Membership

Since August 1990, seven governments—Bolivia, Costa Rica, El Salvador, Guatemala, Macao,² Tunisia, and Venezuela—have acceded to the GATT. In addition, membership requests from Algeria, Bulgaria, the People’s Republic of China, Honduras, Mongolia, Nepal, Panama, and Paraguay are in various stages of consideration, and Viet Nam is exploring the possibility of joining the GATT, as is Taiwan Province of China. The former U.S.S.R. was granted GATT observer status in May 1990; at the time, it announced that it sees this as a step toward membership, but several Contracting Parties, including Japan and the United States, made clear that acceptance of a Soviet accession request will hinge on progress in its building a market-based price system, consistent with GATT principles. The establishment of the Commonwealth of Independent States and changes in the economic regimes obviously will affect the future relationship with GATT as well.

Further, Poland is in process of renegotiating its Protocol of Accession to reflect the changes toward the greater market orientation of its economy. Accordingly, Poland seeks to replace its present commitment to a specific rate of expansion of its imports from GATT members with acceptance of the full GATT disciplines, including the usual schedule of bound tariffs³ on which GATT accession is normally based. The absence of a bound tariff schedule is making it difficult for Poland to participate in tariff negotiations and could limit its market access opportunities.

Similarly, Hungary has taken steps toward renegotiating its Protocol. It seeks an elimination of the special provision in its Protocol, including its right to use bilateral import measures vis-à-vis other Contracting Parties and vice versa, and Hungary’s waiver from its GATT obligations regarding trade with the members of the (former) Council of Mutual Economic Assistance. The normalization of Hungary’s GATT status can be expected to result in the withdrawal of the U.S. nonapplication (since 1973) of the GATT to Hungary. Although the United States grants Hungary most favored nation (MFN)⁴ trading status, it does so on a bilateral basis (which can be withdrawn unilaterally).

The new GATT members followed a trend, starting with the Mexican accession in 1986, of lowering and binding most of their tariffs and, in some cases, of taking measures to liberalize nontariff barriers. Thus, Bolivia, Costa Rica, El Salvador, Guatemala, and Venezuela agreed to bind the entirety of their tariffs, joining Chile and Mexico as the only GATT members to have done so; Macao has announced that by early 1992 it would submit a schedule to bind its tariffs at an acceptable level, and Tunisia bound about one fifth of its tariffs.⁵ In addition, Costa Rica will eliminate import surcharges, surtaxes, and quantitative restrictions by late 1994; Guatemala will eliminate its remaining quantitative restrictions by July 1994; Tunisia is to abolish import licenses on many products; and Venezuela will continue with its present program of removing import prohibitions, restrictive import licensing requirements and other quantitative measures, with the goal to eliminate them completely by 1995.

Dispute Settlement

This subsection deals with dispute settlement under the GATT (normally handled within the context of the Council), as distinct from that under the Tokyo Round agreements (which are discussed below under “Instruments of Protection”).

The working of GATT’s dispute settlement mechanism is normally based on consensus. This has resulted at times in lengthy delays in the establishment of dispute panels and in the adoption of their reports (with a single party able to block consensus). In 1989, the Council decided on certain improvements in the dispute procedures, including the establishment of some firm time limits for the conclusion of various phases of the dispute settlement process.⁶ In particular, the Council, unless it decides otherwise, is required to establish a panel no later than the Council meeting following that at which the request first appeared on the Council’s regular agenda. However, the changes did not address problems in the adoption of dispute panel findings nor their implementation.

The year 1990 marked a substantial decline in the number of dispute panels established by the Council—one panel in 1990, compared with 5 in 1989 and 13 in 1988 (Table A45). Part of the explanation is that Uruguay Round participants were loath to spoil the negotiating atmosphere by trade disputes with the anticipated conclusion of the Round, in December 1990, near. This is supported by the fact that the failure to conclude the Round was followed by the almost immediate establishment of four dispute panels.

The greater automaticity under the new procedures appears to have made GATT’s dispute settlement more effective. Seven dispute panels (four in 1991) have been established under the revised procedures; in three of these, panels were constituted despite serious reservations on the part of the party complained against (once the EC and twice the United States). Four of the seven panels have submitted their reports, of which two were adopted without difficulty and with no apparent problems regarding their implementation.⁷ However, adoption of one of these reports, which found a U.S. countervailing duty on imports of Canadian pork GATT-inconsistent, became entangled with the dispute settlement mechanism of the Canada-U.S. Free Trade Agreement (FTA). The United States noted it was the latter mechanism that would determine whether or not U.S. law had been correctly applied. Canada, with wide support, argued that it was not a matter of whether the duty was consistent with U.S. law, but rather that it had been found in contravention of U.S. obligations under GATT. Once the dispute mechanism under the FTA found against the U.S. duty, the United States, in July 1991, agreed to the adoption of the GATT findings. Understandably, this has raised widespread concerns that the GATT mechanism is being undercut.

The improved record is in contrast to that for disputes brought prior to the implementation of the new procedures: Two panels established in 1985 and 1987,⁸ respectively, still need to start work (due to disagreement on panel members); in 8 out of the 15 panel reports adopted under the old procedures, findings have not been implemented to the satisfaction of some GATT members; and in five of these, the party complained against, in agreeing to adoption of the panel report, tied implementation to the outcome of the Uruguay Round.⁹

The importance of an effective GATT dispute mechanism is underscored by the fact that even a problem-ridden one has been able to diffuse significant trade differences. Thus, as the result of recent cases, both Japan and Korea have taken measures to liberalize beef imports; Japan has acted to improve market access for eight agricultural products as well as for wines and alcoholic beverages; the United States has introduced measures to bring its customs user fee and its sugar import regime into line with its GATT obligations; and India, Norway, and Sweden have moved to liberalize restrictions on certain agricultural products.

Selected Other Council Matters

In the context of German unification, the EC implemented transitional measures, as of October 1990 until the end of 1991, to govern imports of industrial products from Bulgaria, the Czech and Slovak Federal Republic, Hungary, Poland, Romania, the former U.S.S.R., and Yugoslavia to the extent that they are for use in the former German Democratic Republic (GDR). In connection with these measures, which include tariff quotas, the EC requested a temporary waiver from its GATT MFN obligations. Concurrently, the United States proposed a working party to examine both the possible trade diversion effects measures and the possible trade consequences of the extension of the EC’s Common Agricultural Policy (CAP) to the former GDR. While the United States saw the EC’s waiver request as part of the proposed working party’s agenda, the EC saw it as a pro forma matter. After informal consultations, the waiver was granted by an unusual rollcall vote at the December 1990 Session of the CONTRACTING PARTIES along with a decision to create a working party to examine the effects of the measures and to monitor adherence to the waiver conditions.

Following the entry into force of the U.S. Canada FTA on January 1, 1989, the Council established a working party to examine the compatibility of the FTA with GATT provisions. The working party began its meetings in 1991, and the concerns raised by a number of members indicate that there may be no consensus on the full conformity of the FTA with the GATT. While there is a general view that the FTA follows the GATT closely, particular worries have arisen about its dispute settlement mechanism and its agricultural provisions. On the former, some members question whether parties to the FTA would feel more bound by dispute settlement findings under the FTA than under GATT. On agriculture, certain members felt that the perceived lack of full liberalization of trade in agricultural products with the FTA breached the requirement that a regional arrangement cover substantially all trade between its members.

The 1955 U.S. waiver has given rise to contention in the Council in 1990. The waiver has allowed the United States since 1955 to impose, under its Agricultural Adjustment Act, quantitative restrictions and special duties on certain agricultural products. For some time, a number of GATT members, particularly the EC, have felt that the United States has failed to adjust its agricultural policies sufficiently and that therefore the waiver is no longer justified. These views prevented the GATT working party on the 29th and 30th U.S. Annual Reports on the Agricultural Adjustment Acts from reporting consensus conclusions to the Council in 1990.¹⁰ With the United States of the opinion that it was in full compliance with its obligations, the Council’s consideration of the working party report, as well as of the 31st and 32nd U.S. Annual Reports on the Act, has been postponed, probably until after the Uruguay Round. In this regard, the United States’ agricultural offer in the Uruguay Round implied readiness to eliminate the waiver, leading the EC to unblock adoption of a dispute panel report, finding an EC complaint against continued U.S. restrictions on imports of sugar and sugar-containing products unwarranted.

In May 1991, in recognition of the heavy international environmental agenda leading up to the United Nations Conference on Environment and Development (UNCED), the Council held a structured discussion on the relationship between trade and the environment and the role that GATT would need to play. Participants generally were concerned about the widespread misconception that GATT was an obstacle to environmentally sound policies and agreed that this needed to be dispelled. They also concurred that GATT should not involve itself in the design of global environmental policies, but confine itself to its area of competence. Work would be needed, in particular, to ensure that trade measures taken to protect environmental standards were not simply a disguised form of protection.¹¹ Views on how the work should proceed diverged, however. Some, particularly members of the European Free Trade Association, look to the activation of a dormant working group on environmental measures, while others prefer to await the outcome of consultations on the terms of reference for the group.¹² In the interim, the Secretariat is to (1) set out the trade aspects of the preparatory work for UNCED and the history of GATT involvement in the area of trade and the environment, and (2) prepare an inventory of trade measures taken for environmental protection reasons as notified to the GATT.

Report by the Director-General

The Council, in April 1991, had before it the Director-General’s second Annual Report on the status of the trading system, in which he noted that, although slowing down, the growth in the volume of world trade in 1990 had continued to outpace that of output; however, the weakening of the global economy risked intensifying defensive trade actions. Nevertheless, there had been notable positive developments in trade policy, including far-reaching liberalization by Central and Eastern Europe and by some developing countries; and the growing and strengthened participation in the multilateral trading system by a number of countries as evidenced by the recent stream of accessions and accession requests and the disinvocation of cover for import restrictions maintained under the GATT’s balance of payments provisions. On the negative side was the temporary suspension of the Uruguay Round in December 1990. Although the negotiations had resumed in February 1991, major outstanding issues continued to present difficulties, including agriculture, services, tariffs, and rules. Other identified areas of concern were persistent trade frictions between the EC, Japan, and the United States, and recourse to antidumping and countervailing duty actions with protectionist overtones. Further, there was the need to guard against the risk of an introspective orientation of regional arrangements. The Director-General’s overview met with widespread agreement. It is clear, however, that the Council’s discussion of broad trade policy issues needs to evolve over time and, at this time, is inhibited on a number of points important to a thorough discussion by the ongoing Uruguay Round negotiations.

The Trade Policy Review Mechanism

The Trade Policy Review Mechanism (TPRM), established in April 1989, aims to make the trade policies and practices of each country under review explicit and to gauge their possible effects on both the country itself and the global trading system. The reviews, however, are not to judge whether a member’s trade measures conform with its GATT obligations, that being the task of the dispute settlement mechanism.

All GATT members are subject to the TPRM, with the frequency of reviews varying from two years to six years according to the importance in world trade of the country in question. The reviews are backed by a submission by the country and a paper prepared independently by the GATT staff; the papers are published together with the substance of the discussions in the GATT Council. Since initiation of the reviews in December 1989 through mid-1991, 17 members have been examined: all the traders on the two-year cycle (Canada, the EC, Japan, and the United States), as well as Australia, Chile, Colombia, Hong Kong, Hungary, Indonesia, Morocco, New Zealand, Nigeria, Norway, Sweden, Switzerland, and Thailand.

The first round of reviews already is contributing considerably toward transparency by clearly setting out existing policy measures and reasoning, which in turn provides the basis for informed discussions at a national and an international level. The TPRM also has focused attention on the widespread adoption of outward-looking, market-oriented trade policies as an integral part of structural adjustment that aims to improve the competitiveness of the economy; countries as varied as Australia, Chile, Colombia, Hungary, Indonesia, Morocco, New Zealand, Nigeria, and Thailand have chosen this economic policy path, switching from a previous bias toward protection and import substitution. In each case, a positive external environment was stressed as being necessary for the success of adjustment efforts. The reviews also have served to highlight the responsibility of the major traders in safeguarding and improving a liberal system. The relative openness of their economies was acknowledged, but each was subject to criticism. Thus, in the case of Canada, stress was laid on the lack of transparency in its multilayered tariff system. For the EC, emphasis was placed on the trade distortions stemming from the CAP, the harassment aspect of its use of antidumping actions, its widespread resort to bilateral trade restrictive agreements, and on the nontransparent nature of its national subsidies. With regard to Japan, concern was evident about its inclination to settle trade matters bilaterally, the lack of transparency in the administration of trade policies, the high level of support for agriculture, and the difficulty in penetrating its market. On the United States, the review was marked by unease that it may have weakened its past strong commitment to the GATT and the multilateral trading system; this was reflected in the stress on the threat of unilateralism, the resort to measures, such as VERs, and the unilateral interpretation of multilateral disciplines, particularly in the context of antidumping investigations and duties. As to other large traders, both Australia and New Zealand were urged to bind more tariffs and to lower rates in areas of concern to developing countries, such as textiles and clothing. Norway, Sweden, and Switzerland were commended for their generally low tariffs, but criticized for their high levels of agricultural protection and tariff peaks in sensitive areas like textiles and (in the case of Switzerland) for the presence of cartels. Hong Kong drew praise for having essentially no trade restrictions, but was urged to increase its tariff bindings.

Balance of Payments Provisions

The GATT authorizes the use of trade restrictions for balance of payments reasons under Articles XII, for developed countries, and XVIII:B, for developing countries. On restrictions maintained under Article XII, full consultations must be conducted annually by the GATT Committee on Balance of Payments Restrictions. On measures maintained under Article XVIII:B, consultations are normally held under simplified procedures every other year. However, under the simplified consultations, the Committee must decide whether these suffice or whether an indepth (full) examination of the concerned party’s use of trade measures is required. Full consultations consider the overall macro-economic situation of the consulting country, including its prospects and alternative means of adjustment; look at the member’s restrictive system in some detail; and take into account external factors, including access to markets, that affect the country’s balance of payments situation. Background documentation is supplied by the IMF to the Contracting Parties for all consultations and, in the case of full consultations, the IMF makes a statement assessing the balance of payments situation of the consulting party.

The use of the provisions under Article XII by developed countries has declined steadily (Table A46). Czechoslovakia is the only country recently to invoke the Article—in early 1991—in connection with an import surcharge on consumer goods and foodstuffs.

In contrast, Article XVIII:B has been used widely by developing countries and represents the most broadly applied exception to the GATT’s general prohibition on the application of quantitative restrictions; some 80 percent of all such restrictions notified to the GATT are justified under the Article. However, since 1989, five developing countries have disinvoked their current use of Article XVIII:B. Argentina, Brazil, Ghana, and Peru did so while the external financial situation remained under pressure, as part of a wholesale lifting of restrictions in the context of national economic policies to remove market impediments; Korea revoked its use of the provisions under comfortable, external circumstances, as part of lengthy negotiations in the Committee in 1989, and is now lifting its remaining restrictions over an agreed time schedule.

Since early 1990, full consultations have been conducted with Czechoslovakia and Yugoslavia and consultations under simplified procedures, with Bangladesh, Egypt, Nigeria, the Philippines, Tunisia, and Turkey. The consultation with Czechoslovakia went smoothly, with the Committee in firm support of its economic transformation efforts. Czechoslovakia’s use of the provisions was seen by many as being a model, in that the applied measure was price-based and to be removed within a preset time frame, with the intent to do so more speedily, if possible. The consultation with Yugoslavia also went forward in a sympathetic environment, with the Committee expressing understanding for Yugoslavia’s difficult situation and support for its economic policies, commending the scope and pace of economic and trade liberalization efforts.

In the simplified consultations, it was agreed that Egypt, Nigeria, the Philippines, Tunisia, and Turkey would proceed to full consultations. This halted the previous trend of few departures from simplified procedures for developing countries and partly reflects the view of many industrial countries that procedures need to be tightened, particularly to shrink the periods of application and to reduce use of non-price-based measures. Thus, while not denying the right of members under GATT to use trade measures for balance of payments reasons, developed countries have begun to stress their own right to examine such restrictions fully.

Tariffs

Tariffs in industrial countries have been reduced to minimal average levels in successive rounds of multilateral trade negotiations and a large proportion, often in excess of 90 percent, of their tariffs are bound. However, tariff reductions have been less pronounced in some sectors, particularly agriculture and textiles, and both tariff peaks and escalation (successively higher tariffs along the product chain) remain a feature in most countries. In many developing countries, average tariffs are considerably higher, at times at prohibitive levels, than in developed countries; moreover, although there are significant exceptions, a low percentage of their tariffs are bound.

The GATT Committee on Tariff Concessions, after overseeing the phased implementation of the Tokyo Round tariff cuts, continues as a forum for tariff matters, including the supervision of GATT tariff schedules. In recent years, much of the Committee’s work has been related to the implementation, begun in 1988, of the new Harmonized Commodity Description and Coding System (HS). Replacing a variety of different and often inconsistent classifications, the HS provides customs and trade officials with an agreed definition of the content of tariff lines, facilitating both the conduct of, and negotiations on, trade. The HS has been adopted by 65 GATT members, accounting for some 95 percent of the trade of Contracting Parties.

Nontariff Measures

The use of nontariff measures (NTMs) has grown in importance since the late sixties, both in relative terms, given the decline in tariffs,¹³ and in absolute terms. Thus, in 1990, selected NTMs¹⁴ affected 18.5 percent of the value of nonfuel imports into 22 industrial countries—an increase of some 20 percent over the 1981 coverage ratio.¹⁵ Many of these NTMs are in the form of VERs¹⁶ and other gray area measures that effectively bypass GATT’s safe-guard provisions.

Multilateral Efforts

The first and most ambitious attempt to deal with interrelated trade and competition issues was contained in the Havana Charter (1945) for an International Trade Organization. Chapter V of the Havana Charter contained policies and principles to assist in preventing business practices that adversely affect international trade, restrain competition, limit access to markets, or foster monopolistic controls.¹⁹ After the Havana Charter failed to obtain the necessary votes for ratification, a proposal was made in Economic and Social Council of the United Nations (ECOSOC) in 1953 to revive Chapter V as a separate instrument. The proposal was not accepted, however, because it did not receive the support of the United States or of a number of other countries.²⁰ Similar, but unsuccessful, attempts were made in GATT between 1954 and 1960. Finally, in 1960 the CONTRACTING PARTIES adopted a resolution that recommended consultations whenever a Contracting Party felt it was being harmed by restrictive business practices of firms from other parties.²¹ Such activities were to be reported to the Secretariat; no such reports have been made to date.

Beginning in the 1970s, the United Nations continued efforts to develop harmonized international competition policies. In 1980, in line with the 1974 recommendations of a UN Group of eminent persons, “The Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices” (UNCTAD Code) was approved by the General Assembly. The Code is a set of voluntary guidelines that promotes the exchange of information and informal cooperation while leaving each country to devise its own laws. The Code deals with restrictive business practices, trade and antitrust issues, and the activities of multinational corporations, which are of particular concern to developing countries. The Code was reviewed at an UNCTAD conference in 1985, where particular attention was given to OECD analysis that pointed to the risks of antidumping legislation being applied anticompetitively.²²

Within the OECD, discussions among members on restrictive business practices began in 1953.²³ Subsequently, a series of Council Recommendations were adopted that provided the basis for cooperation on competition and trade issues. These include the 1976 Guidelines for Multinational Enterprises (MNEs); the September 1979 Council Recommendation Concerning Cooperation Between Member Countries on Restrictive Business Practices Affecting International Trade; the Revised Recommendations of the Council of May 1986; and the Recommendations of the Council of October 1986 for cooperation between member countries in areas of potential conflict between competition and trade policies.²⁴ The 1976 agreement contains voluntary guidelines dealing with issues related to dumping, subsidies, distribution and licensing, and conflicting requirements that may be imposed on MNEs as a result of different approaches by OECD member countries to law enforcement and jurisdiction, and it provides for consultation between member states before the OECD Committee on International Investment and Multinational Enterprises. The 1979 and subsequent recommendations encourage governments to take account of the impact of their practices on competition, and they contain provisions for notification, exchange of information, consultation, and conciliation (by the Committee of Experts on Restrictive Business Practices—now called the Committee on Competition Law and Policy) in the event consultation does not produce a satisfactory solution. So far, the conciliation provision has not been used. To further enhance the coordination of trade and competition policies, in April 1985 the OECD Council approved the Indicative Checklist for the Assessment of Trade Policy Measures, which had been developed jointly by the Committee of Experts on Restrictive Business Practices and the Committee on Consumer Policy, in consultation with the Trade Committee (Table 18).²⁵ More generally, trade and competition issues are discussed in an interdisciplinary manner within the OECD by a number of committees including the Trade Committee, the Economic Policy Committee, the Committee on International Investment and Multinational Enterprises, the Consumer Policy Committee, and the Committee on Competition Law and Policy. The work of these Committees is to be further integrated as part of the expanded work program that the OECD has in progress on trade and competition issues.

Table 18.

Indicative Checklist for the Assessment of Trade Policy Measures

Source: Organization for Economic Cooperation and Development (1984), p. 24.

Table 18.

Indicative Checklist for the Assessment of Trade Policy Measures

1.	What are the expected direct economic gains to the domestic sector, industry, or firm in question (technically, the increase in producers’ surplus) and also what jobs are expected to be created or protected by the measures?
2.	What are the expected direct gains to government revenues (e.g., from tariffs, import licenses, tax receipts) or increased government costs (e.g., export promotion, government subsidies, lost tax revenues)?
3.	What are the direct costs to consumers owing to the resulting higher prices they must pay for the product in question and the reduction in the level of consumption of the product (technically, the reduction in consumers’ surplus)?
4.	What is the likely impact of the measure on the structure of the relevant markets and the competitive process within those markets?
5.	In the medium- and longer-term perspective, will the measure, on balance, encourage or permit structural adaptation of domestic industry leading over time to increased productivity and international competitiveness or will it further weaken and delay pressures for such adaptation? What will be the expected effect on investment, by domestic firms in the affected sector, by potential new entrants, by foreign investors?
6.	What would be the expected economic effects on other sectors of the economy, in particular, of firms purchasing products from, and selling products to, the industry in question?
7.	How are other governments and foreign firms likely to react to the measure, and what would be the expected effect on the economy of such actions? Is the measure a response to unfair practices in other countries?
8.	What are the likely effects of the measure on other countries? How can prejudice to trading partners be minimized?

Source: Organization for Economic Cooperation and Development (1984), p. 24.

View Table

Table 18.

Indicative Checklist for the Assessment of Trade Policy Measures

1.	What are the expected direct economic gains to the domestic sector, industry, or firm in question (technically, the increase in producers’ surplus) and also what jobs are expected to be created or protected by the measures?
2.	What are the expected direct gains to government revenues (e.g., from tariffs, import licenses, tax receipts) or increased government costs (e.g., export promotion, government subsidies, lost tax revenues)?
3.	What are the direct costs to consumers owing to the resulting higher prices they must pay for the product in question and the reduction in the level of consumption of the product (technically, the reduction in consumers’ surplus)?
4.	What is the likely impact of the measure on the structure of the relevant markets and the competitive process within those markets?
5.	In the medium- and longer-term perspective, will the measure, on balance, encourage or permit structural adaptation of domestic industry leading over time to increased productivity and international competitiveness or will it further weaken and delay pressures for such adaptation? What will be the expected effect on investment, by domestic firms in the affected sector, by potential new entrants, by foreign investors?
6.	What would be the expected economic effects on other sectors of the economy, in particular, of firms purchasing products from, and selling products to, the industry in question?
7.	How are other governments and foreign firms likely to react to the measure, and what would be the expected effect on the economy of such actions? Is the measure a response to unfair practices in other countries?
8.	What are the likely effects of the measure on other countries? How can prejudice to trading partners be minimized?

Source: Organization for Economic Cooperation and Development (1984), p. 24.

Regional Efforts

Attempts to harmonize trade and competition policies have been taken within the context of various regional arrangements. These include the European Community (EC); the European Free Trade Association (EFTA); and the Australia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA). These issues are also under discussion in the U.S.-Canada Free Trade Agreement (FTA), in the negotiations between the EC and EFTA for the creation of a European Economic Area (EEA), in the negotiations among Canada, Mexico, and the United States to form a North American Free Trade Area (NAFTA), and in the negotiation of Association Agreements between the EC and a number of Eastern European countries.

The Treaty of Rome, which established the EC, contains the most comprehensive set of rules to ensure the effective functioning of markets among different countries and to minimize the scope for conflict between trade and competition policies. Articles 85 to 94 give the European Commission power to control anticompetitive practices affecting the common market.²⁶ In particular, noncompetitive behavior related to price discrimination and subsidies within the EC are covered by these articles and not by the EC’s Antidumping and Countervailing Laws, which apply to nonmember countries. In addition, Article 113 of the Treaty of Rome provides for a common commercial policy, although exceptions have been made (under Article 115) for purely national measures. Although the Single European Act (EC 1992) is silent about trade and competition policy, it is understood that the Treaty of Rome will be applied in full after 1993. In particular, the Commission has stated that it will not permit exceptions under Article 115, and laws related to state aids (subsidies) are being enforced more strictly.²⁷ In addition, the EC Merger Control Regulation (implemented in September, 1990) creates extensive new obligations for the notification of concentrations between large companies that meet certain threshold requirements. The extent of extraterritorial powers in the directive has the potential to create conflict between the Commission and other competition authorities.²⁸

With regard to EFTA, Articles 13 through 17 of the Stockholm Convention contain a set of competition rules covering government aids (subsidies), government purchasing practices, the right of establishment, and dumped or subsidized imports. To prevent dumping by companies of one EFTA member in the markets of other EFTA members, EFTA competition rules include a “boomerang” provision, which provides for the re-export of products to domestic markets of producing firms.²⁹ Unlike the EC, however, EFTA does not yet have a supranational body to enforce competition policies within the free trade area.

With regard to ANZCERTA, Article 4 of the 1988 Protocol on Acceleration of Free Trade in Goods provided that, with the achievement of full, free trade in goods on July 1, 1990, neither country would take antidumping actions against the other; rather, each country would apply its competition laws to anticompetitive conduct affecting trans-Tasman trade in goods.³⁰ To give effect to these commitments both countries amended their competition laws—the Trade Practices Act (Australia) and the Commerce Act (New Zealand)—effective July 1, 1990 to extend prohibitions on the anticompetitive use of market power contained in both acts to cover the abuse of market power within trans-Tasman markets. In addition, the competition authorities in each country were given new investigatory powers to obtain information and documents in the other country and the courts of each country were permitted to sit and take evidence (including by videolink) in each other’s country.³¹

In the negotiations leading up to the establishment of the United States-Canada FTA, issues related to the interaction between trade and competition policies were discussed. Indeed a major motivation behind Canada’s decision to negotiate this agreement was an attempt to shield its exports from “contingent” protection measures (antidumping and countervailing duties) in the United States. For its part, the United States was particularly interested in more effective discipline on the use of subsidies and measures to deal with subsidies and dumping. In the event, little harmonization of these policies was achieved in the FTA because of unresolved technical issues, uncertainty about the economic impact of greater price competition that would result if the existing antidumping laws of both countries were not applied against each other, and difficult questions on the conduct of domestic policy and the exercise of sovereignty.³² In addition, neither country was willing to dismantle subsidies, particularly domestic agricultural subsidies, on a bilateral basis, given concerns about subsidy practices in other countries. A Working Group has a five-to-seven-year timetable to negotiate rules on subsidies and methods for dealing with unfair pricing and government subsidization.³³

In June 1990, the EC and EFTA launched negotiations to form a European Economic Area (EEA). The negotiations aim, inter alia, to harmonize competition laws and rules on subsidies; to agree on mechanisms to ensure that such rules are enforced; and to explore the possibility of using competition policy rather than antidumping and countervailing laws to deal with anticompetitive pricing practices within the EEA.³⁴

Bilateral Efforts

The United States currently has bilateral agreements cover cooperation on antitrust issues with Australia, Japan, Canada, Germany, and the EC. In addition, France and Germany have a bilateral agreement with each other.³⁵ These agreements aim to avoid or minimize conflict in the enforcement of antitrust laws and contain clauses to notify each other of pending proceedings, to cooperate in the development of evidence, and to consult about proceedings. Some provisions of these treaties specifically reflect the close relationship between trade policies and competition law enforcement.³⁶

The agreement between the United States and the EC (September 1991) is the most recent bilateral agreement to have been signed. It includes provisions whereby each party will notify the other when its own antitrust enforcement activities raise the possibility of a jurisdictional conflict. It also includes “lead role” provisions whereby one party may take the major enforcement role in a case of common concern. The lead role provisions reflect the principle of “jurisdictional rule of reason.” This principle was developed in U.S. Courts to limit jurisdictional claims resulting from the prior reliance on the “effects doctrine,” which allows a state to claim jurisdiction over conduct that has an effect in its own jurisdiction, even if the conduct originates elsewhere. The parties have agreed to allocate jurisdiction on the basis of “functional advantage” (i.e., a case would be given to the authority with the greatest enforcement powers), the principle of “comity” (the maintenance of international respect and courtesy), an “agency clause” (which allows one party to request the other to take action against anticompetitive conduct in its own territory), and information sharing. Although the agreement does not contain a binding mechanism for resolving disputes, it is expected to provide one avenue for resolving antitrust disputes, including those that may arise under the EC Merger Control Regulation.

Bilateral cooperation between the United States and Japan on competition issues has been strengthened in the context of the U.S.-Japan Structural Impediments Initiative (SII), which was launched in September, 1989. The first Annual Report of the Working Group (1990) on SII contained commitments to implement measures to solve structural problems that, inter alia, were intended to remove impediments to more efficient, open, and competitive markets. These commitments cover a wide range of structural issues including a number that deal with the application and the enforcement of competition laws. In response to U.S. concerns about structural impediments to the Japanese market, Japan agreed to reform its distributive system, to make the keiretsu system more open and transparent, to eliminate exclusionary business practices, to liberalize the foreign direct investment regime, and to implement measures to adjust price differentials between Japan and the United States.³⁷ For its part, the United States agreed to reform its antitrust policy so as to improve the legal climate for joint production ventures and to reduce uncertainty about the treatment of such ventures under antitrust laws. It also agreed to reform its product liability system so as to encourage innovation and enhance international competition, to maintain an open and nondiscriminatory policy toward foreign direct investment, and to eliminate VERs on machine tools (in the context of the Uruguay Round negotiations) and steel (in the context of the negotiation of a multilateral steel consensus).

Actions to fulfill these commitments were reviewed in the 1991 Annual Report of the Working Group. Significant measures implemented by Japan included a liberalization of foreign direct investment (consistent with the OECD Code of Liberalization of Capital Movements) and revised guidelines to ensure transparency and improved enforcement of the Antimonopoly Act. The guideline document, “The Anti-Monopoly Law Guidelines Concerning Distribution Systems and Business Practices,” was issued on July 11, 1991 by the Japanese Fair Trade Commission (FTC). It covers 28 major types of business practices in distribution and other business spheres and gives the FTC’s interpretation on enforcement policy under the Anti-Monopoly Law.³⁸ The document was made available to other OECD member countries for review prior to its implementation.

Unfair Trade Practices and Remedies

Dumping and Antidumping Actions

In principle, antidumping and competition laws have similar objectives with respect to dumping (international price discrimination) and domestic price discrimination, respectively.³⁹ Both seek to ensure that suppliers do not abuse market power so as to reduce or eliminate competition. In practice, however, the objectives of these laws tend to diverge. Whereas domestic competition laws are primarily concerned with protecting “competition,” dumping remedies often seem to be more concerned with protecting “competitors.”⁴⁰ This, and other differences between antidumping and competition laws, results in different standards being applied to import-pricing practices in the enforcement of antidumping laws than would be applied if such practices were examined under competition statutes.⁴¹ For example, the standards for measuring price discrimination, assessing the adverse impact of price discrimination on producers, and choosing entities to look at when considering this adverse impact differ between antidumping policy and competition policy.⁴²

To understand the source of conflict between antidumping and competition laws, it is useful to consider if dumping is harmful and, if it is, why can domestic competition laws not be used to contain its harmful effects? As summarized in Table 19, dumping may do economic harm to an importing country if it involves predatory pricing that is intended to drive domestic firms out of business or if it is done on an intermittent basis. Other forms of dumping typically involve pricing behavior that is considered normal market behavior if it occurs in domestic markets. As noted in Table 19, systemic arguments based on the concept of fairness, which are used to defend the use of ADDs to counter nonpredatory dumping, do not stand up to close scrutiny.

Table 19.

Dumping and Antidumping

¹Based on Banks (1990) and de C. Grey (1988).

Table 19.

Dumping and Antidumping

Is Dumping Harmful?1		Are Antidumping Laws Needed?
1.	From the perspective of the importing country dumping is harmful if it involves predatory pricing or intermittent dumping (Viner (1966)). a. Predatory pricing involves sales in foreign markets at prices below domestic prices to drive foreign firms out of business, after which prices in the foreign market are increased. This form of dumping is not frequent because the conditions required for successful predation are stringent: (i) there must be only one foreign supplier (world trading monopoly or sustainable cartel); (ii) re-entry barriers must exist for local suppliers in the foreign market; and (iii) less costly strategies for attaining market dominance must be absent. b. Intermittent dumping involves the use of export sales as a mechanism to dispose of surpluses. For a small country a one-off dump might wipe out an industry.	1.	a. Antidumping laws are required to shield domestic producers against anticompetitive behavior (e.g., predatory pricing and intermittent dumping) in foreign markets. Antidumping laws are required because domestic competition laws, which are used to remedy anticompetitive behavior of domestic firms, generally cannot be used to deal with anticompetitive behavior in foreign markets. However, it is not easy to identify predatory “intent.”
				In the case of intermittent dumping, it is difficult to devise a scheme to overcome such dumping because the harm is likely to be done before antidumping duties are put in place.
			b. Antidumping laws are also necessary to protect consumers against the consequences of predation. In practice, however, consumer interests are given little weight in antidumping cases. In general, however, the consumer’s best defense against predatory pricing is an alternative supplier (Finger (1987)).
2.	Dumping as normal market behavior. Other forms of “dumping” involving sales in foreign market at prices below domestic prices are part of a profit-maximizing strategy of private firms; they often are a side-effect of domestic interventions that serve to protect the exporters’ domestic market from world competition, keeping home prices high. (The source of the economic costs are the interventions, not dumping as such.) It is not low prices abroad but high prices at home that should be objected to. —This is sometimes viewed as cross-subsidization; but the conditions for such a strategy to be successful are stringent; in particular, the exporter must be a monopolist or a cartel. —Selling products at a price that does not cover full costs is not regarded as an unfair trading practice internally; it should not be regarded as unfair in international trade (Gruen (1986)). —“It is normally in an importing country’s overall economic interest to take the external trading environment as given and accept cheap imports, even if they are dumped or subsidized.” (Gruen (1986)) (Finger (1987)). If dumping is intermittent, the costs to producers are likely to outweigh the benefits to consumers; if dumping is long term, the opposite is likely to be true.	2.	Some argue that antidumping laws are required to deal with dumping that is not harmful to maintain support for an open multilateral trade system. a. Fairness. If the view is widespread that certain trade actions are unfair, failure to reflect that view in the rules of the game may erode support for the game itself, even if such trade rules are beneficial to a community as a whole (Bhagwati (1988), p. 3). This argument would seem more applicable to subsidies (government action) than “dumping” (actions by private firms), especially if there is no predatory intent. b. Antidumping contract. There is an implicit contract between government and industry regarding the antidumping/protection trade-off (perceptions of political feasibility).
				The commitment to a speedy and readily available antidumping system underpins the existing fragile consensus between government, industry, and unions on the need for change toward a less assisted, more outward-looking, restructured industry (Gruen (1986)). But such a rationalization may end up endangering the broader liberalization objective it is meant to serve.

¹Based on Banks (1990) and de C. Grey (1988).

View Table

Table 19.

Dumping and Antidumping

Is Dumping Harmful?1		Are Antidumping Laws Needed?
1.	From the perspective of the importing country dumping is harmful if it involves predatory pricing or intermittent dumping (Viner (1966)). a. Predatory pricing involves sales in foreign markets at prices below domestic prices to drive foreign firms out of business, after which prices in the foreign market are increased. This form of dumping is not frequent because the conditions required for successful predation are stringent: (i) there must be only one foreign supplier (world trading monopoly or sustainable cartel); (ii) re-entry barriers must exist for local suppliers in the foreign market; and (iii) less costly strategies for attaining market dominance must be absent. b. Intermittent dumping involves the use of export sales as a mechanism to dispose of surpluses. For a small country a one-off dump might wipe out an industry.	1.	a. Antidumping laws are required to shield domestic producers against anticompetitive behavior (e.g., predatory pricing and intermittent dumping) in foreign markets. Antidumping laws are required because domestic competition laws, which are used to remedy anticompetitive behavior of domestic firms, generally cannot be used to deal with anticompetitive behavior in foreign markets. However, it is not easy to identify predatory “intent.”
				In the case of intermittent dumping, it is difficult to devise a scheme to overcome such dumping because the harm is likely to be done before antidumping duties are put in place.
			b. Antidumping laws are also necessary to protect consumers against the consequences of predation. In practice, however, consumer interests are given little weight in antidumping cases. In general, however, the consumer’s best defense against predatory pricing is an alternative supplier (Finger (1987)).
2.	Dumping as normal market behavior. Other forms of “dumping” involving sales in foreign market at prices below domestic prices are part of a profit-maximizing strategy of private firms; they often are a side-effect of domestic interventions that serve to protect the exporters’ domestic market from world competition, keeping home prices high. (The source of the economic costs are the interventions, not dumping as such.) It is not low prices abroad but high prices at home that should be objected to. —This is sometimes viewed as cross-subsidization; but the conditions for such a strategy to be successful are stringent; in particular, the exporter must be a monopolist or a cartel. —Selling products at a price that does not cover full costs is not regarded as an unfair trading practice internally; it should not be regarded as unfair in international trade (Gruen (1986)). —“It is normally in an importing country’s overall economic interest to take the external trading environment as given and accept cheap imports, even if they are dumped or subsidized.” (Gruen (1986)) (Finger (1987)). If dumping is intermittent, the costs to producers are likely to outweigh the benefits to consumers; if dumping is long term, the opposite is likely to be true.	2.	Some argue that antidumping laws are required to deal with dumping that is not harmful to maintain support for an open multilateral trade system. a. Fairness. If the view is widespread that certain trade actions are unfair, failure to reflect that view in the rules of the game may erode support for the game itself, even if such trade rules are beneficial to a community as a whole (Bhagwati (1988), p. 3). This argument would seem more applicable to subsidies (government action) than “dumping” (actions by private firms), especially if there is no predatory intent. b. Antidumping contract. There is an implicit contract between government and industry regarding the antidumping/protection trade-off (perceptions of political feasibility).
				The commitment to a speedy and readily available antidumping system underpins the existing fragile consensus between government, industry, and unions on the need for change toward a less assisted, more outward-looking, restructured industry (Gruen (1986)). But such a rationalization may end up endangering the broader liberalization objective it is meant to serve.

¹Based on Banks (1990) and de C. Grey (1988).

Although predatory pricing may be harmful to an importing country, the conditions required for successful predation are quite stringent (Table 19) and, in practice, this does not seem to be the predominant form of dumping.⁴³ Intermittent dumping may occur more frequently, but it is difficult to deal with because harm may be done before ADDs could be applied. Thus, the possibility of successful predation would seem to be the main reason antidumping laws are needed.

In the above connection, the trade system needs antidumping laws to deal with predatory dumping because domestic competition laws cannot prevent foreign companies from becoming monopolies.⁴⁴ A major defect in GATT’s antidumping provisions, however, is that they make no distinction between predatory and other kinds of dumping. Nor has such a distinction been made in national trade legislation.⁴⁵ In practice, ADDs tend to be used primarily to counter dumping that is unlikely to be harmful, rather than to deal with predation. In many cases, ADDs are thought to present greater problems than the dumping they are intended to remedy.⁴⁶ Indeed, existing antidumping regulations are considered to be anticompetitive in their objectives, methods, and instruments.⁴⁷

The major problems in the implementation of antidumping laws are related to the determination of injury, the calculation of dumping margins, insufficient recognition of the principle of national treatment,⁴⁸ and the use of antidumping provisions to sustain collusion in domestic markets (Table 20). The latter reflects the frequent use of price undertakings (EC) and VERs (U.S.) as remedies against dumping and an apparent lack of concern as to whether injury is done to a competitive or an oligopolistic industry (Messerlin (1990)).⁴⁹ In this connection, recent reviews of antidumping cases in the EC are instructive.⁵⁰

Table 20.

Examples of Problems with Antidumping Laws and Procedures

¹Based on Messerlin (1991).

²Based on Rowat (December 1990).

³Prices that do not cover full costs are typical in a cyclical industry (Barton (July 1990)).

⁴This is considered by Messerlin and others to be the most important bias in the antidumping procedure in that it provides quasi-certainty of finding dumping.

⁵For examples of like products that cause bias, see Messerlin (1990).

⁶National Consumer Council (1991).

Table 20.

Examples of Problems with Antidumping Laws and Procedures

GATT Antidumping Code		European Community1		United States2
1.	Initiation of cases (Article 5(i))	1.	Initiation of cases	1.	Initiation of cases
	Establishes only minimum standards.		Searching informal and formal review by Commission before launching. The concept of domestic industry that can initiate cases tends to be “established” firms, representing a major proportion of the market. This favors oligopolistic structures. Domestic industry concept blurred by anticircumvention rules whereby in some cases both defendants and complainants are running “screwdriver” plants.		Low threshold to establish justification for investigation.
2.	Determination of dumping	2.	Determination of dumping	2.	Determination of dumping
	a. “Normal” price in foreign market (Article 2(4)) Use of constructed value with reference to “reasonable” level for administrative selling costs and profits. Used only where no sales in home market or sales do not permit proper comparison in the ordinary course of trade with a third country.		a. “Normal” price in foreign market. If there are no domestic sales, the domestic price or normal value can be assumed to be equal to (i) export price to a third country; (ii) an estimate based on costs and profits; or (iii) domestic price from a “surrogate country.” Two thirds of investigations are based on (ii) or (iii). Where (ii) is used, costs including profits are based on full costs rather than marginal or average variable costs, as is the case for normal antitrust principles.3 In practice, higher profit margins tend to be used for Japanese and newly industrializing economies’ (NIEs) firms than for U.S. firms; also higher profit margins are used for non-NIE developing countries than for industrial countries. Where (iii) is used, the level of development of the surrogate country and the investigated country differs, creating bias in favor of finding dumping; countries with high trade barriers and monopolistic economies (conditions resulting in high costs and profits) are used as surrogate in 43 percent of cases using third country data; countries under dumping investigations are used in 25 percent of third country cases leading to a domino effect.		a. “Normal” price in foreign market. Constructed values include fixed and variable costs—“floors” for selling and administrative expenses established. Constructed values can be used where home market sales have been made over an extended period at prices that do not permit recovery of costs over a reasonable period of time.
	b. Export price that is compared to domestic prices (Article 2.5) Export price may be constructed if actual export price is considered unreliable.		b. Export price that is compared with domestic prices A weighted average of exporters’ domestic prices is compared with export prices on a “transaction by transaction basis.”4 Cases of “negative” dumping (export price greater than domestic price) are omitted in determining dumping margin. Costs such as advertising and overhead and profit estimates are given asymmetric treatment resulting in a systematic bias in favor of finding dumping.		b. Export price that is compared to domestic prices Same as for EC4 “de minimis” dumping margin at half a percent, which given the many adjustments, implies an unwarranted degree of precision. Use of Export Selling Price (ESP) provides some allowance for selling costs in export market.
	c. Definition of “like product” (Article 2.2) Identical product or product with characteristics closely resembling those of the product under consideration.		c. Definition of “like product.” A broader definition of “like” product is used than is the case for EC competition regulations. This creates problems when products are differentiated.5
	d. Size of remedy (Article 8(3)) The amount of duty is not to exceed the margin of dumping.		d. Size of remedy (Article 8(3)) Use of “lesser duty” (below dumping margin) if adequate to remove injury.		d. Size of remedy (Article 8(3)) Margin based exclusively on dumping rather than injury.
3.	Determination of “material” injury	3.	Determination of “material” injury (Article 3, Section 4)	3.	Determination of “material” injury
	(Article 3, Section 4) Injury must be shown from dumped imports but need not be the only factor causing injury. —Cases may be initiated if there is a “threat” of material injury.		Antidumping duties (ADDs) tend to act as a “conditional safeguard” mechanism—a simple correlation between an upsurge in imports and a decline in domestic production is considered adequate for material injury test. The ability to initiate cases based on “sufficiently freely disposable export capacity” of the exporter results in reduced imports even when such cases do not result in a determination of injury.		(Article 3, Section 4) Material injury defined as not inconsequential, immaterial, or unimportant. Need to show injury and to show that imports were a cause (but not the major cause) of injury.
4.	National interest clause (Article 6) All interested parties shall be given an opportunity to present evidence.	4.	National interest clause The use of “interests of the Community” clause in EC legislation is disappointing. A 1979 regulation required competition aspects to be taken into account in antidumping actions. During the period 1980–83, this clause was mainly used to include the interests of users of products but it was not used much. Since 1983 it has been increasingly used to take account of issues related to “industries in crisis,” “fair competition,” and industries considered to be “strategic.” The “community” interest rarely considers consumers’ interests.6
5.	Rules of origin (anticircumvention)	5.	Rules of origin (anticircumvention)	5.	Rules of origin (anticircumvention)
	—Not specified in GATT Code.		“Screwdriver” plants deemed to be inputs circumventing duties must source 40 percent of outside home country to avoid antidumping procedures.		Anticircumvention provision for parts and components subject to ADDs is applied where difference between value of goods sold in the United States compared with value of parts and components used to produce goods is low.
6.	Use of antidumping duties to sustain domestic collusion (Article 7)	6.	Use of antidumping duties to sustain domestic collusion	6.	Use of antidumping duties to sustain domestic collusion. Undertakings by exporters to cease dumping and/or eliminate injury rarely used; quantitative restrictions agreed to following “public interest” assessment.
	—Proceedings can be suspended or terminated based on “voluntary” undertakings of exporters to revise prices or cease exports.		The use of price undertakings instead of ADDs (main outcome until 1987) can become mechanism for price fixing. But the shift to duties since 1988 has also been used as an instrument of collusion—a 1988 regulation that requires foreign producers not to bear ADDs (1) increases the bargaining power of EC firms during negotiation of undertakings and (2) stabilizes the coalition of EC producers.
7.	“Residual” duties	7.	“Residual” duties
			The imposition of duties on potential exporters of potential like products discourages entry of efficient newcomers and protects domestic coalition.
8.	Sunset clause (Article 9) Antidumping provisions should remain in force for only as long as needed to counteract injury.	8.	Sunset clause Except under special circumstances, ADDs lapse after five years.	8.	Sunset clause Quasi-sunset clause that can be avoided by U.S. producers.
9.	Cumulation	9.	Cumulation	9.	Cumulation
	—Not covered in GATT Code.		Cumulation of exports from several exporting countries creates a bias against small exporters including developing countries.		Imports from two or more countries of like products cumulated in determining their effective domestic industry despite size.

¹Based on Messerlin (1991).

²Based on Rowat (December 1990).

³Prices that do not cover full costs are typical in a cyclical industry (Barton (July 1990)).

⁴This is considered by Messerlin and others to be the most important bias in the antidumping procedure in that it provides quasi-certainty of finding dumping.

⁵For examples of like products that cause bias, see Messerlin (1990).

⁶National Consumer Council (1991).

View Table

Table 20.

Examples of Problems with Antidumping Laws and Procedures

GATT Antidumping Code		European Community1		United States2
1.	Initiation of cases (Article 5(i))	1.	Initiation of cases	1.	Initiation of cases
	Establishes only minimum standards.		Searching informal and formal review by Commission before launching. The concept of domestic industry that can initiate cases tends to be “established” firms, representing a major proportion of the market. This favors oligopolistic structures. Domestic industry concept blurred by anticircumvention rules whereby in some cases both defendants and complainants are running “screwdriver” plants.		Low threshold to establish justification for investigation.
2.	Determination of dumping	2.	Determination of dumping	2.	Determination of dumping
	a. “Normal” price in foreign market (Article 2(4)) Use of constructed value with reference to “reasonable” level for administrative selling costs and profits. Used only where no sales in home market or sales do not permit proper comparison in the ordinary course of trade with a third country.		a. “Normal” price in foreign market. If there are no domestic sales, the domestic price or normal value can be assumed to be equal to (i) export price to a third country; (ii) an estimate based on costs and profits; or (iii) domestic price from a “surrogate country.” Two thirds of investigations are based on (ii) or (iii). Where (ii) is used, costs including profits are based on full costs rather than marginal or average variable costs, as is the case for normal antitrust principles.3 In practice, higher profit margins tend to be used for Japanese and newly industrializing economies’ (NIEs) firms than for U.S. firms; also higher profit margins are used for non-NIE developing countries than for industrial countries. Where (iii) is used, the level of development of the surrogate country and the investigated country differs, creating bias in favor of finding dumping; countries with high trade barriers and monopolistic economies (conditions resulting in high costs and profits) are used as surrogate in 43 percent of cases using third country data; countries under dumping investigations are used in 25 percent of third country cases leading to a domino effect.		a. “Normal” price in foreign market. Constructed values include fixed and variable costs—“floors” for selling and administrative expenses established. Constructed values can be used where home market sales have been made over an extended period at prices that do not permit recovery of costs over a reasonable period of time.
	b. Export price that is compared to domestic prices (Article 2.5) Export price may be constructed if actual export price is considered unreliable.		b. Export price that is compared with domestic prices A weighted average of exporters’ domestic prices is compared with export prices on a “transaction by transaction basis.”4 Cases of “negative” dumping (export price greater than domestic price) are omitted in determining dumping margin. Costs such as advertising and overhead and profit estimates are given asymmetric treatment resulting in a systematic bias in favor of finding dumping.		b. Export price that is compared to domestic prices Same as for EC4 “de minimis” dumping margin at half a percent, which given the many adjustments, implies an unwarranted degree of precision. Use of Export Selling Price (ESP) provides some allowance for selling costs in export market.
	c. Definition of “like product” (Article 2.2) Identical product or product with characteristics closely resembling those of the product under consideration.		c. Definition of “like product.” A broader definition of “like” product is used than is the case for EC competition regulations. This creates problems when products are differentiated.5
	d. Size of remedy (Article 8(3)) The amount of duty is not to exceed the margin of dumping.		d. Size of remedy (Article 8(3)) Use of “lesser duty” (below dumping margin) if adequate to remove injury.		d. Size of remedy (Article 8(3)) Margin based exclusively on dumping rather than injury.
3.	Determination of “material” injury	3.	Determination of “material” injury (Article 3, Section 4)	3.	Determination of “material” injury
	(Article 3, Section 4) Injury must be shown from dumped imports but need not be the only factor causing injury. —Cases may be initiated if there is a “threat” of material injury.		Antidumping duties (ADDs) tend to act as a “conditional safeguard” mechanism—a simple correlation between an upsurge in imports and a decline in domestic production is considered adequate for material injury test. The ability to initiate cases based on “sufficiently freely disposable export capacity” of the exporter results in reduced imports even when such cases do not result in a determination of injury.		(Article 3, Section 4) Material injury defined as not inconsequential, immaterial, or unimportant. Need to show injury and to show that imports were a cause (but not the major cause) of injury.
4.	National interest clause (Article 6) All interested parties shall be given an opportunity to present evidence.	4.	National interest clause The use of “interests of the Community” clause in EC legislation is disappointing. A 1979 regulation required competition aspects to be taken into account in antidumping actions. During the period 1980–83, this clause was mainly used to include the interests of users of products but it was not used much. Since 1983 it has been increasingly used to take account of issues related to “industries in crisis,” “fair competition,” and industries considered to be “strategic.” The “community” interest rarely considers consumers’ interests.6
5.	Rules of origin (anticircumvention)	5.	Rules of origin (anticircumvention)	5.	Rules of origin (anticircumvention)
	—Not specified in GATT Code.		“Screwdriver” plants deemed to be inputs circumventing duties must source 40 percent of outside home country to avoid antidumping procedures.		Anticircumvention provision for parts and components subject to ADDs is applied where difference between value of goods sold in the United States compared with value of parts and components used to produce goods is low.
6.	Use of antidumping duties to sustain domestic collusion (Article 7)	6.	Use of antidumping duties to sustain domestic collusion	6.	Use of antidumping duties to sustain domestic collusion. Undertakings by exporters to cease dumping and/or eliminate injury rarely used; quantitative restrictions agreed to following “public interest” assessment.
	—Proceedings can be suspended or terminated based on “voluntary” undertakings of exporters to revise prices or cease exports.		The use of price undertakings instead of ADDs (main outcome until 1987) can become mechanism for price fixing. But the shift to duties since 1988 has also been used as an instrument of collusion—a 1988 regulation that requires foreign producers not to bear ADDs (1) increases the bargaining power of EC firms during negotiation of undertakings and (2) stabilizes the coalition of EC producers.
7.	“Residual” duties	7.	“Residual” duties
			The imposition of duties on potential exporters of potential like products discourages entry of efficient newcomers and protects domestic coalition.
8.	Sunset clause (Article 9) Antidumping provisions should remain in force for only as long as needed to counteract injury.	8.	Sunset clause Except under special circumstances, ADDs lapse after five years.	8.	Sunset clause Quasi-sunset clause that can be avoided by U.S. producers.
9.	Cumulation	9.	Cumulation	9.	Cumulation
	—Not covered in GATT Code.		Cumulation of exports from several exporting countries creates a bias against small exporters including developing countries.		Imports from two or more countries of like products cumulated in determining their effective domestic industry despite size.

¹Based on Messerlin (1991).

²Based on Rowat (December 1990).

³Prices that do not cover full costs are typical in a cyclical industry (Barton (July 1990)).

⁴This is considered by Messerlin and others to be the most important bias in the antidumping procedure in that it provides quasi-certainty of finding dumping.

⁵For examples of like products that cause bias, see Messerlin (1990).

⁶National Consumer Council (1991).

The EC review (based on Commission documents and data) covered all cases in the chemical industry (1980–89) involving both anticartel action under Article 85 (i) or Article 86 of the Treaty of Rome⁵¹ and antidumping action.⁵² It was found that 52 percent of antitrust cases under Article 85(i) had “twin” antidumping cases; thus EC firms being fined for price fixing were simultaneously asking for legal action against foreign price cutting. In addition, EC antidumping procedures were found to provide a high level of protection, to facilitate cartelization of the industry, and to reduce incentives for the industry to adjust. Also, the large net benefits obtained by firms from ADDs, despite anticartel fines imposed later, would likely result in future requests for more antidumping action. The Canadian study covered all antidumping cases during 1980–88. It concluded that it was extremely doubtful that any of the cases reviewed that were actionable under Canadian antidumping laws would have resulted in action under domestic competition law. In most cases, the use of ADDs reduced the pace of restructuring by domestic producers, which were found to be relatively inefficient in global terms.⁵³

The experience with antidumping duties suggests that greater weight should be given to competition policy criteria, particularly those related to consumer interests, in the determination of antidumping cases. This might be achieved by applying the standards of competition policy to antidumping cases or by replacing antidumping laws with competition laws. In addition, the principle of “national treatment” needs to be recognized in measures dealing with the circumvention of antidumping duties, including through assembly operations that use dumped inputs. With the increased globalization of production, the latter will likely give rise to more frequent international disputes if not addressed.⁵⁴

Measures to Deal with Fair Trade: Voluntary Export Restraints

Article XIX of GATT permits the use of safeguard measures to deal with temporary import surges associated with fair trade. Because the provisions of Article XIX are considered too restrictive by some GATT Contracting Parties,⁷⁶ VERs and other gray-area measures are frequently used as substitutes.⁷⁷ While the use of VERs might be challenged under Article XI of GATT, which prohibits quantitative restrictions,⁷⁸ the parties that negotiate such agreements and have “standing” in GATT (i.e., governments in importing and exporting countries that negotiate VERs) have no incentive to do so. Consumers and users of products subject to VERs who bear the costs of these agreements have “no standing” in GATT.⁷⁹

The prevalence of VERs raises policy issues that straddle both competition and trade policies. These include conflicts between competition laws and trade policy conducted outside domestic statutory frameworks; inconsistencies between elements of existing trade laws and the principles of competition policy;⁸⁰ and differences in the enforcement of competition laws among countries.

The implementation of VERs normally requires firms in exporting countries to form cartel-type arrangements (with or without government endorsement) or engage in other restrictive business practices. Enterprises are thus caught between the necessity to solve disputes with trading partners and the requirements of antitrust laws not to engage in restrictive practices.⁸¹ In practice, however, such conflicts have not been very frequent because VERs are not subject to antitrust legislation in the importing country if they are covered by domestic trade laws.⁸² In cases where domestic trade policy has been conducted outside the domestic statutory framework, foreign government compulsion has been used to eliminate the risk of antitrust action in the importing country.⁸³ Most VERs in the EC and the United States have been implemented under the cover of foreign government compulsion.⁸⁴ But, in any case, the elimination of the risk of antitrust action does not reduce the anticompetitive characteristics of these arrangements.

Such arrangements are possible, not because competition laws and trade laws are inconsistent, but because elements of existing trade laws are not consistent with the principles of competition policy.⁸⁵ Indeed, as already noted, trade policy overtly encourages anticompetitive behavior involving the formation of cartels and the use of restrictive business practices.⁸⁶ In addition to these concerns, VERs create conceptual problems for antitrust market share analysis.⁸⁷

In the above context, the recent agreement between the EC and Japan on imports of Japanese vehicles into the EC is important because it is viewed as a test case of the EC “post-1992” approach to imports in trade-sensitive sectors and because of concerns it has raised both inside and outside the EC.⁸⁸ Aside from the continued protection of the EC vehicle market for a long transition period, the agreement raises other concerns involving trade and competition policies: the requirement for Japan to monitor exports will likely involve business practices normally considered to be restrictive; to the extent the agreement contains an implicit limit on the output of “transplants,” it raises questions about its consistency with national treatment and EC competition law; the requirement for Japan to monitor sales from transplants within the EC is only possible because of the block exemption of car distribution from EC competition laws, but this exemption is being questioned by consumer groups within the EC.⁸⁹ The agreement implicitly recognizes its dubious legality under EC competition rules and the GATT in that it commits the EC to a declaration that EC competition law will not obstruct the operation of the agreement, and both the EC and Japan have agreed to defend this agreement in GATT.

A Global Competition Policy

A global competition policy would need to be based on agreed objectives of competition policy and on the role of governments in achieving those objectives; global economic welfare (rather than net national welfare) would be a leading contender among the possible objectives.⁹⁰ These would provide the foundation for global competition laws, which would be enforced by a supranational competition authority. Global competition laws would involve rules for traditional areas covered by national competition laws such as antitrust, and abuse of dominant positions, as well as agreed rules on the use of subsidies and the protection of intellectual property. National competition laws would need to be made consistent with these rules and could be used to deal with the harmful effects of dumping and subsidies rather than existing national antidumping and countervailing laws. Goldberg and Ordover (1991) suggest that competition laws might also be used instead of GATT’s safeguard provisions to provide temporary relief for industries against import surges (see Section V.4.b). Such an approach would need to explicitly recognize that trade policies can undermine the objectives of competition policy and that current differences in competition laws and their enforcement among countries can undermine trade liberalization agreements. Moreover, it would be based on principles (for example, the geographic and economic definition of the market) and practices (for example, assessment of the effects of mergers and acquisitions on market structures) that allow for the increased integration of the world economy through trade, investment, and production.⁹¹

A Global Competition Policy with associated laws and enforcement procedures is not considered within reach in the foreseeable future. This primarily reflects a view that most governments would be reluctant to concede the sovereignty over domestic policies implied by this approach as well as a lack of agreement on what constitutes an optimal competition policy and on the appropriate role of government in fostering competition. Beyond these reasons, such a task would be difficult in that it would likely require a major revision of legal systems in many countries as well as harmonization of thousands of rules and regulations. Indeed, such an approach would go well beyond what has already been achieved in regional arrangements such as the EC, ANZCERTA and the U.S.-Canada Free Trade Agreement and also beyond what is being implemented in the context of EC 1992. As indicated below, however, EC 1992 suggests that a Global Competition Policy may not be necessary to achieve a greater harmonization of competition policies among countries.

Harmonization of Competition Laws Through Policy Convergence

A somewhat less demanding approach, but one which involves the most advanced model of policy convergence, is that being employed by the EC to implement the Single Market Program. This involves the prior harmonization of a minimum number of essential regulations; “mutual recognition” by member countries of regulations that are not harmonized; and factor mobility. As factors of production (capital, entrepreneurship, and labor) will likely move to locations with preferred regulatory systems, this will put pressure on national authorities to adopt these preferred systems and thus result in a convergence of such policies among EC member states. The advantages of this approach are (i) it does not require the prior harmonization of all laws, rules, and regulations; and (ii) it accepts different tastes and preferences among consumers in different countries, differing performance of individual enterprises, and acknowledgement that government policies affect the performance of market participants. Policy convergence under this model aims to optimize factor mobility and competition, not to harmonize tastes, culture, and corporate behavior.⁹² Despite its appeal, this approach is not considered feasible on a global basis, or even among all OECD members, because the necessary conditions (factor mobility and mutual recognition) are not all likely to be met. In particular, the requirement of labor mobility is considered a major obstacle to this approach.

The Role of the OECD

Given the difficulties inherent in achieving complete harmonization of competition policies, more pragmatic approaches are generally preferred to the far-reaching proposals outlined above. These involve stepped-up efforts within the OECD to achieve greater harmonization of competition laws.⁹³ The OECD has in fact already expanded its work on competition policy and the linkages between competition, trade, and innovation policies. This program involves the trade and competition directorates and was agreed by the June 1991 OECD ministerial meeting (Table 21). In this connection, a study on “Nontariff Barriers to Trade and Competition: Theory and Evidence”⁹⁴ has already been completed and other studies on antidumping and distribution-related barriers to international competition are in progress.⁹⁵ The preparation of these studies is intended, in part, to demonstrate the use of the “checklist” approach approved by the Council in 1985 and thereby encourage OECD members to apply this approach at the national level.

Table 21.

Excerpts from OECD Communiqué, June 1991

Table 21.

Excerpts from OECD Communiqué, June 1991

1.	Trade agenda (para. 17)	Looking beyond the Uruguay Round to the trade issues of the 1990s, Ministers emphasize the need to address the new dimensions of trade policy. This includes a whole range of issues which arise because of the increasing globalization of the world economy and the closer relationship between trade policy and competition, investment, technology and innovation, and environment policies. The increasingly international scope of economic activity has seen the emergence of areas in which the needs of private agents and governments run ahead of the existing “rules of the game.” There is a perceived need for better understanding of these issues and, where appropriate, convergence policy approaches and consideration of fresh rules. Many issues, traditionally viewed largely from a domestic policy perspective, have taken on an international dimension, affecting the setting of trade and investment policies themselves. Hence, widening the consideration of trade policies in the 1990s to take account of new developments will go hand-in-hand with efforts to avoid conflict with other policy spheres.
2.	Competition policy (para. 23)	The increasing international scope of economic activity has resulted in a situation in which the existing “rules of the game,” as defined by national or regional competition policies might be usefully complemented. Ministers ask the Organization to continue its work on the international dimension of competition policies and on their interaction with policies in other areas such as trade and industry. They note that recent work in the Organization on competition law and policy provides the foundation for greater policy convergence and progress toward updating and strengthening the existing rules and arrangements (including both policy principles and procedures) for international cooperation in this area. They invite the relevant committees actively to pursue these matters, including the effectiveness of trade rules in facilitating international competition.

View Table

Table 21.

Excerpts from OECD Communiqué, June 1991

1.	Trade agenda (para. 17)	Looking beyond the Uruguay Round to the trade issues of the 1990s, Ministers emphasize the need to address the new dimensions of trade policy. This includes a whole range of issues which arise because of the increasing globalization of the world economy and the closer relationship between trade policy and competition, investment, technology and innovation, and environment policies. The increasingly international scope of economic activity has seen the emergence of areas in which the needs of private agents and governments run ahead of the existing “rules of the game.” There is a perceived need for better understanding of these issues and, where appropriate, convergence policy approaches and consideration of fresh rules. Many issues, traditionally viewed largely from a domestic policy perspective, have taken on an international dimension, affecting the setting of trade and investment policies themselves. Hence, widening the consideration of trade policies in the 1990s to take account of new developments will go hand-in-hand with efforts to avoid conflict with other policy spheres.
2.	Competition policy (para. 23)	The increasing international scope of economic activity has resulted in a situation in which the existing “rules of the game,” as defined by national or regional competition policies might be usefully complemented. Ministers ask the Organization to continue its work on the international dimension of competition policies and on their interaction with policies in other areas such as trade and industry. They note that recent work in the Organization on competition law and policy provides the foundation for greater policy convergence and progress toward updating and strengthening the existing rules and arrangements (including both policy principles and procedures) for international cooperation in this area. They invite the relevant committees actively to pursue these matters, including the effectiveness of trade rules in facilitating international competition.

Authorities in a number of OECD countries have suggested that a greater harmonization of competition and trade policies would need to be achieved in three stages. First, competition laws would need to be established in all countries, including non-OECD countries, based on agreed principles. Second, steps would need to be taken to achieve greater uniformity in the enforcement of competition laws across countries. Third, at a later date, steps might be taken to ensure greater convergence of these laws across countries.

The Use of Competition Policy to Regulate Trade Across National Boundaries

Ongoing Research on Trade and Competition Policies

In addition to the extensive OECD work program on trade and competition issues, major research programs are under way in thinktanks and elsewhere. A brief description of two programs involving The Institute of International Economics (Washington, D.C.) and The Royal Institute of International Affairs (London) is provided below. The projects will involve input and advice from trade policy practitioners, civil servants, business practitioners, and staff of international institutions.

The Institute for International Economics project, Global Competition Policies, is far-reaching and aims to survey national competition policies and the potential tensions they create in a globally integrated economy, and to evaluate proposals for international harmonization and strategic unilateral alteration of these policies. The project will include several country studies covering the philosophy of competition policy, statutes, practice, and institutional issues, including the relationships between relevant institutions for administering trade and competition policies and the extraterritorial reach of competition policies that cause conflict and inefficiency; thematic studies on issues, such as dumping and antidumping policy, VERs, subsidies, intellectual property protection and technology transfer, policies toward non-national firms, extraterritorial aspects of antitrust laws and policies toward mergers and acquisitions, the keiretsu structure of Japanese industry, and selective exemptions from antitrust policy; a survey of the history of efforts to achieve an internationally or regionally consistent competition policy, including the EC’s experience in the implementation of EC 1992; and a survey of recent academic literature on “new” trade policies, and “new” thinking on industrial regulation. Based on these studies, and taking into account the results of the Uruguay Round, the authors aim to develop a future agenda of competition policy issues that need to be resolved and to suggest a priority to items on this agenda and possible approaches and institutional arrangements that may be needed to address these issues.¹⁰⁵

The Royal Institute of International Affairs project, Anti-Competitive Effects of Trade Policy, aims to investigate whether trade policies in the EC, Japan, and the United States have effects that contradict the objectives of domestic competition policies. Particular attention will be devoted to antidumping. The project will also consider whether trade policy should be reformed to make it more competition oriented and whether the scope of competition policy should be widened to take into account factors that are relevant to competition in international markets.

Descriptive Measures of Nontariff Barriers

The frequency index measures the percentage of tariff lines covered by NTBs. This index is often used to describe the restrictiveness of a trade regime, and it is one of the criteria used in Section V to classify countries’ trade regimes. This measure, however, does not capture the relative importance of the restricted items in either imports or domestic output, nor does it indicate the effectiveness of the restrictions in place.

The trade coverage ratio measures the percentage of import value covered by NTBs. It suffers from the problem of any “own” trade-weighted index in that products facing very restrictive NTBs will enter the calculation with zero or low weights. At the extreme, an NTB that precludes all imports of an item will receive a weight of zero. The index therefore underweighs the most restrictive measures. Another problem is that the coverage ratio includes all items covered by NTBs even though some of these restrictions may not be binding. Thus, as restrictions are relaxed the trade coverage ratio would tend to increase, rather than decline. This suggests that trade coverage measures such as those shown in Table 21 and in Tables A13 and A14 need to be interpreted with caution.

While these descriptive measures have serious drawbacks, their chief advantage is that they can be constructed with information that is relatively easy to obtain, and they give some idea of the prevalence of restrictive measures if not their overall effectiveness.

Price Impact Measures

Price impact measures attempt to quantify the effects of NTBs by computing their impact on prices. This is measured by the difference between the domestic price and the foreign price of a restricted item. The difference between the two prices, adjusted for known factors, is attributed to NTBs and is expressed as a ratio or as a nominal tariff rate.²

There are several problems with these measures. First, it is not always clear which prices to compare. Imported goods are often not identical to those produced domestically so there may be price differences because of differences in quality and other factors. Ideally, the price of the closest domestic substitute should be used, while the foreign price should be the c.i.f. import price inclusive of tariffs and other taxes.

Second, such price comparisons often do not account for transport costs inside the country. Sampling prices at different locations in the same country could significantly bias price impact measures. Third, the domestic-foreign price ratio for any particular year may be distorted by transitory factors, such as poor weather. Fourth, the comparison uses world prices that prevail under protection, which may be significantly lower than prices that would prevail under free trade. This is especially true for agricultural products. Finally, this approach can be biased by the degree of substitutability between domestic and foreign goods. If domestic and foreign goods are close substitutes, then a very restrictive NTB may produce only a small price differential.

Roningen and Yeats (1976) provide an example of this method. They compiled price statistics for 90 products that face NTBs in 15 developed countries. The analysis took the world price to be the lowest observed price in any country. Price differences were adjusted to account for domestic sales and excise taxes, tariffs, and transport costs. The remaining price difference is assumed to reflect the effects of NTBs. Table 22 summarizes some of their results.

Table 22.

Estimated NTB Tariff Equivalents in Japan and the United States, 1973

(In percent)

Source: Laird and Yeats (1990), p. 49.

Table 22.

Estimated NTB Tariff Equivalents in Japan and the United States, 1973

(In percent)

Product Group	Japan			United States
		Nontariff barriers			Nontariff barriers
	Nominal tariff	Reported frequency	Price impact	Nominal tariff	Reported frequency	Price impact
Meat products	13	17	161	7	50	54
Apparel	19	—	0	21	100	32
Sugar and products	66	20	68	6	80	23
Fruits and nuts	14	23	180	7	69	128

Source: Laird and Yeats (1990), p. 49.

View Table

Table 22.

Estimated NTB Tariff Equivalents in Japan and the United States, 1973

(In percent)

Product Group	Japan			United States
		Nontariff barriers			Nontariff barriers
	Nominal tariff	Reported frequency	Price impact	Nominal tariff	Reported frequency	Price impact
Meat products	13	17	161	7	50	54
Apparel	19	—	0	21	100	32
Sugar and products	66	20	68	6	80	23
Fruits and nuts	14	23	180	7	69	128

Source: Laird and Yeats (1990), p. 49.

They found, for example, that in Japan restrictions on meat products were associated with domestic meat product prices that were 161 percent higher than world market prices. In the United States, the price impact of restrictions on meat products was estimated to be much less even though a higher percentage of the products studied was restricted; this could be due to greater substitution possibilities in the U.S. market.

Sectoral Studies

Reviews of sector studies of the cost of protection can be found in Kelly and others (1988), Goldberg and Ordover (1991), and Richardson (1989). These surveys provide ample evidence that the gains from protection in terms of jobs saved are outweighed by the welfare loss to the economy. Thus, it would be less costly to provide adjustment assistance to facilitate the exit of resources from sectors where comparative advantage has shifted abroad. Most sector studies reach this conclusion based on partial equilibrium models, but those based on general equilibrium models, which take into account the pull of resources from other sectors and the higher downstream costs to domestic producers, demonstrate more forcefully that the gains from protection are quite small compared with the costs. Reviewing industries characterized by imperfect competition and economies of scale, Richardson finds that the benefits of trade liberalization are even greater than under perfect competition. Selected studies in those sectors most affected by VERs and quota restraints are discussed below. It should be noted that in some sectors conditions have changed since these studies were done. For example, in recent years, the VER on Japan’s automobile exports to the United States has not been a binding constraint for most Japanese companies, and the VER on steel exports to the United States became nonbinding after 1986 for some major exporting countries.

Multilateral Trade Liberalization

There is a broad consensus of support for a successful conclusion to the Uruguay Round of trade negotiations based on the benefits that would accrue from a more liberal trading system. A successful outcome of the Round is generally understood as one that would include substantial liberalization of agricultural trade, the phasing out of the MFA and other NTBs, and extended GATT disciplines in new areas of services, investment, and intellectual property.

While a consensus exists around the desirability of reaching agreement in the Uruguay Round based on a qualitative understanding of its benefits, there is less of a consensus regarding the quantitative effects of Uruguay Round-type trade liberalization. Some studies that attempt to quantify global and regional effects of multilateral trade liberalization do exist; however, the results obtained differ substantially for a number of reasons. Among these are differences in methodology and model structure, the measurement of NTB tariff equivalents, and the type of trade policy change simulated. Such differences, as well as similarities, may be illustrated by reviewing three multilateral trade models: Whalley (1985); Stoeckel, Pearce, and Banks (1990); and Deardorff and Stern (1990). It must be noted, however, that none of these models are capable of estimating some of the complex effects of negotiations in services, investment, and intellectual property.

Tariff and Nontariff Barriers

The Whalley model simulates the effects of eliminating all tariff and NTBs. NTBs are estimated in terms of their ad valorem tariff equivalents using a residual method developed by UNCTAD. This method entails allocating a part of the difference between domestic and world prices to transportation costs and tariffs, with the remainder expressed as a nontariff barrier term. The tariff equivalents of NTBs are set exogenously. In computing the base-year equilibrium position, this model allocates the quota rents from NTBs to the importing country. The tariff equivalent data for the United States, EC, and Japan are from UNCTAD and an arithmetic average of these was used for the other developed country region. These equivalents are assumed equal to zero for the Organization of Petroleum Exporting Countries (OPEC) and, given a paucity of data for the less developed countries, the Whalley model applies tariff equivalent figures from a study of Bangladesh to the developing country region. Finally, NTB tariff equivalents for the newly industrializing economies (NIEs) are assumed to equal the equivalents for the developing country region multiplied by the ratio of NIE tariffs to developing country tariffs.

The Stoeckel model simulates the effects of a global cut in tariff and NTBs by 50 percent. The NTBs are also expressed in their tariff equivalent form and determined exogenously in the model.

The Michigan model simulates the effects of a complete elimination of tariff and NTBs in the developed countries. In simulating these effects, estimates of ad valorem tariff equivalents were made using available data for major industrial countries and a subset of developing countries. High and low estimates of these data were made with the latter adjusted for the percentage of trade covered by NTBs. The Michigan model is unique relative to the others in that the tariff equivalents of NTBs vary endogenously to reflect the difference between the estimated demand for a product and the quota restriction. Thus, a decline in import demand owing to changes in other variables would reduce the estimated NTB tariff equivalent.

As may be seen from Table 23, NTB tariff equivalent estimates vary substantially from study to study because of the differing underlying data sources used in the method of calculation, the period for which data were collected, and the extent of trade coverage. Generally, it appears that, at least for manufacturing industries, the estimates of NTBs in the Stoeckel model are somewhat higher than for the other two models.

Table 23.

A Comparison of NTB Tariff Equivalents

(In percent)

Sources: Deardorff and Stern (1990), Table A10; Whalley (1985), p. 286; and Stoeckel, Pearce, and Banks (1990), pp. 40 and 50.

Table 23.

A Comparison of NTB Tariff Equivalents

(In percent)

Stoeckel, Pearce, and Banks		Whalley		Deardorff and Stern
European Community
Agriculture	5.3	Agriculture and food	33.2	Not available
Mining	9.3	Minerals and extractive ores	48.5
Processed food	105.2	Energy	28.2
Textiles, clothing, and footwear	39.8	Nonmechanical manufacturing	7.9
Motor vehicles, metal products, and machinery	4.2	Machinery and transport	1.7
	5.6
Other manufactures
United States
Automobiles	11.0	Agriculture and food	43.8	Food, beverages, tobacco	14.5
Motorcycles	30.0	Minerals and extractive ores	0.0	Footwear	4.3
Color TVs	15.0	Energy	5.6	Printing and publishing	22.3
CB radios	21.0	Nonmechanical manufacturing	7.5	Chemicals	0.0
Textiles and clothing	30.0	Machinery and transport	0.0	Petroleum and related	0.0
Nonrubber footwear	18.5			Iron and steel	11.3
Carbon and alloy steel	30.0			Nonferrous metals	0.0
Specialty steels	25.0			Metal products	0.0
Nuts and bolts	15.0			Nonelectrical machinery	0.0
Sugar	30.0			Electrical machinery	0.2
Dairy	80.0			Miscellaneous manufacturing	0.0
Meat	14.0
Peanuts	28.0
Mushrooms	20.0
Japan
Not available		Agriculture and food	72.1	Food, beverages, tobacco	27.1
		Minerals and extractive ores	46.0	Footwear	6.1
		Energy	37.7	Chemicals	1.1
		Nonmechanical manufacturing	8.1	Petroleum and related	1.3
		Machinery and transport	1.8	Nonmetallic minerals	1.1
				Miscellaneous manufacturing	0.8

Sources: Deardorff and Stern (1990), Table A10; Whalley (1985), p. 286; and Stoeckel, Pearce, and Banks (1990), pp. 40 and 50.

View Table

Table 23.

A Comparison of NTB Tariff Equivalents

(In percent)

Stoeckel, Pearce, and Banks		Whalley		Deardorff and Stern
European Community
Agriculture	5.3	Agriculture and food	33.2	Not available
Mining	9.3	Minerals and extractive ores	48.5
Processed food	105.2	Energy	28.2
Textiles, clothing, and footwear	39.8	Nonmechanical manufacturing	7.9
Motor vehicles, metal products, and machinery	4.2	Machinery and transport	1.7
	5.6
Other manufactures
United States
Automobiles	11.0	Agriculture and food	43.8	Food, beverages, tobacco	14.5
Motorcycles	30.0	Minerals and extractive ores	0.0	Footwear	4.3
Color TVs	15.0	Energy	5.6	Printing and publishing	22.3
CB radios	21.0	Nonmechanical manufacturing	7.5	Chemicals	0.0
Textiles and clothing	30.0	Machinery and transport	0.0	Petroleum and related	0.0
Nonrubber footwear	18.5			Iron and steel	11.3
Carbon and alloy steel	30.0			Nonferrous metals	0.0
Specialty steels	25.0			Metal products	0.0
Nuts and bolts	15.0			Nonelectrical machinery	0.0
Sugar	30.0			Electrical machinery	0.2
Dairy	80.0			Miscellaneous manufacturing	0.0
Meat	14.0
Peanuts	28.0
Mushrooms	20.0
Japan
Not available		Agriculture and food	72.1	Food, beverages, tobacco	27.1
		Minerals and extractive ores	46.0	Footwear	6.1
		Energy	37.7	Chemicals	1.1
		Nonmechanical manufacturing	8.1	Petroleum and related	1.3
		Machinery and transport	1.8	Nonmetallic minerals	1.1
				Miscellaneous manufacturing	0.8

Sources: Deardorff and Stern (1990), Table A10; Whalley (1985), p. 286; and Stoeckel, Pearce, and Banks (1990), pp. 40 and 50.

Simulation Results

The seven-region Whalley model was used to simulate the comparative static effects of multilateral elimination of tariffs and NTBs. The results were presented in terms of the regional long-run net welfare changes which, when scaled by GDP, yield a 2.2 percent gain for the EC, a 0.5 percent increase for the United States, a 2.8 percent gain for Japan, and an overall global increase in welfare of 0.4 percent of world GDP. The small overall gain is due primarily to terms of trade losses in developing countries. These arise in this experiment because trade barriers in developing countries are very high compared with other regions. In the context of the Uruguay Round, a more appropriate experiment would be an equiproportionate cut in trade barriers.

The Stoeckel model was used to simulate the effects of a 50 percent reduction in tariffs and NTBs. Since trade was permitted to be unbalanced in this model, welfare calculations of the type made in the Whalley model were not, strictly speaking, permitted. However, as mentioned, GDP changes were reported for this simulation and might roughly be compared with the results from the Whalley model. The EC was estimated to gain 5.2 percent of GDP from this liberalization, while North America gains 3.9 percent and Japan, 9 percent. The gain in GDP for the countries reported (and which does not include a residual country category) was estimated at about 5 percent.

Deardorff and Stern used the Michigan model to simulate the effects of a complete trade liberalization by developed countries (including elimination of agricultural subsidies). They do not present welfare calculations for the same reason that the Stoeckel model does not; that is, since trade is permitted to remain unbalanced, welfare calculations would be complicated by issues regarding accumulations and decumulations of reserves. However, a comparison of the effects of this simulation on changes in exports and imports with Stoeckel’s simulation of a 50 percent global liberalization is presented in Table 24. Generally, the Stoeckel model estimates a much greater increase in trade than the Deardorff and Stern results.

Table 24.

A Comparison of the Stoeckel Model and the Deardorff and Stern Model

Sources: Deardorff and Stern (1990), pp. 256–57; and Stoeckel, Pearce, and Banks (1990), p. 70.

Table 24.

A Comparison of the Stoeckel Model and the Deardorff and Stern Model

Percentage Change in Value of Exports					Percentage Change in Value of Imports
Stoeckel, Pearce, Banks			Deardorff and Stern		Stoeckel, Pearce, Banks		Deardorff and Stern
European Community (EC)		16.4	EC	5.3	EC	9.5	EC	5.2
Japan		36.7	Japan	6.7	Japan	33.5	Japan	6.3
North America		26.5	United States	3.7	North America	26.1	United States	3.5
World		17.1	Canada	4.6	World	16.0	Canada	4.8
			World	4.7			World	4.5
Memorandum
Change in terms of trade in Deardorff and Stern (in percent)
	EC	–0.30
	Japan	–1.13
	United States	0.08
	Canada	–0.02
	World	–0.05

Sources: Deardorff and Stern (1990), pp. 256–57; and Stoeckel, Pearce, and Banks (1990), p. 70.

View Table

Table 24.

A Comparison of the Stoeckel Model and the Deardorff and Stern Model

Percentage Change in Value of Exports					Percentage Change in Value of Imports
Stoeckel, Pearce, Banks			Deardorff and Stern		Stoeckel, Pearce, Banks		Deardorff and Stern
European Community (EC)		16.4	EC	5.3	EC	9.5	EC	5.2
Japan		36.7	Japan	6.7	Japan	33.5	Japan	6.3
North America		26.5	United States	3.7	North America	26.1	United States	3.5
World		17.1	Canada	4.6	World	16.0	Canada	4.8
			World	4.7			World	4.5
Memorandum
Change in terms of trade in Deardorff and Stern (in percent)
	EC	–0.30
	Japan	–1.13
	United States	0.08
	Canada	–0.02
	World	–0.05

Sources: Deardorff and Stern (1990), pp. 256–57; and Stoeckel, Pearce, and Banks (1990), p. 70.

Overall, the results of the three models suggest that the Michigan model lies between the more extreme results of the Whalley and Stoeckel models, to the extent that comparisons can be made between these models given their different structures and simulation experiments. Whalley’s results appear to be driven by rather strong terms of trade effects; while Stoeckel’s results appear to be driven by somewhat higher degrees of substitution between products and factors of production. The Stoeckel model also assumes higher NTB tariff equivalents than the other two models; this together with higher assumed elasticities of substitution explains the relatively large gains estimated from trade liberalization.