B. Developments in Restrictions

International Monetary Fund. External Relations Dept.
Published Date:
September 1951
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1. Introduction

During recent months there have been some indications—notably in the attention given by governments to their restriction programs—that the acceptance of restrictions as more or less unavoidable and well-nigh permanent features of international economic activity is being challenged. While restrictions continue to be a major factor influencing international trade and payments, increased attention and action have been devoted by governments to the problem of restrictions.

Although, in the first few months of the period under review, there were no strongly marked trends in the field of restrictions aside from the efforts in Europe to establish regional arrangements, the outbreak of hostilities in Korea was followed by a change. Associated with increased exchange earnings, with rising prices and with fears of future shortages and shipping difficulties, there has been, since June 1950, a tendency on the part of many countries to increase the amount of their imports—often within the framework of existing restrictive systems and without much formal relaxation. Both because of rising prices and in attempts to realize a larger volume of imports, there has been a tendency to spend more exchange than previously. Another important type of change has been associated with the use of restrictions for strategic or security purposes.

The review of the significant developments given in this section is based mainly on the changes in formal arrangements and on pronouncements regarding the form and structure of restrictions. In addition, trade data and information on administrative practices, such as the use of advance deposit requirements and the extension of validity periods for import licenses, have served as supplementary indications of the tendencies in restrictive systems. The following sub-section deals with developments in the application of restrictions. Certain broad distinctions on a geographical basis can be drawn concerning recent developments which have occurred in this field. Structural changes in multiple rate systems and significant developments which have taken place in payments arrangements between countries are outlined in the later sub-sections.

2. Developments in the Application of Restrictions

In Europe, the year 1950 saw the attempt to achieve increasing regional integration through the establishment of the European Payments Union (EPU) and the liberalization of intra-European trade and invisible transactions sponsored by the Organization for European Economic Cooperation (OEEC). Brief details of the EPU are given in Sub-section 4 below, which deals with developments in payments arrangements.

In regard to the liberalization of intra-European visible trade, OEEC member countries agreed to take measures for the progressive elimination of restrictions on non-governmental imports from other members and to provide for the automatic allocation of foreign exchange to pay for such imports. The measures were originally (as at December 15, 1949) applied to 50 per cent of imports on private account from other OEEC countries, using the year 1948 as a basis. As from October 4, 1950, the percentage was raised to 60 (with exceptions in the case of certain countries). These percentages were calculated separately for each of three categories—food and feeding stuffs, raw materials and manufactured goods. It was proposed that the 60 per cent liberalization requirement be raised by February 1, 1951, to 75 per cent of all non-governmental imports from participants regardless of the categories. By December 31, 1950, the measures had to be applied to all members without discrimination; and, as from February 1, 1951, each participant was required to avoid discrimination in respect of “non-liberalized” commodities originating in other OEEC countries. At the time of writing, however, it had not been possible to achieve fully the principles which were to have been operative by February 1, and certain countries had not been able to reach or maintain the 60 per cent liberalization target.

Relaxation measures were to be applied among all OEEC countries, including some application by and in favor of their dependent overseas territories. In addition, Denmark, Greece, Norway, Sweden and Switzerland have extended all or part of their liberalization measures to all countries in the Sterling Area and not merely to the overseas territories of the United Kingdom. The United Kingdom has extended its measures to imports “from all countries to which relaxations could be applied without involving loss of gold or dollars”.1 At the beginning of 1950, this covered all countries except those constituting the “dollar area”;2 Eastern European countries; certain other countries for special reasons; and, among the OEEC countries, Belgium, Luxembourg, Switzerland and Western Germany. During 1950, as these four OEEC countries signified their intention to join the EPU, the United Kingdom removed them from the list of exceptions. Similar steps were taken at different times by other members of the Sterling Area. Further, during the course of 1950, Belgium liberalized almost all of its trade, including that with the dollar area.

The measures taken by the OEEC on the subject of the liberalization of invisible transactions are also of interest. On January 31, 1950, the Council of the OEEC placed a ban on further restrictions on invisible transactions among OEEC member countries. On May 3, 1950, this decision was re-affirmed and a decision on details was taken. With minor reservations, this decision has since been carried into effect.

A major feature of the liberalization of invisible transactions was the undertaking to authorize such transactions on a non-discriminatory basis among participants, to become effective by October 1, 1950, at the latest. While this policy appears to have been carried into effect by the OEEC members, it has resulted in few actual alterations in their exchange control regulations. This is partly because most countries were already freely authorizing payments due by residents in their country to non-residents in respect of contractual obligations—although the payments were to be made by the method laid down in the country’s exchange control regulations. In the realm of non-contractual items, that is, for such items as travel, most OEEC countries maintain some degree of limitation on the amount of exchange they are willing to authorize for such expenditure abroad by their residents. But in order to conform to their obligations, several participants have announced a fixed amount which they are willing to allow their residents for tourist travel in any other OEEC country.

In addition to the intra-European measures related to the liberalization of current transactions, relaxations having a wider field of application have developed in several European countries in connection with capital items, not only as regards the release of former blocked balances held by non-residents, but also in freer treatment of nonresident-owned securities and other capital assets. Several OEEC countries announced in 1950 special terms including a guarantee of repatriation for the investment of new non-resident capital.

In addition to the measures resulting from the operations of the EPU and the OEEC liberalization program, various countries in the Sterling Area took other steps affecting their import programs. The British Chancellor of the Exchequer stated in the House of Commons on November 14, 1950, that “during the informal Commonwealth Economic talks which were held in London in September of this year, it was realized that the 75 per cent, formula [the reduced target for imports from the dollar area] as such had been rendered out of date by price increases, by stockpiling needs, and by the deterioration in the international situation.” While the sterling Commonwealth countries seem to have agreed on the necessity of increased dollar imports, this has not involved a substantial alteration in formal restrictive systems. Certain more formal steps have, however, been taken. The United Kingdom in December announced that the “token imports” allowed from Canada, the United States and certain other countries would be raised from 20 per cent to 40 per cent of the value of such imports in 1936-38. In the British West Indies, a token import scheme which had been operative in 1949 was revived on similar lines in January 1951 by reopening this market on a limited scale to a range of Canadian and U.S. goods traditionally purchased from those countries.

On August 1, 1950, New Zealand announced the import program for 1951. This involved an increase in “soft currency” spending. Additional exemptions from import licensing and quota increases (for imports from “soft currency” countries in both cases) were announced in December 1950. Similar relaxations of restrictions on importing from “hard” and “soft currency” countries were undertaken by Ceylon and Pakistan. In August 1950, India relaxed import restrictions on various raw materials to be imported from any source. Australia, as of September 1, 1950, freed practically all imports from “soft currency” countries from restrictions.1

The Union of South Africa announced changes effective the beginning of 1951, which appear to represent a substantial relaxation of discrimination. According to these changes, imports are allowed on a non-discriminatory basis up to the total South African current external income from all sources (after provision for invisible payments) plus twice the amount of untied capital receipts from “hard currency” countries, with discrimination taking place only to the extent that capital inflow from “soft currency” countries exceeds the capital inflow from “hard currency” countries.

The restrictions in force for balance of payments reasons in seven Commonwealth countries were the subject of consultation at the Fifth Session of the Contracting Parties to the General Agreement on Tariffs and Trade held at Torquay, England, in November and December 1950. At this session, the Fund, in its consultative capacity, expressed the opinion that it would be feasible for Australia, Ceylon, New Zealand, Southern Rhodesia and the United Kingdom to begin a progressive relaxation of their “hard currency” import restrictions, although this should be undertaken with due caution having regard to the existing circumstances. Further relaxation of restrictions on dollar imports by India and Pakistan did not seem feasible in the present circumstances.

Some countries in the Middle and Far East have shared in the general trend toward increased imports, although the actual form by which these changes are evidenced varies from country to country. During 1950, Ethiopia was able to increase the amount of exchange made available to importers of essential goods. In Iran, in July 1950 and in December 1950, previously existing quota restrictions on the import of essential goods and a number of less essential items were removed. These relaxations were announced as effective until March 20, 1951. On June 27, 1950, Thailand removed import controls on many commodities, so that only a few (although important) items remained subject to an import licensing requirement. In June-July 1950, Indonesia placed a number of important commodities on a “free list”, in effect removing them from import quota restrictions, and increased quotas for certain other commodities.

In the Philippine Republic, where exchange control had been introduced in December 1949, all imports were made subject to import licensing in May 1950, with exchange being granted automatically for authorized imports. At first, licenses for all imports were on a quota basis, but on December 21, 1950, these limitations were removed in respect of a number of essential imports.

In August 1950, the restrictive aspect of the Japanese import licensing system was lessened when it was announced that, in respect of applications to import certain essential commodities, licenses would be granted automatically. Later, the published Japanese exchange budget for the first quarter of 1951 included a considerably increased allocation for dollar imports.

This same trend to increased imports is also seen in the Western Hemisphere, where many countries have increased their imports by various means. To a considerable extent this has been done administratively within the framework of the existing restriction systems. There have been, however, various formal changes in restrictive systems. For example, in July 1950, Colombia established a scheme of “special advance quotas” for many goods in potentially critical supply, allowing importers to acquire immediately goods which would otherwise not have been authorized for import until later. In August 1950, Mexico freed various iron and steel products from import licensing and, early in 1951, lifted restrictions on almost all imports. (At about the same time, Mexico established tariffs, ranging from 40 to 70 per cent on certain luxury items.) Argentina announced in July a relaxation of import restrictions on essential imports and in December 1950 began issuing licenses automatically for the importation of a wide variety of essential goods from various countries. In October 1950, Brazil listed a large number of essential items related to the agricultural, mining and metallurgical industries which were exempt from import license requirements. In January 1951, Chile removed licensing requirements from about half of her imports and, in December 1950, Ecuador removed quota limitations on imports. In November, Peru greatly expanded her list of permitted imports and, at the end of January 1951, removed all remaining import restrictions. Uruguay, which had been removing restrictions on various “soft currency” imports, announced in the summer of 1950 that essential goods to be paid for with “hard currencies” would also be permitted freely.

On the other hand, in some countries there were indications of increased restrictions, particularly during the early part of 1950. Bolivia introduced import prohibitions, and later expanded the prohibited list. On January 11, 1951, however, many of these prohibitions were abolished. The purposes for which official exchange is granted were limited by Costa Rica. Brazil further curtailed the allocation of exchange for various invisibles. The Dominican Republic, which formerly had only a limited import licensing system, made all imports subject to license in February 1951.

It is notable that Canada has relaxed restrictions nearly to the point of elimination. Import prohibitions and quota restrictions were progressively relaxed during 1950 and those still remaining were removed on January 2, 1951. This final action was preceded by a significant change in the Canadian exchange system which occurred on September 30, 1950, involving the abandonment of the official exchange rates and the effective appreciation of the Canadian dollar. Another significant relaxation, which occurred on October 5, 1950, was the virtual removal of restrictions on tourist spending in “hard currency” countries. Canadian exchange control regulations continue to include the prescription of currencies; however, it was announced that, as from December 5, 1950, Canadians rendering services to residents of “United States Dollar Area Countries” might in the future receive Canadian dollars instead of only U.S. dollars as previously required.

In December, a new consideration became apparent when the United States, for reasons of national security, placed what is regarded as a virtual embargo on exports to certain Far Eastern destinations and froze assets and restricted payments in the United States of residents of the Chinese mainland and North Korea. The intensification of export control has also been undertaken by some other countries. The introduction of such measures in the post-World War II period highlights an additional set of considerations in the field of restrictions, namely, the use of controls for strategic or security reasons.

3. Developments in Multiple Rate Structures

During 1950 and the first two months of 1951, many changes took place in the use of multiple currency practices. An analysis of these changes does not lead to definitive conclusions regarding overall trends in the use of multiple rates.

In some cases, steps were taken toward the unification or simplification of multiple exchange rate systems. This took the form of eliminating certain differential rates or exchange taxes and of removing practices, such as compensation transactions, which lead to a multiplicity of effective exchange rates. In some cases, the changes were made possible through the substitution of non-exchange devices, such as import duties and other taxation, for the exchange practices removed. On the other hand, an increased reliance on multiple rates can be observed in a number of instances. To an appreciable extent these particular shifts represented effective devaluation through the multiple rate structures.

A simplification of multiple rate structures took place in Colombia and Ecuador, for example, through the removal of certain exchange taxes. Argentina consolidated its complex exchange rate structure into three sets of exchange rates and abolished its auction system. The use of compensation, or barter, transactions was eliminated in several countries, including Chile, Nicaragua, Paraguay and Japan. Nicaragua also eliminated exchange certificates which had involved premium rates.

Among European countries, Austria simplified her exchange rate system by establishing a single rate for commercial transactions, retaining an additional rate only for certain invisibles. At the same time (October 1950) the abolition in principle of private barter and compensation arrangements was announced.

Honduras, effective July 1, 1950, reduced the spread of official exchange rates to within one per cent of parity in conformity with Article IV, Section 3(i), of the Fund Agreement and, as mentioned elsewhere in this Report, became the first country which ceased to avail itself of the “transitional arrangements” under Article XIV and assumed the obligations of Article VIII.

In several cases, the extended use of multiple currency practices took the form of higher fixed rates for current transactions. One of the more significant innovations was the introduction of an exchange certificate system in Indonesia. This led to higher rates for exchange transactions and, in effect, to substantial depreciation.

The imposition of new exchange taxes resulted in additional effective rates in Costa Rica, Nicaragua and Paraguay. In Israel, three exchange taxes were established, leading to multiple rates for various categories of imports. Nicaragua increased penalty selling rates through the use of surcharges applied to payments for less essential imports; this step was taken in conjunction with the removal of restrictions in the form of exchange quotas. In Greece, an additional rate for certain imports was established at a level above the effective rate applying to most transactions.

During the period under review, various developments are also to be noted in the use of free markets for exchange transactions. In Chile and Costa Rica, invisible and capital transactions were permitted to pass through a free market at higher rates. In some countries, such as Chile, Colombia and Costa Rica, more imports were allowed to find their exchange in markets with fluctuating rates. During the course of 1950, Thailand shifted various classes of minor transactions from the official market to the free market, where higher rates prevail. Iran shifted most exports and luxury imports to a free market, although the same transactions were later made subject to a fixed premium rate.

Fluctuating rates were also introduced in Spain, with the establishment in August 1950 of a legal free market to which certain invisibles and capital transactions, as well as varying percentages of specified export proceeds, were admitted. This was followed in October by an extensive rearrangement of the various import rates, including the use of the free market for obtaining all or part of the exchange for certain groups of imports.

The preceding examples do not include all changes which have taken place in multiple currency practices during recent months. However, they include most of the relatively significant modifications and are sufficient to indicate that the use of multiple currencies has been subject to considerable change during this period. But, for the world as a whole, it appears that there has not been a significant trend toward the decrease of such practices.

4. Developments in Payments Arrangements

The most extensive payments arrangement introduced during 1950 was the European Payments Union. Among the European participants in the EPU (and the regional liberalization efforts associated with it) are the following Fund members: Austria, Belgium, Denmark, France, Greece, Iceland, Italy, Luxembourg, the Netherlands, Norway, Turkey and the United Kingdom. The Irish Republic, Portugal, Sweden, Switzerland, Trieste and Western Germany are the European participants who are not members of the Fund. Other segments of the Sterling Area and the overseas territories of Belgium, Denmark, France, the Netherlands and Portugal also participate in the EPU payments arrangements through their European associates, while practically all payments between Indonesia and the participants in the EPU come within its scope through the Netherlands account.

The European Payments Union was set up as of July 1, 1950, to provide for a multilateral clearing arrangement among participants. (Switzerland did not participate until November 1, 1950.) Through its operations, each participant need not balance its accounts separately with each other participant and may concentrate on its payments with all of the other members as a group. All authorized payments between participants pass through the EPU and settlements are based upon the net cumulative credit or debit standing of each participant with the other participants as a group. Certain initial credit or debit positions were established for some participants, with settlements being offset against these insofar as possible. Beyond the use of initial positions, settlements are made partly through the granting of credits to or by the EPU and partly in gold or dollars received from or paid to the EPU. If the credit facilities were used completely, the ratio of credits granted or received to gold or dollars received or paid would, in general, be 60 to 40. The possibility of the EPU having to pay out more gold or dollars than it receives is provided for by a grant of U.S. dollars to it by ECA.

In general, the obligations as to the multilateralism of payments among EPU members have been maintained at the Central Bank level1 and the mechanism of prescribing the method of settlement for payments and receipts has remained unaltered in the exchange control systems, still following patterns which conform to the terms of earlier payments agreements concluded by those countries. The United Kingdom offered the extension of the Transferable Account arrangements to all EPU participants not already availing themselves of this facility, and this offer was accepted by Austria, Denmark and Greece.2

The EPU agreement has, however, provided for the holding of currencies of participants by other participating countries. The agreement provides that creditors in the EPU may acquire currencies of other participants instead of obligations of the EPU to the extent of the smallest of (1) their overall credit position in the EPU, (2) their credit position with the debtor whose currency is to be acquired, and (3) an amount previously agreed upon between the creditor and the debtor country. Further, the agreement gives debtors in the EPU the right, subject to certain conditions, to use their pre-EPU holdings of the currency of another EPU participant to settle their debit balance. Although Italy built up a debit balance in the first six months of the operation of the EPU, she did not settle this through the use of her sterling holdings, deciding to continue holding sterling and incur interest-bearing indebtedness to the EPU until the point where a gold or dollar payment would have been the alternative.

Another European group measure is to be found in the “UNISCAN” arrangements. On January 30, 1950, representatives of Denmark, Norway, Sweden and the United Kingdom agreed to develop closer economic cooperation. The proposals to be immediately adopted were for all current payments to be made without restriction among the four countries, although Norway would continue to limit the tourist expenditures of her residents. Denmark, Sweden and the United Kingdom also agreed to remove restrictions, but not controls, on capital movements among the three countries, including the repatriation of balances. Norway adopted similar conditions only in a modified form, according to the amount of funds belonging to Norwegian residents which were released to her. All these proposals were put into effect during 1950 by the countries concerned. Since relaxations in trade restrictions were not appreciably more than were applied to other OEEC countries, these changes have their main significance in the relaxation of restrictions on invisibles and capital movements.

Apart from the developments described above, changes in the field of payments agreements do not appear to have been particularly significant during recent months. There were, however, certain cases of decreased reliance on the settlement of accounts in U. S. dollars. Agreements between certain Latin American countries and Western European countries, especially Western Germany, have sought to achieve greater movements of goods and to provide for more liberal swing credit arrangements. A payments agreement between France and Peru, providing for the settlement of French commercial payments in French francs instead of U. S. dollars, as previously required, was announced as becoming effective on December 2, 1950. This agreement also provided for payment in sterling for certain Peruvian imports from the French franc area and it was reported that Peru might use her French franc holdings for settlements in other countries. Brazil also made provision for the use of sterling in settlement with certain countries for imports and certain exports (excluding coffee and cotton).

Reliance on barter or compensation transactions decreased during 1950 in certain countries, as mentioned above. Brazil, which had been using barter transactions through 1950, announced in February 1951 the discontinuance of such transactions for an indefinite time. But there were other cases of their increasing use, as in Ecuador and Greece.

* * *

Thus, in summary, early in 1950, the outstanding trend in restrictions was toward regional arrangements for relaxation which widened the area of freedom among certain countries, while maintaining or intensifying restrictions against countries outside the region. However, after the middle of 1950, there has been evidence of increased willingness to relax restrictions on a more global basis, whether formally or by administrative action. Even more, recent occurrences seem to reflect the increasing influence of commodity shortages and export controls. The entry of strategic and military considerations into the field of restrictions has introduced a new aspect to the use of restrictions in the postwar period.

Announcement by the President of the U.K. Board of Trade in London on September 29, 1949.

U.SA. and possessions, Bolivia, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Philippine Republic, Venezuela and Canada.

The countries which are treated as “hard currency” countries in various control systems are indicated in footnotes to individual country surveys in Section C below.

There is one notable exception to this. The French authorities on November 7, 1950, announced that transfers between the French franc accounts of persons resident in any EPU country or associated monetary area would no longer require the permission of the exchange control authorities.

The Transferable Account arrangements already applied, among OEEC countries, to Italy, the Netherlands, Norway and Sweden.

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