Recent Trade Trends

The world steel market has been under strain since the early 1970s owing to overcapacity and sluggish demand in industrial countries, reflecting in part a substitution of plastics for steel in the production of many products.¹⁵⁸ After a recovery in 1983-85, world consumption and production declined in 1986 (Table A58). In 1987 and 1988, however, the world market recovered somewhat because of buoyant demand in the United States, Japan, and Canada.

In the face of sluggish demand and increased competition from emerging developing country suppliers (Brazil, Korea, and Mexico), the steel industry in OECD countries has undergone considerable structural adjustment involving substantial reductions in both installed capacity and employment (Tables A58 and A59). Nevertheless, capacity utilization has remained low: it fell markedly in 1982, but improved somewhat thereafter; in 1987, capacity utilization rates were 67 percent and 65 percent in the EC and Japan, respectively, and 80 percent in the United States.

In contrast to developments in the OECD, installed capacity has increased in the rest of the world, particularly in Korea, where it rose by 75 percent during 1979-85. Capacity utilization rates have also been higher outside the OECD area. The increasing importance of developing country producers and exporters has resulted in a decline in the share of OECD countries in world exports, from 74 percent in 1980 to 62 percent in 1987 (Table A60). Korea’s share has increased, and in 1985 Korea was ranked fifteenth and seventh, respectively, among world steel producers and exporters.

The volume of world steel exports increased significantly during 1983-85, but declined thereafter. The steel trade has become increasingly subject to quantitative restrictions, particularly voluntary export restraints (VERs); by May 1988 a total of 52 known VERs (or equivalent measures) affected the steel trade (compared with 38 in September 1987).¹⁵⁹ Most of these VERs protected the U.S. and EC markets and restrained exports from developing countries (20), Eastern European countries (11), the EC (6), and other industrial countries (15). Trade flows are also influenced by subsidies and dumping and measures to counteract their effects by the use of countervailing and antidumping duties. Indeed, many VERs in the steel sector, particularly in the United States, were negotiated following countervailing and antidumping investigations.

United States

Following the strong recovery in U.S. steel consumption during 1983-84, demand softened in 1985-86, as the declining trend in steel demand from the automotive and construction sectors was compounded by a drastic decline in tubular products caused by the curtailment of U.S. oil and drilling activity following the collapse of oil prices (Table A61). Demand for steel recovered in 1987: consumption increased by more than 7 percent at a time when imports, which continued to be constrained by VERs, decreased by 2 percent. Production thus rose by almost 10 percent and import penetration (ratio of imports to apparent consumption) dropped to 21 percent. Capacity utilization exceeded 80 percent and steel prices surged, resulting in a price level that was 20 to 40 percent higher at the end of 1987 than a year earlier. Indications are that the same trends continued in the first half of 1988, and some items were in short supply in North American markets.

Despite considerable structural adjustment, including a reduction in production capacity from 140 million tons in 1980 to 102 million tons in 1987, the U.S. steel industry has continued to rely on protective trade barriers; many of these were negotiated in lieu of countervailing measures to combat “unfair” competition from abroad. Under the President’s steel program presented on September 18, 1984, U.S. steel imports are regulated by a series of bilateral arrangements aimed at reducing import penetration (to a working target of about 18.5 percent of domestic consumption) and allowing time for domestic producers to undertake further adjustment. ¹⁶⁰ By early 1987, the United States had VERs with many steel exporting countries,¹⁶¹ generally covering a period of five years ending September 1989, and restricting shares in the U.S. market to specified proportions. Sweden and Taiwan Province of China have resisted VERs; however, Taiwan Province of China imposed a unilateral restraint on steel exports to the United States effective September 1986, and the United States has a “consulting arrangement” with Sweden on the latter’s exports of stainless steel to the United States. Quarterly consultations on steel trade developments have been held with Canada,

The new steel arrangements (1986-September 1989) agreed between the United States and the EC in December 1986 replaced the 1982-85 Carbon Steel Accord and the 1985-86 ad hoc Pipes and Tubes Accord. Under the new arrangements, overall limits on ten categories of products covered by the 1982 accord were expanded by 125,000 tons. Limits in place since August 1985 on the quantity of exports subject to “consultation” clauses were expanded by an extra 25,000 tons and some new products were added. Semifinished steel products were to be treated as “consultation products,” that is, while not subject to limitation, the United States reserved the right to review the situation should there be any surge in imports. The existing pipes and tubes arrangement continued as a separate accord, but its duration was extended to September 30, 1989 so that its termination would coincide with that of other steel accords. In addition, the United States imposed an annual quota of 400,000 tons on imports of semifinished steel from the EC in January 1986, following the Community’s refusal to incorporate this limit in the VERs. The EC retaliated with curbs on trade worth $43 million. A settlement of this dispute was reached in July 1986, whereby the United States agreed to raise the quota to 600,000 tons and the EC lifted its retaliatory measures.

Following agreements on VERs on steel imports into the United States, petitions for dumping and countervailing duty investigations (which were numerous before 1985) declined; however, a number of antidumping and/ or countervailing duties remain in effect on imports from nonagreement countries (e.g., Saudi Arabia). As some products such as semifinished steel were in short supply at the beginning of 1988, requests for imports beyond specified limits were granted by the U.S. Department of Commerce.

On July 16, 1987, the President granted a 27-month extension of the specialty steel tariff and quota protection introduced four years earlier under GATT Article XIX safeguard provisions. For flat-rolled products—stainless steel sheet, strip, and plate—the tariff will be decreased from 3 percent ad valorem in the first year to 1 percent by September 30, 1989, pursuant to findings by the U.S. International Trade Commission that this segment of the industry was becoming more competitive. The existing quota program was extended for stainless steel bar and wire rod and alloy tool steel, and by the end of October 1987 orderly marketing agreements on steel were negotiated with Canada, Japan, Korea, Poland, Spain, and Sweden; unilateral quotas were assigned to Mexico and Taiwan Province of China.

A number of studies have estimated the costs of protection for the U.S. steel industry and economy. In one such study, the impact of VERs on steel was estimated to lead to an increase in average prices of steel in the United States by 4.8 percent, and a reduction in steel imports by $2.8 billion.¹⁶² However, in steel-consuming sectors, VERs were estimated to bring about higher import penetration and reduced exports, as U.S. firms forced to purchase steel at inflated prices became less competitive. Total imports were estimated to decline by $1-1.5 billion, while exports were estimated to fall by $0.5-1.0 billion. In terms of employment, the jobs saved were estimated at 27,000 man-years, but this would be largely offset by a decline of 24,000 man-years in other sectors.

Another study¹⁶³ estimated the costs to consumers of the restrictions on steel at $1.1 billion a year (in 1983 dollars) and the annual overall cost for the U.S. economy as a whole at $779 million; gains for domestic producers were estimated at $428 million a year and quota rents extracted by foreign producers at $557 million a year. Jobs protected in the steel industry were estimated at 9,000, and the cost to consumers of each job thus saved was estimated at $114,000 a year. For every dollar earned by workers who would have been displaced in the absence of protection, consumers and the U.S. economy were estimated to lose $35 and $25, respectively.

European Community

Since the late 1970s, the European steel industry has been in a generally depressed state and apparent consumption has declined (see Table A58). Partly reflecting restructuring efforts, installed capacity, production, and employment in the steel sector declined significantly in the 1980s. Even so, capacity utilization has remained below 70 percent. A limited improvement has been observed recently, but problems associated with excess capacity are likely to re-emerge in 1989, especially when investments in developing countries (e.g., Korea) come on stream and competition becomes tougher even in high-specialty steel segments.

Since 1980, the Community’s steel industry has been declared in “manifest crisis.” Internal and external measures are maintained to assist in an orderly reduction in production capacity. The internal measures consist of production quotas and target guide prices (supplemented by minimum prices) for a number of steel products and regulations on state aids to the steel industry. The latter were strengthened in 1981 and aimed at eliminating operational subsidies by the end of 1984 and general aids by the end of 1985. Although the objective for capacity reduction (by 30-35 million tons) during 1980-85 was met and subsidies were cut, at the end of 1985 the Commission estimated that excess capacity still amounted to 25 million tons, or 17 percent of existing capacity.

Under a new regime for the steel industry for the two-year period ended 1987, production quotas were lifted on steel products (coated sheet and reinforcing bar) accounting for 15 percent of output, and some flexibility provisions were built into the quotas to allow limited shifts between products;¹⁶⁴ in addition, the Commission was authorized to allocate supplementary quotas to firms that could prove hardship under the quota system.¹⁶⁵ Minimum prices were abolished, but the Commission continued to issue guide prices. State aids to companies that reduced capacity or closed plants¹⁶⁶ continued to be permitted, in addition to aid for research and development and environmental protection.

At the end of 1987, the Commission estimated that some 30 million tons of capacity was in excess of the level justified by market prospects. Hence, production quotas were continued for the first six months of 1988, albeit for products covering only about half of production.¹⁶⁷ Quotas for certain products were to be extended to the end of 1990 provided that undertakings were received by the Commission by June 1988 to close at least 75 percent of excess capacity. Social aid was increased for persons losing jobs as a result of the restructuring, mainly in the form of early retirement and assistance for new employment and retraining, and was to be financed out of levies on steel output. A program (RESIDER) to stimulate new economic activities and investment in regions adversely affected by restructuring of the steel industry was also introduced; the program cost amounted to ECU 300 million for three years and was to be financed jointly by the European Regional Development Fund (i.e., the common budget of the EC) and the member states.

Notwithstanding proposals to extend quotas, production quotas were discontinued for all categories of steel in June 1988. This action was partly motivated by the belief that restructuring would occur more rapidly if left to market forces, and that quotas hindered competition (by allocating quotas to efficient and inefficient producers alike) and discouraged rationalization by means of cross-border mergers.¹⁶⁸ EC members with less efficient industries were in favor of continuing quotas while restructuring was underway; others were concerned that the elimination of quotas under conditions of continued subsidization by some members would distort trade within the EC.¹⁶⁹

With regard to external measures, imports of steel from major suppliers have been regulated since 1978 through bilateral export restraint agreements. These agreements have been renewed annually with the majority of supplying countries, on the basis of expected domestic consumption and with reference to the 1980 import level. Under the arrangements, import volumes during 1981-85 were set 9-12.5 percent below the 1980 import level. In 1986, the arrangements aimed at limiting outside supplies to about 10 percent of internal consumption and permitting a 3 percent increase in import volume over the previous year.¹⁷⁰ The number of arrangements declined from 15 in 1984 to 12 at the end of April 1988 (including EFTA countries).¹⁷¹

Export restraint agreements have been complemented by a system of surveillance and import licenses and the basic import price system that is applicable to nonagreement countries. The basic import price system sets floor prices that, if not observed, can trigger antidumping actions against the foreign supplier. (Antidumping duties have been applied against Mexico on this basis.) The EC announced in 1987 a revision of its official basic import prices: for most products the prices were lowered to reflect changes in production costs (stemming from cheaper raw materials and energy) and the depreciation of the U.S. dollar.

It was originally intended to eliminate VERs and production quotas at the same time. Although production quotas have been eliminated, the VERs remain in place. The Commission has indicated that the EC is unlikely to dismantle VERs while world trade is essentially managed. In a market free of restrictions, the EC would likely encounter problems competing in the U.S. market with Argentina, Brazil, and Korea.

Canada

Canada’s steel industry remains competitive in the world market as a result of major investment and plant modernization in the last two decades. A substantial recovery in apparent consumption and crude steel production began in 1983; following a pause in 1985-86, the recovery continued in 1987. Exports began to recover in 1984 and the trend continued until 1987. In recent years, Canada has shipped 60-70 percent of its steel exports to the United States, while the latter supplies the major share of Canada’s imports.

Canada has been concerned that some third-country suppliers have attempted to circumvent restrictions on steel exports to the United States by channeling shipments via Canada. In view of U.S. industry pressure for protection against increasing imports from Canada, the latter introduced rules of origin in October 1986 on all imports of iron and steel pipes and tubes. To prevent circumvention and to minimize the “diversion” of steel to Canada following increased import restrictions in other markets, Canada progressively introduced an import/export monitoring system for carbon and specialty steel in 1986-87 that requires import and/or export permits before any shipment can be cleared for delivery in or from Canada, Such permits, however, have been granted freely on request. In addition, in 1986 the Canadian Import Tribunal began an investigation into the risks of diversion to Canada of foreign carbon steel and specialty steel products.

Australia

Faced with a sharp downturn in production, employment, and profitability in the domestic steel industry in the early 1980s, the Australian Government announced in August 1983 a five-year assistance package for the industry, commencing January 1, 1984. The main element was the introduction of sliding-scale bounties on four (later five) product categories produced and sold in the domestic market, representing about 26 percent of domestic production for this market. The ceiling on bounty payments was initially set at A$72 million a year, while that for individual bounties could be adjusted in line with domestic steel price movements. The bounties were complemented by a safety mechanism providing for a review of assistance needs when the local industry’s share of the domestic market in eight (later ten) specified product categories fell below 80 percent or rose above 90 percent. The assistance package also introduced general limits on imports of steel products from developing countries at preferential rates of duty; imports from these countries, exceeding the average volume of imports during the five years ended June 30, 1983, would attract general rates of duty. Finally, the package provided for the introduction of a “fast track” antidumping mechanism for steel products.

The situation improved after 1983, but it is difficult to assess how much this improvement was related to the assistance package: it is probable that the main positive factor was the recovery of the Australian economy, combined with the sustained depreciation of the Australian dollar since the end of 1984, The bounties have contributed to the renewed profitability of the industry, as they have helped create a more stable environment for producers. In addition to the assistance provided by tariffs, the bounties were structured to provide up to 17-20 percent of the sales value of high alloy and steel mill products (in a period when tariffs on high alloy and stainless steel were phased from 25 percent in April 1984 to 15 percent by April 1988). The only change in the scheme owing to the triggering of the safety mechanism was the withdrawal of developing country preferential treatment for Brazil, Korea, and Taiwan Province of China for exports of hot-rolled steel strip and plates.

Recent Trade Trends

World output of textiles and clothing has generally increased since 1982. In the industrial countries, production of textiles rose by ½ of 1 percent and 3 percent in 1985 and 1986, respectively; clothing production was stable in 1985 and increased by 2 percent in 1986. Employment in both the textile and clothing sectors declined steadily in all industrial countries (Table A62). The decline was more pronounced in the textile sector, which has adopted more capital-intensive production methods.

In the developing countries, output of textiles rose by 3 percent and an estimated 6 percent in 1985 and 1986, respectively, while that of clothing was stable in 1985 and increased by an estimated 8 percent in 1986. Buoyant consumer demand in the industrial countries, particularly in the EC, contributed to the expansion in 1986.

World exports of textiles (in U.S. dollars) expanded by 21 percent in 1986, in marked contrast to the stagnation of the previous year. In part, this expansion reflected the depreciation of the dollar. The exports of both industrial and developing countries (including the centrally planned economies) grew roughly in line with world exports, resulting in unchanged market shares (65 percent for industrial countries).

World exports of clothing (in U.S. dollars) grew by about 4 percent in 1985 and 27 percent in 1986. Industrial countries’ exports rose by 32 percent in 1986, with the result that their share in world exports increased to some 45 percent, compared with about 43 percent in 1985 (and about 56 percent in 1973). Their share in world imports of clothing rose in 1986 to about 85 percent. Clothing imports in 1986 rose strongly in the EC (45 percent), Japan (43 percent), EFTA (43 percent), Canada (19 percent), and the United States (15 percent) (Table A63).

Multifiber Arrangement

Over the past 27 years, trade in textiles and clothing has been regulated under international agreements. Following the Short-Term Arrangement Regarding International Trade in Textiles (October 1961-September 1962) and the Long-Term Arrangement Regarding International Trade in Cotton Textiles (October 1962-73), the Multifiber Arrangement (MFA)came into existence as a “temporary” departure from normal GATT rules. The MFA’s stated objectives are to achieve the expansion and progressive liberalization of world trade in textile products, while at the same time avoiding disruptive effects in individual markets and in individual lines of production in both importing and exporting countries. The original MFA (1974-78) was followed by MFA II (1978-81), extended by MFA III (1982-July 1986), and extended again in July 1986 by MFA IV (August 1986-July 1991), By early 1988,39 participants had officially accepted the corresponding protocol of extension.¹⁷²

The MFA envisages essentially two types of restrictions: (1) those under its Article 3, which permits bilateral or unilateral restrictions as a result of market disruption, and (2) those under Article 4, which provides for bilateral agreements to eliminate the risks of market disruption. In effect, these Articles provide for a volume growth norm of at least 6 percent annually in export categories restricted under the MFA for more than one year. The MFA has “flexibility” provisions that permit switching between individual quota categories (swing), carryover of unutilized quota to the following year, or borrowing (carry forward) of next year’s quota.

The 1986 protocol of extension of the MFA (MFA IV) was originally opposed by most developing countries, which favored a return to GATT rules after the expiry of MFA III. These countries finally agreed to the extension as they became more sensitive to the risk that, in its absence, developed countries would resort both to safeguard actions under GATT Article XIX and probably to strong unilateral actions. Also, some suppliers became concerned that they might lose market shares if the MFA was terminated.

MFA IV widened the coverage of the Arrangement. Besides products from cotton, wool, and man-made fibers, it now includes those from other vegetable fibers, such as ramie, sisal, and jute, and blends containing vegetable fibers and silk that are directly competitive with those already covered by the Arrangement. Further, under MFA IV, an importing country can prolong unilateral restrictions (previously limited to a maximum duration of 12 months) for an additional 12 months without a new finding of market disruption. In contrast to these more restrictive provisions, MFA IV includes an understanding that bilateral agreements should provide for increased market access to imports in overall terms, and that exports from least developed countries, small suppliers, and new entrants should not be made subject to restraints. It also recognized that the existence of serious injury to domestic producers, or its threat, should not be based solely on the level or growth of imports but should be substantiated by relevant information on an identifiable segment of the domestic industry. However, as in MFA III, paragraph 10 of the protocol stipulates that any “mutually acceptable agreement” can be made between importers and their dominant suppliers. Finally, MFA IV also contains the objective of eventually applying GATT rules to trade in textiles and clothing but does not specify a time limit for reaching it.

Restraints under the MFA have been applied almost exclusively to products from developing countries. Table A64 lists the bilateral agreements in effect in early 1988 under Article 4 of the MFA; most of these were negotiated under the 1986 protocol of extension.

Although it is difficult to assess the overall impact that MFA IV might have on world trade in textiles and clothing, some indications are provided by recently concluded bilaterals. In most of the agreements signed by the United States, product coverage was expanded to include textiles and/or apparel of silk blends and other vegetable fibers; these represent a minor share of U.S. imports of textiles, but a significant portion of imports of clothing (8.2 percent). Permissible import growth rates remained mostly unchanged with respect to previous agreements, but for dominant suppliers like Hong Kong and Korea, growth rates of less than 6 percent and more limited flexibility provisions compared with other suppliers were negotiated under paragraph 10 of the 1986 protocol.

In the European Community, product coverage in agreements concluded under MFA IV has remained unchanged, and several restraints were terminated. Total EC restraints, including national subquotas, have been reduced by about 30 percent relative to those maintained under MFA III. In the two-year period 1986-87, imports of textiles from MFA exporters rose by 54 percent in volume terms.

Japan has continued its past practice of not imposing quantitative limitations under the MFA; however, the Japanese market is protected by a number of non-MFA export restraint arrangements, notably with China and Korea. The GATT reports the existence of nine such arrangements in mid-1988.¹⁷³

Evidence suggests that the MFA has acted to reduce imports considerably below the level that would have occurred without it, but that it has nevertheless permitted additional inflows in response to economic factors such as exchange rate changes, domestic growth, or increased competitiveness of exporters.¹⁷⁴ Thus, despite the MFA, developing countries have significantly increased their share of world exports of textiles and clothing over the last twenty-five years. A number of factors have contributed to this growth. First, numerous bilateral agreements under the aegis of the MFA have entailed monitoring rather than strict quota provisions; further, when quotas were in place, the “carryover” provisions permitted temporary flexibility in response to changes in demand. Second, because the MFA tends to operate on the volume rather than the value of imports, it introduces an incentive to upgrade product quality; hence, the unit value of U.S. imports of textiles and apparel appears to have rapidly adjusted upward in the initial years of MFA II, as well as at the beginning of MFA III. Third, quotas imposed on the major exporters have encouraged additional supplies from new entrants and non rest rained producers.

Nevertheless, the MFA has a restrictive effect. Two main methods have been used to quantify this impact. Under the first, a number of studies have computed tariff equivalents of quotas. For the United States, the estimates range from 8.8 percent to 50 percent depending on product and country coverage, with a central value of 15-25 percent.¹⁷⁵ The tariff equivalent of German quotas on men’s and boys’ shirts has been estimated at 54 percent.¹⁷⁶ For Canada, estimates indicate that without quotas, landed prices would have been lower by 17 percent for outerwear and 25 percent for shirts.,¹⁷⁷ These results are based on the hypothesis of perfectly elastic supply and may therefore be excessive. Estimates for the United Kingdom, which relax this assumption, suggest that abolishing the MFA would reduce the U.K. landed price of imports by only 5-10 percent.¹⁷⁸

Under the second method, several studies have estimated import reductions and the associated welfare losses in importing countries owing to MFA quotas. In the United States, imports were 26-44 percent below levels that would have been attained without quotas in 1978,¹⁷⁹ while in Germany, the reduction in the 1980s was estimated at 30 percent,¹⁸⁰ In terms of welfare, studies of shirt imports indicate a loss equivalent to 14-20 percent of the import value of shirts in the United States, and of 19-27 percent of import value for Germany.¹⁸¹ Part of these losses constitute “rents” received by the more advanced developing countries; it is estimated that the annual transfer from OECD countries to exporters of textiles and clothing in the newly industrializing economies of Asia is at least $2 billion.¹⁸²

Other Protective Measures

Tariffs on textiles and clothing differ widely among industrial countries. In the EC market, most-favored-nation (MFN) duties are 15 percent or less, with half of the imports entering at a maximum rate of 10 percent. A similar situation exists in Sweden and Switzerland. In Japan, nearly 40 percent of textile and clothing imports in 1984 were duty free; the other 60 percent were covered by duties below 25 percent, for the most part less than 15 percent. Tariffs are somewhat higher in a number of other countries. More than half the tariff lines in Austria, Canada, Finland, Norway, and the United States carry duties in excess of 15 percent. The markets of the industrial country members of the MFA are also protected by a significant number of non-MFA voluntary export restraint arrangements. The GATT reports that these numbered 72 in mid-1988, compared with 28 in September 1977, directed exclusively against the exports of developing and Eastern European economies.¹⁸³

Australia participated in MFA I, but not in subsequent MFAs, while New Zealand has never participated in the MFA. As in other developed countries, tariffs on textiles and clothing in Australia and New Zealand are significantly higher than on other goods and tend to escalate with the stage of production: tariffs are lower than 20 percent on fibers, yarns, and fabrics, but on clothing average 50 percent in Australia and 96 percent in New Zealand. Australia also maintains a system of tariff quotas, which are being gradually phased out and replaced with tariffs, while New Zealand’s imports of textiles and clothing are subject to import licensing procedures, normally in the context of global quotas. Substantial tariff cuts were recently announced by Australia,

A detailed picture of protection levels in developing countries is not available. Partial information on textiles and clothing shows that protection in a number of these countries is fairly high in terms of tariffs as well as nontariff measures.¹⁸⁴ In the early 1980s, Brazil, Egypt, India, Morocco, and Pakistan applied average tariff rates in excess of 75 percent on their imports of textiles and clothing, while rates in Argentina, Korea, and Mexico were in the 30-40 percent range. However, Hong Kong, Macao, and Singapore (with the exception of a low tariff on clothing) allow imports free of duty.

With respect to nontariff measures, Singapore has no GATT-notified restrictions while Korea, Malaysia, Sri Lanka, and Thailand have only a few; however, other developing countries have relatively many. Nonautomatic import licensing is the most frequently used measure, particularly in Argentina, Bangladesh, Brazil, Columbia, Peru, and Tunisia. A number of developing countries maintain these restrictions under the GATT’s balance of payments provisions, to which they have easier and more frequent resort than industrial countries.

A comparison of nontariff measures in industrial countries and in developing countries¹⁸⁵ shows that for clothing, their frequency in both groups of countries is in the 50-60 percent range. A number of industrial countries believe that it would be easier to liberalize trade in textiles and clothing, including the dismantling of the MFA, if their higher value-added products in this sector had improved access to developing country markets, and if greater protection of intellectual property rights was guaranteed by the latter countries.

Claims that protection of textiles and clothing is needed to provide time to adjust is questionable for a number of reasons. First, declining employment in these sectors in the industrial countries has been largely due to productivity growth, with imports playing a comparatively minor role. Second, these sectors are not submitted to pressures common to steel and shipbuilding, in which industrial country consumption has declined in real terms. Third, a number of industrial countries have become competitive in textiles, largely owing to the growing capital intensity of the sector. Thus, in 1986, the Federal Republic of Germany, Italy, and Japan were the world’s largest exporters of textiles. Finally, in the clothing sector, with the exception of “high-fashion” goods in which some industrial countries hold a comparative advantage, comparative advantage has shifted away from industrial to developing economies. This shift reflects the fact that the clothing sector does not lend itself to automation and returns to scale. Trade protection hinders the adjustment necessary to adapt to this shift in market conditions. These factors also undercut claims by a number of developing countries that protection is required for “infant industry” reasons.

Claims that protection is required for social reasons have also lost force. Although production and employment in textiles and clothing are important in some regions, the sector has declined to such an extent that its evolution no longer significantly affects overall economic activity in industrial countries. In this context, regional problems can be better dealt with by other policies that do not distort trade.

Trade in textiles and clothing is an issue in the Uruguay Round of multilateral trade negotiations (see Section IV).

United States

Clothing imports, which account for some three fourths of total imports of textiles and clothing in the United States, increased in 1985 and 1986 by 11 percent and 15 percent, respectively, reflecting the continued strength of consumer demand. Similarly, imports of textiles grew by 8 percent and 18 percent in 1985 and 1986, respectively. The trade deficit for textiles and clothing rose to $18 billion in 1985, and to $21 billion in 1986; some 86 percent of these deficits were attributable to trade in clothing.

Pressures for protection have remained strong, in part owing to the increasing trade deficits. The President vetoed in 1985, and again in 1988, bills providing for comprehensive global quotas on imports of textiles, clothing, and footwear. The EC had threatened retaliation in the event the bills were enacted.

The United States maintains 30 bilateral agreements under Article 4 of the MFA (Table A64) and 12 agreements with nonsignatories of the MFA.

European Community

Following a strong increase in consumer demand, expenditure on clothing in the EC rose in real terms by 1.5 percent in 1985 and 3 percent in 1986. Although this was accompanied by modest increases in production, imports grew rapidly in nominal terms in 1986, with the result that the combined trade balance for textiles and clothing recorded a deficit of $850 million in 1986 after a surplus of almost $900 million in 1985. Protectionist pressures, which had abated in 1985, have resurfaced.

The EC maintains 20 bilateral agreements under Article 4 of the MFA. In addition, it has 8 export restraint agreements with Mediterranean developing countries in the context of overall cooperation agreements. It also has a consultation agreement with one signatory to the MFA and has negotiated export restraints with 8 nonsignatories of the MFA. Furthermore, the markets of both Germany and the United Kingdom are protected by Turkish export restraints.

Recent Trade Trends

World automobile production was virtually stagnant in 1986, compared with an average annual growth of some 7 percent during 1983-85. This slowdown was mainly due to a decrease in apparent automobile consumption in the United States and Canada (of 1.6 percent and 6.3 percent, respectively) that led to declines of 2.9 percent and 3.8 percent, respectively, in production in these two countries. Production remained stable in Japan in 1986, in contrast to the 3-7 percent growth recorded in 1984-85. Production rose by about 5 percent in the European Community in 1986, in response to a strong increase in apparent consumption (9 percent) (Table A65). Industrial countries account for more than 90 percent of world automobile production.

The volume of world trade in automobiles and automotive parts is estimated to have increased by 2.5 percent in 1986. The value of such trade (in U.S. dollar terms) rose by 23 percent in 1986, the strongest increase in the last ten years.

Industrial countries’ exports of automobiles were stable in volume terms in 1986, with Japan and Canada both experiencing a 2 percent decline and the United States exporting approximately the same number of vehicles as in 1985. The European Community’s exports rose by about 2 percent, mainly owing to a strong increase (22 percent) in Italian car exports.

In value terms, industrial countries’ exports of automobiles and parts rose by about 24 percent to $200.5 billion in 1986 (Table A66). Exports by the Community (including EC intratrade) increased by close to 30 percent, and Japan’s exports to the United States increased by 38 percent, mainly in categories not subject to export restraints. In contrast, U.S. exports decreased by 4 percent and Canadian exports increased by only 2 percent. Japan, the world’s largest exporter, expanded its share of industrial country exports from 24 percent in 1983 to 27 percent in 1986. Developing countries’ exports rose by 3.5 percent as a rapid expansion of exports by Korea and Mexico (which grew by 133 percent and 37 percent, respectively) more than compensated for the 20 percent decline in Brazil’s exports.

A prominent feature of the world automobile industry in recent years has been the strong and continuing expansion of foreign investment by Japanese motor companies, first in North America and in developing countries, and subsequently in Western Europe. Protection against Japanese exports as well as the appreciation of the yen since 1985 have played a role in stimulating such investments. These investments are likely to result in a decline in Japanese exports to the United States and Western Europe as Japanese production increases in those markets and as exports rise from Japanese companies in developing countries.

United States¹⁸⁶

During the four-year period March l981-March l985, discriminatory trade restrictions were maintained in the automobile sector in the form of “voluntary” restraints (requested by the United States) on exports of passenger cars to the United States from Japan. The restraints were maintained against a background of severe difficulties faced by the U.S. automobile industry. In March 1985, following a turnaround in consumer demand and an improvement in the automobile industry’s financial situation, the United States announced that it would not seek a further extension of the voluntary restraints. However, the Japanese Government decided to impose a ceiling of 2.3 million units (a 24 percent increase over the 1984 ceiling) for two more years to March 1987. The ceiling was subsequently extended for the fiscal years ending March 1988 and March 1989, even though it was not reached during 1987-88.

The financial position of the U.S. automobile industry has improved substantially in recent years. Owing to the voluntary export restraints, the Japanese share of the U.S. car market, which had peaked at 22.6 percent in 1982, decreased to 18.3 percent in 1984 and was contained to 20.1 percent and 20.7 percent in 1985 and 1986, respectively, after the ceiling was adjusted upward. The U.S. car industry was thus able to take advantage of the growth of consumer demand in 1983-85, with the result that there was an increase in domestic production, capacity utilization, and employment. Production of passenger cars reached 8.2 million units in 1985, and employment (which had fallen to 699,000 in 1982) recovered to 876,000 by 1985. Simultaneously, losses of the U.S. automobile industry on U.S. operations were replaced by profits that reached $10 billion in 1984 and about $6.8 billion in 1985.

Since 1986, however, the impact of the voluntary export restraints has declined. First, the Japanese authorities increased the ceiling by 24 percent in 1985. Second, penetration of non-Japanese foreign cars and foreign investment in the United States increased strongly in a period of stable consumer demand. Passenger car production declined by 4.9 percent to 7.8 million units in 1986, while the foreign share of the U.S. market rose to 28.3 percent (compared with 25.7 percent in 1985). Employment fell in 1986 to 843,000 and profits declined to $5.6 billion. Investment in automobile plants and equipment remained high in 1986 and was expected to increase in 1987.

The competitiveness of the U.S. automobile industry vis-à-vis foreign producers improved significantly in 1987 owing to the depreciation of the U.S. dollar. Prior to that, competitiveness was affected in part by relatively high labor costs in this sector; in 1986, hourly compensation in the U.S. motor vehicle industry was still more than twice that of Japan. The Japanese cost advantage in producing a subcompact model in 1984 was estimated at $1,500-2,500. One study¹⁸⁷ estimated that the cost differential should be eliminated at an exchange rate of about ¥ 150 to the U.S. dollar. The effects of exchange rate changes were only progressively incorporated in foreign car stickers, but are expected to be fully incorporated in 1988 in favor of domestic producers.

The decline of the dollar and the regular extension of the voluntary export restraints have encouraged investment by Japanese firms in the United States. In 1986, such plants accounted for some 5 percent of the total U.S. passenger car production, compared with only 2.7 percent in 1984. The total annual capacity of Japanese-owned assembly plants in the United States is projected to reach at least 1.4 million units in 1989,¹⁸⁸ or more than 10 percent of domestic production. Some analysts argue that this internationalization of the motor vehicle industry will be irreversible as the U.S.-based production of Japanese models will erode consumer brand preference for U.S. cars; they contend that from a long-term, competitive viewpoint, U.S. producers would have been in a more favorable position if trade restraints had not encouraged Japanese investment.¹⁸⁹

European Community

Imports of automobiles from Japan into the EC are subject to formal or informal restrictions or equivalent measures, at the individual member level, or the Community level, or both. These restrictions have prompted Japanese companies to move into the upscale European market—an effect similar to that observed in the United States—and to increase direct investment in the EC. This investment is likely to increase to take advantage of the single European market.¹⁹⁰ Such investments are subject to local content rules.

At the national level, Italy has imposed an annual quantitative limit on imports of Japanese passenger cars since 1956; the limit is currently fixed at 3,425 units (about 0.2 percent of total annual sales in Italy). Japanese imports have also been restrained in France at about 3 percent of the domestic market since the end of the 1970s, and in the United Kingdom (11 percent of the market) since 1980. Export restraints are also applied to exports to Spain and Portugal. Overall, 63 percent of the EC market (excluding Co mm unity-wide restraints in this sector) operates under quota restraints, whether voluntarily agreed or unilaterally imposed.

At the Community level, surveillance has been exercised on imports of certain motor vehicles originating in Japan since early 1981. In 1983, a three-year agreement called for moderation in the growth of Japanese automobile exports to the Community, without a specific limit. In 1987, following record passenger car shipments in the first five months of the year, Japan stated that it intended to hold the increase in car sales to the EC in 1987 to 10 percent of the 1986 level. Despite renewed pressure for Community-wide controls, the Commission announced that it would not impose additional external restraints. Japanese motor manufacturers indicated recently that their exports to the Community in 1988 would be limited to 1.21 million cars and commercial vehicles, representing a 3.2 percent increase over shipments in 1987.

State aids also provide some support to the EC automobile industry (see Appendix I). In principle, state aids are prohibited. The Commission has authority to grant certain exemptions, however, if such aid does not distort trade and production within the Community. Certain exemptions that have been granted may, in practice, distort trade within the EC and in relation to non-EC countries.

In recent years, the Commission has made greater use of existing competition rules to eliminate state aids and ensure that they are not substituted for technical and other barriers that will be eliminated by 1992. In the automobile industry, this policy resulted in reductions of U.K. aid for Leyland trucks and in regional assistance in Germany for Daimler-Benz. (Germany argued that its aid to Daimler-Benz had characteristics of regional aid.) In a recent case, however, the Commission agreed to an injection of F12 billion (consisting of F 8 billion of equity and F 4 billion of debt write-offs) by the French Government in Renault, provided that Renault was transformed from a Régie (under which its debt is guaranteed by the Government) to a state-owned company subject to common commercial rules. A proposal by the United Kingdom to inject £800 million into Rover (which has received £3.8 billion of state aid since 1976) prior to its takeover by British Aerospace was initially blocked on the grounds that it contravened EC competition rules; it was subsequently accepted when the aid package was reduced to £470 million.

As part of the process to complete the internal market by 1992, the EC aims to create a single market for automobiles. Such a market will enable manufacturers to take greater advantage of economies of scale and will likely encourage greater foreign investment as well as some concentration of the sector. Several issues must be settled before the single market is completed. First, substantial differences in indirect taxes on motor vehicles exist across the Community. Currently, manufacturers attempt to offset these differences by applying lower prices in high-tax markets. This has provided incentives for the purchase of cars in high-tax countries for shipment elsewhere, with possible trade-distorting effects. While tax differentials have been narrowed to some extent in recent years, significant differences remain. Second, the harmonization of technical standards has not yet been completed because the standards proposed by the Commission for tires, safety glass, weight, and dimensions pose difficulties for France. Third, the elimination of national import restrictions is encountering strong resistance from producers and might be difficult to achieve, given disparities in national levels of protection and in competitiveness among EC members.

Resistance to the elimination of national restrictions has raised concerns that they might be replaced by tighter EC-wide restrictions. In this context, automobile producers in a number of EC members have stated that the lifting of restrictions was dependent on (i) a reduction of Japanese sales in the European market to their average level prevailing in 1985/86 (about 10 percent of the EC market), and (ii) an increase in access for the EC automobile industry to 5 percent of the Japanese market, compared with just over 2 percent in 1987, EC member countries believe that access to the Japanese market is restricted by the Japanese distribution system, by the indirect tax system that discriminates against large cars, and by technical barriers (standards, testing, and certification procedures). Some progress has been made in reducing technical barriers as a result of bilateral discussions between the EC and Japan in which Japan agreed to adopt international or EC-wide standards, where such standards exist. Further progress is impeded partly by lack of EC-wide standards in a number of areas. The Japanese Government has proposed a tax reform plan, which replaces the commodity excise tax system with a new consumption tax system that taxes all automobiles at the same rate. The new tax system, if adopted, will mitigate the criticism of the current tax system.

Canada

The Canadian automobile trade policy has the following five main elements.

First, under the U.S.-Canada Automotive Agreement of 1965, duty-free access is available to car manufacturers for new cars and parts for their production. The agreement requires manufacturers to produce finished automobiles in Canada that are at least equal in total value to the value of automobiles sold in Canada, thereby guaranteeing an important level of employment to Canadian workers. Also, under a “letter of intent,” it is agreed that at least 60 percent by value of the parts in qualifying automobiles should be made in Canada. Currently, manufacturers from other countries can qualify for trade under this auto-pact; Volvo, for instance, currently operates in Canada under its terms. The U.S. Canada Free Trade Agreement, if ratified, will limit the benefits of the auto-pact to foreign companies already benefiting from the scheme.¹⁹¹

Second, under the Free Trade Agreement the prohibition on the import of used vehicles (excluding cars of the current model year) will be abolished. This is likely to help reduce the incentive for differential pricing by manufacturers on cars sold domestically and across the border.

Third, between 1982 and 1985, export restraints limited Japanese car exports to about IS percent of the Canadian market. These restraints were partly intended to avoid diversion of Japanese exports from the United States to the Canadian market. Since 1985, Japanese car exports to Canada are “monitored” by Japan and Canada. Since 1986, Korea has exercised “prudence” in its export of passenger cars to Canada; an indicative ceiling limits these exports to 10,000 units a year. Hyundai’s share of the Canadian passenger car market declined from 7 percent in 1985 to 6.4 percent in 1986 and 1987.

Fourth, a tariff—9.9 percent in 1986—is levied on most car imports not qualifying under the U.S.-Canada auto-pact. The duty-free treatment applied in the past to imports from developing countries was replaced by a 7 percent levy applied on auto parts (in May 1985) and on automobiles (in January 1987). This tariff will be progressively phased out on trade between the United States and Canada under the Free Trade Agreement.

Fifth, to provide an incentive for automobile producers to locate investments in Canada, the Canadian authorities had established a program for export-based and production-based duty remissions. For export-based duty remissions, duty paid on imports of cars by foreign firms is refunded provided the same firm exports automotive parts from Canada to the United States or elsewhere. These remissions are considered by the United States to constitute export subsidies; under the Free Trade Agreement, they are expected to be eliminated beginning 1989. For production-based duty remissions, duty paid on imports of cars by foreign firms is refunded provided certain production targets are met. Under the Free Trade Agreement these will be eliminated by 1995.

Costs of Protection

Studies on the costs of restrictions imposed by countries on automobile imports from Japan include a special OECD (1987a) study covering Canada, France, the United Kingdom, and the United States, a study by the United States International Trade Commission (1985) on the United States, as well as other studies.

The results of the OECD study are summarized in Table A67. The study notes that the restrictive measures resulted in losses for consumers in the four countries, while the short-term benefits to domestic industry and employment were at best modest. The long-term effects on the protected economies were negative, owing to distortions in investment patterns and possible delays in structural adjustment by U.S. and European producers. Also, productivity increases in Europe and North America, although resulting largely from Japanese investments, might have been achieved faster if protection had not relieved competition. Furthermore, protection may have encouraged concentration in the protected markets, with the risk that cooperation may have replaced competition among firms in the protected sector.

Other studies also show that the VERs on Japanese exports to the United States had a significant impact on automobile prices, entailed major costs to the consumer, and saved a relatively limited number of jobs; but the estimated effects vary substantially owing to differences in assumptions. Estimates of the overall cost to consumers range from $6.6 billion (assuming a competitive domestic market) to $14 billion (assuming some degree of imperfect competition).¹⁹² The estimates for the increase in profits in 1985 on account of VERs range from $550 million to $1,290 million in the OECD study; other studies give substantially higher estimates for 1984. (The latter are more in line with profits of $8.9 billion made by domestic producers in 1984.) Estimates of employment gains on account of the VERs vary, ranging from 20,000-35,000 (OECD), 44,000 (USITC), and 40,000-75,000 (Fund staff studies). These figures do not include possible gains in employment in steel and other supply industries as a result of the VERs, but they also exclude possible losses in employment in other sectors of the economy.

In Canada too, VERs were estimated to have resulted in higher automobile prices, but these increases were mitigated to some extent by the availability of substantial import substitutes from Germany and Korea. Consequently, the increase in Japanese car import prices as a result of the restraints, although significant, was limited to between 8 percent and 14 percent in 1985. Under the assumption of a competitive domestic market, the OECD study estimated the gain in output to North American car producers at 22,000 cars, the cost to consumers at Can$199 million, and the increase in employment at 880 jobs; thus, the cost of each job to the consumer was close to Can$200,000. Assuming a strongly oligopolistic market, the estimated cost of the VER to Canadian consumers more than quadruples, to Can$913 million. In this respect, comments in the study concerning the effect of the auto-pact are noteworthy: the limitation of the auto-pact benefit to manufacturers is considered to be partly responsible for imperfect competition in the Canadian market, as evidenced by the fact that Canadian prices for automobiles are not directly related to their actual costs. The observed deviations between prices of similar products in Canada and in the United States result from differences in emission control equipment, limits on large-scale arbitration by retail and franchise contracts, and a prohibition of used-car imports into Canada.

In France, the impact of the VER was also estimated to be substantial, although it was limited by the substitution of cars imported without restriction from other EC members for Japanese vehicles. The OECD study assumed that the restraint had been binding since the early 1980s, but a more recent study,¹⁹³ found that the restraint only became binding in 1984. Thus, the increase in Japanese prices between 1981 and 1983 was apparently motivated by quality upgrading. From 1984 on, the prices of Japanese imports were higher than they would have been without the VER; the consumer loss was limited to F 320 million; the increase in French production owing to the restraint was 5,000 units to 10,000 units and only 300 jobs were saved.

In the United Kingdom, the OECD study found that the VER had effects similar to those reported for other countries. However, a number of other factors could have contributed to the high U.K. car prices.¹⁹⁴ Multinational producers have long had a large share in the U.K. industry, and their pricing behavior is not determined solely by their production costs in the United Kingdom. The penetration of European producers is significant, and the price increases observed in Japanese car imports are similar to those of their European competitors. The impact of the VER on the structure of the U.K. automobile industry may have been wider than indicated by the estimates in Table A67. According to the OECD study, the large inroads the Japanese would have made without the VER would probably have led to the bankruptcy of British Leyland; however, mismanagement and failure of the 1975 restructuring plan may well have been avoided had competitive pressures been maintained. The direct costs to consumers, while difficult to estimate, may have been substantial, given that several cash injections were necessary to support British Leyland and Chrysler U.K. between 1975 and 1986.

Recent Trade Trends

The shipbuilding sector has suffered from overcapacity since the second half of the 1970s. Although world trade volumes have recovered since the international recession following the oil shocks, this recovery was not accompanied by an increase in world seaborne trade. Hence, demand for new ships has remained low and the competition for orders available has been intense. World production and prices have been depressed in recent years. In 1987, production fell by 18 percent to 9.9 million gross register tons, equivalent to slightly over half the level of production in 1976 (Table A68). Total new orders also continued their declining trend in 1987 (Table A69).

As a result of shifts in comparative advantage, Japan, Korea, and other new suppliers from developing countries have improved their competitive positions compared with traditional producers in Western Europe. The share of the European Community in total world production has declined sharply, from about 31 percent in 1976 to 19 percent in 1987. The share of Japan, the world’s leading producer, has fluctuated between 37 percent and 47 percent of world production during 1976-87, while that of non-OECD countries has more than doubled (from 13 percent in 1976 to 32 percent in 1987). Among the latter, Korea has witnessed a dramatic expansion in production over the past decade and is currently the second largest producer.

The shipbuilding sector is characterized by extensive government subsidies and aid programs—the chief means of support for this sector—as there are few trade restrictions, considering the difficulty of implementing border measures.

Under the auspices of the OECD Working Party on Shipbuilding, industrial countries are coordinating their efforts to modernize operations, reduce installed capacity, promote structural adjustment, and reduce and rationalize government aids to this sector. OECD guidelines aim gradually to reduce aid measures that distort trade and discourage capacity adjustment (such as national aids, subsidized export credits, and discriminatory procurement practices).

Over the period 1976-86, physical capacities have been reduced by 50-60 percent in the EC and the Nordic countries, and by 35 percent in Japan (in compensated gross tons). Nevertheless, under current depressed market conditions, capacity in OECD countries remains excessive. In addition, overproduction of ships has depressed freight rates.

Although the short-term outlook for this sector is not bright, it is generally believed that demand for ships may revive in the early 1990s, as a number of commercial fleets are due for replacement. Even so, the world order book may rise to only slightly more than half the 1976 level. Moreover, given the volatility of the oil market, forecasts of market prospects are fraught with uncertainty.

European Community

The Community’s shipbuilding sector has had to adapt to reduced demand, intense international competition, and changing technology. Despite the sharp fall in capacity and employment that has taken place over the past decade, the Community’s shipbuilding industry continues to face severe problems. The Community recognizes that these problems are structural rather than conjunctural, and recognizes the need to reduce overcapacity further; however, because shipbuilding is the only industry in some regions, for social reasons the Community considers that this reduction cannot take place too rapidly. State aids are therefore permitted, subject to Community directives.

The European Commission has estimated that a further reduction in capacity (by one third from its 1985 level) is required, implying a greater than commensurate decline in employment as productivity improves. Such a reduction would enable the remaining installations to operate at 70 percent of available capacity during 1987-90, with the possibility of resuming an 80 percent capacity utilization rate thereafter. The Commission has forecast a loss of more than 30,000 jobs in the shipbuilding sector before the end of 1990.

The Community has also attempted to rationalize and reduce government aids to shipbuilding. The Fifth Directive on aid to shipbuilding (1981-86) established a Community discipline on direct and indirect state aids. It was aimed at preventing distortions in competition that may result from uncontrolled state intervention and ensuring that public aid supports restructuring. Implementation of this directive succeeded in rationalizing aids and making them digressive, but full transparency was not achieved, particularly for indirect aids such as aid to shipowners.

The Community’s Sixth Directive (1987-90) on aid to shipbuilding uses a market-based approach to bring about the desired restructuring and reduction in capacity. This policy is designed to induce shipyards to adapt to market requirements and to bring about a concentration of shipbuilding in the most viable yards, with a production mix oriented toward specialty ships with an advanced technological and engineering content. Toward this end, government aid is limited to 28 percent of the contract value. The ceiling includes all direct and indirect aids but excludes development assistance (grants, loans, and mixed credits); for export credits, only the margin below the OECD consensus rate is counted against the ceiling. In determining the ceiling, account is taken of the extent of the gap between international prices and the costs of the most competitive firms in the Community. The ceiling is to be reviewed annually, and is expected to be reduced over time as Community shipyards become internationally competitive. State aid to investment may be granted only in support of restructuring plans that reduce capacity. Aid may be used to defray the cost of closure (such as payments to redundant workers or yard redevelopment), but it must be commensurate with the extent of restructuring. The Commission expects that shipyards that are lagging in adapting to market conditions cannot be maintained on heavy government subsidies under the new policy.

The Commission recognizes that the implementation of the new directive will cause substantial difficulties for areas that are heavily reliant on shipbuilding and that have already suffered shipyard closures; in July 1987 it proposed a program to help develop new job opportunities in these areas. It has also proposed Community financial support for national measures to benefit workers made redundant by restructuring; such assistance could take the form of early retirement or retraining.

The Community has emphasized that the success of its new approach on state aid will also depend on cooperation by Japan and Korea to contain capacity and refrain from expanding their shares in the world shipbuilding market. The Commission in March 1988 adopted the broad outline of an external policy for shipbuilding that aims at re-establishing a healthy international market by seeking, in conjunction with the main producing countries, to stabilize trade, reduce capacity equitably, maintain normal prices, as well as transparency in prices, support, and financing. The Commission is engaged in exploratory talks on these matters with Japan and Korea and will seek formal negotiating directives from the EC Council. The aim is to arrive at a “sectoral arrangement on production” by the end of 1988, which should be backed up by measures to restore prices to a level that will help cover the operating costs of Community shipyards and enable a reduction in aids and capacities.

If the proposed arrangements do not materialize, the Commission will consider introducing a mechanism for a levy on every loading or unloading in a Community port of a ship purchased from Japan or Korea, provided that the ship was sold at “abnormal” prices (i.e., on general conditions of sale that are prejudicial to Community shipyards).

Japan

Owing to the severe recession in this sector, 1987 was a difficult year for the Japanese shipbuilding industry. New orders dropped by 15 percent in 1987, following a steady decline in the past several years. The short-term prospects are not encouraging.

To rationalize the industry, Japanese shipbuilders adopted adjustment programs to reduce capacity from 9.8 million compensated gross register tons in 1972 to 7.2 million in 1985, and to monitor the operation of shipyards with the help of ceilings on production. Despite these efforts, the industry continues to suffer from a structural recession owing to the continued sluggish trend in seaborne traffic of main cargoes, a resultant decline in ship demand, the rise of new competitors (particularly Korea), and the decline in competitiveness as a result of the appreciation of the yen.

The Council for Rationalization of Shipping and Shipbuilding Industries, an advisory panel to Japan’s Ministry of Transport, advocated closing surplus shipbuilding facilities and restructuring the industry, which is currently affected by fragmentation and overcompetition. The Council recommended reducing berths or docks by at least 20 percent of installed capacity and integrating businesses through capital, business, and other tie-ups. On the basis of these recommendations, the Government promulgated a management stabilization law in April 1987. Under this law, more than 20 percent of installed capacity was to be scrapped, and some medium-sized shipbuilding companies with only one berth or dock were to withdraw from the shipbuilding business. The Government supported these measures by providing loan guarantees and purchase facilities. As a result, a reduction in capacity by 24 percent (in compensated gross tons) was made within a year of promulgating the law.

In addition to 7 major builders, 44 firms in Japan are equipped with docks capable of constructing vessels of more than 5,000 tons. To encourage reorganization among shipbuilders and cuts in their surplus capacities, Japan’s Fair Trade Commission authorized formation of a “cartel” of the 33 top-ranking Japanese yards. This cartel was intended to help limit production in fiscal year 1987 to 3.3 million compensated gross register tons and in fiscal year 1988 to 3.1 million tons (about half of construction capacity).

The appreciation of the yen and competition from Korea are exacting considerable pressures on Japanese builders. In the past, they had occasionally accepted foreign orders at very low profit margins or at below costs to keep their yards operating, but the appreciation of the yen has made it difficult to continue this practice. The Shipbuilders Association of Japan has estimated that the break-even point for its members is about ¥ 200 per U.S. dollar.

Korea

In the past decade, Korea has rapidly built up its shipbuilding sector and is currently the second largest shipbuilding country. Korea has enjoyed a significant price advantage owing to both low labor costs and an efficient steel industry. In the 1980s, Korea’s shipbuilding industry, which is heavily dependent on export production, has suffered a slowdown as a result of the long-term recession in the world marine transportation industry. In 1986 the industry began to show signs of recovery as new orders increased substantially. The increase was due mainly to a shift in demand away from Japanese-made ships following the rapid appreciation of the yen. According to a study made by the Korean Development Board, the yen’s appreciation has given Korean-made ships a 25 percent price advantage over ships built in Japan.¹⁹⁵ The expansion in orders is mainly for tankers; shipowners have recently been taking advantage of the very low shipbuilding prices to meet the rising demand.

In 1987 new orders declined somewhat, but they were still higher than in 1985, with some improvement in prices. Despite the upswing in the past two years, the Korean shipbuilding industry faces a number of problems: increasing labor disputes and a deterioration in the financial position of shipbuilding companies; at end-1986 debt stood at $105 million. A structural problem is the concentration of production on lower-value ships. Technologically, Korea remains far behind Japan, its main competitor, because technological transfers have been limited, and Korea’s own research and development activities have not been sufficient to fill the gap. Also, Korea’s industry is heavily dependent on imported intermediate goods, and since most of these come from Japan, the appreciation of the yen has not been wholly beneficial. Moreover, lower-wage countries, such as Brazil, China, Taiwan Province of China, and perhaps India, may well become major competitors in the 1990s.

The EC has been concerned about possible subsidization and dumping by Korean shipbuilding firms. While little concrete evidence of such practices exists, the concern is related to a lack of transparency in the Korean shipbuilding industry owing partly to the industry’s ownership structure. Some of Korea’s shipyards are owned by conglomerates that also own banks and other manufacturing establishments. A breakdown of group turnover is not available in some cases. In an industry beset with international price wars, Korea’s low prices have caused considerable competitive pressure for OECD members and have sometimes generated suspicions of dumping.

In November 1986, OECD Working Party No. 6 of the Council on Shipbuilding established a liaison arrangement with Korea for the exchange of information. The Community has increased contacts with Korea (and Japan) to evaluate market trends. Pursuant to an agreement made two years ago with Japan, Korea has undertaken to end installation of new capacity in exchange for receiving technological know-how.

Recent Trade Trends

The share of electronic products in total world trade in manufactures has increased steadily, from 8 percent in 1980 to 11.5 percent in 1986. World exports of electronic products expanded by nearly 21 percent to $164 billion in 1986, owing in part to exchange rate and price developments. Led by continued growth in demand for automatic data processing equipment (which includes computers), the industrial countries’ exports of electronic products increased in 1986 by almost 21 percent to $131.5 billion (Table A70). At this level they constituted 12 percent of their total exports of manufactures. Exports from the European Community and Japan grew by some 28 percent and 25 percent, respectively, while U.S. exports expanded by about 6 percent. The exports of the four major developing economies in Asia—Hong Kong, Korea, Singapore, and Taiwan Province of China—grew by 33 percent, and these countries gained significant market shares, especially in standardized consumer electronic products.

The imports of electronic products by industrial countries rose by about 21 percent in 1986 to almost $126 billion. Of these imports, the EC accounted for nearly half, the United States for about a third, and Japan for somewhat less than 4 percent. The EC share is large because its imports are concentrated in the fast growing area of automatic data processing equipment, whereas those of Japan and the United States are diversified. Imports by the four major Asian developing economies grew by about 31 percent, in part because of significant increases in imports of computers and electronic parts by Korea and Taiwan Province of China.

A characteristic of the sector is that many countries perceive elements of it, particularly microelectronics, to be of strategic importance to their economies, with the result that government intervention to support national producers has increased. Thus, the EC and the Governments of France, the Federal Republic of Germany, Japan, the United Kingdom, and the United States have undertaken funding of projects in microelectronics; state support for the electronics industry is also important among such developing country producers as Brazil and Korea. Further, the use of export restraint arrangements has grown, notably in the areas of consumer electronics and numerically controlled machine tools.

Trade disputes in the electronics sector have increased. The most prominent of these disputes gave rise to a finding of dumping by the U.S. International Trade Commission (USITC) against a number of Japanese semiconductor producers. Antidumping duties were not imposed, with the matter being initially resolved by the conclusion of the Japan-U.S. Arrangement Concerning Trade in Semi-Conductor Products in September 1986.

Under the terms of the arrangement, Japan was to (a) improve access to its domestic market for foreign semiconductor producers on a most-favored-nation basis; and (b) prevent sales of Japanese semiconductors at less than fair value, both in the United States and in third countries. However, U.S. complaints continued, focusing on charges of Japanese dumping in third markets as well as on the perceived slow liberalization of the Japanese market. This led the U.S. Administration to impose, in April 1987, a 100 percent ad valorem tariff on $300 million of U.S. imports of certain electronic products from Japan. Subsequently, in June and November 1987, the duties were rescinded on $136 million of these imports because, in the U.S. view, Japanese companies had eliminated their “unfairly low pricing” of certain semiconductors in global markets.

The EC contested the conformity of elements of the arrangement with GATT rules. A GATT dispute panel was established in April 1987 to investigate the EC complaint and concluded, inter alia, that the arrangement entailed restrictions, through the Japanese implementation of price monitoring, on exports to non-U. S. markets that were inconsistent with the GATT. The GATT Council of Representatives adopted the panel’s report in May 1988, and Japan has undertaken to implement its recommendations concerning third-country market monitoring.

United States

In July 1987, Korea restricted shipments to the U.S. market of several electronic products, including video-cassette recorders and color and black and white television sets. Korea announced that the measure was initiated in response to sensitivities in the United States resulting from the debate over trade legislation. With respect to machine tools, including numerically controlled machine centers and punching machines, Japan and Taiwan Province of China agreed to limit their exports to the United States for a five-year period beginning in January 1987. In the absence of similar agreements with the Federal Republic of Germany and Switzerland, the United States announced that it would monitor their machine tool exports to the United States, and that the President would be prepared to take unilateral action under U.S. trade law if exports are in excess of those consistent with national security.

In November 1987, the United States announced that it would retaliate against a wide range of Brazilian exports unless Brazil reconsidered its 1984 ban on foreign companies from the Brazilian computer market when the product has an equivalent manufacture in Brazil. Following proposed Brazilian regulations to liberalize access to its computer market, the U.S. decision on retaliation was postponed.

In 1988, the U.S. Congress included in the Department of Defense Authorization Bill a $100 million grant to a consortium to conduct research and development on advanced semiconductor manufacturing techniques. The consortium is expected to complete its work in 1993 and to receive annual aid of $100 million. Also in the area of semiconductors, a U.S. company recently concluded a licensing agreement with a Korean manufacturer of data storage chips, after the USITC had found patent infringement by the Korean firm and had proposed an import ban on its product. The President rejected the ban, partly on the grounds that it would have required all importers of items containing data storage chips to determine the type and source of the chips in the product; instead, he proposed a ban covering a narrower range of products.

The United States maintains, for national security reasons, certain restrictions on the exportation and transfer of high technology to certain destinations.

European Community

In 1984, the Community launched the ten-year European Strategic Program for Research and Development in Information Technology to promote increased cooperation in research and development between electronic industries, universities, and research laboratories in EC member states. The program has a first five-year budget of ECU 1.5 billion, half of which is provided by the Community. The EC also funds an ECU 0.5 billion project to set common EC standards for segments of the telecommunications industry. Several initiatives have been made by member states, including a French plan to strengthen research in its electronics sector, a German program on microelectronics application of DM 500 million, and an advanced information technology research plan in the United Kingdom.

In mid-1988, some 16 arrangements limited exports of electronic products, including certain machine tools, to the EC or its member states,¹⁹⁶ compared with 9 such arrangements in early 1985, suggesting that pressures for protection in the area remain high. Japan monitors its exports of numerically controlled lathes and machine centers as well as color television sets and tubes to the Community market, and it limits its exports of video tape recorders to that market to 1.7 million units a year. Korea restrains its exports of videocassette recorders to the EC to 1985 volume levels, or below, while the Community conducts a posteriori surveillance on its imports of Korean video tape recorders. In addition, a number of individual member states separately protect their markets; for example, imports of color television sets from Japan to France are limited to 84,000 units a year.

In April 1988, the EC imposed antidumping duties on certain electronic typewriters and scales made by Japanese-affiliated, EC-based companies substantially using parts imported from Japan. The duties were imposed under the June 1987 EC extension of its antidumping legislation to include the products of assembly (screwdriver) plants, which the EC claims were set up to circumvent existing antidumping duties. In this instance, the Community had imposed antidumping duties in 1985 on imports of some Japanese typewriters and scales. Japan has protested the duties in the GATT Committee on Antidumping Practices (see Section IV and Appendix I). The Community maintains antidumping duties on imports of certain Japanese photocopiers and has recently initiated antidumping investigations on some Japanese semiconductors, on certain cellular mobile radio telephones from Canada and Japan, and on Korean television sets and tubes, microwave ovens, and video tape recorders.

Japan

Recent government-funded initiatives to promote research and development in the Japanese electronics sector include (with the duration of the programs in parentheses) the Supercomputer Project (1982-90), the Optoelectronics Project (1980-91), and the New Function Elements Project (1982-89). Total funding for the projects by the Japanese Ministry of International Trade and Industry is estimated at ¥ 66 billion. The results of the projects, in which the leading Japanese manufacturers participate and cooperate, become the property of the Government and can be made available on a nondiscriminatory basis to other Japanese and foreign firms.¹⁹⁷ In addition to research funding, producers in Japan, including locally based foreign firms, are eligible for loans from the Japan Development Bank.

Some countries suggest that Japan has “targeted” the electronics sector, particularly by concentrating resources at the Government’s direction, to gain dominance in certain markets, especially semiconductors. Japan’s response is that the role of government is largely consultative, and limited mainly to fostering research and development (as is the practice in many other countries), and to creating an environment conducive to vigorous private sector activity. It is also sometimes thought that Japan prices its electronic products according to expected long-run costs; these costs, once economies of scale are in place, are likely to be lower than present costs. Partly as a result of this, a number of dumping investigations and duties have been made on Japanese products by the EC and the United States (as noted above).

United States

Between 1983 and 1986, U.S. footwear consumption volume increased rapidly, by an average of 9 percent a year. This high growth rate was entirely accommodated by imports, which grew on average by more than 17 percent a year. Domestic production, faced with cost-efficient competition from developing countries, declined by more than 10 percent a year during the same period. In 1987, consumption and production decreased moderately, while imports remained stable in volume terms. Indications are that, owing to the depreciation of the dollar, imports will decline sharply in 1988 while domestic production will increase. Korea and Taiwan Province of China are the two largest suppliers, and since 1983 their share in total imports is close to 60 percent. Other important suppliers are Brazil and Italy. China increased its share from almost nil in 1981 to 5 percent in 1987.

The penetration of foreign producers in the U.S. market is mostly a result of the large, long-standing gap between costs of imported and domestic footwear. However, the vulnerability of the domestic industry increased in the first half of the 1980s owing to the appreciation of the dollar and to the removal of protection granted in the past. After the expiration of the orderly marketing arrangements with Korea and Taiwan Province of China in 1981, countervailing duty orders on imports from Brazil, India, and Spain were revoked in 1983. In that year, as well as in 1984, the industry’s petitions for import relief were rejected. In 1985, following the 1984 Trade and Tariff Act modification of Section 201 of the 1974 Trade Act, the USITC instituted another escape clause investigation and subsequently recommended a five-year quota on imports of nonrubber footwear. The Federal Trade Commission estimated that the quota would save 26,000-30,000 jobs at a cost of $50,000-80,000 a job, while the average annual wage in the sector was about $14,000. On this basis, it recommended adjustment assistance rather than import restrictions. In addition, the European Community and other trading partners threatened to retaliate against the proposed quotas. In view of these factors, the President refused to impose quotas or other trade restraints on footwear, but instead authorized the development of an adjustment and retraining program for workers in the shoe manufacturing industry. In 1986 and 1987, the industry was unsuccessful in its efforts to obtain legislation aimed at a freeze on imports of nonrubber footwear. However, Korea is said to have applied a restraint on its exports to the United States in 1987.

European Community

The Community’s apparent consumption of footwear grew slowly in volume terms during 1983-85, but production and exports increased, and import penetration was contained at about one third of the domestic market (Table A71). Employment decreased to 291,000 jobs in 1985 from 311,000 jobs in 1983.

Buoyant domestic demand and the depreciation of the U.S. dollar brought a reversal of these trends in 1986 and 1987. The increase in consumption (4 percent in 1986 and 6 percent in 1987) was entirely satisfied by imports that surged by 41 percent in the two-year period and brought the import penetration to over 42 percent in 1987. Production declined in 1986-87 owing to the reduced competitiveness of EC relative to East Asian manufacturers, and exports dropped by about 25 percent over the two years. Portugal and Spain were less adversely affected than other Community members because their producers were fairly competitive and were still benefiting from their new access to EC markets. In 1986, the main economies exporting footwear to the EC were China, Hong Kong, Korea, and Taiwan Province of China.

The deteriorating trade trends strongly increased protectionist pressures in the EC and led to a multiplication of requests for safeguard measures. France and Italy, soon followed by Greece and the United Kingdom, requested the Community’s authorization to impose restrictions on footwear imports. In the EC’s view, an undervalued Korean exchange rate was a major cause of the difficulties faced by the Community’s footwear industry. The lack of homogeneity of the footwear industry within the EC was also a factor: Italy, for instance, has 9,000 medium- or small-sized companies presently operating in the leather and footwear industry. Although the Commission was attempting to encourage automation via its Strategic Program for Innovation and Technology Transfer and its Basic Research in Industrial Technologies for Europe research programs, the restructuring process was complicated. Consequently, the Community allowed Italy to impose quantitative restrictions on imports from Korea and Taiwan Province of China, conditional on the industry improving its structure by introducing new technologies, France was authorized to abstain from applying Community treatment (that is, free trade flows within the Community) to footwear originating from Taiwan Province of China. The legislation permitting retrospective control of imports of footwear into the Community from state-trading countries and China was extended at the end of 1987 for one more year.

A series of VERs were also agreed. Korea, with which some industry-to-industry arrangements had existed since 1982, agreed to limit its exports of shoes to Italy to 12.6 million pairs in 1988, with a 5 percent annual growth in its exports until June 1990. Taiwan Province of China entered into gentlemen’s agreements with France and the United Kingdom for 1985-87. Previously, China had agreed to a voluntary limit of its exports of slippers and sandals to France. The European Commission expected that these national restrictions could be replaced by Community-wide safeguard measures as the internal market was opened.

The Community’s exports face barriers in third countries: Japan, for example, imposes a tariff quota of 3 million pairs, with a within-quota duty of 20 percent. Counterfeiting of finished products and of the design of molds used in shoe manufacture is also frequently encountered by French, German, and Italian manufacturers. Competition in third markets, particularly the United States, is becoming fiercer with the development of EC manufacturers’ investments in Indonesia, Korea, and Thailand, and with the increase of joint ventures with Asian competitors.

Canada

From 1977 to 1985, Canada maintained global quotas on imports of certain footwear. Following the recommendation of the Canadian Antidumping Tribunal, the Government ended import quotas effective November 30, 1985 on all categories of shoes, except women’s and girls’ dress shoes and casual footwear. On these items, quotas are being phased out over a three-year period that started December 1, 1985, by increasing the quota level by 6 percent, 8 percent, and 10 percent, respectively, a year. However, Korea and Taiwan Province of China are at present maintaining unilateral export restraints, which have probably contributed to averting a surge of imports in recent years. Italy and Spain rejected export restraints.

Australia

Since the beginning of the 1970s, Australian imports of footwear have been regulated by import licensing schemes. These were replaced in 1980 by tariff quotas sold, in part, by tender. In 1982, a seven-year assistance program for the textiles, clothing, and footwear sectors was introduced. It allowed for a modest amount of trade liberalization through an annual expansion of the quota that was larger than the market expansion.

In 1986, a new seven-year plan for textiles, clothing, and footwear, to begin March 1,1989, was announced. It provided for the phasing out of the import quota system by 1996 through a gradual reduction in the rate of penalty applying to imports outside quota. The rate of duty applying to within-quota imports would be increased for footwear to 50 percent, for footwear components, 40 percent, and for clothing, 60 percent. These rates will apply once the plan makes quotas redundant in March 1996. At the same time, the plan provided for the progressive sale of quota by ad valorem tender so that by March 1, 1992, all quotas would be allocated in that manner. These measures will be accompanied by four programs at a total cost of $120 million over the period. They aim at developing the textiles, clothing, and footwear industries by encouraging raw material processing, raising industry efficiency, enhancing the skill base of workers, and promoting exports. Measures designed for retraining workers and for regional assistance are also included in the plan. However, owing to a decision made recently by the Australian Government to reduce tariffs across the board, the textile, clothing, and footwear plan will be modified, with lower tariff endpoints for clothing and footwear.

Recent Trade Trends

World trade in civil aircraft is strongly cyclical: after increasing from 197 units in 1976 to 754 in 1979, orders for new commercial jet aircraft declined sharply until 1982, when they reached 87 units. New orders recovered during 1983-85 to about 300 units a year, and surged in 1986 to 724 orders. Trade was mostly concentrated in three companies: Boeing, whose market share has declined to 50-60 percent, from 70 percent on average during the period before 1980; McDonnell Douglas, which lost market share in the 1970s but regained about 30 percent in the 1980s; and Airbus Industrie, which only entered the market in the mid-1970s but quickly reached a 15-25 percent share (Table A72). Owing to the aging of several airline fleets, current orders for civil aircraft are large. The division of these orders among the three major producers will likely affect the industry for the next several years.

Airbus Industrie is a consortium formed in 1966 by France, the Federal Republic of Germany, Spain, and the United Kingdom, and involves one company from each country (namely, Aerospatiale, Messerschmitt-Boelkow-Blohm, Construcciones Aeronauticas, and British Aerospace). Its success, and later the pressures that its development implied for other market participants, generated a debate between the United States and the European Community concerning support provided by the European Governments, its funding, the subsidy element of its export credits, and, more generally, the rules that should govern trade in civil aircraft. These issues were abated after agreement on some guiding principles for trade in civil aircraft was reached in 1979 during the Tokyo Round negotiations. The debate was revived in 1987 with the development of new generations of commercial jetliners and greater pressure resulting from competition for new orders.

Institutional Framework

Trade in civil aircraft is governed by the Tokyo Round Agreement on Trade in Civil Aircraft. While recognizing the specific characteristics of trade in civil aircraft and its importance as a component of economic and industrial policy, the agreement aims to (i) achieve maximum freedom of trade in civil aircraft, parts, and related equipment, and (ii) eliminate the adverse trade effects of government support of such activities. The main provisions of the agreement are as follows. First, all customs duties and other charges levied on civil aircraft in the course of their manufacture, repair, maintenance, modification, or conversion are to be eliminated. Second, it attempts to lay the basis for the regulation of state intervention in the civil aircraft industry. Article 3 of the agreement states that the provisions of the Agreement on Technical Barriers to Trade apply to trade in civil aircraft. Article 4 stipulates that purchasers of civil aircraft should be free to select suppliers on the basis of commercial and technological factors.¹⁹⁸ Further, signatories are prohibited from applying’’unreasonable pressures” on airlines or others engaged in the purchase of civil aircraft to purchase from any particular source that would discriminate against foreign suppliers. Article 6 states that while special factors should be taken into account in the aircraft sector, the provisions of the GATT Agreement on Subsidies and Countervailing Measures are applicable. Finally, Article 8 established a Committee on Trade in Civil Aircraft, which is responsible for reviewing the implementation and the operation of the agreement. In 1981, an addendum to the OECD consensus on export credits was signed by France, the Federal Republic of Germany, the United Kingdom, and the United States to raise the minimum interest rate charged for government loans in support of commercial aircraft exports to 12 percent and to limit loan terms to ten years.

The Airbus Dispute

In March 1987 the United States, after unsuccessful bilateral discussions with the European Community, filed a complaint to the GATT Committee on Trade in Civil Aircraft on the grounds that Airbus Industrie had since its creation received $10 billion in subsidies, and that these subsidies had allowed the company to sell below competitive prices. European countries argued that support had been provided to Airbus Industrie in the form of “reimbursable advances,” repayment of which depended on the sales realized. However, figures for reimbursable advances were considered confidential. They also added that Airbus competitors had received indirect aid from the U.S. Government in the form of defense contracts and research and development support; the total subsidies received by U.S. companies were estimated by an Airbus Industrie study to be $23 billion. The United States, for its part, claimed that the EC also provided indirect support for Airbus.

Outside observers have made various comments on the role of subsidies in Airbus development and on the justification for such subsidies. It was pointed out¹⁹⁹ that Airbus’s initial success was due in large measure to the fact that the original A300 series (aircraft designed specifically to fly medium to short hauls) had at the time of their launching filled a void and, in comparison with other models, involved limited exploitation costs. Moreover, the act of subsidizing Airbus was defended by some economists on the grounds of efficiency, because its existence was necessary to avoid the inefficiencies that might prevail if the market was reduced to a duopoly.

Multilateral discussions by the GATT Committee on Trade in Civil Aircraft failed to resolve the dispute because participants could not reach a common understanding of the 1979 Agreement, in particular concerning the appropriate use of subsidies. Discussions subsequently resumed among representatives of the United States, the European Community, and the four states, following a ministerial meeting in October 1987 that provided a mandate for the parties involved to define disciplines on the role of government support in aircraft production and to formulate rules concerning transparency to ensure that disciplines are enforced. Following a second ministerial meeting in March 1988, an agreement was close to being reached on the following: future government aid to Airbus would be granted only for research and development and not for production; negotiations should encompass direct and indirect aid; any final agreement would include a clause allowing governments to step in with assistance when companies faced unforeseeable financial troubles; a consultation method would be set up and other countries would be invited to adhere to the final U.S.-EC accord. The unresolved areas comprised the terms and conditions of government support, the degree of transparency for direct and indirect support, and the commercial business practices to be considered acceptable. Recently another major point of disagreement emerged. Owing to the depreciation of the U.S. dollar (in which aircraft are invoiced), a proposal referred to as the “dollar clause” has been made by the European Governments that would allow these Governments to compensate Airbus Industrie for losses resulting from exchange rate changes. The United States has opposed this proposal because it would, in effect, insulate Airbus Industrie from market forces.

Other developments may affect the outcome of the negotiations. The consortium partners have recently decided to restructure Airbus management and to improve the transparency in its operations by a holding company that will own the four European companies’ facilities presently used by the consortium and that will have a supervisory board, a global accounting system, and an independent financial department. The possibility of collaboration between Airbus and McDonnell Douglas on a long-range airliner project is also being discussed. Such collaboration might defuse possible disputes between McDonnell Douglas and Airbus that could result from the small market in which the MD11 (presently being developed by McDonnell Douglas) and the A340 (presently being developed by Airbus) will soon compete. The European Commission also unveiled plans to spend ECU 60 million on subsidizing cross-border collaborative research in aircraft technology between 1989 and 1991. These plans, however, were met with reservations by some European countries, fearing that they may appear as new Airbus subsidies. Finally, discussions between the German Government and Daimler-Benz, which may buy Messerschmitt-Boelkow-Blohm if protection is provided against future Airbus losses related to exchange rate variations, have highlighted the importance of the “dollar clause.”