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What is at Stake in the Uruguay Round?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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After four years of multilateral trade negotiations, progress has been made on resolving key issues.

But countries still need to confront certain domestic policyissues for the Round to be Successful

H. B. Junz and Clemens Boonekamp

In late February 1991, the Uruguay Round of multilateral trade talks was relaunched, as a result of an understanding among the participants that the critical agricultural issues would be addressed explicitly and with reasonable flexibility. The much troubled talks—rather than concluding as scheduled in Brussels in December 1990—had been suspended over this issue. But even if agriculture had not been a sticking point, it would not have been easy to achieve consensus on a number of other outstanding issues. Hence the decision to resume the four-year trade round without setting a specific time frame for a conclusion. Indeed, the recognition was widespread that for the 108 participating nations to reach agreement, it would require months, not weeks.

At stake is an agreement that would bring a material increase in world trade and, thereby, growth. In Brussels, a package appeared in sight that would (1) reduce tariffs significantly, including those on higher value-added production; (2) gradually bring trade that had moved outside the multilateral framework, including textiles and clothing, back into the GATT; (3) bring discipline to the trade-related aspects of intellectual property; (4) improve the rules and dispute settlement system of the GATT; and (5) provide, at least, a framework for trade in services. Other questions, such as those on trade-related investment measures (discussed below) and the functioning of the GATT system—including the GATT’s relationship with the IMF and the World Bank in achieving greater coherence in policy formulation—probably could have fallen into place with agreement elsewhere. In fact, this package would have gone a considerable way toward meeting the objectives set at Punta del Este, Uruguay, in September 1986 (see “The Uruguay Round: Revitalizing the Global Trading System,” by Naheed Kirmani, in Finance & Development, March 1989).

But achieving these objectives involves confronting and solving deep-seated political and economic problems that.beset most participating countries, large and small, developed and developing—a challenge that policymakers in many countries have found most difficult. Not to do so, however, raises the risk of yet another breakdown in the talks, and some doubt that the Uruguay Round could survive another stoppage. This article (based on a longer background paper by the authors and Grant Taplin) looks at the underlying problems and the progress up to early 1991 on key negotiating issues, as well as the prospects for success and the dangers of failure.

Underlying problems

From the very beginning of the Uruguay Round, there have been signs that many countries were not yet ready to address the problems that had given rise to a network of subsidies and noneconomic production in farming, managed trade in various sectors, defensive attitudes toward the establishment of foreign firms, and a host of other distorting policies. This difficulty, in fact, was behind the numerous setbacks: it caused a four-year interval between initial efforts to get agreement on the need for a Round in 1982 and the adoption of its terms of reference in 1986; it brought the negotiations to a four-month halt at the time of the mid-term review—from December 1988 to April 1989; and it derailed them in Brussels in late 1990.

These economic and political problems find a focal point in agriculture, where policies in many countries involve the whole complex of basic reasons that drive departures from market solutions—such as social, political, and cultural concerns, and more recently, environmental ones (see accompanying Guest Article by Sylvia Ostry). Some, or all, of these considerations also play into other areas of the negotiations, particularly where there have been large changes in the size and location of production capability. At root are internal market rigidities that stem from delays in dealing with changing economic realities.

In recent years, however, developed and developing countries alike have begun to reappraise their economic strategies, increasingly opting for a basic policy stance that looks to market signals for guidance and seeks to reduce, if not eliminate, government intervention. In keeping with this outlook, many governments have included market opening and trade liberalization as a major element in their economic programs, although in many industrialized countries, the emphasis was more on domestic deregulation. This shift should have greatly enhanced the trade negotiating environment, but countries have found it extremely difficult to bring these attitudes into the Uruguay Round, where each liberalizing measure is viewed as a “concession” requiring a counterconcession. This has led to the question whether the agenda was too ambitious, and therefore, an impossible task from the outset. The answer then and now is that the Round’s ambition sprang from necessity—a necessity to reverse trade policy trends that tended to export the effects of delays in difficult policy decisions.

Paradoxically, however, despite the danger signals of increasing defensive actions in some sectors and concentration of economic power or market management in others, domestic and international markets remained dynamic during the 1980s. This dynamism can be traced, in part, to the vigorous development of trade sectors that have benefited from deregulation of domestic markets coupled with technological advances that tended to globalize business activity, particularly in services. Consequently, part of the support for the Round may be related to the extension and preservation of these dynamics. In this respect, while there is broad support for eliminating barriers and expanding trade opportunities, there remain basic tensions between the interests of “sunrise” and “sunset” (or emerging and declining) industries, and it is often the latter that capture the greatest attention. Thus, the Round’s issues are integral to the domestic policy debate—and this sets it apart from previous trade talks, which addressed mainly levels of border protection and its rules.

Further complicating matters have been the numerous links—both tactical and functional—between issues, reflecting their complexity, the breadth of the Round’s objectives, and the array of special interests. The decision early on to create 15 separate negotiating groups met the need for various negotiating aspects to have their own forum, but now, in moving to concrete results, the linkages again dominate (the 15 groups were reduced to seven in late April, 1991). At the tactical level, negotiating a balanced package means that each negotiator will agree to some points contingent upon agreement in other areas. For example, some more efficient agricultural producers have held back agreement in some areas awaiting an agricultural package. Functional linkages relate, for example, progress in product-based groups, such as textiles, to improving those rules that, for lack of clarity and difficulty of application, have pushed these sectors outside the GATT to begin with.

Market access issues

Agriculture. The need for reform of agricultural trading policies is not in question in the Round. This sector is riddled with economic distortions that have achieved a life of their own, with some farmers being paid not to produce, and others stimulated to increase production, sometimes within the same region. The result has been rising agricultural support costs, which burdened taxpayers and consumers in the Organization for Economic Co-operation and Development (OECD) countries alone to the tune of almost $300 billion in 1988, equivalent to about 3 percent of OECD consumption expenditure and 10 percent of savings in that year. Not surprisingly, direct and indirect import barriers proliferated under these policies and export subsidies skyrocketed. But reform moves meet serious political obstacles, in part because the subsidies enable efficient producers to reap large economic rents, while the inefficient ones enjoy political leverage well beyond their numbers, owing largely to cultural and social reasons.

The United States—supported in the main by the Cairns Group of agricultural exporters (Argentina, Australia, Brazil, Canada, Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand, and Uruguay)—has sought large reductions in export subsidies (phasing them down by 90 percent by the year 2000), with accompanying commitments to reduce internal price supports and import barriers. They argue that improved market access and better world market conditions require both direct remedies and a substantial, continuing effort. Trade developments of the past two decades seem to support this view: for example, the EC’s share of world exports of agricultural products rose from 24 percent in 1970 to 36 percent in 1988, just below the almost 38 percent held by the Cairns Group and the United States together over that period. Although it is not possible to quantify the effects on the structure of trade of lower levels of EC protection, it is still illuminating that a stable export share for the EC between 1970 and 1988 would have implied an increase in the exports of other suppliers of some $43 billion.

The EC’s original offer—supported in part by Japan, the Nordic countries, and Switzerland—was based on a reduction in the level of total assistance (by 30 percent over a ten-year period from its 1986 level). This would narrow the gap between world and domestic prices, but the latter would continue to be cushioned by a fixed margin of Community preference and a variable buffer to protect against exchange rate fluctuations and world market price changes. Within the overall level of assistance, protection would be “rebalanced” by raising import barriers for certain products (e.g., oilseeds), as barriers are lowered on others.

Although some flexibility in negotiating approaches emerged in Brussels, including the possibility of a specific commitment on export subsidies, the absence of a dynamic that would assure permanence of reductions in export support and of increases in market access beyond 1995 was a major element in the suspension of the negotiations in December. The basis for resumption was provided by confirmation that specific commitments in each of the areas of agricultural support—domestic support, market access, and export subsidies—would be part of the negotiations. At the same time, EC efforts to review fundamentally the workings of its internal support system, even if unrelated to the trade talks, has helped provide a better basis for a longer view. Nevertheless, a complicating factor may well be the lengthy nature of such a review process.

Textiles and clothing. For the past three decades, trade in this area has been subject to special restrictions as the main importers (industrial countries) have asserted the need for protection against “market disruption” by lower-cost suppliers (usually developing countries). Thus, under the current Multifibre Agreement (MFA), some 50 percent of textiles and clothing trade is regulated through bilateral quotas in a continued breach of the GATT’s nondiscrimination principle. With developing and Eastern European countries relying on these goods for almost 40 percent of their manufactured exports, and with potential higher value-added production hampered by fears that successful investment would lead to a broadening of quotas, developing countries, in particular, insist that integration of the sector into GATT be based on a phase-out of the MFA.

Under the draft text, the MFA would be phased out in three stages over a ten-year period. But only 45 percent of covered products would be liberalized before the final stage, and countries could choose the timing for bringing specific products under the GATT. Consequently, liberalization of the most sensitive products could be left to the end, raising doubts about achieving full integration into the GATT by the specified terminal date. Further, during the phase-out, countries could introduce discriminatory restrictions on those products not already made subject to the GATT, or on which they do not have existing bilateral arrangements.

All these elements, which reflect strong vested interests in the status quo, especially in the United States, make it unclear that the phase-out will be trade-expanding, particularly in the initial stage; but bringing MFA trade back under GATT means de facto acceptance that bilateral sectoral management of trade is at odds with multilateral rules, thereby halting the drift in that direction. The latter, however, as well as implementation of the phase-out, critically depends on strengthened GATT rules, particularly on antidumping and trade in counterfeit goods, and on the readiness of developing countries to open their own markets.

Traditional market access issues. Progress in other market access areas—tariffs, nontariff measures (NTMs), and natural resource-based and tropical products—is closely connected to progress in agriculture. As it is the overall incidence of border protection that matters, few countries are ready to commit to lower NTMs until they have a clearer view of the outcome in tariffs, and vice versa. Willingness to reduce NTMs also depends on the results in the rule-making areas (e.g., safeguards).

Negotiations on tariffs have proved difficult, in part because previous trade rounds reduced average tariff rates on manufactures in industrial countries to about 5 percent, leaving most industrial participants with tariffs concentrated in sensitive areas. Moreover, the low averages frequently disguise both tariff peaks and tariff escalation (where tariff rates for a commodity rise with the degree of processing)—both key issues for developing countries. A substantial package may be within sight, however, especially if it incorporates the US offer of a so-called “zero-for-zero” option, under which industrial countries would reduce some 2,000 industrial tariff lines to zero or very low rates. This still presents problems in some sensitive areas, but could well be accepted in others, including chemicals, pharmaceuticals, and, perhaps, steel. A positive outcome could also result in a sizable increase in bindings (a legal commitment not to raise a specific tariff above a given level) by developing countries and in significant reductions in their tariffs. This would support the permanency of the recent trade liberalization in many developing countries and be a major step toward the active partnership sought by the industrial countries.

Rules

In recent years, trade expansion and, consequently, investment, has been deterred not so much by tariffs as by numerous measures that were largely of a unilateral and bilateral nature, of dubious GATT legality, and implemented with little predictability. Bringing clarity and consistency to trading rules, along with a credible dispute settlement mechanism, therefore, is key to achieving the objectives of the Round. But the need to balance the rights and obligations of signatories, and the imperative of not losing the objectives of consistency and appropriate tightness in the process, has created great difficulty. Thus, in the search for compromise in the important areas—safeguards, antidumping, and subsidies—the price for bringing all trade back into the GATT may turn out to be high in terms of allowing relatively easy access to defensive action. The limited effect of the commitment not to use measures inconsistent with the GATT during the negotiations and, indeed, to roll them back so that they could be eliminated by the Round’s end, point in that direction. By contrast, there has been progress toward a more credible dispute settlement mechanism.

Bringing clarity and consistency to trading rules, along with a credible dispute settlement mechanism… is key to achieving the objectives of the Round.

Safeguards. The need to incorporate temporary protection of industries injured by import competition into the system is evident. Since the mid-1970s, the perceived inadequacy of the safeguard rules has led to their being increasingly by-passed through recourse to bilateral actions, such as voluntary export restraints, that restrict imports of a product from selected sources. Re-establishing GATT control over such actions has been central to the safeguards negotiations, with the key issue being whether actions should be applied selectively. The EC has argued for selectivity, while smaller industrial and developing countries prefer nondiscrimination, as they fear that selective measures both increase their vulnerability to pressure from major traders and can lead to market-sharing arrangements. Recently, the EC proposed a modified form of selectivity—”modulated” quotas—covering all suppliers, but the degree of restraint would vary according to the perceived contribution of individual suppliers to disruption of domestic industry.

The other elements of a safeguards agreement seem clear, although their implications are less so. The critical points include the following: (1) countries could assert injury to domestic producers and take measures, initially largely beyond multilateral questioning; (2) measures could be in place for five to eight years, and trading partners could not initiate compensation or retaliation procedures during the first three years at least; (3) measures would be price-based, in principle, but “modulated” quotas could change this; and (4) measures would be eased progressively and subject to multilateral monitoring and dispute settlement procedures. In return, participants would rule out non-GATT specified measures and phase out existing ones over a three- to four-year period. However, the relatively easy access to safeguards could open the danger of first-resort use. The main benefits would lie in the increased transparency in the use of safeguard measures, the progressiveness of their phase-out, and their being subject to multilateral surveillance.

Antidumping. Abuse is central to the negotiations on antidumping. These actions are meant to protect domestic producers against predatorily priced imports, but they may now have become a preferred protective instrument in some countries. For example, since 1980, the four leading users of antidumping measures (Australia, Canada, the EC, and the United States) have initiated over 1,000 investigations, of which some 50 percent have led to action. As a result, the countries that are often subject to such actions—led by Japan and other Asian exporters—want clear rules to prevent unpredictability; they suggest an agreed methodology for calculating dumping margins and strict limits for the period between initiation and definitive findings of antidumping actions. On the other side, the EC and the United States want the rules to cover circumvention (e.g., assembly of dumped inputs in the domestic or third markets). But the framing of rules to determine “intent” in investment decisions is difficult in the face of internationalization of production that can make exporting via third countries, or moving assembly operations into markets, an economically sensible undertaking. There is also the danger of loss of consistency in dealing with local content rules (see section on TRIMs). The need to find a solution is the more pressing as failure to do so could well delay implementation of, if not agreement to, the phasing out of the MFA.

Subsidies. Although there is virtually a worldwide move toward reduction of subsidies, these efforts have taken on Herculean aspects, as they involve difficult internal policy dilemmas of which trade distortion is only one aspect. Addressing them primarily in the context of trading rules has created basic difficulties, especially for the EC, which has to balance the domestic priorities of its member states while retaining sufficient flexibility vis-à-vis other participants. In this respect, moves by the EC to limit sector-specific subsidies, in the context of completing its internal market integration by 1992, may assist its Uruguay Round position.

The central point concerns outright prohibition of subsidies. The United States would go furthest, prohibiting all export subsidies and those domestic subsidies that distort trade. The EC, Japan, Korea, the Nordic countries, and Switzerland would treat agricultural export subsidies within agriculture, but would prohibit others, including those that relate to export performance. However, neither Japan nor the EC would prohibit domestic subsidies; the EC would deal with these on a case-by-case basis, depending on clearly demonstrated negative trade effects, and would rely on tightened countervailing measures. Most developing countries resist outright prohibition, arguing that subsidies are an essential development instrument. But given domestic budgetary pressures and the need to fend off domestic vested interests, a number might well agree to limitations on industrial export subsidies.

Dispute settlement. A major problem in this area has been the painfully slow process of adopting and implementing findings of GATT panels. However, negotiators now are close to an agreement that could improve this situation materially. The agreement provides that, unless the GATT Council decides to the contrary, panel findings would be adopted automatically. Moreover, retaliation would be possible if the findings were not implemented within defined time limits. This contrasts with present procedures, which require an explicit Council decision for adoption of findings, normally on a consensus basis. Even this improvement, however, does not provide small traders with appropriate leverage in case of non-implementation, given that it is based on retaliation. In return for injecting some automaticity into dispute settlement procedures, countries would renounce the use of unilateral measures inconsistent with GATT rules. At issue is the operation of Section 301 of US trade law and the tendency of other countries to emulate that law. But many countries, including the United States, would not undertake such a commitment without appropriate results on dispute settlement and elsewhere in the Round. Thus, material improvement in the dispute settlement mechanism could be lost if other elements of the package lag.

New areas

Trade-related investment measures (TRIMs). As with subsidies, many participants regard certain TRIMs as a form of protection in that they divert trade and encourage inefficient production. Most industrial countries hold that certain TRIMs—such as local content and trade balancing requirements—should be prohibited as they are contrary to present GATT Articles (on national treatment and the elimination of quantitative restrictions, respectively); further, prohibition also should include export performance requirements, which are not currently covered by the GATT. By contrast, many developing countries maintain that TRIMs are necessary for development purposes and opt for a case-by-case approach that addresses only clearly identified adverse trade effects. A further question is whether disciplines should apply only to requirements that are to be met by investors, or also, as argued by many OECD countries, to measures that offer or withdraw incentives, such as subsidies or tax advantages, and that, therefore, could become TRIMs as well. Despite the basic questions, a compromise appeared possible in Brussels, with many developing countries indicating a willingness to accept the prohibition of those TRIMs that would be regarded as running counter to GATT rules.

Trade-related aspects of intellectual property rights (TRIPs). National sovereignty concerns also dominated the early discussions on TRIPs—an area where the United States, for example, estimates it is losing tens of billions of dollars. However, developing countries now agree on the need to deal with trade in counterfeit goods, estimated to have grown to 3-6 percent of world trade. The debate on intellectual property rights has generally sought to balance protection for the holders of these rights with the national objectives of developing countries, including technology transfers and avoidance of high charges for patent rights, at least in certain socially sensitive areas (e.g., pharmaceuticals). Basic agreement seems possible on substantive norms to protect these rights and on multilateral disciplines to enforce the norms. There remains a question on where to lodge enforcement of rules and disciplines on TRIPs—in GATT, including its dispute settlement mechanism, or elsewhere.

Services. Bringing this area—which covers some 20 percent of world trade—under multilateral rules is a major element in a strong Uruguay Round package. Negotiating difficulties include the problems associated both with bringing under one framework a “supersector” comprising very diverse subsectors and the tendency to carry over existing language, some of which is under negotiation, from the GATT into the agreement—meaning that the emerging framework may well include some GATT ambiguities.

The main issues are threefold:

  • • devising appropriate rules for trade in services, especially as delivery of a service frequently depends on the right of establishment (e.g., a subsidiary in a foreign market). Negotiation of the latter falls outside the limits of the traditional GATT and, therefore, is being challenged by some. An important point of debate is whether, in case of disputes, countries could retaliate across services sectors—a particular concern in financial services—and across services and goods, as well;

  • • formulating coverage, as a number of sectors are managed by bilateral treaties (civil aviation), and others are effectively closed to genuine competition—either to accommodate strong domestic and cartel-type interests (maritime services, especially in the United States), or because they are in the hands of government monopolies (telecommunications in most countries); and

  • • confronting the “free-rider” issue, which springs from the fact that in a number of areas and in a number of countries, market access has been largely unregulated, if not relatively free. This raises the question of how to bring along those who are reluctant to liberalize access. The US proposal to make most-favored-nation (MFN) treatment conditional, based on the degree of access participants are willing to bind, was opposed as compromising a basic principle of the GATT; the EC’s sectoral nonapplication approach, based on a participant’s liberalization commitments for a particular sector, creates problems for countries that seek to trade off a higher level of commitments in one sector against a lower one in another.

These deliberations have led to a reassessment of the benefits to be derived from a services agreement, both by those who were the main proponents and those who were initially unconvinced. As the ardor of the former tempered during the discussions, some of the latter began to see material advantages. With mutual interests more apparent, there is now a large constituency in favor of an agreement, including most major traders among developing countries.

Conclusion

With complex issues to be resolved, it is not surprising that the systemic issues of how to improve the functioning of the multilateral trading system and how to strengthen the responsibilities of the GATT and its Secretariat have taken a back seat. Thus, the question of increasing the GATT’s contribution to improved coherence in global policymaking, including strengthened cooperation with the IMF and the World Bank, has been left to some appropriate time down the road.

Consideration of closer ties between the institutions also depends upon whether the GATT is to evolve toward a World Trade Organization, which would bring all multilateral trade treaties under one roof.

Whatever form the GATT takes, a successful outcome of the Uruguay Round means increased responsibilities. This is so because the results need to be comprehensive if they are to set the trading environment—and hence help shape the external environment within which countries formulate their adjustment and growth objectives—for the next several decades. This has become increasingly clear with the difficulties negotiators have faced, including the possibility of losing the Round entirely. Thus, virtually for the first time, businessmen worldwide are making a concerted effort to voice their interest in not allowing the talks to be derailed.

Without a successful Uruguay Round, one of the main worries is that the trend toward bilateral and regional trading agreements is likely to accelerate and might do so in a way not supportive of the growth of global trade. Ideally, the formation of these pacts would work toward member countries’ opening their markets globally as well, so that any trade diversion could generally be presumed to be offset by trade creation. It was on that basis, for example, that the Canada-United States Free-Trade Agreement was put forward. However, the belief that global trade creation may only be a minor part of the dynamics of regional integration has given impetus to the expansion, if not formation, of these regional groupings (e.g., the recent spate of EC membership and association applications, the prospect of a European Economic Space, and the moves toward more free trade agreements in the Western Hemisphere). Moreover, if market access were reasonably assured on a regional basis only, production decisions within a country would be based on regional rather than on general market signals and could fall short of potential.

The recent resumption of the negotiations obviously constitutes a necessary, but not a sufficient, step toward success. It needs to be coupled with a genuine commitment to confronting and solving the underlying problems that have repeatedly stopped the Round. It would be ironic if the virtually worldwide trend toward allowing national economies to be guided by market signals were to be frustrated by an inability to allow these same signals to guide the complex workings of the multilateral trading system.

Interim Committee and IMF Executive Board Laud Alan Whittome

First the Interim Committee and then the Executive Board of the IMF passed resolutions of praise upon the retirement on March 31, 1991 from IMF staff of L. Alan Whittome after 27 years of service. The resolutions recognized Mr. Whittome’s exemplary service as a member of the IMF staff and his efforts in the promotion of international monetary cooperation.

Mr. Whittome joined the IMF staff in 1964 as Director of the European Department, after attaining a senior position in the Bank of England. He subsequently became Counsellor of the IMF, and Director of the Exchange and Trade Relations Department. Noting his many other achievements, the Managing Director, Michel Camdessus, and the Chairman of the Interim Committee, Michael H. Wilson, stated that “Most recently, Mr. Whittome contributed indelibly to the Study of the Soviet Economy requested by the heads of State and Government and the President of the EC Commission at the Houston Economic Summit, a study that typifies the sound advice he has given to an entire generation of public officials.”

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