economics. Qunbridge: MIT Press. United States International Trade Commission. 1983. For- as export promo- ap Jtulustrial Targeti,eg a,ul Its Effect°" U.S. ltulustries: Pbase I: Japan. USITC 1437. Washington, D.C. 197 intellectual property laws would become a GATI violation. Even so, the comity approach clearly has limitations. It leads, at best, to a possibly meager minimum of protection and probably cannot lead to agreement on an acceptable maxi- mum. The chapter concludes with an economic the- ory of why these difficulties exist and a suggestion of a possible economic approach to negotiating agreement on intellectual property issues within a trade context. What are intellectual property rights? Intellectual property law concerns legal rights in new ideas. Very generally, an intellectual prop- erty right is a state-granted power to a private person to secure the aid of the state, for a limited number of years, to prevent unauthorized per- sons from commercially exploiting a new idea, which the person "owns." Often, the right is viewed as a quid pro quo from the state to the person. The state provides its sanctions to the person in return for the person's making available to the public some advance in thinking. The availability of state sanctions permits the owner of intellectual property rights to extract economic rents when commercially exploiting the advance in thinking. Those rents, or their prospect, in• duce investment in developing new technology. Intellectual property law consists of two major parts: (1) industrial property law, and (2) copy- right and neighboring rights. Industrial property law .. patent law is the most prominent example •· is directed primarily to mass-produced articles of commerce. Industrial property law therefore tends to reflect the economic values of manufac- turers and sellers of such articles and society's Intellectual property Typical subject matter of patents is machinery, electronic circuits, chemicals, and processes. In some countries, drugs are not patentable or are subject to special limits. In some countries, computer programs are not protected by patents. There are also questions about the patentability of products of genetic engineering. As will be suggested later, these discrepancies in national patent law might lead to assertions that a nation's patent law creates NTBs. A patent may be sold, like other personal prop- erty, and the owner of a patent may choose or refuse to license it to others. Under a patent license, the owner of the patent allows a licensee to practice the invention or some aspect of it in return for money, typically a percentage of the sales price of the product made under the license. In many countries, a patent owner's power to refuse to license the patent is not absolute. In such cases, there are circumstances in which other persons may be entitled to a compulsory license, so that they can practice the invention in return for payment of a reasonable royalty to the patent owner. protects similar Many national laws also limit the conditions that a patent owner may impose on a licensee in connection with the license. Most national laws do not permit a patent owner (or for that matter, of being "property the owner of any other intellectual property right) to impose conditions on a customer to whom the product is sold. The rights of a patent owner usually apply only in the country that granted the patent. Typically, however, a patent owner will own parallel patents relational inter- in many countries and will therefore own parallel sets of rights in the various countries. Often, different persons will be licensed under the dif. ferent patents, so that person A is licensed to practice the patent in country A, person B in country B, and so on. This may lead to "parallel importation" (or gray-market) controversies, when products made under the patent in country A are imported into country B and are sold there in competition against the products that person B makes or sells under the patent in country B. The European Economic Community has developed a substan- tial body of law dealing with such controversies. The general rule from these cases is that parallel importation is permissible in the EEC when the patent owner has been rewarded under one of its patents. So, patents may not be used as barriers in the to intra-EEC trade when there has been a distri- bution of the product authorized by the patent 199 scope of copyright in computer software. To some, the proper scope of such protection is only over the particular lines of code and possibly close paraphrases of them. Others contend that copyright should protect the "look and feel" of computer programs, which means the organiza- tion of the program, the choice of data fields, menus, screens, selection of thinp to put into subroutines, and an indefinite number of other thinp beyond the lines of code. What might happen if the tendency to assert copyright protection over noncode aspects of computer programs continues? It may lead to international controversy between nations assert- : ing that their nationals are entitled to be pro- tected against piracy of the look and feel of their software and nations asserting that their nationals should be free to compete in the supply of com- puter programs that emulate other computer programs without copying their codes. That may result, in tum, in claims that nontariff barriers to trade (NTBs) are created by such a copyright stance. Another area in which international difference of opinion over the proper scope of copyright may lead to controversy is whether a copyright in a drawing should protect against competitive marketing of the depicted object. Under the law of the United States and that of Japan and most continental European countries, a copyright in a picture does not protect the depicted object. Under the copyright law of the United Kingdom and those countries following its principles, however, a copyright in a blueprint or other tech- nical drawing furnishes the basis for a copyright infringement action against a rival seller of the depicted product. This has led to widespread litigation over the distribution in the United King- dom of spare parts for automobiles and similar step" or "non- products. (At the moment, the controversy has been muted over automobile parts, because a majority of the House of Lords has concluded in the sense that that automobile owners have an implied license to purchase repair parts wherever they please, and a Royal Commission has suggested reassess- ment of the copyright law. But the controversy may be revived for products other than automo- bile parts, since U.K. copyright law apparently still applies to protect them.) Some EEC nations whose nationals' spare parts were excluded from the United Kingdom under this interpretation of copyright law asserted that the United Kingdom was violating the Treaty of Rome's ban on intra-EEC barriers to trade. The Intellectual p,operty trademark is permissible. Part of the difficulty stems from a difference of view about the proper legal theory on which trademark protection should be based. When only the conventional "source confusion" theory is used, there may be difficulty in finding a justification for preventing the importation of "genuine" goods. There is less difficulty, however, if a "property right" theory is used. Another field where the law is uncertain is that of character merchandising. This is the marketing of goods with a picture or other symbol on them indicating some sort of sponsorship by an actor, a cartoon character (Snoopy, Bugs Bunny, Mickey Mouse), a rock singer or group (Elvis Presley, The Beatles), or other entity (E.T., Darth Vader). Usually, the legal theory used to support the character merchandiser's claim of right is some sort of trademark theory, except in the case of actual individual persons where a "right of per- \ sonality" may be invoked. There are more diffi- culties in fitting the character-merchandising concept within a conventional "source confu- sion" trademark law theory than under a "prop- erty right" theory of trademark. Many nations do not recognize a character- merchandising right. Controversy in this field may increase if nations recognizing the right seek to require nations that do not recognize it to police their nationals accordingly. For example, a U.S. company asserting proprietary rights over E.T. or Elvis Presley as a character will wish to prevent the manufacture or sale in any nation of toys, lunch boxes, T-shirts, and the like that bear the likeness of the character. By the same token, such companies may seek to have the United States induce foreign governments to establish laws recognizing proprietary rights in the mer- chandising use of characters. As in the instances of computer software and spare parts protection, discussed above, there is a potential for charges of nontariff barriers to trade. Chip topography invested The United States and Japan have enacted laws protecting the topography or layout of semicon- ductor chip products (integrated circuits). These laws are between copyright and patent laws. The United Kingdom and other nations have indicated that they interpret their existing copyright laws to cover chip topography. The EEC has issued a directive to its member states to establish chip topography laws. It is expected that to protect 201 Slavish copying is the very close copying of another person's industrial design or another person's marketing program. In some nations, such as Germany and in Scandinavia, this is a wrong, even though the design or program is unpatented and uncopyrighted. In other nations, such as the United States, slavish copying is gen- erally considered part of free competition and permissible. Presumably, if a Japanese firm "slav- ishly copied" a chair designed by a Scandinavian firm, the United States would allow the chair to be imported into the United States while Den- mark would bar it from importation into Den- mark. As yet, no suggestion appears to have been made that any nation's laws against misappropria- tion of trade secrets or against slavish copying constitute nontariff barriers to trade. Intellectual property law and barriers to trade In the most literal sense, intellectual property laws are NTBs. Accordingly, GATT expressly rec- ognizes them as exempt from GATT's proscription of NTBs. But it can be argued that intellectual property law need not be considered as an excep- tion to GATT, because intellectual property law does not raise the kind of NTBs cognizable under GATT. It is more useful to discuss whether na- tional intellectual property laws or national refus- als to recognize intellectual property legal doc- trines are NTBs cognizable under GATT than it is to discuss whether they are NTBs. In the broadest sense of the term, many things are NTBs. Excluding stolen property from impor- tation is an NTB. So is having a national language in which official business must be transacted. So, too, are having stringent health and safety laws or technical standards •· and having laws requiring driving on the left side of the road or using a nonmetric system of measurement. A continuum of practices could be listed, all of which may be considered NTBs, but at least some of which most observers would agree should not be considered cognizable under GATT and should not be ad- dressed by GATT-type disciplines. The question then becomes one of distinguish- ing NTBs that should (by some generally agreed- on standard or premise) be cognizable under GATT from those that should not. One appropri- ate threshold criterion is substantiality: there must be a rule excluding trivial barriers. Another appropriate criterion would exclude barriers in- volving clearly supervening national interests in Intellectual property way that the disputants recognized as legitimate. The question is not resolvable because of the lack of an accepted basis on which to answer it. There is insufficient agreement on the appropri- ate premises for reasoning and standard for weighting competing interests. But the question is not open for discussion. GATT provides that it will not act against intellectual property law as an NTB. Why does GATT so provide? In all probability, there could be no GATT unless it were recog- nized that intellectual property law is outside GATT. It would not have been, and it would not be, possible to get the nations recognizing intel- lectual property rights to agree to a treaty under which they were required to modify their patent and copyright laws -- or to convince countreies without such laws to adopt them. The status quo under GATT permits intellectual property laws, and there is no reason to expect that status quo to be changed. The scope of a nation's intellectual property law as a GAIT issue A more appropriate question (because it is more manageable) is whether a particular na- tional law is an intellectual property law, in the meaning of the GATT exemption. Among nations believing in having intellectual property laws, there are differences of opinion over what the scope of those laws should be. Should copyright be used to protect spare parts? Should the look and feel of computer software be protected by copyright law? Should semiconductor chips be to describe those who fail to sold that are the products of reverse-engineering? Should character-merchandising rights be recog- nized? Is it proper to bar from importation goods made by means of a purloined trade secret? Should "genuine" trademarked goods be barred from parallel importation? The spare-parts copyright dispute, discussed above, is illustrative. The United Kingdom calls this type of protection "copyright." But applying a label to something, perhaps arbitrarily, does not necessarily resolve the question. To most na- tions, the United Kingdom's application of copy- right law to drawings and products made in ac- cord with them probably is aberrant and inconsis- tent with fundamental principles of intellectual property law distinguishing patents and copy- rights from one another. In effect, by extending the scope of the copyright protection for a draw- ing of a mechanical object to the object depicted 203 to trade relations as is imposing NTB-cognizable under GATT. Therefore, GATT mechanisms should be expanded to compel adherence to at least specific minimum levels of intellectual prop- erty protection in all GATT nations. These proposals address not only the failure of some nations to accept generally recognized doctrines of intellectual property law. They seek to proselytize expansion of copyright or other intellectual property law to new technology not previously recognized as part of the subject mat- ter of copyright or other intellectual property law. It is an avowed goal of these proposals to extend existing laws or develop new ones to cover fron- tier technologies (such as semiconductor chip topography and computer software). 2 The economic rationale of these proposals is that capital is made available to innovative tech- nology and to the development or invention of new technology only when investors believe that they will profit from investing in the new technol- ogy. As suggested earlier, a principal source of such investor belief is the promise by intellectual property law that the proprietors of new technol- ogy will be able to extract economic rent (monop- oly rent) because the state will prohibit competi- tors from freely appropriating and exploiting the new technology. Buy if pirate competitors may readily operate in nations that reject intellectual property law, those pirate competitors will divert rent from the investors. The return from investing in new technology will be lower, and there will be and sets of a decrease in investment. The result will be to slow technological progress worldwide, even though the pirates and the nations in which they operate may realize some short-term gains at the than "expressions," expense of investors in technology. Part of the theory, too, is the proposition that the total magnitude of all the economic rents under the proposed system is less than the total social value of the increment in technology brought forth by governmental installation of the intellectual property system. Probably, without the support of this premise, it would not be possible to secure agreement that the state should lend its coercive power to private persons so that they can extract the economic rent that the intellectual property system provides. Questions may be raised about the empirical data supporting the theory. Other questions may be raised about the method for determining rela- tive magnitudes of rent and social value. In short, it can be assumed that there may be resistance to the whole plan, and disagreements may be par- Intellectual property will be perceived that there will be "winners" and "losers" among nations under any new level of intellectual property protection. This fundamen- tal difficulty with the comity approach suggests that a GATT agreement on intellectual property matters could provide comity at a minimum level, but the result would be of limited value to any- one. (lbe immediate value would be only that something is better than nothing. There might be a symbolic or ceremonial value, however, or one in providing a springboard for future advances.) Realization of truly uniform intellectual property laws is probably out of the question. A further difficulty with pursuing the comity approach stems from its being inherently multilateral. Experience has shown that bilateral discussions more often result in recognition of intellectual property rights than multilateral discussions do. Therefore, any proposal for a GATT agreement on intellectual property issues might well foster im- proved trade relations if the proposal merely sought to have a vague (albeit unproductive in the short term) endorsement of the principle of recognition of intellectual property rights and of the promotion of comity with regard thereto, rather than seriously attempting to exact agree- ment on substantive issues. (At the same time, pursuing a series of separate bilateral approaches toward recognition of specific types of intellectual property rights might more produce more con- crete results in the short run.) An alternative concept for minimum and maximum protection To the extent An impasse is likely in negotiating recognition by developing countries of rights in intellectual property, so long as the matter is presented in terms that lend themselves to ideological dispute. This applies paramountly to the "natural justice" approach - that is, developing countries owe it to inventors and authors (or their assignees) in developed nations not to rob them of their inven- tive, technological, and literary creations. It applies also to the "do it because it is good for you" theory -- since developing countries are unlikely to believe that their net domestic social and economic gains (encouraging technological progress) will really exceed the costs (royalty payments). And it applies to any approach that tries to balance incommensurable interests against one another, such as the value of free trade versus national interest in security, national pride in promoting a local computer industry, and 205 latitude in a highly developed country's tariffs on labor-intensive goods to provide the concession needed to induce recognition of intellectual prop- erty. Thus, the option may not be equally open to all highly developed countries. Nonetheless, this approach is probably more likely to succeed than those previously attempted. To date, highly developed countries seem to hold that recognition of intellectual property rights should be treated as a "just" demand for which no concessions need to be offered. Perhaps, at the same time, developing countries have as- sumed that favorable tariff provisions for their levied by a govern- labor-intensive goods are their "right," and need not be preserved by making concessions in other trade areas. Are either of these positions realistic? It would seem, on balance, that the two positions are equally unsound. Those in highly developed countries view strong intellectual property law as a nonnegotiable and just demand for which no concession need be offered. Those in developing countries are unwilling to bargain over the price for implementing stronger intellectual property laws -- and believe that refusal to bargain over the matter can have no trade consequences for labor- intensive goods or other goods in which they have comparative advantage. If it is possible to approach the question of stronger intellectual property laws in the forth- coming trade negotiations as a sort of tariff nego- tiation problem, there may be less heat and smoke in the process than other approaches promise. Unless this or some other type of eco- nomic or business approach to the question can be devised, however, the impasse over the issue is likely to continue. Notes recogni- 1. On 7 April 1986, the Office of the United States Trade Representative released an Administration Statement on the Protection of U.S. Intellectual Property Rights Abroad, stating that the .Administration "will seek to conclude, in the new GATT round of multilateral trade negotiations, an enforce- able multilateral trade agreement against trade-distorting practices arising from inadequate protection of intellectual property" (Id.4). 2. "Many nations provide only limited copyright protec- tion ... Their copyright laws do not cover many new and evolving forms of authorship, such as computer software and satellite retransmissions." Administration Statement, (pp. 2- 3). Accordingly, the .Administration stated that it would seek to extend existing legal standards or develop new ones "to cover frontier technologies." Administration Statement, (p. 2). Other stated examples of such technology in need of in- tellectual property protection and biotechnology (presuma- bly, that of recombinant DNA and hybridomas) and semicon- ductor chip topography. Administration Statement, (p. S). lei to the next round of talks on goods or separate from them? The U.S. position at the outset was clearly to prefer the augmentation of GAIT to include serv- ices, leaving the question of the shape of such an augmentation to the negotiations. That shape may, as a witticism went, be simply to add to the GAIT articles the two words "and services" wherever the word "goods" appeared. Or, taking the cue from the conventional Oxford English Dictionary where "man" embraces "woman," it might be to declare that "goods" imply "services" in the agreement. But good wit is often bad economics, and services raise issues that go well beyond the scope of GAIT. It followed that the United States wanted the new round of trade talks to include the negotia- tion of the services compact. The single track was therefore the preferred option. By contrast, Brazil and India, and indeed the G-10, wished to delink GAIT altogether from a potential services agreement, deriving comfort rather than suffering embarrassment from the fact that the acronym for the General Agreement on Services would be GAS. They pushed for this delinking because they feared the grand tradeoff (described later in this chapter), so it was natural for them to seek a neat separation in the negotiating procedures for goods and for services: this was the dual-track procedure that Brazil proposed in June 1985. The negotiations, according to this formula, would be distinct for services, undertaken by governments rather than GAIT contracting par- ties. Because they need not be parallel to nego- tiations in goods, they would not be under GAIT auspices -· and would lead to a services compact outside GAIT. 207 wire" are obvious c:nmples. Traditional banking and insurance services fall into this category, in principle, since loans could be secured by mail or phone, and insurance policies arc often so pur- chased Such arm's length services are best de- scribed as "long-distance" services, to be distin- guished from the "temporary-factor-rclocation- requiring" services, for which physical proximity is essential (Bhagwati 1985). 1 The latter are the more important today. Therefore, the question of devising a services compact, whether as part of an augmented GATT or outside GATT, is inextricably bound with the question of provider-mobility across national borders. The negotiations on services must there- fore come to terms with the implications of the essential connection, in many services, between international factor mobility and international trade. The distinction between these two phe- nomena, accepted since the founding of Econom- ics and of GATT, vanishes for the first (indeed the preponderant) class of services. Factor mobility and trade are simply two integral aspects of the service transaction. For this reason, it is prefer- able to talk of service transactions rather than service trade, so as not to lose sight of this dual nature of the services requiring proximity. Among the critical implications of this essential connection with international factor mobility are the following. (1) If services require factor mobility, the abil- ity of governments to exclude or impede service transactions does not depend alto- gether on restrictive border measures on trade. Restrictions on factor inflow can suffice for this purpose. Protection be- comes readily possible by exercise of non- trade measures. (2) The need to go beyond the conventional focus on such border measures as tariffs and quantity restrictions is thus immediate and compelling for services. This fuels therefore the demands for the "right to es- tablish." (3) But the phrase "right to establish" con- ceals a continuum of factor-mobility phe- nomena, embracing both capital and labor mobility. Thus, it can embrace the right of an American bank to establish a branch in Bombay, implying foreign investment, and the right to employ foreign personnel lo- cally, implying skilled and semiskilled im- ports of labor. It can embrace a Korean Services nificant temporary relocation of labor and con- centrate on the rest raises a dilemma. It not only rules out of the compact an important class of services. It also rules out a range of services for which some of the principal developing countries that have been skeptical or opposed to negotiat- ing services happen to have the skills and endow- ments to entertain export prospects. In fact, rul- ing out such services from a services compact is likely to have the serious consequence that "such a definition of services therefore excludes any substantial export interest on the part of develop- ing countries" (Hindley 1986a, p. 4). across na- Regulation relocation Regulation applies far more pervasively to serv- ices than to goods, and regulatory provisions are rarely harmonized across national boundaries. The critical difference with goods, however, arises from the fact that these regulations often apply to the provider of the services while their intention is to protect the user of the services. With goods, the regulations apply to the product. Thus, with trade in goods, it is possible for for- eign suppliers, to meet national regulations by manufacturing to necessary standards. Different regulatory conditions on the production process are not generally a valid ground for restricting trade in goods, though complaints are often heard about how different health, safety, and human rights traditions and standards result in unfair competition. By contrast, with services, it is impossible to disregard these regulatory differ- ences. With services, such distancing is often impossible. What this regulatory difference between serv- ices and goods implies is that, while local estab- lishment by a foreign provider to provide a serv- ice will permit the fulfilment of local regulatory criteria, sale of such services from a base abroad (where the regulatory criteria are less strict) will not. Interestingly, this difficulty with regulation arises with arm's-length transactions. The diffi- culty with service transactions requiring physical proximity between provider and user arose where arm's-length transactions were infeasible or sig- nificantly inefficient! of market access." The nonharmonization of regulatory systems has led to major difficulties with service trade liberalization in the EEC (Hindley 1986d). The EEC does not lack for the right to establish. But the incapacity to sell services from a base abroad, where the regulatory regimes are dissimilar, has 209 trial countries. On the other hand, the develop- ing countries' service exports are by no means negligible •• and seem to reflect earnings even from "other private services" (which include professional, design, construction, and related services) rather than earnings only from tourism and transport. Detailed studies further underline the export possibilities that the energetic, outward-oriented NICs have in services. For example, the earlier U.S. domination of the world market for interna- tional construction has diminished, with the inter- mediate developed countries and a NIC such as the Republic of Korea taking substantial shares in the 1980s (table 26.2). In the more complex field of international design contracts, the data again show an increased share of contracts being awarded to firms from Brazil, Lebanon, Vene- zuela, the Republic of Korea, and Taiwan (Prov- ince of China). There is little doubt that the broader group of NICs •· not just the super-exporting economies like the Republic of Korea but also the tradition- ally inward-looking economies like India •· pos- sess skills that make it possible for them to con- template export advantages. These advantages are not merely in computer software (a good, not a service) and in an increasing range of over-the- wire (long-distance) services that new technolo- gies make possible. They are also in the services that imply temporary relocation of skilled labor. Legal and professional services, with the right of establishment, can exhibit a mutual rather than one-sided export advantage for developing and developed countries. The developing countries must not be misled into thinking otherwise simply because the initiative to include such trade in a services compact comes almost wholly from multi- national firms in the developed countries. Why? Such services are not homogeneous. Lawyers, doctors, accountants, and the like in the develop- ing countries, simply because they are equally competent, can work more cheaply and offer a range of services where price competition is deci- sive. 3 The export possibilities become even more compelling for developing countries if the issue of unskilled labor mobility, in executing specific short-term contracts (as in the Middle East) is resolved in favor of its conceptually legitimate inclusion in the concept of the right to establish. The question is already in the realm of probability thanks to the widespread use of such unskilled labor, even by U.S. international contracting Table 26.1 Industrial and developing countries, 1980 (US$ billion) Industrial country exports Developing country exports to developing countries to Industrial countries To other From traditional From other countries otl exporters countries 180 227 158 4 218 40 31 7 60 145 2 58 72 30 35 10 14 12 23 8 merchandise trade, International Trade 1982-83 (Geneva: GATI Secretariat 1983); Even in telematics and information, such poli- cies as the protection of locally produced com- puter hardware may represent an unnecessarily expensive and thus suboptimal way of securing one's objectives. If the objective of such a policy is to build up national technological know-how through learning-by-doing (rather than to develop the industry itself on some ground such as de- fense or national security), the cost of such a policy is to spread computer illiteracy in the population and high costs to producers that must make do without lower-cost access to modem information technology in the production proc- ess. These costs do not need any economic sophis- tication to recognize. In India, one sees them in the enormous lags in use of computers in the tourism industry, and in the difficulties faced in providing computers to the judiciary, to schools, and so on. The import-substitution policy man- ages to distance greatly even a highly educated population and skill-endowed economy from the modem world outside. It also inhibits the rapid adoption of modem information-technology- based processes that are essential to absorbing high-productivity, economically efficient advances in the manufacturing sector. As it happens, a country such as India (and possibly Brazil and Argentina as well) has the possibility of using an alternative policy instru- ment to achieve the desired mastery of know- how, even more successfully, without these costs. 211 Table 26.2 (measured by new contracts awarded to the top contractors) (US$ billion) 1981 1982 1983 1984 48.8 44.9 29.4 30.1 (36%) (36%) (31%) (38%) 12.1 11.4 10.0 5.4 (9%) (9%) (11%) (7%) 9.9 9.5 5.4 4.8 (7%) (8%) (6%) (6%) 9.3 7.8 7.2 7.8 (7%) (6%) (8%) (8%) 8.7 7.5 6.4 5.7 (6%) (6%) (7%) (7%) 12.6 10.3 9.1 7.2 (6%) (8%) (9%) (9%) 8.6 9.3 8.7 7.3 (6%) (8%) (9%) (9%) 13.9 13.8 10.4 6.8 (10%) (11%) (11%) (8%) 10.5 8.6 7.0 5.9 (8%) (7%) (7%) (7%) 134.4 123.1 93.6 80.5 News Record; from ongoing studies by the Office of Technology Assessment, Washing- resource any time it wishes to do so. Going the protectionist route will yield a lower level of embodied technology in resident nationals (who may leave anyway) and will sacrifice computer literacy and efficiency in production. By permit- ting cheap imports at world prices, these costs are avoided, and by using an added policy instrument that permits free outmigration and enables using of the superior embodied know-how in .one's own people abroad, know-how is also secured at its best and cheapest. To put it differently, the two objectives of (1) spreading computer literacy and encouraging adoption of efficient production processes and (2) building up technical know-how among one's Services first viewpoint is put forth by stressing that an efficient world allocation of resources requires that everything be put on the table. The out- moded GATI' must be redesigned, augmented in scope, brought up to date to embrace new reali- ties. The second viewpoint is developed in terms of U.S. comparative advantage having shifted to the new areas. If the United States is to yield on goods, it is fair for it to ask others to yield on services and new issues. (A brief summary of U.S.-perceived "losses" and "gains" vis-a-vis the developing countries in terms of the perverted logic of trade-barriers-bargaining is presented in table 26.3.) An added argument in the United States in fa. vor of this grand tradeoff is that the administra- tion is too beleaguered to hold protectionists at bay in the Congress unless the advanced develop- ing countries (and Japan and EEC) open their markets to U.S. exports qf services as a quid pro quo. 6 Thus, these countries are faced with what could be construed as a rather difficult situation: trade concessions appear to be demanded of them, in their view, as a way of ensuring that market access for their exports is continued (rather than expanded). But this, in turn, reflects a substantial shift in U.S. positions in trade negotiations from GATI'- style "first-difference" reciprocity to "full" recip- rocity. Increasingly the United States has looked not at the balance of advantages from changes in trade barriers, but at the balance of advantages from the whole trading system. The U.S. insistence on full reciprocity can be seen as an inevitable return to the original sym- metric conception of the world trading order. So, it is not a position that the developing countries are likely to be able to challenge with success, much as they consider it to be unfair from the perspective of first-difference reciprocity. Nor is Japan, which is alleged, rightly or wrongly, to offer less-than-symmetric access to its market. The developing countries must thus proceed from the unhappy premise that the United States, espe- cially the U.S. Congress, cannot be expected any longer to permit traditional access to its markets without significant elements of reciprocity from the developing countries, even if the balance-of- trade deficits are somehow eliminated. Why the developing countries sbould negotiate For the hesitant developing countries, the U.S. position opens one major difficulty -- even if they 213 Table 26.3 "loses" vis-a-vis developing countries from prospective liberali- trade in the Uruguay Round U.S. losses Rollbacks of the MFA and of other VERs and orderly marketing arrangements on goods Standstills on VERs and orderly marketing arrange• ments on goods More stringent use of safeguard actions and tighter rules to prevent abuse of countervailing duty and antidumping actions Improved structural adjustment the left as agricultural liberalization in cereals is expected to favor U.S. exports, mostly depending on the final package, even at the expense of some developing coun- Quid pro quo in the service sector certainly exists for the skill-abundant NICs, and especially so if the labor-intensive and skilled-labor-inten- sive services requiring temporary relocation are not ruled out of court in the formulation of a services agreement. 8 Reason 2: The difficulties plaguing rapid prog- ress in the liberalization of services imply that the Uruguay Round is unlikely to yield anything more concrete than a code or an agreement of prin- ciples. It is improbable that actual liberalization under the code will emerge during the round itself. This prospect underlines the wisdom of a strategy where the developing countries offer to discuss services, thus assuaging the desire to begin bringing them under trade discipline and helping to head off protectionist pressures on goods trade, while using the opportunity to en- sure that they get their interests and export pros- pects built into the services code. Reason 3: Another reason, relevant to the larger developing countries, is that they can ex- pect the United States to continue to use bilateral approaches to pry open selected service sectors in selected countries, even while the rulemaking is pursued elsewhere. (It has done this with Is- rael in the context of Article XXN and with the Republic of Korea on insurance with the aid of Services So, any agreement on services will need, at least for developing countries, some quantity safe- guards, just as there is the Article XIX safeguard on goods. These safeguards would have to be far more generous for the developing countries, and would have to be subject to eventual and negoti- ated erosion with graduation, perhaps even slower-paced than for goods. But to win explicit safeguards on services, the developing countries outcomes. This will have to argue for them. And they cannot argue for them if they do not actively participate in the ruiemaking. Everything points therefore to one simple bit of advice for the hesitant developing countries: Get into the negotiations on the code, and voice your interests and concerns. would Notes 1. A detailed taxonomy is proposed in Sampson and Snape (1986), aimed at assisting trade negotiators. From the ana- lytical viewpoint adopted in this paper, however, the critical distinction is between long-distance and temporary-factor- relocation-requiring services, and the important issue in the latter class relates only to the subcasc where providers must go to users. 2. See Hindlcy's (1986d) penetrating discussion of this issue in reference to the OECD document, "The Element of a Conceptual Framework for Trade in Services," Paris. 3. The question whether they would be allowed to in- dulge in price competition is critical, of course. It is obvious, however, that attempts by professional associations to regu- late minimum prices would then be in restraint of trade. 4. The successful outward-oriented regimes have man- aged to ensure that internationally traded intermediate goods were available to domestic producers at world prices. Similar logic should obviously apply to internationally traded inter- mediate services as well. 5. While the discussion below focuses on the United States it is clear that by now, unlike in 1982 at the GATT ministerial meeting, the EEC also perceives export competi- tiveness for itself in services and hence is closer to the U.S. positions on it than before. See, for example, the statements of Willy de Clcrcq (1986) to this effect recently. Table 24.3 on the United States could be readily modified to one for the EEC, with agriculture going on the right-hand side instead. Japan, with its enormous surplus, also secs clear comparative advantage in financial services. 6 . The U.S. government has encouraged such export- seeking lobbies as a political countervailing force to the trade-destroying protectionist lobbies. 7. The failure of the developing countries to get actively involved in the Tokyo Round negotiations on the subsidies code, for example, until fairly late in the game may have caused the code to be against their interests (note the blan- ket restrictions on export subsidies) and to have led to wide- spread refusal by the developing countries to sign it. 8. Geza Feketekuty's (1986) extended analysis and docu- mentation of U.S. visa practices for domestic entry for tempo- rary business purposes needs to be read by the skeptical among the developing countries. Evidently, there is far more room for active diplomacy and negotiations here than is commonly believed. 215 Economy. Semces World Economy Series 1. Oxford: Pergamon Press. and Disembodiment 1986b. "Liberalization of Semce Transactions." Tbe World Economy ~ashington, D.C.: World Bank. Processed. 1986c. "Trade in Semces within the European In Services and its Rele- ~munlty." Paper presented at the Conference on Free Trade in the World Economy - Towards an Opening of Servic• Economy. Markets. Kiel, Germany, June 23-26. . 1986d. "Introduc- ing Semces into GAIT." Paper prepared for the Spanish and VIEs: Political- Ministry of Finance and Economy and the Trade Policy #039;7Ullional Economic Research Center's European Meeting on the position of the European Community in the New Gan Round. Col- Professional Semces: An lado-Vtllalba, Spain, October 2-4. of Chicago Law Le Clen:q, Willy. 1986. "The European Community and GAIT Negotiations on Trade in Services." Speech at Lugano Economic and Financial Symposium, Lugano, Swit- zerland. May 27. Rwiewof/ncom. Sampson, G., and R. Snape. 198S. "Identifying the Issues irl Trade in Services." Tbe World Economy 8Qune): 171-81. on Jagdish Bhagwati's Sapir, Andre. 198S. "North-South Issues in Trade in Seiv- Tbe Emerging s.roic• ices." Tbe World Economy 8,l(Man:h): 27-41. are essentially nontarifI taxes and subsidies on trade that should be subject to GATI review. But such developing countries as India and Brazil maintain that investment policies are needed to ensure conformity of economic development to national objectives. Developing countries also believe that restrictions on investments are needed to combat imperfections in domestic and international markets. Some of them view the ab- sence of an international charter governing the behavior of multinational enterprises as making performance requirements an essential weapon in their arsenal of defense against the (perceived) monopolistic practices by these enterprises. Investment policies: some definitions National policies on governing foreign and do- mestic investment are expressed through a wide variety of incentive and disincentive measures. This variety makes it difficult to characterize by any single indicator the investment policies of a country or their influence on any investment decision. The diversity of policy instruments is apparent in the investment policies listed in the top part of table 27.1, which also indicates the direction of impact of each policy instrument on an investment's profitability. For example, a cor- porate income tax, a disincentive, reduces profit; accelerated depredation, an incentive, increases profit by reducing the base on which corporate income taxes are levied. Investment policies are frequently defined broadly to include any incentive or disincentive that governments apply at the time of investment, whether these policies affect the price of labor, capital or commodities involved in production. For example, many governments include training 217 Table 27.1 of Investment policies affecting the cost of tnvestment Effect on profit + + + + + + + + + + + + + + + + + + + + + + Other measures affecting: + + + + + Investment related to lnlde Table 27.1 (continued) Other measures affecting: + + + ts. minimum levels of activity for an investing firm to achieve. For example, they establish a minimum level of exports or local content or a required percentage of host country nationals employed by the firm. Performance requirements include both operational targets and conditions on the form or ownership of the investment, such as majority ownership by host-country nationals. Require- ments that stipulate minimum targets for exports or local content are often referred to as trade- related performance requirements. Some coun- tries impose performance requirements as entry conditions. But their most common use is as a condition for more favorable treatment, usually in the form of added incentives. Performance requirements impose quantitative limits on managerial decisions rather than operate indirectly through the price system and are always accompanied by incentives. So, their independ- ent contribution to the net investment incentive is often hard to establish. This is especially true since performance requirements operate dis- continuously, exerting a cost on the firm only when certain targets are not met. In addition, the disincentive effect on the decisions of firms is not clear because little is known about governments' enforcement of performance requirements. Some governments regard performance requirements as little more than useful targets that investors 219 the criteria. Manufacturing firms enjoy a reduced rate of corporate tax (10 percent instead of the statutory rate of 50 percent). The book value of plant and machinery is not written down by the amount of the grants received, so firms are able to depreciate the original cost of these assets at an accelerated rate. In addition to these benefits, firms receive generous training grants for workers and can lease assets on subsidized terms. Thus, while Ireland does not have explicit performance requirements, investments that meet export or local-content objectives are given more favorable treatment through discretionary grants. More explicit use of performance requirements can be found in China and Mexico. In 1986 China announced new measures to encourage foreign investment. Any firm producing mainly for the export market and generating a net foreign exchange surplus through its operations receives the designation "export enterprise" and is en- titled to special incentives. These incentives in- clude tax exemptions, land tax abatements, re- duced charges for workers' social payments, and priority in obtaining locally supplied inputs and loans. Even after tax exemptions have expired, the regulations entitle export enterprises to pay income tax at haH the normal rate so long as they export 70 percent of their output. Beginning in 1962 Mexico issued a number of decrees concerning the automobile industry. The first decree required 60-percent local content and established production quotas for firms in the industry. A 1977 decree increased local content requirements progressively and required manu- facturers to balance foreign exchange expendi- tures with earnings, which effectively establishes a floating export requirement that varies with the import intensity of production. At the same time, for firms meeting these requirements, the govern- ment offered substantial benefits in the form of fiscal incentives, guarantees against competition, agree to meet targets. increases in price ceilings, and government fund- ing of new investment. By 1982 none of the firms interviewed in one survey had met the require- ments, one had paid a substantial fine for non- compliance, and all had altered their investment and production plans in an effort to meet govern- ment requirements (Guisinger 1985, ch. 3). Similarity of Investment incentives and tariffs to creating It is not difficult to see that investment incentives and tariffs have similar effects on an investor's Investment relaled ID trade within one country, or the change in net incen- tives over time. • Surveys by the U.S. government provide two sources of information on the incidence of per- formance requirements. The 1986 Report on Foreign Trade Barriers (Office of the United States Trade Representative 1986) found that twelve of forty countries had export or local- content requirements deemed to have a signifi- cant effect on U.S. trade. The 1977 Benchmark Survey (Department of Commerce 1981) reports that of more than 20,000 foreign affiliates of U.S. companies, 14 percent experienced some type of performance requirement. About half of these reported either export or local-content require- ments. Affiliates in developing countries had a much higher incidence of performance require- ments than those in developed countries. Be- cause of the 1mrvey's methods, these estimates most likely understate the incidence of perform- ance requirements (Safarian 1983). Another survey, in 1982, found that of seventy- four new or planned investment projects, thirty- eight had either explicit or implicit requirements on domestic content or exports (Guisinger 1985). This same study concluded that trade-related performance requirements were much more likely to occur in large developing countries. And it confirmed the view that governments provide investment incentives or tariff protection to com- pensate for the disincentive effects of perform- ance requirements. The effectiveness of incentives and performance requirements , y. Do incentives and requirements make a differ- ence in how firms invest and operate? Effective- ness is a much more difficult topic to tackle in research than incidence because a researcher must be able to infer changed behavior between two states: the first in the absence of one (or more) of the investment policies described above, and the second in the presence of these policies. For a variety of reasons, it has so far been impos- sible to take before and after snapshots of invest- ment behaviors. Not the least of these versions is the complexity of netting out the effects of the dozen or more policy instruments that affect the typical investment. The empirical researcher must use a roundabout process for drawing inferences about effectiveness. One such method is to measure, as best one cari, the net investment incentive and to compare 221 vantageous prices. But fewer than 5 percent of these companies actually altered an investment decision because of a country's trade-related performance requirement. Another method for drawing inferences about the effects of incentives and performance require- ments is to enlist the judgment of experts familiar with cost and market conditions in their special fields and able to assess effects on an industry arising from changes in investment incentives and performance requirements. One study using this method (Guisinger 1985) concluded that of sev- enty-four investments studied, four investments would have located elsewhere (or would not have been made at all) if the host country had not applied performance requirements. Two conclusions emerge from these studies. First, investment incentives and performance re- quirements are pervasive, appearing in many forms, in many industries and in many countries. Second, in certain instances, investment incen- tives or performance requirements (or both) have had a significant impact on decisions of firms to invest the export or import. Investment policies clearly distort patterns of trade and investment. The unanswered question is: To what degree? on Negotiating positions Developed countries The developed countries have entered agree- ments to liberalize the movement of capital among themselves. And the current move to place investment issues on the GATT agenda can be seen as an extension of this effort. The first such agreement was the Code of liberalization of Capital Movements signed by members of the Organization for Economic Cooperation and Development (OECD) in 1961. During the 1940s and 1950s, liberalization among OECD members progressed more rapidly in trade than in capital movements. And the code was aimed at disman- tling the remaining barriers, many of which were erected during or immediately after World War IL The 1976 Declaration on International Investment and Multinational Enterprises (and the related Decisions of the OECD Council) moved a step beyond the removal of barriers. Central to this declaration and subsequent decisions was the commitment by the signatories to ensure national treatment -- no foreign investor was to receive less favorable treatment than that afforded local investors. At the encouragement of the United Investment related lo trade export requirements were not covered under GATT. Developing countries The developing countries have advanced vari• ous reasons for resisting efforts to restrict their use of investment incentives and performance requirements. Central to their concerns is a feel- ing that investment policies are the most efficient and equitable means of overcoming what are perceived to be market imperfections that impede the rapid growth of developing countries, espe- cially those created by multinational corpora- tions. Their sentiments are reflected in a recent report of the United Nations Center on Transna- tional Corporations (1983, p.15): ... (I)t cannot be taken for granted that performance requirements or incentives necessarily distort the allo- cation of resources, or cause damage to the interests of other counnies. There are many cases in which such measures are designed to correct palpable distortions associated with the existing business environment. For example, foreign affiliates may import more and export less than the free operation of market forces would require. They may import more than they need to despite the existence of cheaper local sources of supply, because of centralized procurement policies, traditional supplier linkages, the resources they had previously committed to plants located elsewhere, and for similar reasons. And they may export less than the competi- tiveness of a particular affiliate would permit, because of, for example, the requirements of a global company strategy for supplying the world market. A related issue is that performance require- ments may be a useful second-best instrument for stemming the outflow of rents created by the developing countries' own policies. The excess payments to producers created by tariff protec- tion (producers' surpluses) do not represent a cost to society but only a transfer of income from consumers to producers •· if the producers are all nationals of the country applying the tariff. Pro- ducers' surpluses received by foreign investors represent real resource losses to the host country in addition to the normal deadweight loss of consumer surplus arising from tariff protection. Performance requirements that reduce the ability of foreign investors to repatriate these surpluses (limits on ownership and remittances abroad) or exact a price for them (greater exports or domes- tic purchases) may improve national welfare when first-best remedies are not available. Another appealing feature of investment incen- tives and performance requirements for develop- 223 vestments create serious problems for calculating the net impact of government interventions to promote investment. Without such a common denominator, it is not possible to compare levels of intervention across countries or to evaluate relative degrees of concessions that are offered. Industrial economists who wish to measure the impact of nontrade measures must contend with more than two dozen different taxes, incentives, regulations, and other interventions that have no immediately obvious common denominator. But three standard measures of incentives have come into use -- the net effective rate of protection, the cash grant equivalent, and the subsidy to capital's rental cost. Each of these measures records some aspect of government intervention, but none provides the much-needed comprehensive meas- ure of trade and nontrade interventions. Under specific assumptions, units of each measure can be translated into units of the other measures, allowing a measure of the total impact of incen- tives to be constructed But because these meas- ures are technically complex and sometimes ambiguous, they do not serve well as negotiating currency. Even so, valuable progress can still be made in three areas. The first of these is a clearer distinc- tion between investment promotion efforts that contribute to the economic welfare of the host countries and those that do not. Investment policies designed to influence aegregate invest- ment as part of stabilization or development pro- grams are unarguably in the national interest. But tax holidays matched by other countries in com- petition for the same set of footloose foreign investments -- which could be eliminated by all countries with no country's loss of competitive share -- are almost certainly in no country's na- tional interest. Many investment policies occupy the twilight zone in between, and their status needs to be clarified. An additional benefit of reviewing the social benefits and costs of invest- ment policy instruments is that some governments may discover deficiencies in existing policies, prompting them to undertake reforms on their own. The second area concerns the discretionary powers of governments -- the ability to discrimi- nate between firms in matters of incentives and performance requirements. If governments could agree to apply incentives and performance re- quirements uniformly, automatically, and trans- parently without discrimination among investors of different national original, much but not all of Investment reialetl IO lrrMle able. Quite often, economic research is con- ducted where there is light in the form of ample data, not necessarily where there is a problem. Now the time has arrived to turn the spotlight toward the other end of the playing field -- to see how much of the unevenness is really contributed by investment policies. the subsidy Referenca Bond, Eric W., and Stephen E. Guisinger. 1984. "lmesanent Incentives and Tariff Substitutes: A Comprehensive Meas- ure of Protection." TM RftMW ofl!anlomks - " Stalisics LXVD,l(Pebruary):91-97. Conference Board. 1983. op.rating Foreign Subsidiaria. New York. Prank, Isaiah. 1980. Foreign Bntnprise in Dweloping Cmm• tries. Baltimore: John Hopkins University Press. Guisinger, Stephen E., and Associates. 1985. Jrwestrrumt Jncentivn - " Perfomumce Req,,i~. New York: Praeger Publishing. Office of the (Jnited States Trade Representative. 1986. National Trru/41 Estimate: 1986 Report on Foreign Trad4 Bamff'S. Washington, D.C. Safarian, A.E. 1983. "Trade-related Investment Issues." In W.R. Oine, ed., Trad4 Policy in ti# 1980s. Washington, D.C.: Institute for International Economics. United Nations Center on Transnational Corporations. 1983. Tnmmatimull Co,porations in W o r l d ~ . Third Survey. New York: United Nations. United States Deparanent of Commerce. 1981. U.S. Direct Jnves,-t Abroad, 1977. Washington, D.C. 225 Jar products sold on the domestic market. For example, refunds of domestic indirect taxes on goods destined for export; or charges on imports similar to the taxes levied on like domestic prod- ucts. Also see DRAWBACK. (Art. III; Report of the Working Party on Border Tax Adjustments, BISD, lSS/97.) BOUN1Y Financial aid to producers, manufac- turers, exporters, and so on. Also see SUBSIDY. CODE See MTN AGREEMENT. COMPENSATORY ADJUSTMENT Measure taken, after withdrawing of a (tariff or other) concession, to compensate for such withdrawal. (Art. XXVIII.) CCCN Customs Cooperation Council Nomen- clature. An international product classification for customs purposes. Also see HARMONIZED SYSTEM. CONCESSION See TARIFF CONCESSION. CONDITIONAL IMPORT See LICENSING. CONDITIONAL PROHIBITION A ban on imports (or exports) except under specified con- ditions: for example, a ban on imports except for a specific use. CONSUIAR FORMALITIES Formalities re- quired in connection with importing and involv- ing the services of a consul for, say, the legaliza- tion of documents. Consular fees may be charged for these services. (Art. VIII.) CONTENT, DOMESTIC or LOCAL In connec- tion with ORIGIN RULES, the proportion of a product that has been domestically or locally produced, or the value added domestically or locally in the production of the good. CONTRACTING PAR1Y In terms of GATI', a country having acceded to the General Agreement on Tariffs and Trade. Written "contracting party(ies)," the expression denotes the individual 227 rable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country." The margin of dump- ing is the difference between the two prices. (Art. VI; Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade, BISD, 26S/171.) DU1Y See CUSTOMS DU1Y. EFFECTIVE RATE OF PROTECTION A meas- ure of the protection afforded by an import re- striction calculated as a percentage of the value added in the product concerned For example, where paper is made of wood pulp and value added by a processing activity, the effective rate of protection of paper is the duty on paper ex- pressed as a percentage of the value added only. EMERGENCY ACTION See SAFEGUARD AC- TION. ENABLING CIAUSE Decision on "Differential and More Favorable Treatment, Reciprocity and Fuller Participation of Developing Countries". One of the FRAMEWORK AGREEMENTS, it en- ables contracting parties to GATT, notwithstand- ing the nondiscrimination provisions embodied in Article I of the General Agreement, to "accord differential and more favorable treatment to de- veloping countries, without according such treat- ment to other contracting parties." Also see - GENERALIZED SYSTEM OF PREFERENCES. ESCAIATION Increase in the degree of pro- tection (tariff or nontariff) with the level of proc- essing of a commodity: for example, higher duties on wrought iron than on iron ore. ESCAPE CIAUSE Emergency clause in a legal text allowing temporary derogation from its provi- sions. The escape clause of the General Agree- ment on Tariffs and Trade is its Article XIX, which allows temporary suspension, modification or withdrawal of an obligation or concession relat• ing to a particular product when an unforeseen surge in imports of the same or like product causes or threatens serious injury to the domestic industry. Also see SAFEGUARD ACTION. (Art. XIX.) EXCHANGE CONTROL Control by a govern- ment or central bank over the holding, sale, and purchase of foreign exchange. FISCAL POLICY Government policy that oper- ates through its revenue-raising (taxes, duties, charges, and the like) and revenue-spending ac- tivities. FRAMEWORK AGREEMENTS The four "Agree- ments Relating to the Framework for the Conduct of International Trade," resulting from the Tokyo Glossary of terms example, VOLUNTARY EXPORT RESTRAINTS with respect to GAIT. HARD-CORE WAIVER Waiver provided under the GAIT in 1955, in the face of an end to the balance-of-payments difficulties that had justified the application, by the major industrial nations, of import restrictions under the provisions of Article XII of the General Agreement. To enable a domestic industry to adjust to the removal of such a restriction, the waiver allowed for the mainte- nance, for a transitional period and under certain terms and conditions, of quantitative restrictions on products that had thus enjoyed protection over several years. (BISD, 3S/38.) HARMONIZED SYSTEM "Harmonized Com- modity Description and Coding System". Nomen- clature developed by the Customs Cooperation Council for customs tariffs and international trade statistics. It is scheduled to enter into effect, for countries that have adopted it in place of their existing nomenclature (national or CCCN), on 1 January 1988. (BISD, 30S/17.) HEALTH AND SAFE1Y REGUIATION See TECHNICAL BARRIER TO TRADE. IMPAIRMENT Damage to, or weakening of, benefits accruing under contractual obligations. (Art. XXIII; BISD, 26S/210.) INITIAL NEGOTIATING RIGHT Right accruing to a party with which a concession was initially negotiated: for example, in relation to its modifi- cation. Also see PRINCIPAL-SUPPLIER RIGHT. (Art. XXVIII.) INTELLECTUAL PROPER1Y Such material as industrial designs, inventions, and literary or artis- tic material. Intellectual property is sometimes defined in terms of the instruments used for its protection, such as patents, trademarks, trade names, and copyright. (Art. XX(d).) IABELING See TECHNICAL BARRIER TO TRADE. LIBERAL LICENSING See LICENSING. LICENSING (of imports or exports) Practice requiring approval to be granted by the relevant government authority, or by a body designated by such authority, as a prior condition to importing or exporting. 0 Automatic licensing: where approval is freely granted •· for example, licensing for keeping statistical records. 0 Nonautomatic licensing: where approval is not freely granted. This may be used as a restriction itself, or it may be used to ad- minister a QUOTA. The license may be sub- ject to certain conditions being met: for example, a requirement to export; the use 229 - Agreement on Interpretation and Application of Articles VI, XVI and XXIII ("Subsidies Code") - Agreement Regarding Bovine Meat - International Dairy Agreement - Agreement on Implementation of Article VII ("Valuation Code") - Agreement on Import licensing Procedures - Agreement on Trade in Civil Aircraft - Agreement on Implementation of Article VI ("Antidumping Code"). (BISD, 26S/8 and ff.) MULTIFIBER ARRANGEMENT (MFA) "Ar- rangement Regarding International Trade in Tex- tiles." Arrangement negotiated as a temporary exception to the General Agreement on Tariffs and Trade in 1973 and renewed at intervals since then. It regulates the trade in certain textile prod- ucts between its signatories by means of negoti- ated bilateral restraint agreements subject to de- fined conditions. NATIONAL TREATMENT (of imports) Treat- ment of imports, with respect to internal charges, regulations, or requirements equal to that af- forded to like domestic products. (Art. III.) NONAUTOMATIC LICENSING See LICENS- ING. NONTARIFF BARRIER Any government action with an actual effect on the value, volume, or direction of trade. Also see NONTARIFF MEAS- URE. NONTARIFF MEASURE Any government ac- tion with a potential effect on the value, volume, or direction of trade. Also see NONTARIFF BARRIER NORMAL VALUE The normal value of a prod- uct is the price at which the like product enters the market in the ordinary course of trade. The normal value is used to assess the existence and extent of DUMPING. (Art. VI.) NULLIFICATION Negation of benefits accru- ing under contractual obligations. (Art. XXIII; BISD, 26S/210.) OFFSET REQUIREMENT Requirement, stipu- Prin- lated by the authorities of the importing country, that exporters to that country compensate for their exports by, say, purchasing products of the importing country or investing in the importing country. Also see COUNTERTRADE. ORDERLY MARKETING ARRANGEMENT See VOLUNTARY EXPORT RESTRAINT. ORIGIN MARK See TECHNICAL BARRIER TO TRADE. ORIGIN RULE Rule that defines the criteria for establishing the country of origin of a product: for example, for duty assessment. Depending on Glossary of terms hibitions or embargoes. (Arts. XI, XII, XIII, XVIII, XIX, XX, XXI.) QUOTA Measure that directly restricts the trade (import or export) in a particular good, by specifying either the maximum quantity or the maximum value of imports or exports. 0 Global quota: quota specifying the total vol- ume, or value, of the product to be imported (exported) without regard to the country or countries of origin (destination) of the prod- uct. 0 Bilateral quota: quota applied to imports from (exports to) a specific country. 0 Quota by country: quota which not only specifies the total volume, or value, of the product to be imported (exported), but also allocates the trade between the various coun- tries of origin (destination). (Art. XI, XIII, XN.) RECIPROCI1Y Mutual exchange of trade con- cessions. REFERENCE PRICE See MINIMUM PRICE SYSTEM. REQUEST-AND-OFFER PROCEDURE Negotiat- ing procedure based on the tabling, by each party, of a list of concessions requested of other parties, followed by an offer list of the conces- sions that could be granted if its request were met. In GATT, negotiations are then usually car- ried out on a bilateral with the results universal- ized through the application of the MOST-FA- VORED-NATION PRINCIPLE. A final, overall package of concessions is arrived at only at the end of the process, when each party weighs its gains and losses. RESIDUAL IMPORT RESTRICTION Import restriction imposed for balance-of-payments pur- poses during the post-World War II period but no longer justifiable under Article XII of GATT once balance-of-payments difficulties had been re- solved in the mid-1950s. (BISD, 9S/18.) RESTRICTIVE BUSINESS PRACTICE Practice of business enterprises to limit access to markets and restrain competition (such as the formation of a cartel). (BISD, 9S/28 and 170.) ROLLBACK In context of the Uruguay Round of multilateral trade negotiations, rollback refers Also see to the phasing out, without counterpart, of meas- ures inconsistent with the provisions of the Gen- eral Agreement or Instruments negotiated within the framework of GATT or under its auspices, through either their elimination or their being brought into conformity with GATT. (Ministerial Declaration of the Uruguay Round, GATT/1396.) 231 position. (Ministerial Declaration on the Uruguay Round, GATI/1396.) STRUCTURAL ADJUSTMENT Process of adjust- ment of the structure of production and employ- ment of a national economy to changing eco- nomic or trading conditions. (BISD, 31S/138.) SUBSIDY Assistance granted by government to the production, manufacture or export of spedtic goods, and taking the form either of direct pay- ments, such as grants or loans (also see BOUN1Y), or of measures having equivalent ef- fect, such as guarantees, operational or support services or facilities, fiscal incentives, or invest- ment. (Art. VI; Art. XVI; Agreement on Interpreta- tion and Application of Articles VI, XVI and XXIII of the General Agreement on Tariffs and Trade, BISD, 26S/56.) SUNSET CIAUSE Clause in a legal instrument limiting the duration of validity of that instrument. TARIFF See CUSTOMS DU1Y. TARIFF CONCESSION In GATI terms, the commitment (also termed a "binding") by a con- tracting party to levy, on a specified good, a cus- toms duty not in excess of that provided for in its schedule of TARIFF CONCESSIONS. The sched- ule is annexed to the contracting party's PROTO- COL OF ACCESSION to the GATI. (Art. II, XXVIII, XXVIII bis.) TARIFF QUOTA Specified volume (quota) of imports of a good for a given period defining the application of different rates of duty (tariffs), the lower rate applying until the specified volume is reached, the higher rate thereafter. (Art. XIII.) TECHNICAL BARRIER TO TRADE Barrier to trade arising from the application of technical regulations or standards: such as testing require- ments, labeling requirements, packaging require- ments, marketing standards, certification require- ments, origin marking requirements, health and safety regulations, and sanitary and phytosanitary regulations. (Agreement on Technical Barriers to Trade, BISD, 26S/8.) TECHNICAL REGUIATION See TECHNICAL BARRIER TO TRADE. TERMS OF TRADE The ratio of export to import prices. TRADEMARK See INTELLECTUAL PROPER1Y. TRANSAcnON VALUE The price of a good actually paid or payable. (Art. VII; Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade, BISD, 26S/116 and 151.) TRANSPARENCY Clarity, openness, and com- prehensibiljly (used in regard to individual trade Glossary of terms versely with the world price. VOLUNTARY EXPORT RESTRAINT Informal agreement between an exporter and an importer, whereby the former agrees to limit exports of a specified good to avoid dislocation of the industry in, and possible imposition of mandatory restric- tions by, the importing country. The restraint agreement may be concluded at either industry or government level. In the latter case, the agree- ment is sometimes referred to as an "orderly marketing arrangement." VOLUNTARY RESTRAINT AGREEMENT See VOLUNTARY EXPORT RESTRAINT. WAIVER Authorized deviation from a previ- ously undertaken and legally binding obligation. 233 and Trade Most-Favored-Nation Treatment of Concessions Treatment on Internal Taxation and Regulation Provisions relating to Cinematograph Films of Transit and Countervailing Duties for Customs Purposes Formalities connected with Importation and Exportation and Administration of Trade Regulations Elimination of Quantitative Restrictions to Safeguard the Balance of Payments Administration of Quantitative Restrictions to the Rule of Nondiscrimination Arrangements Enterprises Assistance to Economic Development Action on Imports of Particular Products Exceptions Exceptions or Impairment Application -· Frontier Traffic •· Customs Unions and Free- by the Contracting Parties Entry into Force and Registration or Withdrawal of Concessions of Schedules Table of contenl$ of lbe General A«I_,_,., Negotiations of this Agreement to the Havana Charter Parties of the Agreement between Particular Contracting Parties and Objectives to Article I to Article II and Supplementary Provisions Appendix and to Provisions in Supplementary Agreements affecting of the General Agreement. have adopted the following Declaration. The Multilateral Trade Negotiations (MTN) will be open to the participation of countries as indi- cated in Parts I and II of this Declaration. A Trade Negotiations Committee (fNq is estab- lished to carry out the Negotiations. The Trade Negotiations Committee shall hold its first meet- ing not later than 31 October 1986. It shall meet as appropriate at Ministerial level. The Multilat- eral Trade Negotiations will be concluded within four years. Part I - Negotiations on trade tn goods The Contracting Parties meeting at Ministerial level Determined to halt and revise protectionism and to remove distortions to trade Determined also to preserve the basic prin- ciples and to further the objectives of the GATI Determined also to develop a more open, vi- able and durable multilateral trading system Convinced that such action would promote growth and development Mindful of the negative effects of prolonged financial and monetary instability in the world economy, the indebtedness of a large number of less-developed contracting parties, and consider- ing the linkage between trade, money, finance and development Decide to enter into Multilateral Trade Negotia- tions on trade in goods within the framework and under the aegis of the General Agreement on Tariffs and Trade. A Objectives Negotiations shall aim to (i) bring about further liberalization and expan- Tbe Punta del Hste Ministerial Declaration (iv) Contracting Parties agree that the principle of Differential and More Favourable Treatment embodied in Part IV and other relevant provisions of the General Agreement and in the Decision of the Contracting Parties of 28 November 1979 on Differential and More Favourable Treatment, Re- ciprocity and Fuller Participation of Developing Countries applies to the negotiations. In the implementation of standstill and rollback, particu- lar care should be given to avoiding disruptive effects on the trade of less-developed contracting parties. (v) The deieloped countries do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of developing coun- tries, i.e. the developed countries do not expect the developing countries, in the course of trade negotiations, to make contributions which are inconsistent with their individual development, financial and trade needs. Developed contracting parties shall therefore not seek, neither shall less- developed contracting parties be required to make, concessions that are inconsistent with the latter's development, financial and trade needs. (vi) Less-developed contracting parties expect that their capacity to make contributions or nego- tiated concessions or take other mutually agreed action under the provisions and procedures of the general agreement would improve with the progressive development of their economies and improvement in their trade situation and they would accordingly expect to participate more fully in the framework of rights and obligations under the General Agreement. (vii) Special attention shall be given to the particular situation and problems of the least- developed countries and to the need to encour- age positive measures to facilitate expansion of their trading opportunities. Expeditious imple- mentation of the relevant provisions of the 1982 Ministerial Declaration concerning the least-de- veloped countries shall also be given appropriate attention. C. Standstill and rollback Commencing immediately and continuing until the formal completion of the Negotiations, each participant agrees to apply the following commit- ments: Standstill (i) not to take any trade restrictive or distorting measure inconsistent with the provisions of the General Agreement or the Instruments negotiated 237 concessions among all participants. Nontarlff measures Negotiations shall aim to reduce or eliminate non-tariff measures, including quantitative restric- . tions, without prejudice to any action to be taken in fulfilment of the rollback commitments. Tropical products Negotiations shall aim at the fullest liberaliza- tion of trade in tropical products, including in their processed and semi-processed forms and shall cover both tariff and all non-tariff measures affecting trade in these products. Contracting Parties recognize the importance of trade in tropical products to a large number of less-developed contracting parties and agree that negotiations in this area shall receive special at- tention, including the timing of the negotiations and the implementation of the results as provided in B(ii). Natural resource-based products Negotiations shall aim to achieve the fullest liberalization of trade in natural resource-based products, including in their processed and semi- processed forms. The negotiations shall aim to reduce or eliminate tariff and non-tariff measures, including tariff escalation. Textiles and clothing Negotiations in the area of textiles and clothing shall aim to formulate modalities that would per- mit the eventual integration of this sector into GATI on the basis of strengthened GATI rules and disciplines, thereby also contributing to the objective of further liberalization of trade. Agriculture Contracting Parties agree that there is an urgent need to bring more discipline and predictability to world agricultural trade by correcting and preventing restrictions and distortions including those related to structural surpluses so as to re- duce the uncertainty, imbalances and instability in world agricultural markets. Negotiations shall aim to achieve greater liberalization of trade in ag- riculture and bring all measures affecting import access and export competition under strength- ened and more operationally effective GATI rules and disciplines, taking into account the general principles governing the negotiations, by: (i) improving market access through, inter alia, the reduction of import barriers; (ii) improving the competitive environment by increasing discipline on the use of all direct and indirect subsidies and other measures affecting directly or indirectly agricultural trade, including the phased reduction of their negative effects and Tbe Punta del Este Ministerial Declaration parties, negotiations shall aim to improve and strengthen the rules and then procedures of the dispute settlement process, while recognizing the contribution that would be made by more effec- tive and enforceable GAIT rules and disciplines. Negotiations shall include the development of adequate arrangements for overseeing and moni- toring of the procedures that would facilitate compliance with adopted recommendations. Trade-related aspects of intellectual property rights, including trade in counterfeit goods In order to reduce the distortions and impedi- ments to international trade, and taking into ac- count the need to promote effective and adequate protection of intellectual property rights, and to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade, the negotia- tions shall aim to clarify GATI provisions and elaborate as appropriate new rules and disci- plines. Negotiations shall aim to develop a multi- lateral framework of principles, rules and disci- plines dealing with international trade in counter- feit goods, talcing into account work already undertaken in the GATI. These negotiations shall be without prejudice to other complementary initiatives that may be taken in the World Intellectual Property Organiza- tion and elsewhere to deal with these matters. Trade-related investment measures Following an examination of the operation of GATI articles related to the trade restrictive and distorting effects of investment measures, negotia- tions should elaborate, as appropriate, further provisions that may be necessary to avoid such adverse effects on trade. E. Functioning of the GATI system Negotiations shall aim to develop understand- ings and arrangements: (i) to enhance the surveillance in the GATI to enable regular monitoring of trade policies and practices of contracting parties and their impact on the functioning of the multilateral trading sys- tem; (ii) to improve the overall effectiveness and decision-making of the GAIT as an institution, including, inter alia, through involvement of Min- isters; (iii) to increase the contribution of the GAIT to achieving greater coherence in global economic policy-making through strengthening its relation- ship with other international organizations re- sponsible for monetary and financial matters. 239 Declaration (vi) the GNG shall report to the Trade Negotia- tions Committee. In order to ensure effective application of dif- ferential and more favourable treatment the GNG shall, before the formal completion of the nego- tiations, conduct an evaluation of the results at- tained therein in terms of the Objectives and Gen- eral Principles Governing Negotiations as set out in the Declaration, taking into account all issues of interest to less-developed contracting parties. to Part. II - Negotiations on trade in services Ministers also decided, as part of the Multilateral Trade Negotiations, to launch negotiations on trade in services. Negotiations in this area shall aim to establish a multilateral framework of prin- ciples and rules for trade in services, including elaboration of possible disciplines for individual sectors, with a view to expansion of such trade under conditions of transparency and progressive liberalization and as a means of promoting eco- nomic growth of all trading partners and the development of developing countries. Such framework shall respect the policy objectives of national laws and regulations applying to services and shall take into account the work of relevant international organizations. GATI procedures and practices shall apply to these negotiations. A Group on Negotiations on Services is established to. deal with these matters. Participation in the negotiations under this Part of the Declaration will be open to the same coun- tries as under Part I. GATI secretariat support will be provided, with technical support from other organizations as decided by the Group of Negotiations on Services. The Group of Negotiations. on Services shall report to the Trade Negotiations Committee. Implementation of results under Parts I and II When the results of the Multilateral Trade Negotiations in all areas have been established, Ministers meeting also on the occasion of a Spe- cial Session of Contracting Parties shall decide regarding the international implementation of the respective results. negotiations Mauritania Mauritius Mexico Morocco New Zealand Nicaragua Niger Nigeria Norway Pakistan Paraguay Peru Philippines Poland Romania Rwanda Senegal Sierra Leone Singapore South Africa Sri Lanka Suriname Sweden Switzerland Tanzania Thailand Togo Trinidad & Tobago Tunisia Turkey Uganda United States Uruguay Yugoslavia Zaire Zambia 241 Suppl Tech Gov·t Subsod Bovine Customs Import Civi Anti• 1979 Barners Procur. Counter• Oa11y Val Aircraft Dumpong Meal Le Pro1ocol vail IAareemen1 s A A s· s A A" A A A A A A A A A A A A A A A A A A A A A A" A A A A A A A" A A A A A A A A A A" A A A A" A" A A A A A s A s A A A A A A A A A A A A A A A A A A A A A A' A' s s A A A A A A A A' A A A A A A A A A' A A A A' A A A A A' A A A A A A A A A A A A A A A" A A A A' A A A A A A A A' A A A A A A A A A A A A A A A A A A A A' A' A A s A A A' A A A A A A A A s A A A A A' A A A A A A A A A A A A A A A A A A A A A A A A A A A A A' A' A' A" A' A A' A A A A A A A A A A A A A s A A A A A I A' A A A' A A .:md/ or dectarat1on • A Accepted S Signed (acceptance pending) 243 - Belize - Benin - Botswana - Burkina Faso - Burundi - Republic - Chad - Comoros - Congo - Cote d'Ivoire • Djibouti - Fiji - Gabon - Gambia - Ghana - Grenada - Guinea - Guinea - Lesotho - Liberia - Madagascar - Malawi - Mali - Mauritania - Papua New Guinea - Rwanda - St. Christopher and Nevis - - Sao Tome & Principe - Senegal - Seychelles - Sierra Leone - - Swaziland - Tanzania - Togo - Tonga - Trinidad & Tobago Samoa - Zaire - Zambia - Zimbabwe. Democratic Republic of Korea - German Democratic Republic - - USSR - Viet Nam. Germany - France - Greece - Ireland - Italy - Luxembourg - Neth- Switzerland & Liechtenstein. (Finland has an association agreement 244 Merchandise trade Aven,ge annual growth n,tc" (millions of dollars) (percent) Tenns of trade Exports lmpons Expons lmpons (1980z 100) 1985 1985 196'-lKJ 1980-85 196.S-lKJ 1980-85 1983 1985 52,704 t 82,SS4 t 2.7w S.0w 2.4 w 7.3 w 93m 94m 37,587 I 57,134 I 4.8w 7.6 w 4.Sw 12.1 w 105 m 107 m 15,117 I 25,420 I 0.2 w 0.1 w 0.3w -0.5 w 93m 94m 338 989 -0.5 -0.8 -0.9 6.8 92 100 999 2,772 7. 1 3. 1 I02 113 68 261 4.0 0 .8 5.7 -5 .2 95 81 172 363 I0.2 4 .2 5.3 -1.0 93 82 174 547 161 459 -2 .3 8.4 3.0 7.8 89 94 251 287 4.3 2.9 3.3 -6.4 113 IOI 1,568 1,178 4.4 -2 .9 -1.9 -0.2 84 83 303 283 -2. 1 0.2 -5.8 -6.7 77 70 110 194 3.0 12.5 2.1 5. 1 90 99 242 321 5.4 -4.2 8.4 -12.5 90 86 311 323 0.7 -2.8 -0.4 -1 1.6 95 I03 250 353 12.8 -17.4 6.6 -8.1 I07 107 152 437 -2 .3 -1.3 9.4 -2.3 93 89 115 /40 -1.4 6.5 -4.8 3.7 90 95 I0,260" 14,608 3.7 4.6 1.6 2.2 111 115 75 235 5.9 -0.9 7.3 2. 1 91 102 91 380 4 .4 -7.4 4.4 9.2 97 90 976 1,436 (.) -3 .9 1.7 -9.0 94 94 255 1,017 -4.0 -II.I 1.6 -3 .9 91 90 374 771 -0.3 6.1 2.4 -8.9 99 87 27,327 42 ,526 5.5 8.8 8.0 17.6 100 100 455 512 2.5 / .3 5.5 / .9 93 95 465 370 137 166 -3.9 -3 .5 -2.7 -16.7 95 96 526 862 2.4 5.2 4.1 -0. I 99 98 617 727 -1.8 -7.9 -1.4 - 8.6 88 91 2,740 5,890 4.3 2.4 0.5 3.9 96 95 1,333 1,832 0.5 7.3 -I.I 1.5 IOI 97 829" 654 1.7 -0.3 -5.5 -7 .7 78 72 566 999 113 218 19 64 332 380 -3.9 4.7 -5.3 6.0 89 96 379,877 I 360,816 I 3.2 w 3.7 w 6.0w -1.0 w 96m 94m 91,343 I 101,265 I 6.8w 1.1 w S.9 w -1.3 w 9S m 93 m 374 234 2.7 14.9 6.6 -3.6 99 96 662 550 2.5 -2.4 5.0 -4.3 90 86 452 293 4.5 -1.4 1.5 -7.I 95 91 18,590 12,069 9.7 I.I 13.0 4.9 97 97 645 1,543 -13.6 /.3 -7 .3 3.7 96 JOO 10 1,360 -0.3 1.8 25.2 -3 .0 95 96 2,156 3,885 3.6 3.5 6.6 0.3 86 86 4,629 5,459 4 .7 -2.1 2.9 -5 .9 99 96 4. 150" 11 ,200' 2.0 3.9 6.0 8.0 99 93 2,972 1,749 5.6 1.8 8.0 - 10.7 92 94 920 1,077 12.8 1.5 1.7 0.3 95 94 1,061 854 3.4 -2.7 -2.0 -7.7 95 89 406 585 3. 1 -7.2 2.6 -5 .2 99 95 303 849 2.4 -2.9 1.3 -0.1 95 89 735 1,276 3.7 -1.5 5.0 -0.3 87 83 12,567 8,877 11.5 -9.9 15 : 1 -11.5 97 95 7,100 9,23 1 8.5 8.4 4.1 2.8 84 77 2,322b I, 132b 5.2 12.2 5.6 -4.6 94 93 705 999 2.4 -5.3 2.7 1.8 92 98 .. .. 304 502 6.5 4.0 3.6 -1.7 96 83 538 1.124 -0.2 -7.3 -1.8 (. ) 95 95 2,966 1,835 2.3 1.4 -0.2 -10.3 84 81 8,255 11,035 5.5 25.3 7.8 10.1 94 92 414 522 3.4 7.4 6.4 - I. I 86 78 1,097 716 12.5 6.5 1.0 6.3 97 95 2,905 1,606 15 .2 6.3 6.9 -4.3 97 94 1,738 2,757 8.5 -1.8 I0.4 -2.8 91 91 1.060 1, 175 4 .9 -1.3 4.6 -6.1 93 91 sec the technical notes. Figures in italics are for years other than those specified. Growth of merchandise trade Merchandise trade Average annual growth rate' (millions of dolla~) (percent) Tcnns of trade Imports Exports Imports (1980= 100) 1985 1965-80 1980-85 1965-80 1980-85 1983 1985 957 1,108 7.1 0.4 5.8 -4.4 98 97 4,113 1.5 1.6 5.3 -1.4 92 97 2,743 7.9 2.3 1.5 -12.5 84 79 789 2,733 13.5 8.3 9.8 3.1 92 93 1,640 3,844 11.4 0.4 8.6 -0.9 99 94 482 2,230 259,551 t 1.6 Ill S.0 Ill 6.0 w -0.8 w 97 m 94m 14,346 9.4 6.6 8.3 -9.I 87 87 855 666 4.6 (.) 1.2 -16.5 88 85 8,224 7,652 3.4 10.0 3.8 -2.4 87 90 12,302 4.4 10.7 2.2 6.4 88 85 16,523 11.469 7.9 -3.0 0.1 -8.8 86 85 I0.761 .. .. 12,207 5.6 2.1 6.6 -3.3 110 Ill 13.459 7.7 10. 1 5.7 -11.3 98 98 2.603 -3.6 -1.5 105 94 3,814 4.7 3.2 1.8 -17.2 96 88 31,129 27.3 13.0 15.2 9.8 IOI 105 9,061 1.6 0.9 13 .1 -0.2 97 94 8,178 -9.4 -5.8 8.7 -9.1 96 94 10,134 12.0 2.5 5.3 1.8 96 91 10,163 8.9 5.0 6.2 3.8 94 95 1,586 -5.5 -9.9 -5 .7 -11.8 97 97 29,705 9.5 9.4 8.3 7.7 109 110 3.153 .. .. .. .. 26.285 4.8 5.9 7.0 4.2 IOI IOI 11 .658 9.780 10,969 432,581 I 443,370 I 3.1 Ill 3.9 w 5.3 Ill 0.4 Ill 9S m 94m 96,319 t -0.2 w -0.3 w 1.9 Ill -4.2 Ill 97 m 94m 202,011 t 218,822 I 1.9 Ill 7.9111 1.5 Ill 5.3 Ill 102m 103 m 85,719 I 0.5 Ill I.I Ill 6.3 Ill -8.6 Ill 96m 94m 31,861 I 28,004 I 9.6w - S.0w 9.8 w -9.4 w 95 m 94m 63,573 I 44,087 I 4.4111-17.1 Ill 19.3 Ill -I.I Ill 105 m 107 m 6,186 -2 .1 -9.1 15.0 -8.9 96 97 23,697 8.8 -24.0 25.9 -0.1 106 107 6.614 -1.9 -9.2 11 .8 3.8 110 )08 7.590 10.9 -3.9 20.2 -0.1 104 103 1,089,810 I 1,227,022 t 1.S w 3.7 Ill 6.1 Ill 3.9 Ill 100 m 100m 30.066 18.6 8.3 11.3 0.6 88 93 10.049 9.2 9.7 7.5 3.2 )05 104 91.123 8.1 4.7 6.3 3.2 98 97 5.982 4.5 4.8 3.3 4.8 107 94 56,147 7.6 3.4 7.7 I.I 95 95 109,110 5.5 2.6 4.2 4.3 100 100 20,803 8.4 5.7 8.7 3.4 IOI 99 65.212 8.3 3.4 6.3 2.6 IOI 104 107.588 8.9 2.2 8.9 I.I 99 !03 25,890 6.1 5.7 2.1 4.2 97 90 13,226 5.6 3.2 5.0 1.0 IOI 102 25,268 7.9 4.6 7.2 2.6 99 98 18.246 5.3 6.0 4.4 3.8 99 100 130.488 11.5 7.3 8.7 2.4 106 113 28,538 5.0 6.4 4.5 3.8 100 104 81,477 6.0 8.8 7.0 5.4 97 92 15,556 7.2 5.8 5.5 4.2 109 115 30,626 5.9 3.5 5.4 3.6 112 107 361,627 6.7 -2.8 6.6 8.4 112 114 2,061 1,018 13,341 13,647 17,554 17,548 25,684 25,268 87,201 82,596 estimate. C. Figures are for the South African Customs Union comprising South Africa. Namibia. Botswana. and Swazi- is excluded. d. Includes Luxembourg. 247 e:xpom Pe1ten11ge share of merthandise exports Fuels, Olher Machinery and primary tnnspon Other (Textiles and metals commodities equipment manufacture, and clothing)' 1965 1985 1965 1985 1965 1915 1965 1985 1965 1985 25 w 31 w 4w 41 w 20w 25 w 22w 5w 47 w 23 w 67 w 53w lw lw 9w 23 w 4w 13 w 100 89 0 (. ) (.) I ( ,) (.) 3 .. 32 (. ) 6S 55 I {.) 94 89 4 4 6 2 2 I 2 96 81 I 2 /6 I 3 84 64 (.) I 2 24 (.) (.) 56 I 43 34 99 94 (.) I I 4 ( ,) 3 20 17 (.) (, ) 8 JO (.) (.) 94 79 (.) I (. ) 5 ( .) (. ) 94 82 (.) (.) 6 16 l (. ) 62 35 I (. ) 4 13 (.) (.) 90 86 I I 4 8 l 4 95 .. I 4 I 94 39 2 /3 3 3 ( ,) I I 3 45 64 (. ) (. ) 54 33 ( .) (. ) 41 26 I 4 48 45 36 18 5 60 94 0 (. ) I I 86 98 4 I 10 I 77 65 (.) 2 IO II (.) (. ) 17 86 76 0 {,) 13 7 (.) 4 2 98 94 I I (.) 3 (.) I 25 21 6 48 24 14 33 (.) {.) 60 32 (. ) (.) 88 72 I I 2 9 I 2 85 65 I (. ) 2 5 (.) (.) 62 35 I 2 35 61 29 45 97 63 (.) I I 26 ( .) 2/ 3 4 (.) (.) (.) 2 (.) {.) 87 13 13 92 99 (.) (.) (.) 32 (.) 6 (.) 86 99 (.) (,) (. ) (.) {. ) 46w 19 w 4w 14 w 15 w 27 w 5w 9w 63 w 29w lw 3w 7w 17 w 2w 1w 5 41 I (.) (.) I (. ) {.) 3 12 0 I 4 6 (.) I .. .. .. 25 34 I {. ) 3 I (. ) 0 53 14 3 I I /0 (.) 2 15 4 2 4 2 (. ) .. 55 28 (.) I 5 39 I 14 84 36 (.) 5 6 46 I 7 71 18 (.) (.) 20 10 15 8 2 IO 93 80 I 2 4 8 I 2 90 46 0 (.) 10 2 0 {.) J :ii 47 51 6 I 23 24 6 I : 11 90 84 (,) (. ) 4 9 I I 2 90 85 (,) (.) 6 13 (. ) I 88 76 (.) 4 2 19 ( .) {. ) 65 3 0 (. ) 2 (.) (.) (.) 5 84 60 (.) 7 4 28 ( .) 13 77 34 3 (,) 2 2 (.) (.) 2 81 70 I JO 16 /7 6 7 . _;· 92 93 (.) (.) 8 7 (. ) (.) 41 21 (.) 2 31 JO 4 2 ;, h 54 /8 (.) I I JO (. ) 6 .b i~ 89 36 (.) 5 2 49 I 32 • ~~ , I 100 (Ii (.) I (.) 30 ( .) 23 4 89 45 6 2 {.) 49 5 (.) (.) 96 25 (.) (.) 2 I I (.) 51 II (.) 5 19 37 2 18 < ' 6 86 (Ii I I 13 24 4 4 see the technical notes. Figures in italics an: for years other than those specified. Structure of men:btllndlse ezports Percentage share of merchandise expons Other Machinery and primary 1ranspon Other (Tex1iles commodi1ies equipmenl manufactures and clothing)' 1965 1985 1965 1985 1965 1985 1965 1985 84 70 I 5 15 25 2 8 75 67 (.) I 6 17 2 3 7 29 I I 4 6 (.) (.) 54 16 II 14 7 38 I 7 89 22 I I 9 12 7 8 52 14 19 2 38 Ml 16 w 6w 18 w 20w 30 w 6w 9w 83 44 2 14 7 27 I 3 95 62 0 I 5 36 2 16 25 24 32 33 37 35 9 6 34 17 3 16 58 62 24 29 59 39 2 19 4 8 (.) 3 44 20 3 2 29 39 2 .. 33 12 24 33 33 46 8 9 62 9 I 16 15 12 3 I 63 83 (.) (.) 2 13 I 4 93 77 I 5 5 13 (.) I 25 5 3 36 56 55 27 23 39 (.) 2 (.) 2 2 (.) (.) I I (.) (.) 2 5 (.) (.) 78 31 2 3 II 46 3 23 28 14 2 21 63 63 9 6 9 2 (.) 3 7 II (.) (.) II 6 6 24 81 68 43 32 92 I .. 5 2 (.) 44 12 IO 32 24 26 6 4 8 I (.) (.) 4 I 4 I 4 I (.) (.) I (.) (.) (.) 48 w 21 w 4w 13 w 16 w 28 w 6w 10w 29w 7w 1w 4w Sw 6w 2w lw 40w 17 w 11 w 23 w 40w 47 w 18 w 17 w 51 Ml 26 w 3w 11 w 8w 18 w lw 3w 60w 31 w I w lw 7w Sw 1w lw lw (.) w I w I w (.) w lw (.) w (.) w I (.) I (.) I (.) (.) I (.) I I I (.) (.) I (.) I (.) 3 (.) (.) I I 0 0 (.) 0 (.) 21 w 13 w 31 w 40w 38w 37 w 7w 4w 51 17 IO 27 29 44 6 4 63 27 5 30 29 39 7 5 14 9 30 32 47 53 15 13 94 67 (.) 5 5 21 (.) 3 13 II II 12 20 23 55 53 12 7 IO 8 41 32 41 35 7 4 17 9 20 31 55 55 12 9 32 23 21 16 35 35 9 4 21 19 26 34 45 41 IO 5 73 36 5 5 10 15 I I 40 15 12 26 45 51 2 5 5 7 46 47 42 41 5 5 55 35 22 25 21 33 4 5 7 I 31 62 60 36 17 3 23 II 35 42 33 38 2 2 35 17 15 40 22 21 I I 28 7 17 14 34 16 2 I 7 4 30 33 60 59 IO 6 27 17 37 48 28 27 3 2 6 97 76 3 (.) 17 (.) (.) (.) 92 (.) 4 (.) of other manufactures. b. Figures are for the South African Customs Union comprising South Africa. Namibia. Lesotho, Bot- component territories is excluded. c. Includes Luxembourg. 249 Pen:cntagc share of men:handise impons Other Machinery primary and 1ranspon Other Food Fuels commodities cquipmenl manufactures 1985 1965 1985 1965 1985 1965 1985 1965 1985 10w 5w 11 w 8w 9w 31 w 27 w 35 w 40w 11 w 1w 11 w 27 w 45 w 17 w 6w 21 w 4w 4w 28 w 28 w 43 w 30w 29 6 15 6 4 37 29 44 23 24 17 8 18 .. 33 23 4 17 14 6 19 24 40 30 14 6 18 5 3 23 26 47 40 20 8 18 7 4 24 33 45 26 13 II 5 20 .. 51 8 5 18 3 3 21 25 57 47 II 7 20 5 2 33 36 37 31 5 4 3 5 3 18 53 58 37 9 6 15 8 6 15 37 55 33 15 4 44 5 3 32 II 45 27 12 5 28 2 4 25 27 48 30 15 6 4 6 7 21 25 55 49 12 6 5 7 5 17 17 53 60 17 7 2 2 4 29 36 49 41 13 5 21 14 6 37 25 22 34 9 7 16 5 6 28 35 50 35 22 5 18 8 4 24 32 33 24 9 36 4 23 28 .. .. II 5 21 4 3 21 31 47 33 JO (.) 13 27 50 27 9 35 3 2 29 15 41 21 26 6 JO 4 4 15 28 38 32 15 4 8 3 9 33 40 48 28 19 3 24 5 6 38 27 34 24 15 8 26 4 3 12 24 34 32 5 10 43 3 33 29 45 22 4 I 8 69 20 4 21 42 7 2 26 58 14 6 19 34 15 Ill 11,. 8w 18 Ill 11 Ill 7,. 30 w 31 w 37 w 33 w 16 Ill 13,. 1w 19w 6w 6111 31 w 28 w 40w 34w 25 4 19 I 2 56 35 30 20 23 I 2 3 3 34 25 42 48 .. .. .. 24 8 20 3 3 33 27 39 27 6 3 20 2 7 39 36 50 31 23 39 37 5 3 10 19 26 17 . . 17 5 28 10 13 18 18 31 24 8 10 27 7 5 33 21 30 39 25 7 4 12 10 23 25 31 36 18 16 6 22 3 4 28 22 46 36 15 4 21 3 2 25 29 45 33 5 (.) I 4 3 41 65 47 26 JO 6 22 I 2 26 18 56 47 13 5 19 2 I 30 21 51 46 14 10 36 4 3 23 17 40 29 21 6 5 3 3 34 35 48 37 5 9 23 6 8 31 29 49 34 17 5 2 4 2 28 38 51 41 20 5 9 4 4 28 21 48 46 .. .. 8 14 27 2 3 37 33 33 29 19 9 23 5 3 23 22 42 32 3 3 5 3 41 38 34 31 5 10 36 10 7 37 25 37 26 25 5 19 3 5 15 12 42 39 15 12 6 2 I 2 34 48 44 36 JO 9 2 4 5 33 36 44 47 6 II 7 JO 31 31 41 33 9 7 17 2 4 29 18 50 53 see the technical notes. Figures in italics are for years other than those specified. Structure of mercbandlse Imports Percentage share of merchandise impons Other Machinery primary and transpon Other Fuels commodities equipment manufactures 1965 1985 1965 1985 1965 1985 1965 1985 5 17 2 3 29 18 54 52 I JJ 10 7 45 35 35 37 6 21 10 5 35 22 30 33 6 22 6 4 18 20 42 35 10 34 9 4 16 19 43 24 9 9 17 36 8w 17 w 13"' 1w 29w 32 w 35 w 33 w 21 53 9 5 22 15 28 17 17 36 16 8 24 19 36 30 II 22 22 10 27 27 28 34 8 26 19 II 27 22 30 26 12 /0 10 5 22 46 32 28 5 6 5 II 5 42 55 37 34 .. 6 27 19 14 28 25 32 30 2 3 10 6 50 45 33 29 21 26 2 I 21 22 45 40 10 JO 21 JI 25 32 38 43 7 24 26 13 13 34 38 23 (.) 2 6 6 15 32 52 41 I I 5 6 44 43 39 3/ 8 30 II 7 35 23 30 28 6 16 12 6 28 27 38 42 49 3 2 5 16 37 21 38 3 5 13 7 13 24 46 55 /4 2 2 41 41 13 29 19 5 14 31 30 26 (.) 5 6 6 36 39 42 38 (,) I 7 2 25 45 44 37 16 w 11"' 1w 17 w 10 w 1w 30w 30 w 36 w 34 w 6w 7w 6w 6w 34"' 31 w 40w 3S w 8w 20 w 16 w 9w 25 w 21 w 31 w 3S w 1w 21 w 10 w 1w 34w 29w 35 w 31 w 6w 13"' 4w 3w 30 w 32 w 45 w 34"' 2w 3w Sw 3w 32 w 44w 40w 40w 4 /0 3 3 36 36 43 40 I I 5 3 27 45 37 41 I 5 7 3 32 44 39 38 11"' 20w 20 w 8w 19 w 29 w 31 w 33 w 10 36 16 12 27 22 28 21 8 12 10 5 25 31 39 40 16 27 24 12 15 21 21 27 7 13 10 5 33 36 43 41 9 17 21 10 24 23 32 39 II 13 25 8 II 32 23 36 7 15 13 9 31 30 35 40 10 22 13 6 25 23 37 35 15 22 18 8 20 25 27 35 8 7 10 4 37 42 41 42 10 24 12 8 35 30 34 33 8 20 21 9 13 23 35 37 II 17 II 6 25 26 39 40 20 44 38 16 9 9 II 18 II 19 12 7 30 33 36 35 7 6 9 5 40 56 34 28 7 9 12 7 38 38 32 40 6 10 II 6 24 26 43 50 10 16 20 5 14 38 36 35 .. .. 2 3 3 2 24 36 54 33 10 3 15 43 Union comprising South Africa, Namibia, Lesotho, Botswana, and Swaziland; trade between the component territories is 251 of merchandise exports Dcslination of merchandise exports (percentage of total) Industrial Nonrq,oning market nonmember High-income Developing economics economics oil exponers economies.. 1965 1985 1965 1985 1965 1985 1965 1985 52 w 4w 4w 41 w 45 w 8w 2w 45 w 65 w 60w 4w 3w 2w 6w 29w 32 w 78 71 3 8 6 4 14 17 48 4 2 46 17 35 83 65 7 54 4 (.) 89 45 15 85 24 44 4 (.) 4 72 52 39 4 ( .) .. 57 69 6/ (.) (.) 31 39 93 66 (.) (. ) (.) 7 34 29 28 7 4 I 3 63 66 24 8/ (.) (.) 76 /9 92 54 2 {. ) 6 46 85 90 (.) I (.) 15 8 (.) (. ) 39 88 92 12 8 71 66 (.) 29 33 58 57 15 /7 2 6 25 20 96 8/ (.) 4 /9 40 /8 (.) .. 3 67 57 /5 69 51 I I I I 29 48 66 63 (.) 4 I I 33 32 56 29 9 (. ) 4 36 31 34 41 5 I 53 95 (. ) 5 89 (.) JI 92 97 (.) (.) 8 3 (.) 7 74 86 14 (.) (.) (.) 12 14 48 49 4 5 3 13 46 32 56 45 6 5 3 6 35 44 87 71 2 (.) 12 29 47 .. 27 26 .. 64 78 2 34 22 6 58 91 69 88 (.) 2 30 9 68"' 64"' 8w 7w lw 2w 24 w 28w 74w 71 w 5w 2w lw 2w 20w 25 w 96 76 (.) .. (.) 4 24 97 37 2 (.) 3 61 98 92 {. ) (.) 2 8 72 76 4 {. ) (.) {.) 24 24 (.) 61 23 13 64 80 65 6 5 ( .) 3 14 27 95 78 (.) 2 ( .) I 5 /8 28 53 38 7 I 2 33 38 84 71 5 I (.) 15 24 98 82 (.) (.) 2 18 50 82 (.) I 48 17 80 81 I 2 20 17 81 75 /.) (.) 19 25 99 84 7 (.) I 9 91 89 I (.) (.) (.) 7 JI 44 56 (. ) I 2 4 54 39 93 92 (.) {. ) (. ) {. ) 7 8 73 "79 ( .) (.) (.) 27 21 58 46 (.) 42 53 93 80 (. ) {. ) (.) (. ) 6 20 86 77 2 I (.) (.) 12 22 71 51 10 3 (.) 9 19 37 94 95 {. ) (.) 6 5 86 94 I {.) (.) 13 6 89 63 (.) (.) (.) II 37 61 81 3 I 3 4 32 15 75 57 2 (.) 2 25 39 sec the technical notes . Figures in italics are for years other than those specified. Origin and destination of merchandise exports Destination of merchandise cxpons (percentage of total) Industrial Nonrcponing market nonmember High-income Developing economies economies oil exponcrs economies;& 1965 1985 1965 1985 1965 1985 1965 1985 79 76 (.) (.) 0 I 20 24 86 8/ I I (.) (.) 13 /8 90 74 (.) I 0 2 10 23 20 9 4 I 22 19 54 70 26 40 14 15 8 4 53 42 43 14 3 {.) 35 66 19 zo 64111 62 Ill 10 Ill 6111 (,) Ill 2w 26 w 30 II' 77 62 4 5 (.) 2 19 JI 76 40 4 8 (.) 3 20 49 22 27 58 48 (.) 2 20 23 65 85 15 4 (.) (.) 20 II 56 52 6 2 (. ) 2 37 45 96 84 (.) (.) (.) I 4 /5 32 36 I 31 40 33 33 42 (.) 2 26 23 82 86 (.) I (.) (.) 18 13 87 82 (.) I (.) 2 13 /5 67 43 7 /9 (. ) {.) 27 38 75 69 (.) (. ) (.) 6 25 25 90 92 2 I (. ) (. ) 8 8 63 75 (.) (. ) (. ) (. ) 37 25 64 68 16 6 2 6 19 20 72 74 I (.) 27 26 92 74 (.) (.) (.) (. ) 8 26 67 54 (.) (.) I 2 32 43 .. 28 47 5 I 2 4 65 48 67 74 2 (.) I (.) 30 26 83 33 I (.) (. ) (.) 16 67 67 w 63 w 8w 7w I II' 2w 2S w 30 w 71.,, 77w 4w 2w (.) II' (.) II' 2S w 22 w 52 w S3 w 19 w 9w Iw 3w 28 w 3S w 74w 71 w Sw 6w (.) II' I II' 21 w 22 w 78w 81 w 2w 2w Iw Iw 19 w 17 w 70w 59w (.)"' (.) w 3w Iw 27 w 40w 97 43 (.) (. ) (.) {.) 3 57 71 (i() 0 0 8 (.) 21 40 56 49 0 (. ) I 4 44 47 69 75 0 {. ) 2 I 30 24 70w 71 II' 2w 2w lw 3w 27 w 24 w 73 66 5 4 (. ) 3 21 26 91 89 I (.) ( .) I 8 9 71 70 3 3 2 5 25 22 88 66 I 2 (.) 2 II 30 86 84 I 2 (. ) 2 12 13 63 77 2 I I 4 33 18 71 73 9 7 ( .) 2 19 18 83 85 I I I I 15 12 68 71 2 3 (.) 2 29 24 69 51 4 3 I 3 27 42 71 65 17 23 (.) I 12 12 77 78 2 3 I 2 21 18 85 81 3 I (.) 2 12 16 49 58 3 2 2 4 47 36 85 83 3 2 (. ) 2 12 13 87 89 4 2 (. ) (.) 10 9 82 88 3 I (.) (.) 14 II 76 75 2 2 I 4 21 20 61 60 (.) I I 3 38 36 (.) (. ) 45 61 (.) 24 15 57 27 are for the South African Customs Union comprising South Aftrica, Namibia, Lesotho. Botswana. and Swaziland; trddc c. Includes Luxembourg. 253 Destination of manufactured expons (percentage of total) Industrial Nonreponing market oonmember High-income Developing (millions of dollars) economies ei:onomics oil exponers economics.. 1985 1965 1985 1965 1985 1965 1985 1965 1985 S6 w 45 w 9w 3w 2w 4w 33 w 49w .. 39 w Sw 3w 53 w 58 w 64w 4w 4w 2w 6w 31 w 21 w 4 67 63 (.) 21 20 3 13 13 645 .. 53 3 (.) 43 6 2 34 98 66 30 14 II 8 (.) 78 89 {.) 59 27 2 5 (.) (.) 9 68 89 76 .. 65 7 (.) 28 14 3 39 97 61 138 93 22 (. ) (.) (. ) /.) 7 78 26 73 43 I /. ) (. ) 7 26 51 /6 (.) 28 99 72 30 37 II (.) I 63 89 32 80 77 (. ) 6 20 17 .. 43 . ' 57 . ' /3 15 82 85 18 36 60 7 0 (,) 40 93 5,890 55 59 II /0 2 7 32 24 I 95 93 4 7 3 21 65 (.) 2 I 77 33 128 23 8 (,) (,) 2 I 75 9/ 3/ 93 86 (.) 2 (.) 7 /2 79 (.) 2 20 13 ,380 32 3 2 63 337 99 (, ) I 5 44 3 53 29 99 99 (. ) I 48 (.) 52 26 60 40 JO I 29 60 1.731 40 59 7 5 2 12 52 24 398 59 89 5 (.) (.) (, ) 36 /0 2/ 14 67 (.) 86 32 98 (.) 2 II 6 II 25 69 89 28 71 14 88 3 7 8/ (,) 93 /8 45 w 51 w 22 w 9w lw 4w 33 w 31 w 38 w 55 w 11 w 2w 6w 6w 46w 31 w 2 61 34 /.) 39 66 54 86 71 {,) 14 29 ,. 5 77 60 (, ) 23 39 2,365 25 50 2 {,) 4 73 46 5 32 33 4 6 2 62 6/ 7 70 23 7 876 63 52 5 7 (.) 6 32 36 2,534 93 77 (, ) ( ,) 2 7 2/ 375 20 37 44 36 4 5 32 21 15 273 50 32 ( ,) (,) (.) (.) 50 68 27 100 85 0 /.) (.) 15 167 12 78 2 (,) 86 22 58 2 28 98 72 56 4 38 {,) 96 62 3 155 95 87 (. ) 5 /3 78 85 64 (.) (.) (.) (.) 15 36 2,583 39 63 (.) (. ) (.) 6 61 3/ 47 46 47 (.) (.) (. ) 54 52 231 I 46 (.) 99 53 50 93 49 7 51 89 93 38 ( ,) /.) 7 62 5 236 51 72 (. ) (.) (. ) 49 27 3,849 83 56 I I (.) 7 15 36 115 16 89 . , (. ) 84 II 24 59 88 39 I II 61 21 25 /9 (,) 75 81 756 19 70 3 I 5 4 73 25 278 9 3 91 97 see the technical notes. Figures in italics are for years other than those specified. Origin and desttnatton of merchandise imports Destination of manufactured expons (percentage of total) Industrial Nonrcponing market nonmember High-income Developing of dollar>) economies economics oil exponers economics• 1985 1965 1985 1965 1985 1965 1985 1965 1985 320 6 4/ (.) 94 59 611 43 58 (.) (.) (.) 57 41 255 38 35 (.) (.) 62 65 408 49 8 ( .) (.) 23 19 28 73 246 5 6 12 66 25 7 59 20 457 19 /5 I 61 70 19 15 46w 57 w 23 w 9w lw 3w 31 w 31 w 134 8,911 40 52 I I (.) 3 59 43 to 346 71 51 5 6 (. ) 24 43 1,053 5,866 II 21 65 53 (.) 2 24 24 355 4,412 59 87 18 4 (.) ( .) 23 8 75 4,404 17 69 (.) (.) 2 2 81 29 443 4, /// 94 84 (.) (.) 6 /6 7,403 .. 17 46 2 36 617 8,421 24 28 41 46 I 2 35 24 165 7,129 71 90 (.) (.) (. ) 29 9 I 35 7 39 5 (.) 93 56 84 1.423 45 45 5 ( .) (. ) 54 50 104 27,669 68 68 () (.) 6 32 26 24 184 50 77 2 4 I (. ) 48 /9 51 647 59 66 ( .) (.) (. ) 41 34 44 2,241 56 67 6 3 9 8 29 23 281 5,212 67 71 ( .) 31 29 28 330 78 79 () (. ) 22 21 995 27,540 71 56 (.) (.) 2 28 41 262 30 43 .. 27 338 13,317 9 52 (.) 3 4 88 42 58 28/ 61 8/ (.) to II 28 8 8 45 24 83 I 13 4 63 /3 41w 56 w 19 w 8w 2w 4w 32 w 32 w 52 w 75 w 12 w 8w 4w 2w 34 w 16 w 42 w 52 w 24 w 9w 1w 3w 34 w 36 w 43 w 56 w 20 w 16 w (.) w 2w 38 w 27w 55 w 58 w 1w lw (.)w 3w 44 w 40w 30w 47 w 21 w 16 w 49w 36 w 7 205 57 (.) (.) 43 19 888 31 65 17 3 52 32 17 364 18 25 33 48 49 27 671 23 20 57 66w 70 w 2w 2w lw 3w 31 w 25 w 382 17,227 57 64 9 5 (.) 3 34 28 203 7,251 82 93 ( .) (.) ( .) I 17 6 67,292 68 70 3 3 2 5 27 21 53 1.488 90 68 (.) ( .) I 10 32 4,823 40,860 86 83 I 2 (. ) 2 13 14 68,392 61 71 2 I I 5 36 24 14.628 67 72 12 7 ( .) 2 21 18 35,149 81 84 2 I I 2 17 13 7, 139 72 .242 64 69 2 2 I 3 33 26 432 4,548 57 43 (.) ( .) (.) I 43 56 815 10,499 63 63 23 26 (. ) I 14 to 161 ,304 76 77 2 3 I 2 22 18 967 9.599 79 78 3 I (.) 2 17 19 7,704 171.144 47 58 3 2 2 4 49 36 24.457 82 83 3 2 ( .) 2 15 14 51,523 88 94 (.) (.) (.) (.) 12 5 734 5,618 78 70 2 I ( .) I 20 28 25,230 75 74 2 2 I 4 22 20 158.517 58 61 (.) (.) I 3 40 35 ( .) (.) 97 27 .. 68 .. 5 .. 15,250 JI 60 2 27 are for the South African Customs Union comprising South Africa. Namibia, Lesotho, Botswana. and Swaziland; trade c. Includes Luxembourg. 255 1981 1982 1983 c tnt. aff. neg. tnt aff. neg. tnt aff. neg. 0 0 0 3 0 1 7 9 0 0 0 0 3 0 1 7 9 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3 0 1 0 0 3 0 2 0 3 0 1 0 0 3 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 3 0 0 2 3 0 0 0 0 1 0 0 1 1 0 1 1 1· 0 2 0 0 1 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 10 6 7 124 80 23 21 21 21 6 1 7 85 61 18 3 3 11 4 4 5 0 39 19 5 16 18 10 0 0 0 0 0 0 0 2 0 0 0 4 0 4 71 0 71 35 0 35 0 0 0 0 8 0 8 11 0 11 0 4 0 4 63 0 63 24 0 24 15 10 11 202 80 95 69 33 59 6 4 7 98 61 27 25 13 24 5 9 6 4 104 19 68 42 20 35 0 0 0 0 0 0 0 2 0 0 countries. DCs: Developing countries. NMEs: Nonmarket economies. World Bank, WoFld Development Report (1985), AICs include all members of OECD, except are included in DCs. Nonmarket economies (NMEs) are the East European NMEs. except AICs and NMEs. EEC, and Chile are obtained from GATI reports. They are thus incomplete since GATI nonsignatories. The reports were available for the first half of 1986 only. if there was a "Definitive Duty" or "Price Undertaking" or "Other Action." If a case was outcome. We have, however, classified some ''withdrawn" United States cases as arrangement between U.S. and exporting countries. as published in the USITC's OTAP, it is classified as negative. 1982 are from "Status of Dumping Complaints, Australian Industries Assistance Commission are no GATI reports for Australia during that period. A 8.1 Anttnlbsldy actions, 1980-86 1986· 1980-86 neg. ini. aff. ini .aff. neg. pend. ini. aff. neg. pend. 1 0 1 2 1 5 20 13 2 5 1 0 1 2 1 4 19 13 2 4 0 0 0 0 0 1 1 0 0 1 0 0 0 0 0 0 0 0 0 0 2 0 0 1 0 0 11 8 3 0 1 0 0 1 0 0 10 7 3 0 1 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 7 6 3 0 0 0 0 0 0 0 2 3 0 0 0 2 0 0 0 0 5 3 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 0 24 25 28 28 11 9 281 181 130 9 6 8 8 10 2 2 130 84 72 2 17 17 20 18 9 7 146 96 54 7 1 0 0 0 0 0 5 1 4 0 1 6 5 0 5 0 140 1 139 0 0 0 1 0 1 0 24 0 24 0 1 6 4 0 4 0 116 1 115 0 28 33 34 31 17 14 460 209 278 14 8 8 10 13 4 6 185 107 101 6 19 25 24 18 13 8 270 101 173 8 1 0 0 0 0 0 5 1 4 0 EEC Journal, various issues. to the European Parliament, September 1983, December 1984, and June 1986. Office of the United States Trade Representatives, April 4, 1986; and federal Register, Note that the U.S. counting of cases is based on the number of ITC's initiations of every of Commerce's case numbers. Since ITC then initiates a separate investigation cases exceeds Commerce's. GATT's semi-annual reports. According to one of Chilean officials, almost all of the CVD imposing any CVD rate. Instead they increase their customs duty rates from 20% there was not enough information on dates of the final decisions, therefore decisions are initiations. Program (OTAP), USITC, 1981 through 1986. The data are based on actions on Subsidies and Antidumping Practices. GATT's Semi-Annual Reports on 259 anlisubsldy actions, 198~6 USAd EE<:? pend. int. a.If. neg. pend. int. a.If. neg. 2 27 19 6 2 4 3 1 0 19 12 7 0 2 2 0 0 5 5 0 0 1 0 1 0 27 19 8 0 0 0 0 1 7 5 1 1 0 0 0 0 20 12 8 0 0 0 0 0 13 8 5 0 0 0 0 1 15 9 6 0 0 0 0 2 7 4 3 0 0 0 0 0 11 9 2 0 0 0 0 0 12 10 2 0 0 0 0 0 11 6 5 0 0 0 0 0 3 1 2 0 0 0 0 1 10 7 2 1 0 0 0 0 9 7 2 0 0 0 0 0 5 4 1 0 0 0 0 0 8 5 3 0 0 0 0 0 4 4 0 0 0 0 0 0 5 1 4 0 0 0 0 0 6 5 1 0 0 0 0 0 4 2 2 0 0 0 0 2 5 2 1 2 0 0 0 0 4 2 2 0 0 0 0 1 4 1 2 1 0 0 0 1 4 1 2 1 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 2 1 1 0 0 0 0 0 3 1 2 0 0 0 0 0 3 3 0 0 0 0 0 0 1 1 0 0 0 0 0 0 2 0 .2 0 0 0 0 0 2 2 0 0 0 0 0 0 2 2 0 0 0 0 0 0 1 0 1 0 0 0 0 0 2 0 2 0 0 0 0 0 1 1 0 0 0 0 0 0 1 1 0 0 0 0 0 0 1 0 1 0 0 0 0 0 1 0 1 0 0 0 0 0 1 1 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 1 1 0 0 1 0 0 0 1 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 1 0 1 0 0 0 0 0 1 0 1 0 0 0 0 frequently subject to antisubstdy actions, 19IJl#l6 Cbtle g int aff. neg. 1 0 56 0 56 1 0 16 0 6 0 0 26 0 26 0 0 1 0 1 0 0 15 0 15 0 0 0 0 0 0 0 8 0 8 0 2 0 0 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 2 0 6 0 6 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 3 0 3 0 0 2 0 2 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 2 1 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 261 anllsubridy actions, 19BIUJ6 UStld BBC? pend. int. ajj. neg. pend. int. aJJ. neg. 0 1 1 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 1 1 0 0 0 0 0 0 1 1 0 0 0 0 0 14 281 179 93 9 7 5 2 of cases initiated during 1980 through 1986 only. USITC and GATI reports do not to the subsidies code. EEC, and Chile are from GATI reports. They are thus incomplete since GATI does not Also the reports were available for the first half of 1986 only. if there was a "Definitive Duty" or "Price Undertaking" or "Other Action." If a case was outcome. We have, however, classified some ''withdrawn" United States cases as arrangement between U.S. and exporting countries. as published in the USITC's OTAP, it is classified as negative. System, Department of Commerce, April 4, 1986; Federal Register, various issues. The initiations for every product line rather than the Department of Commerce's case the Commission to the European Parliament, Commission of the European Commu- of the European Communities, various issues. "Status of Dumping Complaints", Australian Industries Assistance Commission Annual reports for Australia during that period. semi-annual reports. According to one Chilean official, almost all of the CVD cases filed by any CVD rate. Instead, they inaease their customs duty rates from 20% to 35% if was initiated by Japan in 1983 and withdrawn In 1984. Program (OTAP), USITC, 1981, 1982, 1983, 1984, 1985 and 1986. Semiannual actions, GATI, various issues. frequently subject to anttsubsidy actions, 198().86 Canada Chile g a.ff. neg. int a.ff. neg. 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 8 3 140 1 139 263 1981 1982 1983 int. a.ff. neg. tnt. a.ff. neg. tnt. a.ff. neg. 49 28 25 77 47 15 80 58 43 34 14 16 55 25 13 59 44 35 15 11 9 20 20 2 21 13 8 0 3 0 2 2 0 0 1 0 0 0 0 0 0 0 1 1 0 23 13 10 72 21 13 36 41 23 12 8 10 54 10 11 27 29 16 8 1 0 15 7 1 7 10 7 3 4 0 3 4 1 2 2 0 47 16 14 55 42 9 36 45 11 9 8 6 18 9 2 11 12 3 3 5 7 15 4 1 9 12 2 35 3 1 22 29 6 16 21 6 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2 1 0 0 0 0 0 0 0 1 1 0 0 0 0 0 0 0 1 14 4 14 61 45 5 47 15 16 7 3 9 47 41 2 27 9 9 4 0 4 13 3 2 19 6 7 3 1 1 1 1 1 1 0 0 135 61 63 265 155 42 200 160 95 62 33 41 174 85 28 125 95 63 31 17 20 63 34 6 56 41 25 42 11 2 28 36 8 19 24 7 countries. DCs: Developing countries. NMEs: Nonmarket economies. World Bank, World Development Report (1985), AICs include all members of OECD, except are included in DCs. Nonmarket economies (NMEs) are the East European NMEs. except AICs and NMEs. EEC, and Chile arc obtained from GATI reports. They are thus incomplete since GATI nonsignatories. The reports were available for the first half of 1986 only. if there was a "Definitive Duty" or "Price Undertaking" or "Other Action." If a case was outcome. We have, however, classified some "withdrawn" United States cases as arrangement between U.S. and exporting countries. as published in the USITC's OTAP, it is classified as negative. are from "Status of Dumping Complaints, Australian Industries Assistance Commission A 8.3 Antidumplng actions, 1980-86 1986a 1980-1986 neg. tnt. a.If. neg. pend. tnt. a.If. neg. pend. 30 28 33 6 18 46 416 219 175 46 15 17 19 4 10 23 263 134 125 23 12 10 11 2 8 16 130 72 46 16 3 1 3 0 0 7 23 13 4 7 0 0 0 0 0 0 1 2 0 0 27 8 7 12 6 8 230 140 88 8 16 7 5 6 3 5 160 87 71 5 8 0 2 4 3 3 53 35 14 3 3 1 0 2 0 0 17 18 3 0 12 13 24 14 5 47 280 213 74 47 9 2 8 7 1 11 83 71 26 11 1 3 5 0 2 15 63 34 19 15 2 8 11 7 2 21 134 108 29 21 0 0 0 0 0 0 3 3 0 0 0 0 3 2 1 0 3 2 1 0 0 0 2 1 1 0 2 1 1 0 0 0 1 1 0 0 1 1 0 0 1 0 0 0 0 0 1 1 0 0 0 0 0 0 0 2 4 0 2 2 0 0 0 0 0 0 1 0 1 0 2 0 0 0 0 2 3 0 1 2 53 25 70 50 27 39 350 195 137 39 19 12 30 15 13 17 180 98 85 17 20 9 34 32 14 16 137 78 45 16 14 4 6 3 0 6 33 19 7 6 74 137 84 57 142 1288 775 477 142 38 64 33 28 56 693 397 308 56 22 53 39 27 50 385 220 125 50 14 20 12 2 36 210 158 44 36 are no GATI reports for Australia during that period. EEC Journal, various issues. to the European Parliament, September 1983, December 1984, and June 1986. Office of the United States Trade Representatives, April 4, 1986; and Federal Register, Note that the U.S. counting of cases is based on the number of ITC's initiations of every of Commerce's case numbers. Since ITC then initiates a separate investigation cases exceeds Commerce's. Program (OTAP), USITC, 1981 through 1986. The data are based on actions on Subsidies and Antidumping Practices. GATT's Semi-Annual Reports on 265 anlldumplng actions, 1980-86 USA II EECI pend. Int. aff. neg. pend. Int. ajJ. 12 33 16 11 6 17 11 8 0 0 0 0 27 18 3 21 10 9 2 0 0 7 21 12 7 2 4 0 5 15 11 3 1 13 8 6 19 8 10 1 3 0 4 18 8 9 1 0 0 6 15 6 8 1 0 0 6 22 13 7 2 11 7 4 18 11 6 1 0 0 4 13 8 4 1 18 9 8 2 2 0 0 25 16 2 18 8 9 1 6 5 1 2 1 1 0 0 0 4 10 6 2 2 0 0 4 7 4 2 1 20 15 ; 8 4 2 2 16 11 11 4 2 1 1 21 8 6 6 5 1 0 16 8 4 4 3 0 1 15 7 3 4 3 0 1 6 4 ; 2 0 1 1 15 9 3 4 1 2 1 4 2 1 6 6 0 0 3 3 2 3 0 3 0 0 0 2 10 8 1 l 1 0 1 11 7 3 1 3 2 i 4 1 3 0 3 1 3 3 1 1 1 2 0 0 4 4 0 0 1 1 1 5 2 3 0 2 1 0 6 5 1 0 0 0 1 1 1 0 0 0 0 0 4 2 2 0 0 0 3 2 1 0 1 2 1 1 2 1 1 0 2 0 1 3 0 2 1 1 1 3 2 1 0 1 4 3 1 1 1 0 0 3 1 0 1 0 1 0 0 0 0 0 0 0 0 4 2 1 4 1 2 1 0 0 0 0 0 0 0 0 0 0 2 1 1 0 1 1 0 2 2 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 0 1 0 0 0 0 0 0 2 2 0 0 0 0 0 0 0 1 0 1 1 0 0 1 0 to antidumping acttons, 198~6 Canada a.ff. neg. pend. 10 5 1 22 17 2 11 8 0 12 7 1 7 1 0 1 2 0 9 8 0 10 3 0 8 0 0 11 4 0 2 6 0 3 2 0 0 0 0 0 0 0 4 3 1 3 0 0 1 2 0 1 0 0 3 0 0 0 0 0 4 0 1 1 0 0 2 0 0 1 1 0 3 1 0 1 1 0 0 0 0 1 1 0 0 0 0 0 4 0 2 0 0 1 2 0 2 1 0 1 0 0 0 0 0 1 1 0 0 1 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 1 0 0 0 1 0 0 0 0 0 0 0 0 0 0 267 antldumptng actions, 1980-86 USAe EEd tnt. aff. neg. pend. tnt. aff. 0 0 0 0 0 0 0 0 1 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 0 0 1 1 0 0 0 0 0 0 0 0 0 1 0 0 1 1 0 0 0 0 1 1 0 0 1 0 0 0 0 0 0 0 1 1 0 1 1 0 0 0 0 1 1 0 0 1 0 0 1 1 0 0 1 0 0 0 0 0 0 0 1 0 0 0 0 0 0 1 1 0 0 0 0 0 1 1 147 350 191 120 39 280 160 of cases initiated during 1980 through 1985 only. All decisions are reported in the GATI reports do not include cases filed by nonparties of the antidumping code. the EEC are obtained from GATI reports. They are thus incomplete since GATI does nonsignatories. The reports for Australia and Canada were available for the first half of the following antidumping initiations: and one against China in 1986 with two final affirmative determinations against China against Japan. in 1983 with final affirmative determination in 1983. against Switzerland in 1980 and 1984 and against Germany in 1980 all with final affirmative which were against Korea and Yugoslavia in 1981 with negative determinations and the two in 1985 both pending. in 1984 with affirmative determination. if there was a "Definitive Duty" or "Price Undertaking" or " Other Action." If a case was outcome. We have, however, classified some "withdrawn" United States cases as arrangement between U.S. and exporting countries. as published in the USITC's OTAP, it is classified as negative. System, the U.S. Department of Commerce, April 4, 1986; and Federal Register, The Commission to the European Parliament, Commission of the European Commu- Journal of the European Communities, various issues as well as GATI reports. "Status of Dumping Complaints," Australian Industries Assistance Commission, Annual reports for Australia during that period. The initiations for 1980-82 are based on the not on the both have notified data as their initiation dates. subject to antulumplng actions, 1980-86 Canada Int. aff. neg. pend. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 230 139 85 6 269

Key facts

Organisation World Bank Group

Document type Publication

Date October 31, 1987

Country Uruguay

Source worldbank_document