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Guest Article: The Uruguay Round - An Unfinished Symphony

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1991
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As the current multilateral trade negotiations go into “overtime,” an observer comments on agriculture and related important issues that hold the key to the triumph of multilateralism

Sylvia Ostry

Chairman, Centre for International Studies, University of Toronto

The Uruguay Round should have been over by now. But participants failed to reach agreements at their Ministerial meeting in Brussels in December 1990. This had led to an extension of the round into an “overtime” of sorts. There are some who would argue that the Uruguay Round was too much, too late.

It was too much, because in addition to tackling two sectors—agriculture and textiles and clothing—that had escaped the discipline of the General Agreements on Tariffs and Trade (GATT) for decades, the round attempted to deal with the unfinished business of the Tokyo Round in safeguards, and to stem the erosion of GATT of the 1970s and 1980s by the use and abuse of the trade remedy laws of antidumping and of countervailing moves against subsidies. Further, the agenda also included major additions to GATT’s mandate by adding the “new issues” of services, trade-related intellectual property and investment, and measures to strengthen GATT as a contract and an institution.

It was also too late, because the United States had been trying to launch a new round since the early 1980s (in part to cope with the alarming rise in protectionist pressure fed by an increasing trade deficit). These efforts had been successfully blocked until September 1986 by the European Community (EC) (because of fear that agriculture would be prominent in the negotiations) and by some less developed countries (because of opposition to the new issues). But by then, there had been a fundamental change in US Government trade policy, from a single, overriding commitment to the GATT to a multitrack policy of unilateralism, bilateralism, and multilateralism. The first—unilateralism—was launched in 1985 through more active use by the Administration of section 301 of the 1974 Trade Act, under which the United States alone decides other countries’ unfair trade practices on specific items, determines violators, and implements retaliation to secure compliance. The idea of unfair trade practices was later extended in the 1988 Omnibus Trade Act to cover trade practices of whole countries (“Super 301”). Bilateralism was endorsed first in the 1985 US-Israel free trade agreement, then in the much bigger US-Canada free trade agreement initiated in December of that year, and (in a different way) in the US-Japan structural impediment initiative of 1989.

It seems unlikely that the United States will soon return to the single track policy of the post-World War II years, or its role as guarantor of the multilateral trading system. That must be kept in mind whatever the final outcome of the Uruguay Round. One of the main lessons of the round to date is that neither of the two other major trading powers—the EC and Japan—was prepared to assume the role of guardian of the system, perhaps because they were operating under the traditional, but outdated, assumption that the United States would do it.

But this negative verdict about the round—too much, too late—suggests there are preferable alternatives to pursuing this extraordinarily difficult effort of updating and reinforcing multilateralism, which is not the case. For, indeed, what is really on the table in the negotiations is the future of a trading system, however imperfect, based on rules rather than on power. To the nonpowerful countries, the alternatives are obviously unattractive! But even to the major trading powers, the uncertainty and instability that would be generated by a move away from a transparent rules-based system is likely to be costly in the longer run. The basic international public good of the GATT system is stability and a sustained force for integration, rather than divisiveness, both economic and political—hardly an unimportant public good.

So what are the prospects for the current trade round in light of the recent stumbles?

The Brussels ministerial meeting

Unusually, the Punta Del Este Declaration, which launched the Uruguay Round, specified the duration of the negotiations, so the Ministerial meeting in Brussels of December 3-7, 1990, had been “on the books” for four years. Yet the profoundly divisive issue of agriculture, which had delayed the launch of the round and nearly brought negotiation to a halt at the mid-term ministerial meeting in Montreal two years earlier, dominated the Brussels meeting and forced an adjournment without agreement on any other item on the agenda. Unlike previous rounds, when disagreement between the European Commission and the United States on agriculture did not prevent negotiation of a reasonable “package”—the main reason why agriculture has remained a sector uniquely untouched by international rules—this escape route of agreeing to disagree was closed not only because the US position was much firmer this time, but also because the Cairns Group (a coalition of countries—both developed and developing—that export agricultural products) were not prepared to accept another such bargain.

Agriculture has been protected in all countries in one way or another, but the international spillover effects of these domestic economic and social policies became seriously destructive in the 1980s for a variety of reasons too complex to detail here. The fundamental problem in agriculture is that market signals have been blocked by government intervention, and technological change has greatly exaggerated the impact of these interventions. The EC produces 15-20 percent more food than it needs, and this “overhang” is rising as technological change improves productivity and changing food consumption habits reduce demand. The reforms suggested would increase the role of market signals. The debate in the Uruguay Round also required the EC to confront the political and social consequences of reforming the “basic mechanisms” of its Common Agricultural Policy (CAP), the original glue binding the Franco-German alliance.

This is the first of a series of commentaries from different vantage points on aspects of the Uruguay Round. Guest Articles do not necessarily reflect the views of either the IMF or the World Bank.

Readers are also invited to contribute their views in the form of Letters to the Editor.

External pressure is often used by countries as a device for undertaking necessary but politically dangerous internal reform—the most obvious example today is Japan, and the bilateral structural impediments initiative with the United States. However, the EC is, in some respects, unique as a trading entity. There, the opposite situation prevails: External pressure creates a negative force impeding domestic reform. Those blocking reforms argue that other countries, especially the United States, do not understand the “true” dimensions of farming in Europe and are trying to impose their ideas, based on a totally different agricultural system, on Europe. The CAP needs basic reform, if only for budgetary reasons. But only domestic pressures could lead the political decisionmakers to take the bull by the horns (to use a rural metaphor).

Brussels meeting fails

In February 1988, a modest change was made to the CAP because of the need to reduce budgetary expenditure on agriculture and free funds for regional adjustment after the accession of Spain and Portugal to the EC. By 1990, it was clear to the Commission that there would be growing budgetary overruns (and growing lakes and mountains of subsidized agricultural products) unless a much more radical reform were undertaken—especially in light of the prospect of increasing agricultural exports from a reforming Eastern Europe. While for the EC, the Uruguay Round negotiations were either irrelevant or deleterious to the prospects of agricultural reform, a happy side benefit of such reform would be the rather rapid reduction, or even elimination of subsidies, especially export subsidies. But the intensely divisive political debate that would inevitably accompany any real effort to reform the CAP had not yet begun in December 1990. So the Brussels meeting ended with the EC (and, strangely, Japan and the Republic of Korea—strange because unnecessary and certain to enrage the US Congress) rejecting the proposal for a negotiating framework circulated by the chairman of the Agricultural Negotiating Group and acceptable to the United States and the Cairns Group.

Nonetheless, a curious event occurred before the final rejection. What has been aptly described as a “phantom offer” by the EC was circulated by word of mouth among a number of delegations, and it sounded quite promising in that it got over the main sticking point—a refusal by the EC in its formal position to accept separate and specific commitments on internal support, border measures, and export subsides. But when the ghost took material form in the Chairman’s paper, the meeting ended with a rejection of the proposal—which outlined the framework for negotiations in the three kinds of subsidies with suggested magnitudes of reduction—by the EC, Japan, and Korea.

Post Brussels prospects

After two months of shuttle diplomacy by GATT Director-General Arthur Dunkel, unsuccessful meetings of major trade officials, numerous false starts, and mixed signals, on February 20, 1991, in Geneva, the European Commission accepted (or, more precisely, did not reject) what more or less amounted to the phantom offer: for example, participants “agree to conduct negotiations to achieve specific binding commitments” on each of the three areas of contention (domestic supports, market access barriers, and export subsidies). The negotiations were relaunched—or rather some work began a few days later on technical matters in agriculture and other agenda items.

Timing is everything. Between the end of December 1990 and February 20, 1991, the discussions on CAP reform had started in Brussels—to be concluded when? No one knows. However, the United States had signalled that it would ask for an extension of its “fast track” from Congress (needed anyway to pursue its North American Free Trade Agreement with Mexico and Canada). This it did. (The “fast track” requires Congress either to approve or reject the entire trade agreement without any amendments. It is meant to stop an avalanche of proposed changes from special interests that would likely decimate the agreement. It was due to expire on June 1, 1991, under the terms of the 1988 Act, and the law required a two-year extension to be requested by the President by March 1, 1991.) So the Uruguay Round negotiations can theoretically continue for up to two more years.

While some agreement on agriculture between the United States and the EC is a sine qua non for a successful conclusion of the round, it is by no means sufficient. There are still significant policy differences both within the Organization for Economic Co-operation and Development and with some developing countries in the area of the new issues, especially in services (in which domestic US pressure has created problems in a number of sectors) and in intellectual property. Other serious unresolved problems remain in the trade remedy laws negotiations, where progress on the subsidy countervailing code and, to a lesser extent, antidumping, has been glacial. Since, after the Tokyo Round reductions of tariffs, the use of the trade remedy laws became the major form of protectionism in a number of countries as tariffs were less and less important as trade barriers, these are not trivial issues.

Finally, there is the question of the future of the multilateral system. Only a “big package” (including at least agriculture, a phase-out of the Multifibre Arrangement on textiles and clothing, services, intellectual property, a significant increase in market access, and possibly some movement on trade remedies) would stand a chance of incorporating elements of systemic reform. The latter would have to include enough strengthening of the dispute settlement mechanism to guard against any resurgence of unilateralism, and the establishment of a World Trade Organization. The WTO, apart from creating an international organization to continuously monitor trade arrangements and support work on the policies and issues, would need to provide for the legal establishment of a Trade Policy Review Mechanism (set up provisionally after the December 1988 mid-term Ministerial Review). Finally, in the absence of a WTO, it is difficult to see how the GATT could cope with the implementation of the enormously complex Uruguay package. The fragmentation of dispute settlement, already introduced in the Tokyo Round (by the legally separate codes on a number of items), would be greatly exacerbated.

It is difficult to imagine how the contemplated General Agreement on Trade in Services (GATS), or obligations on the level of intellectual property rights, or even new disciplines on agriculture could be effectively integrated with the GATT as now constituted. The legal and political complexities would prove so formidable that over time the results of the negotiations could well be negated. The erosion of the GATT, so evident in the 1970s and 1980s, would commence again. The form might be different but the result would be the same: the end of multilateralism. Let us hope that this fearful prospect will steel the resolve of the negotiators and speed them toward a quick and practicable resolution of key issues. There is no preferred alternative.

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