III. Regional Arrangements

International Monetary Fund. External Relations Dept.
Published Date:
September 1972
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During the period of review, the European Economic Community entered into a number of new agreements with associated and third countries. On January 1, 1971 the Second Yaoundé Convention with the African and Malagasy Associated States 6 entered into force, as did the second Association Agreement with the countries of the East African Community. On April 1, 1971 the Association Agreement with Malta entered into force. An interim agreement with Turkey, which is to lead eventually to a customs union, entered into force on September 1, 1971.

Important steps were taken during 19^71 toward the enlargement of the EEC to include the United Kingdom, Ireland, Denmark, and Norway. By January 15, 1972 all outstanding issues with these countries had been settled and the four applicant countries formally signed the acts of membership on January 22, 1972.

The common external tariff of the EEC became operative on January 1, 1971, together with the implementation of the fourth of the five duty reductions agreed upon in the Kennedy Round. As of July 1, 1971 the EEC’s generalized preferences for developing countries, covering manufactured and semimanufactured products and some processed farm goods, became effective. The preferences applied to 91 developing countries.

On February 1, 1971 a common fisheries policy entered into force. The EEC’s Commission presented in February 1971 proposals for a new orientation for agricultural policy, seeking to establish a link between agricultural structures and prices. A modified version of the proposals was adopted in March 1972. In June, the adoption of complementary regulations in the dairy sector entered into force; this implied that henceforth dairy products would move freely within the EEC. The valuation of the unit of account used under the common agricultural policy presented certain problems following the exchange crises of May and August. A system of border adjustments adopted in May 1971 and elaborated early in 1972 was used as an interim solution.

In the previous Report, it was noted that the Council of the EEC decided in February 1971 to move in stages toward the creation of an economic and monetary union. The Report also made reference to the system of short-term monetary support set up in 1970 and to a new medium-term monetary support system which was to come into effect on January 1, 1972. Under the medium-term system the member states would have to consult their EEC partners before seeking medium-term assistance. During the first three years credit would be granted for a maximum of two to three years but after that the period would be two to five years. The rate of interest would be halfway between that charged by the International Monetary Fund and the current market rate. Progress toward a monetary union was hampered in 1971, first by the floating of the deutsche mark and the Netherlands guilder in May, and then by the emergency measures with respect to exchange rates and capital controls that were introduced in EEC countries and elsewhere after August 15. Within the EEC, discussions centered on exchange rate margins and the desirability of capital controls. In May the Council agreed to allow under certain conditions a widening of the fluctuation band of EEC currencies, and in June the Commission presented a plan for measures to deal with international capital flows. On November 4, 1971 a Ministerial Conference of the EEC confirmed certain principles on which the exchange systems of the EEC countries should be based, including a return to fixed parities; it also recommended the adoption of measures to combat destabilizing capital movements.

Following realignment and the Fund’s decision on wider margins, the EEC resumed its efforts toward early monetary and economic integration. Discussions were held aiming at agreement on ways to limit the exchange rate fluctuations between EEC currencies by prescribing considerably narrower margins than those that could result from the application of the new 2.25 per cent limits against the U. S. dollar. Related problems that were subjected to review were the modalities of intervention in the exchange markets, notably as to the currencies to be used for this purpose and the financing of support operations, and again the desirability of capital controls. On March 7, 1972 the Finance Ministers agreed on the following.

a. The central banks of the EEC countries will reduce progressively the existing fluctuation margins between the currencies of the EEC while using fully the margins allowed by the Fund for the currencies of nonmember countries. By July 1, 1972 at the latest, the fluctuation band among the EEC currencies is to be reduced to 2.25 per cent or 1.125 per cent above or below their new official values. If exchange rates for EEC currencies reach the fluctuation limits within the narrow band of 2.25 per cent, the central banks will intervene in EEC currencies. The intervention will be in U. S. dollars if the rate of the dollar on the currency market concerned reaches the fluctuation limits authorized by the Fund. Prior agreement among the EEC central banks will be required for any intervention inside the 4.5 per cent band permitted for the U. S. dollar. The central banks will settle debts resulting from operations in the currencies of the EEC within a period of one month but this period may be extended if experience shows it to be necessary. The method of settlement will depend on the structure of the debtor country’s monetary reserves.

b. The EEC’s Monetary Committee and the Committee of Central Bank Governors are to report by June 30, 1972 on the organization and functions of a European monetary cooperation fund to coordinate central bank market intervention and harmonize reserve policies.

c. Within the Council of Ministers of the EEC, a coordinating group of high-ranking national and commission officials will be set up for the coordination of short-term economic and financial policies.

The Council on March 21, 1972 confirmed this agreement and also adopted the proposals made by the Commission for the regulation of short-term capital flows and the neutralization of their impact on EEC economies. Members would accordingly be enabled to regulate short-term money market investment by nonresidents, to control international borrowing operations other than those in support of commercial transactions, and to introduce obligatory reserve requirements, in particular in respect of nonresident-owned holdings of EEC currencies. The Council Resolution of March 21 was implemented on April 24, 1972, when the member countries began to apply narrower margins for dealing in each other’s currencies.

Following the December currency realignment, the EEC and the United States pursued their discussions regarding immediate and longer-term trade matters. In February 1972 agreement was reached regarding wheat, feedgrains, and citrus fruit. With regard to the first two items, the EEC agreed to augment its stocks of wheat and to operate its system of export payments on grains so as not to divert trade in its favor, while the United States agreed to stockpile 10 per cent of its production of grains and to withhold additional land from wheat and grain production. With regard to citrus fruit, the EEC agreed on a reduction of duty on a number of items. It was also agreed to initiate and support a comprehensive review of trade matters. Furthermore, the United States and the EEC agreed to call for a multilateral review of trade matters, to take place in 1973 within the framework of the GATT. This move was supported by a similar joint statement by Japan and the United States.

Developments in the European Free Trade Association (EFTA)7 were dominated by the negotiations, first for accession to the EEC by the United Kingdom and by Denmark, Ireland, and Norway, and then for special agreements with the EEC by those EFTA members that are not candidates for accession to the EEC. Within EFTA, the examination of nontariff barriers was continued, and three new agreements to end such obstacles to trade in specified categories of goods were concluded during the period July 1970-June 1971. None of these agreements is intended to be limited to EFTA countries. One of the major preoccupations of EFTA is how to preserve free trade between the present EFTA countries even after some of them join the EEC.

The Council of Ministers for Asian Economic Cooperation at their meeting in Kabul in December 1970 had called for the establishment of special committees to pursue trade and monetary cooperation in the countries of the Economic Commission for Asia and the Far East (ECAFE). Pursuant to this, the Preparatory Committee for the Establishment of an Asian Clearing Union was convened in March 1971 and adopted a Draft Agreement for the Asian Clearing Union. The Intergovernmental Committee on Trade met in November 1971 and studied the scope for concessions in the context of regional trade expansion. It agreed to meet again at some future date to consider further the question of trade concessions.

In the East African Community, Tanzania, in an effort to stem the decline in its foreign exchange reserves, imposed restrictions on capital exports, including the export of its currency notes, to the other two members, Kenya and Uganda. Similar measures were adopted in the same month by Kenya, thus effectively suspending the free movement of capital within the East African Community. The range of functions exercised by the three central banks was broadened further.

In Central America further difficulties arose regarding the operation of the Central American Common Market (CACM). At the end of 1970 Honduras had suspended its full participation in the CACM by imposing tariffs on all imports from the region and suspending the surcharge on imports from outside the area. In response, Guatemala, Nicaragua, and Costa Rica imposed tariffs on all imports from Honduras, as authorized by the common market treaty. At a meeting of all members, except Honduras, a Normalization Commission was created to settle certain problems concerning trade in staples and to prepare proposals for restoring the full operation of the Common Market. At its meeting in October 1971 agreement was reached on the specific trade problems and on a formula to resume free trade.

On May 1, 1971 British Honduras became a member of the Caribbean Free Trade Association (CARIFTA).8 At the Ninth Ministerial Meeting of the Council of Ministers of CARIFTA in October 1971, the question of a common external tariff and the harmonization of fiscal incentives were discussed but no agreement was reached.

In the Andean Group 9 a foreign investment code was ratified and became effective on July 1, 1971. Under this code a common policy is established for the treatment of foreign capital, the import of technology, patents, trademarks, and the repatriation of profits, royalties, and interest. The new investment code has been ratified by all the member countries except Colombia, where it was declared unconstitutional by the Supreme Court.

In the Latin American Free Trade Association (LAFTA)10 the principal activities during the period under review were those in the Andean Group that are described above. The tariff reductions negotiated in December 1970 were of very limited scope, covering only some 30 items for 1971, as compared with several hundreds in each of the previous negotiations. Free trade within LAFTA has again been hampered by the unilateral imposition or tightening of import restrictions, the application of advance deposit requirements and import surcharges, and the maintenance of exchange restrictions, including those hampering travel and personal remittances. A small number of reciprocal credit agreements were added to the intra-LAFTA clearing mechanism.

The Council of the Central African Customs and Economic Union (UDEAC)11 in December 1971 adopted a decision on the application of a unified investment incentives program to encourage expansion of existing enterprises and the establishment of new industrial projects.

As of January 1, 1971 customs duties on all manufactured products of national origin were abolished within the Arab Common Market.12 The Council of the Arab Common Market called on its members to take the necessary steps to eliminate all barriers to trade among themselves.

Burundi, Cameroon, Central African Republic, Chad, People’s Republic of the Congo, Dahomey, Gabon, Ivory Coast, Malagasy Republic, Mali, Mauritania, Niger, Rwanda, Senegal, Somalia, Togo, Upper Volta, and Zaïre. On September 9, 1971 Mauritius applied for accession to the Yaoundé Convention.

The present members are Austria, Denmark, Iceland, Norway, Portugal, Sweden, Switzerland, and United Kingdom. (The United Kingdom has given notice of termination of its membership with effect from December 31, 1972.) Finland is linked to EFTA by the Finland-EFTA agreement.

Antigua, Barbados, British Honduras, Dominica, Grenada, Guyana, Jamaica, Montserrat, St. Kitts-Nevis-Anguilla, St. Lucia, St. Vincent, and Trinidad and Tobago.

Bolivia, Chile, Colombia, Ecuador, and Peru.

Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.

Cameroon, Central African Republic, Gabon, and People’s Republic of the Congo.

Egypt, Jordan, Iraq, and Syrian Arab Republic.

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