This paper contains further work by the Fund staff on trade issues and developments following the pattern of the surveys prepared in 1978 and 1981,¹ mainly focusing on commercial policies of the major trading nations. It also includes a discussion of agricultural protection and issues relating to international trade in agricultural products.

The paper, rather than describing all trade policy developments in detail, highlights developments that illustrate the nature of current issues and problems in the trade field. It draws in part on information obtained by regular Fund missions and in part on published and unpublished data made available by national authorities and regional and international organizations.

In addition. Fund staff teams have had the benefit of discussions with various official agencies. To collect information and obtain data for the paper, a Fund staff team held discussions with U.S. trade officials in Washington in March 1982. Staff teams visited Ottawa, Canberra, Wellington, and Tokyo in May–June 1982 to hold discussions with trade and other officials of Canada, Australia, New Zealand, and Japan. Discussions were held in May in Paris, Brussels, and Geneva with officials of the Organization for Economic Cooperation and Development (OECD), the Commission of the European Communities, the General Agreement on Tariffs and Trade (GATT), and the United Nations Conference on Trade and Development (UNCTAD).²

Section II discusses trade trends and the economic setting of recent policy developments. Sections III and IV describe the main developments in industrial and agricultural trade policy. The final section discusses the main features in the recent evolution of the international trading system. A more detailed account of developments affecting the international framework for the conduct of agricultural trade, an explanation of GATT classifications, and statistical tables are included in the appendices.

Trade Trends and Economic Setting

During much of the period after World War II and up to 1973, world trade grew rapidly, aided by the significant trade liberalization achieved in successive rounds of trade negotiations. The world economy became increasingly integrated, as the growth of trade outpaced the growth of production. In the period since 1973, global trade volumes have been erratic, the growth of trade has slowed considerably, and the pace of integration has stabilized. Between 1963 and 1973, world output (excluding construction and services) rose by 6 per cent annually, while the volume of world exports increased by 8½ per cent annually. During 1974–80, when world output growth fell by half to only 3 per cent, the world export expansion rate also halved to some 4 per cent. By 1981, when output grew by only 1 per cent, world trade stagnated. Export performance has differed widely between and within broad country groupings. For example, exports of low-income developing countries grew during the 1970s at only one fifth of the rate of the 1960s, even though exports in the developing countries as a whole continued to grow relatively well.

A major problem facing the world economy is a substantial underutilization of resources. The unemployment rate in seven major industrial countries, which averaged just over 3 per cent in 1963–72, increased to 5½ per cent in 1975–76. Unemployment became less severe over the next three years, but then it rose again, exceeding 6½ per cent in 1981, with a further increase to some 7½ per cent projected for 1982. Capacity utilization is generally low, and employment opportunities have been eroded severely in some industrial sectors.

The groups threatened by import competition tend to be the traditional industries, where political influence is relatively well developed. On the other hand, those hurt by protectionist policies, including consumers and taxpayers, have not influenced policy as actively. Consequently, the current economic difficulties have increased pressures on governments to adopt protective policies to maintain employment by supporting ailing industries or erecting trade barriers. In some sectors, such as engineering products, a liberal trading environment has nonetheless permitted relatively rapid trade expansion.

In sectors facing difficulties, investments in the importing country by the foreign investor may offer employment opportunities where they would otherwise be threatened by import competition; in such cases, it would be relevant to assess to what extent the investment inflows are induced by protection in the importing country. While finished products were being increasingly restricted, investment flows may have served to encourage international trade in semifinished products and components. In certain instances, investment flows affected by trade policy considerations may have led to inefficient allocation of resources.

The recent pressures for protection sometimes have been attributed to exchange rate developments. Some exchange rates have continued to diverge from levels consistent with the underlying economic fundamentals; their consequent trade effects have encouraged protectionist forces in certain countries experiencing trade deficits to demand trade restrictions on a bilateral basis. Furthermore, the increase in exchange rate instability (overshooting or undershooting of exchange rates from their long-term equilibrium levels) and variability (erratic short-term fluctuations) is said to have led to severe problems at the microeconomic level by impeding rational long-run business policymaking, entailing high hedging costs, and shifting competitive positions significantly and abruptly to an extent that threatens the survival of small firms. Finally, it is sometimes contended that trade liberalization is less important under a floating exchange rate system than under fixed exchange rates because the effects of arduously negotiated tariff concessions are likely to be swamped by large exchange rate changes.

The importance of exchange rates that reflect economic fundamentals has long been recognized and has been discussed by the Fund staff in the context of Fund surveillance over members’ exchange rate policies.³ At the economic summit meeting in Versailles in June 1982, the leaders of seven industrial countries agreed to work toward greater stability of the world monetary system. They recognized that the maintenance of the internal and external values of currencies “rests primarily on convergence of policies designed to achieve lower inflation, higher employment, and renewed economic growth.” They expressed their determination to achieve greater stability in close collaboration with the Fund and to strengthen the Fund’s surveillance.

Although exchange rate developments may have encouraged protectionist pressures, application of trade restrictions or other protectionist policies would only worsen the underlying problems by reducing economic efficiency; exchange rate developments do not justify bilateral, sectoral, or restrictive approaches to trade policy. Such actions would implicitly assume that there is a given level of the exchange rate which would narrow bilateral trade imbalances and ensure competitiveness of all sectors of the economy. While a given exchange rate, or change in the exchange rate, is the same for all sectors and firms in the economy, its impact on the individual firm’s competitive position will differ according to the firm’s initial profitability position, supply elasticity, etc. Moreover, tariff and nontariff barriers affect not only the level of protection but also the structure of protection, and they have direct, industry-specific resource allocative effects. Consequently, exchange rate changes and trade liberalization are not offsets to each other. Protectionism is not a viable solution to the problems arising from inappropriate exchange rate levels or exchange rate instability; it is likely to lead to a misallocation of resources, to slow the pace of necessary structural adjustment (particularly in the case of ailing industries), and to invite retaliation in other countries. Indeed, protectionist measures tend to perpetuate inappropriate exchange rate levels.

Main Trade Policy Developments

The rise in protectionist pressures is worrisome, because the likelihood of chain reactions toward a protectionist “vicious circle” that can be generated by individual restrictive actions is greatest in a setting of slow economic growth and highly interdependent economies. Two broad developments are of particular concern. First, with the conclusion of the Tokyo Round of Multilateral Trade Negotiations (MTN) in 1979, the momentum toward trade liberalization that had been sustained for three decades appears to have dissipated. Protectionist pressures and protective actions that were taken or intensified since the conclusion of the Tokyo Round affect sectors accounting for more than one fifth of world trade in manufactures, including iron and steel, automobiles, textiles, and clothing. In addition, industrial countries apply restrictions at the border or use other measures that affect or distort trade in temperate zone agricultural products accounting for one third of international trade in agriculture, including sugar.

Second, there appears to have been a perceptible shift in the attitude of policymakers toward trade. Evidence of such a shift is the increasing preoccupation with bilateral trade balances between the major trading nations. For example, the unexpected development of the large bilateral trade surpluses in Japan’s balance of payments in 1981 and the probability that these surpluses could again be large in 1982 have contributed to the perception that correction of bilateral trade deficits is essential to recoup lost employment opportunities. The “reciprocity” legislative proposals introduced in the U.S. Congress in early 1982 exemplify this preoccupation. Bilateral approaches, including the reciprocity proposals, also reflect a concern that foreign competitors are receiving an undue advantage through internal policies and institutional arrangements abroad.

In addition to these developments, sectoral approaches to trade problems have become more entrenched, thereby jeopardizing the prospects for developing and strengthening general rules governing international trade. This shift could bring about greater international acceptance of existing sectoral restrictions or lead to further regulation of international trade Hows: at worst, it could lead to balancing of trade flows, bilaterally or sectorally, at progressively lower levels. Political and strategic considerations also appear to have influenced trade policy in several recent instances.

The Fund staff survey found that in the past 18 months restrictive actions have become more widespread in both industrial and agricultural sectors. The measures affecting trade in industrial products have been recognized, in principle, as being exceptions from the liberal framework to be applied temporarily and selectively, while, for legal and historical reasons, GATT rules have not applied equally rigorously to agricultural trade.⁴ Policymakers continue to recognize the need to overcome structural rigidities—such as those prevailing in the determination of wages—and to adopt policies that promote structural adjustment and encourage goods to be exchanged on the basis of comparative costs. The recent strengthening of various forms of regional or international surveillance over subsidies to ailing industries and other potentially trade-distorting practices is intended to support such adjustment efforts. Not surprisingly, however, there is little agreement on the specific modalities by which government intervention should encourage structural adjustment. Agricultural protection has again become a debated issue—both in the protecting countries, because of its economic and budgetary costs, and in the competitive exporting countries, because of the burden of adjustment it imposes on their agricultural sectors. But the central problem of international trade policy persists—namely, that the urgent need for structural change, arising not only from import competition but also (and more importantly) from technical change, productivity gains, and sudden changes in the relative scarcities of industrial inputs such as oil, is greater than the extent of adjustment that is actually under way.

Industrial Trade Policies

The loss of dynamism in world trade has been particularly marked in the case of manufactured products, which account for 55 per cent of world trade and 70 per cent of trade among industrial countries. The growth of world exports of manufactures decelerated from 11 per cent annually during 1963–73 to 5 per cent during 1974–80 and further to 3 per cent in 1981. In the past 18–24 months, a few existing import restrictions were liberalized, but in the main the trend was toward increased protective actions that affected not only historically protected industries but also new sectors.

The most important set of recent protectionist actions has been in the automobile sector, which, overall, accounts for 8 per cent of world trade in manufactures. In 1981, bilateral limitations or other forms of restraints were introduced on Japanese exports to several industrial countries, including the United States, that together account for two thirds of Japan’s exports of automobiles. Combined with previous restrictions, the measures now affect virtually all Japanese exports of automobiles to industrial countries. The spread of protection in this important sector is symptomatic of the problems of structural adjustment in the industrial countries. Although some restructuring and modernization efforts are now under way, it is debatable whether the restrictions are delaying the needed adjustment: there is little assurance that these restrictions will be removed in the near future.

International trade in iron and steel accounts for 4 per cent of world trade and has been growing relatively rapidly despite restrictions imposed by one or more industrial countries periodically since the 1960s. In the period since early 1981, pressures for protection have remained high. The European Community continues to apply both production restraints on the Community’s producers and export restraints on foreign suppliers in the form of bilateral price and/or quantity undertakings. The recent U.S. finding of injury from subsidized imports from certain members of the Community and other countries runs the risk of provoking retaliatory actions. Given the persistence of trade and adjustment problems in this sector and the recent increasing inroads made by competitive developing country suppliers in the markets of the industrial countries, it is not surprising that suggestions for negotiating wider restrictions on steel have surfaced from time to time and may again be pursued more actively.

Trade restrictions in the textile and clothing sector, which accounts for about 5 per cent of world trade, also raise difficult issues of trade policy. In December 1981, the Multifiber Arrangement, which authorizes importing countries to restrict imports from individual exporting countries, was extended by a protocol of extension to July 1986 (MFA III). Although it is still too early to judge the effect of MFA 111 on the export prospects of developing countries, indications are that it may be used by some importing countries to restrict exports of “dominant”—i.e., efficient—developing country suppliers more severely than those of other countries. At the expiration of MFA III. multilaterally negotiated restrictions in textiles and clothing will have been applied for a period of nearly 25 years. During this period, they have become progressively more complex and comprehensive.

In other industrial sectors that have been subject to protectionist pressures in recent years, the picture is somewhat mixed. The only significant liberalization of existing sectoral restrictions in the past 18 months was undertaken by Canada and the United States with regard to footwear. In addition, restrictions on certain consumer electronics were eased in the United States. Although medium-term problems of surplus capacity persist in the petrochemicals sector, short-term trade frictions that had arisen in the previous two years, following increased U.S. exports to certain European countries, were eased in 1981 with the decontrolling of U.S. oil prices and a strengthening of the U.S. dollar vis-à-vis major European currencies. In the shipbuilding sector. Japan captured an unexpectedly large share of new orders in 1980. Notwithstanding the reduction in shipbuilding capacity achieved in Japan, this raised concerns in Europe about the application of OECD agreements in this sector.

A common pattern of the sectoral pressures for protection in North America and Europe is that they have often arisen with respect to the industrial performance of Japan. The flexibility of the Japanese economy and its ability to shift resources rapidly to more promising lines has been generally recognized. Nevertheless, pressures directed at addressing the alleged specific problems posed for North America and Europe in their bilateral trade with Japan have increased. For example, the European Community recently lodged a complaint under GATT procedures against Japan that not only aims at securing specific import concessions and moderation in Japan’s exports of sensitive products to the Community but also requests Japan to address the “cause” of the frictions with the Community, which is perceived to be a low Japanese propensity to import. Trade in high technology products has become subject to new pressures in the United States as a result of rapid breakthroughs in the application of new technology by Japanese producers. In response to pressures from trading partners, in late 1981 and early 1982 Japan announced measures to facilitate imports and streamline import procedures and to more effectively deal with complaints from abroad through the establishment of a trade ombudsman’s office. The measures included elimination and reduction of some tariffs and simplification and relaxation of certain procedures and standards perceived as nontariff barriers.

An area of concern that cuts across sectors is domestic and export subsidies. Subsidies other than export subsidies are often used as important instruments for the promotion of social and economic objectives. At the same time, public subsidies, which have increased in recent years in many major trading nations, can distort trade flows by impeding specialization in production in response to comparative advantage. The issue therefore is to what extent domestic subsidies, which may be used to support ailing sectors and industries or encourage new activities, can be effectively controlled by international regulation. It has arisen most recently in the context of support policies for research and development in high technology. With regard to the 1978 Arrangement on Guidelines for Officially Supported Export Credits, there has been controversy on the adaptation to the changes in market rates of the minimum interest rates to be charged for export credits, in order to reduce the subsidy element in export credit rates. A higher level of interest rates on official export credits was approved in October 1981, and in July the interest rates were raised further for the period up to May 1983.

Agricultural Trade Policies

In the agricultural sector, to a greater or lesser degree all major trading nations pursue the following objectives, which are not necessarily mutually consistent; self-sufficiency or security of supplies in food; parity or fair income for the domestic farm sector; market stabilization: and reasonable prices to the consumer. In addition, agricultural policies also take account of social, regional development, environmental, and health considerations. Agricultural production is inherently subject to the vagaries of the weather, which can bring about sharp fluctuations in global availabilities. These factors, combined with generally low short-term demand and supply price elasticities, tend to produce relatively wide price fluctuations. International trade policy in the agricultural sector is designed to achieve the main objective of income support through a variety of measures, including import quotas, tariffs, variable import levies, and export subsidies, and is also designed to mitigate the extent of market fluctuations. Market developments are also related to policies on food security and food aid, and they are influenced by preferential access commitments undertaken by some industrial countries. In addition, international agreements exist for sugar, dairy products, grains, and meat, but only the sugar and dairy products agreements contain economic provisions.

The paper focuses on the five principal agricultural commodities produced in temperate zones—dairy products, fats and oils, grains, meats, and sugar. It reveals that, while the specific modalities of protection vary from product to product, virtually all major industrial countries protect their domestic agricultural sectors to a considerable extent. In the fats and oils sector, protection is relatively low. In the other sectors, high domestic price supports often encourage production that cannot be absorbed at prevailing prices; this obliges disposal of stocks in international markets, displacing more efficient producers. An indication of the extent to which industrial countries’ agricultural sectors are insulated is given by the generally low ratio of international trade to global production. For certain individual products, such as soybeans, milk powder, and sugar, the proportion exceeds one fourth, but for most commodities the proportion is lower, ranging from 25 per cent for wheat and 12 per cent for feed grain to 5–10 per cent for butter, cheese, and meat. The insulation of domestic markets produces a considerable divergence in domestic wholesale prices among countries, as well as between the domestic price and the “international” price (see also Section IV). Domestic prices in the European Community exceed “international” prices by 25–50 per cent for beef, lamb, sheep meat, and wheat, and by up to 100 per cent for maize and sugar. In Japan, price differentials prevail in the 25–50 per cent range for wheat and barley and in the 100–200 per cent range for rice, soybeans, sugar, and beef. In the United States they had been in the 15–35 per cent range for rice and lamb, before virtually disappearing in 1980.

International trade in dairy products totals some $13 billion, but accounts for only 3 per cent of world milk production, and is volatile. The OECD countries supply virtually all world exports. In the past two years, surpluses of butter and cheese increased to record levels in North America, and U.S. net expenditure on dairy support programs reached about $2 billion in 1980/81. The future course of U.S. policy on their disposal is a key issue of concern in this sector. The European Community reduced its intervention stocks of butter by increasing its share of world exports; in 1981, payments of export subsidies for dairy products reached 2 billion European Currency Units (ECUs), or two fifths of total agricultural export restitutions. New Zealand entered into a new bilateral export restraint agreement with Japan on butter. In addition, in order to help dispose of the U.S. surplus and maintain market stability. New Zealand agreed in 1981 to purchase a quantity of U.S. butter (equivalent to one half of New Zealand’s annual output) at above the minimum export prices established under the International Dairy Arrangement.

International trade in wheat and coarse grains is relatively well developed, accounting for about 25 per cent and 15 per cent of world production, respectively, and has been rising strongly in recent years. Recently, new trade frictions have arisen from complaints by U.S. and other producers about the subsidization of exports by the European Community. In certain markets, traditional wheat exporters such as Australia and Canada found themselves hard-pressed to compete against subsidized exports of wheat or wheat flour by the Community. U.S. grain producers were required to abide by acreage limitation or set-aside programs for 1982. In the European Community, the possibility of substituting cheaper products, such as soybean cake, corn gluten feed, and cassava, for cereals in animal feed has been a source of new protectionist pressures. In recent years, the Community’s imports of cereal substitutes have increased dramatically. These imports could threaten the Community’s internal price support levels for cereals, or at least increase the budgetary cost of intervention and disposal in third markets. In accordance with its proposals for the Common Agricultural Policy (CAP) for 1982/83, the Commission of the European Communities has sought new bilateral export restraint arrangements with foreign suppliers of cereal substitutes in order to deal with this problem.

International trade in meat is relatively small in relation to production (7 per cent for beef and 10 per cent for sheep meat). The international market is strongly segmented, owing to differences in health and sanitary regulations that shift trade patterns over relatively short periods. As a result of new legislation introduced in the United States and Canada in 1979 and 1982. access to the North American market will be limited according to the legislated formulas whenever domestic beef supplies, which are strongly cyclical, are relatively ample; given the modalities of the cattle cycle in other countries, these import restrictions in effect pass the burden of adjustment to foreign suppliers. In the European Community, beef imports are subject to bilaterally negotiated quotas with countries with which the Community maintains preferential arrangements, and trade in sheep meat became subject to common organization of the Community market at the end of 1980. following which numerous bilateral restraints were negotiated with supplying countries. Japan’s global import quota on beef and veal has been implemented restrictively in the past year.

International trade in sugar is about one third of world production, and developing countries account for 65 per cent of world trade. International trade is governed by the International Sugar Agreement, but recently its mechanisms have not proved adequate to deal with cyclical changes in the world market. Under the Lomé Convention, the associated developing countries are entitled to sell a certain quantity of sugar to the European Community at guaranteed prices: however, given that Community production has been 25 per cent in excess of its consumption requirement, this commitment in effect increases the Community’s exportable surplus, which is disposed of in the international market through export subsidies. The Community has increased its share of world sugar exports, and traditional exporters of sugar have launched complaints under the GATT against the Community’s sugar export policy. The Community has attempted to meet these complaints by substituting producer-financed export subsidies for subsidies financed through the Community’s budget. In the United States, domestic price support levels for sugar were seen as being eroded by imports. In order to avoid the budgetary cost of maintaining support levels in the face of falling world prices, the United States in early 1982 raised the sugar import fee and imposed country-specific quotas on imports of sugar.

Although trade policies and market conditions for each of the main temperate zone products differ, a broad generalization that emerges from the survey of agriculture is that national policies have given a first and unequivocal priority to the achievement of domestic social and political objectives, to the detriment of trade liberalization. In the few products where international trade has remained relatively free, such as cereal substitutes, the liberal stance of policies is increasingly in jeopardy. Long-term trade agreements that involve elements of market organization could become increasingly important, particularly if the European Community adopts a proposal to actively seek such agreements. Currently, such agreements reportedly cover principally grains (accounting for at least 15 per cent of international grain trade), beef, soybeans, and dairy products.

The economic effects of agricultural protection can take the form of overproduction and underconsumption of agricultural output in the protecting country, as well as distortions in the allocation of resources between agriculture and other sectors. Large exportable surpluses may develop that may be disposed of in the international market through export subsidization, imposing costs on consumers or taxpayers in the protecting country and on efficient producers abroad.⁵

According to some studies, including a recent report by the OECD Secretariat, reform of agricultural policies might not provoke the massive structural dislocations that are sometimes feared. Moreover, even a relatively small reduction in surpluses in the traditional importing countries would bring about a significant improvement in conditions of access for the traditionally efficient suppliers of agricultural products such as dairy products and meat. In spite of the somewhat higher rate of growth of world agricultural trade since 1973, the proportion of world agricultural production entering trade is still generally small. More open agricultural trade policies would tend to reduce market instability and possibly raise the average level of free international market prices for certain commodities, while lowering high consumer prices in certain countries. Even so. establishment of more liberal international trading conditions per se in agriculture is still not generally accepted as a priority objective. In the absence of new policy initiatives to promote reform of agricultural trade policies, an intensification of restrictions through a proliferation of bilateral arrangements cannot be ruled out; this would pose serious consequences for efficient producers.

Implications for Developing Countries

In the aggregate, developing countries’ total export growth rates have in recent years held up rather well in relation to the growth of world trade generally. However, within these averages there have been wide disparities in export performance. Trade among developing countries (see Section II) has expanded faster than their exports to industrial countries. Although in certain sectors the non-oil developing countries have increased their share of apparent consumption in industrial countries, their overall import penetration is less than 4 per cent for the manufacturing sector as a whole.

The higher rates of export growth in some non-oil developing countries have been associated with diversification of markets and products. Export growth has been relatively favorable in sectors such as chemicals, engineering products, steel, and miscellaneous finished consumer goods, and lower than average in textiles, clothing, and miscellaneous semimanufactures. The post-MTN tariff rates remain relatively higher than average on products of export interest to the developing countries, and in a number of sectors tariff escalation—increasing nominal protection by stage of processing—limits the possibilities for them to seek a higher proportion of value added by domestic processing activity. In addition, the incidence of nontariff barriers is frequently higher in sectors where they have a comparative advantage, such as textiles and clothing. Although the Generalized System of Preferences (GSP) has improved market access for developing countries, it is widely recognized that in the aggregate its impact has been limited, and recently the scope for growth of exports under some GSP schemes has been narrowed.

In this context, the implications of recent trade policy developments for developing countries’ future investment and export possibilities are particularly worrisome. With relatively small economies, possible gains from the economies of scale that could be derived from access to foreign markets can make a critical difference between an acceptable or a sluggish rate of economic growth. Thus, greater economic integration of developing countries with the world economy and an increase in trade among them would appear to be crucial elements in raising the level and improving the pattern of domestic investment.⁶ The persistence of difficulties in access to foreign markets could risk slowing the efforts—already being actively pursued by a number of developing countries—to achieve greater integration into world markets. For countries that rely heavily on external financing, the balance of payments problems generated by increasing protectionism may weaken their ability to service their external debts.

Evolving World Trade System

Three central concerns emerge from the Fund staff survey of international trade policy developments. Sectoral trade restrictions have been intensified recently. Moreover, countries have increasingly preferred to deal with problems of import competition through measures that are not as easy to challenge under existing rules governing world trade as were the more traditional forms of restrictions at the border. In addition, as trade frictions have arisen in individual sectors, the major trading nations have shown a distinct preference for alleviating them through bilateral accommodation, and the relative lack of clarity in some rules of international trade has encouraged the search for short-term solutions.

Against this background, it is recognized that the future effectiveness of multilateral discipline in the trade field will be influenced by the approaches being developed in four broad areas: (1) availability of information on trade actions; (2) criteria for assessment of countries’ adherence to international rules and decisions; (3) development of multilateral rules in new areas; and (4) the strength and flexibility of dispute settlement mechanisms. These and other issues will be the focus of discussion at the November 1982 GATT ministerial meeting, the first such meeting to be held since 1973.

The problem of lack of availability of current and relevant information on national actions affecting trade has often frustrated discussions and negotiations to correct emerging problems before they pose a major threat to the trading system. Notification requirements were strengthened during the MTN in several areas, and committees of code signatories were established to exercise surveillance over the application of the MTN codes and to improve the flow of information. However, difficult problems still remain. For example, under certain GATT Articles, notifications are largely voluntary, and if trading nations do not inform others of their actions, the possibility of bringing international discipline to bear on those decisions becomes more remote.

A related, and more substantive, issue is the economic and legal complexity of establishing the extent to which countries adhere to multilaterally agreed rules. The General Agreement is founded on the premise that when protection to domestic industry is appropriate, it should be given only, or primarily, through tariffs. It also contains provisions regarding quantitative restrictions, incorporating some exceptions to the undertakings regarding their elimination and provisions whereby countries may apply for a waiver of these obligations. Since the General Agreement itself is difficult to amend, requiring a substantial majority or even unanimity for revision of its central provisions. GATT members have found it convenient to use codes of conduct to strengthen international discipline. However, the codes may not influence the trade policy of GATT members who choose not to accept them.

This relative lack of clarity in some aspects of international trade obligations of countries has increased the difficulty of enforcing trade rules. For example, as discussed more fully in Section V, countries have often applied restrictions in forms or under circumstances that would escape the relatively strict criteria that would allow for invocation of the safeguard provisions of Article XIX of the GATT. Some major trading nations use the exceptions under the GATT to justify their quantitative import restrictions in agriculture, while others have obtained specific GATT waivers. Still other countries benefit from exceptions declared upon adherence to the General Agreement. In both agricultural and industrial trade, “voluntary” bilateral export restraints fall in a “gray area”: they may have significant trade effects, but their legality under GATT rules has not been established—and frequently, it is not challenged. A major area of possible reform of the safeguard rules of the GATT, now under consideration, would be the introduction of some form of surveillance of such “gray area” measures. It remains to be seen, however, whether this can be done without legitimizing or perpetuating these restrictions.

Another area of debate is the extent to which the GATT system could be strengthened by bringing under its purview areas that have thus far not been addressed internationally, or in which comprehensive multilateral rules have not been developed. Barriers to trade in services, which are of growing importance in international exchanges, and trade-related investment performance requirements have been proposed for discussion and possible negotiation in the GATT. The nature of the barriers in both areas transcends the traditional distinction between restrictions at the border on the exchange of goods and domestic measures that, while not necessarily aimed at restricting international transactions, may have a limiting or distorting effect on them. Extensive technical work and preparatory discussion will be required before new disciplines can be developed in these complex areas.

Finally, the GATT dispute settlement mechanisms, which were strengthened during the MTN, have come under increased pressure recently. Since 1980. the number and diversity of complaints lodged under these procedures have increased considerably. The approach of individual countries to these procedures has varied, depending in part upon the importance given to adjudication in the domestic legal systems. Although there is little controversy about the need for an efficacious dispute settlement mechanism, the consequent “overloading” of the established procedures that could be caused by excessive dependence on adjudication—in cases where important and strongly held principles of domestic economic policies are involved—has been of growing concern in some quarters.