Chapter

III Industrial Countries’ Trade and Trade-Related Policies

Author(s):
International Monetary Fund
Published Date:
January 1992
Share
  • ShareShare
Show Summary Details

Since the mid-1980s, there has been little, if any, decline in the overall level of trade protection in industrial countries despite the expansion of output and trade, the reduction in current account imbalances among the major industrial countries, and the ongoing Uruguay Round of multilateral trade negotiations. Protection persists in agriculture and in declining industries, and new pressures have emerged for government intervention in sectors considered “strategic.” The limited progress in addressing the long-standing problems in agriculture and declining industrial sectors will intensify adjustment pressures in the industrial countries as the European single-market program progresses, the developing countries continue to expand and diversify exports, and the Eastern European countries seek to reintegrate their economies into the multilateral trade system.

Many of the issues that need to be resolved to expedite adjustment in agriculture and in mature industries, such as textiles and steel, are under negotiation in the Uruguay Round trade negotiations and in other multilateral forums. The Uruguay Round, which was extended following the failure to conclude the Round on schedule, aims to substantially reduce tariff and nontariff barriers to trade, strengthen existing rules and dispute-settlement procedures, bring sectors such as agriculture and textiles and clothing under normal GATT disciplines, create disciplines in new areas (services, foreign investment, and intellectual property), and improve GATT surveillance over trade policies and the coherence of trade and financial policies. The liberalization of steel is proceeding in multilateral negotiations under the U.S. Steel Liberalization Program, and an agreement that would phase out subsidies to shipbuilding and repairs is being negotiated in the OECD Council Working Party on Shipbuilding.

Despite these negotiations, the salient feature of trade policy developments among the major industrial countries is the threat of reduced reliance on the multilateral approach in relations with trade partners. Issues of “fair” trade and market access are often dealt with bilaterally, outside the scrutiny of the GATT Contracting Parties and in ways that are at variance with GATT rules or the principles of nondiscrimination and transparency that underlie the GATT. Areas not covered by the GATT have become a growing source of trade friction: services, foreign investment, and intellectual property rights. With the limited progress in the Uruguay Round, countries are addressing these issues in bilateral and regional trade arrangements where it is easier to reach a consensus. Liberalization among the industrial countries is proceeding largely in the context of regional trade arrangements. While such arrangements can expand the scope for free trade, they hold risks for the multilateral trade system and are a source of concern for countries that fall outside regional groupings.

In 1990 and 1991, the industrial countries began to dismantle selected import restrictions affecting Eastern European countries and to establish normal trading relationships with these countries. These developments are discussed separately in Section IV. Similarly, industrial country policies on agriculture are described in Section VI.

The rest of this section reviews recent developments in industrial countries’ trade policies and trade-related industrial policies. The first part covers the main instruments of trade policy. The second reviews government support policies and efforts under way to curb trade-distorting subsidies. The third discusses trade policies in selected individual countries.

Recent Trends in Trade Policies

Tariffs

The GATT system has sought to establish nondiscriminatory tariffs as the principal means of protection. During the past forty years, industrial countries have dismantled most import quotas on nonagricultural products and, through seven rounds of multilateral trade negotiations, have reduced the average level of MFN tariff rates from around 40 percent at the end of World War II to around 5 percent at the end of the Tokyo Round in 1979. Further reduction in average tariff levels by one third is a major objective of the Uruguay Round. The progressive decline in tariff rates has lessened their importance as an instrument of trade policy, although the levels of protection they provide differ considerably across countries and products (Table A5).22 The tariff rates applied after the Tokyo Round are relatively high (tariff peaks) in a number of countries for agricultural products and for clothing, textiles, and footwear. Progressively higher tariffs along the processing chain (tariff escalation) are also a feature of most industrial countries’ schedules, particularly for certain foodstuffs, leather, fabrics, and some petrochemical products. In contrast, tariffs on capital and intermediate goods and durable consumer goods are relatively low.

Applied tariff rates may differ from the Tokyo Round MFN rates because of subsequent tariff cuts or preferential trade arrangements among countries, including customs unions, free trade areas, and tariff preference schemes such as the GSP. Nearly 40 percent of world trade is conducted within preferential trade arrangements among industrial countries.23 Because of this, average applied tariff rates can be lower for some products than average rates applicable to GSP beneficiaries. This is a major concern of developing countries, which complain that free trade areas can undermine their preferential access to industrial country markets. At the midterm review of the Uruguay Round, industrial countries agreed to a moderate reduction in tariffs on tropical products that are of particular interest to developing countries.

Nontariff Measures

With the decline in industrial country tariff rates and the high level of bound tariffs, particularly for industrial products (Table A6), countries have increasingly relied on nontariff measures in response to adjustment pressures in trade-sensitive sectors. Such measures include VERs, similar restraints under the MFA, other orderly market arrangements, tariff quotas, surcharges, variable levies, prohibitions, licensing, import monitoring, antidumping and countervailing actions, and price control measures. The incidence and restrictiveness of nontariff measures are difficult to judge (Appendix III), but trade coverage ratios estimated by UNCTAD using its Data Base on Trade Control Measures indicate that nontariff measures affected almost 19 percent of nonfuel imports of 22 industrial countries in 1990 (Table 4).24 Coverage varies significantly among product groups with the highest incidence on food items (36 percent) and the mature industries: iron and steel (53 percent), textiles (39 percent), clothing (63 percent), footwear (20 percent), and motor vehicles (55 percent). Imports of textiles and clothing, footwear, steel, and motor vehicles are mainly affected by VERs and the MFA, while imports of agricultural products are controlled by other quantitative restrictions.

Table 4.Import Coverage Ratios of Selected Nontariff Measures, by Type of Measure, Applied by Selected Developed Market-Economy Countries1(In percent)
Product GroupNTM Coverage by Type of NTM
All NTMs2Subgroup of

NTMs3
Quantitative

restrictions
Of which:

VERs and

OMAs4
19881990198819901988199019881990
All food items35.435.932.931.826.525.32.81.5
Food and live animals38.839.335.834.529.828.43.41.7
Oilseeds and nuts7.47.46.96.95.85.8
Animal vegetable oils10.110.09.69.64.34.2
Agricultural raw materials4.34.32.92.92.42.4
Ores and metals19.017.912.711.612.711.510.410.3
Iron and steel56.252.938.935.338.935.332.532.5
Nonferrous metals0.80.80.20.20.20.2
Fuels17.917.913.513.512.712.7
Chemicals10.710.86.76.65.55.4
Manufactures, excluding chemicals16.017.811.011.010.410.38.78.8
Leather9.313.21.31.31.31.30.20.2
Textiles, yarn and fabrics38.638.734.234.334.134.124.624.6
Clothing63.763.157.156.657.156.653.653.0
Footwear19.719.71.98.01.98.00.97.6
Vehicles554.929.628.428.0
All items, excluding fuels17.318.512.712.511.511.37.27.1
All items17.418.412.812.611.611.46.36.2
Source: United Nations Conference on Trade and Development (1991b).Note: NTMs = nontariff measures; OMAs = orderly marketing arrangements; VERs = voluntary export restraints.

Overall, nontariff measures affect exports from developing countries to a greater extent than do exports from industrial countries, particularly for manufactured products (Table A7). This primarily reflects the high proportion of imports of textiles, clothing, and footwear subject to nontariff measures.25 For imports of food items, iron and steel, and motor vehicles, the proportion of trade affected is greater for exports originating in industrial countries. For most categories of goods, exports from the former U.S.S.R. and Eastern Europe have had the highest trade coverage ratios; some of these were dismantled in 1990, but the indicators reported here will not reflect these developments until 1991.

In order to assess the longer-term trend in the use of nontariff measures. Laird and Vossenaar (1991) combined the most recent UNCTAD estimates for the period 1988–90 with earlier estimates for the period 1981–88 (Table A8). Their calculations suggest that the incidence of the “core” nontariff measures,26 which are considered the most restrictive, increased by about 5 percent between 1981 and 1987–88, but had declined somewhat by 1990. The experience varies across countries during the 1980s. The coverage ratios rose most for both the United States and the EC, which made increased use of VERs (many directed against Japan and the newly industrializing economies in Asia) on motor vehicles, steel, machine tools, textiles, and, in the case of the EC, consumer electronic products; in the EC, some national VERs were phased out after 1983 (Tables 5 and A9). Japan’s trade coverage ratio declined in the second half of the 1980s owing to the lifting of restrictions on some agricultural products. Several other countries, namely, Canada, New Zealand, and Norway, have recorded notable declines in their import coverage ratios since the mid-1980s. Canada terminated a VER agreement with Japan covering exports of automobiles and phased out restrictions on imports of footwear (1985–88); New Zealand substantially reduced quantitative restrictions as part of a comprehensive reform program to deregulate and open up its economy; and Norway lifted quotas on imports from Japan and some other Asian countries.27

Table 5.Summary of Export Restraint Arrangements by Product and Exporting Region, End of March 19891
IndustryEFTACanadaECJapanSouth KoreaChinaTaiwan Province of ChinaUnited StatesEastern EuropeOtherTotal
Steel7253512121350
Machine tools2511514
Electronics1384328
Footwear4713318
Textiles12412193766
Agriculture613241362551
Automobiles18220
Other3223911342
Total1859703851234188289
Summary of Export Restraint Arrangements by Product and Importing Country
IndustryEFTACanadaECJapanAustriaAustraliaSwitzerlandU.S.S.R.United StatesTotal
Steel1143550
Machine tools41014
Electronics25328
Footwear215118
Textiles128276271366
Agriculture41365231251
Automobiles1117120
Other1352442
Total1912173132210169289
Source: General Agreement on Tariffs and Trade (GATT), Review of Developments in the Trading System, various issues.Note: EC = European Community; EFTA = European Free Trade Association.

The increased use of nontariff measures by the EC and the United States, particularly VERs and orderly market arrangements, which fall outside the GATT framework, and frequent recourse to “unfair” trade remedies (antidumping and countervailing actions) have been linked to the difficulties of applying safeguard provisions under Article XIX of the GATT, as evidenced by the decline in their use (Appendix I). A country must prove serious injury to meet the GATT criteria to apply safeguards, normally take any action in a nondiscriminatory manner (MFN basis), and compensate affected exporting countries or risk retaliation. In contrast. VERs and “unfair” trade remedies can be applied selectively, by product and country, and, in the case of VERs or price undertakings, they automatically compensate the exporter through higher prices and thereby foster cartel-like behavior (Appendix II). The attractive features of VERs to domestic industries seeking protection from imports and to export industries abroad explain their rapid growth and their application for extended periods to large portions of sectors such as textiles and clothing, steel, motor vehicles, and, more recently, machine tools. The negotiations on GATT safeguard provisions in the Uruguay Round are considered essential to bring these sectors under GATT discipline; the key issue is whether or not and under what circumstances to permit the selective application of safeguard actions.

The economic effects of nontariff measures are inherently difficult to quantify (Appendix II) because they can be circumvented in various ways. In part, this explains why exports of restricted items, such as textiles and clothing, have continued to expand, requiring more extensive agreements with each renegotiation of the MFA (Table A10).28 Aggregate trade flows are largely determined by macroeconomic conditions, such as growth in the domestic and foreign markets and external price competitiveness; to the extent that productive resources are flexible, nontariff measures primarily affect the composition of trade. However, nontariff measures are a cause for concern because they distort the allocation of resources, including the pattern of domestic and foreign investment. By locking resources into inefficient uses, nontariff measures reduce potential output in both restricting and restricted countries. Their prolonged use has delayed adjustment in declining sectors in the major industrial country markets, and their selectivity and lack of transparency have weakened the multilateral trade system.

Antidumping and Countervailing Duties

Under GATT rules, antidumping and countervailing duties can be imposed by countries to protect their domestic producers from injury owing to the “dumping” of goods by foreign suppliers or to trade-distorting subsidies. As discussed above, the use of such measures has been cited as another form of selective protection; it has been argued that countries find it easier to use antidumping and countervailing measures, which involve a weaker injury test (or no test in some cases), when a safeguard action would be more appropriate, that is, when the nature of the problem is injury from trade, not “unfair” trade. Questionable practices and vague rules and definitions for determining injury, dumping margins, and subsidies provide considerable scope for variations in domestic legislation and the application of “unfair” trade laws.29 In examining the use of unfair trade remedies in the EC and the United States, Messerlin found that they often led to the introduction of more secure nontariff barriers, such as VERs or quantitative restrictions (steel, electronic products, and textiles and clothing), or they became the main tool of protection (chemicals, abrasives); he also found evidence of collusive behavior among the domestic and foreign firms affected by such measures.

The pattern and volume of antidumping and countervailing actions lend support to the view that these measures respond to pressures for protection by import-competing firms. In the early 1980s, in the wake of a second round of oil price increases and a severe world-wide recession, the demand for relief from import competition through antidumping and countervailing measures increased (Tables A11 and A12). Since the mid-1980s, the number of investigations initiated has declined significantly; although, the trade coverage ratios in Table 4 suggest that the proportion of trade affected by antidumping and countervailing actions has increased somewhat since 1988. The sectors most affected by these measures are motor vehicles, steel, textiles and clothing, and leather products, the same sectors that are protected by other nontariff measures.

The United States, the EC, Canada, and Australia account for nearly all antidumping investigations initiated by industrial countries.30 In the United States, the sharp rise in antidumping cases in the first half of the 1980s has been attributed to the real appreciation of the dollar and structural problems in the international steel industry.31 While the number of antidumping investigations initiated declined during the second half of the 1980s, the stock of outstanding cases continued to rise until 1989/90, when it declined slightly. At the end of 1990, Japan, China, Korea, and Taiwan Province of China accounted for 83 of the 195 outstanding cases; developing countries accounted for most of the rest (Table A13). The iron and steel sector accounted for most (54 percent) of the antidumping cases initiated in 1980–87, followed by chemicals (11 percent).

The EC has been a frequent user of antidumping procedures; its stock of outstanding cases rose from 124 in 1983/84 to 170 in 1988/89, but declined to 152 in 1989/90, partly because of a reduction in cases involving Central and Eastern Europe. Measures against these countries have accounted for more than half of the total cases.32 EFTA countries, Japan, China, Hong Kong, and Korea have also been frequently investigated. The principal sectors initiating cases in 1980–87 were chemicals (42 percent), iron and steel (11 percent), nonelectrical and electrical machinery (15 percent).

Both the EC and the United States have widened the provisions of their antidumping legislation to address the circumvention of antidumping duties, although the EC has been the main user of anticircumvention measures (all directed against Japan).33 The EC legislation was challenged in the GATT and found inconsistent with GATT rules (Appendix I). As a result, the EC has suspended the use of its anticircumvention legislation, but it does not intend to change its laws until an acceptable solution to the problem of circumvention is agreed in the Uruguay Round. The ongoing globalization of investment and production and the increase in regional arrangements is likely to increase trade friction related to rules of origin.

In contrast to the United States and the EC, recent changes in antidumping legislation have worked to reduce outstanding dumping cases in Canada and Australia. In Canada, the number of outstanding antidumping cases began to decline in 1989 as a result of the five-year sunset provision in the Special Import Measures Act, which went into effect in 1984. Outstanding cases fell to 103 in 1990 compared with 159 in 1988. Australia’s antidumping legislation was modified in 1988 and 1989 to clarify what constitutes material injury and normal values and to tighten the review process. As a result of these changes, outstanding antidumping cases fell from 109 in 1987 to 11 in 1990. In March 1991, when further tariff reform measures were announced, a number of changes were made to Australia’s antidumping procedures to widen their applicability and expedite the handling of investigations.34

The United States has made the greatest use of countervailing duties in part because of the relatively limited role of subsidies in the United States and U.S. efforts to limit the subsidies of other countries. Also, under U.S. law, countervailing duties may be imposed without an injury test for those countries that have not signed the GATT Subsidies Code or negotiated a bilateral agreement with the United States.35 Outstanding countervailing actions rose steadily from 53 in 1982/83 to 86 in 1984/85 and remained at about this level before declining to 73 in 1989/90 (Table A12); most of the outstanding cases at the end of 1990 affected developing countries (Table A13). Over half of the countervailing cases initiated in 1980–87 were lodged by the iron and steel industry; the other industries initiating a significant number of cases were textiles, chemicals, and food products, each accounting for about 7–8 percent of cases.

Trends in Government Support

Governments use a wide range of domestic policies to promote industrial adjustment and development and to pursue “noneconomic” objectives, such as environmental quality, education and health, and regional equity. Various forms of intervention include direct subsidy payments, tax concessions, subsidized loans and loan guarantees, government procurement, regulations and standards, and administrative guidance. This section focuses on the nature and extent of direct and indirect subsidies to the industrial sector because of their possible trade-distorting effects and the lack of comparable information on other forms of government assistance. Countries disagree on which subsidies distort trade, but generally, sector-specific subsidies fall into this category, while broadly based subsidies, such as support for education and health or basic research, that do not confer differential advantage on specific industries are considered less trade distorting. While governments have made some progress in reducing support to declining industries, the evidence suggests that support to high technology industries is rising.

Industrial Subsidies

In recent years, governments have scrutinized subsidies more carefully because of budgetary constraints, the failure of sector-specific assistance to facilitate adjustment, the possibility of countervailing actions, and the desire to establish a more neutral incentive framework. In the EC, in particular, the Single Market Program has entailed stricter discipline on and monitoring of state aids to ensure a “level playing field” within the Community. Despite the widespread use of subsidies, comprehensive and comparable data are not readily available, although work is under way at the OECD, the EC, and EFTA to improve information in this area. In a recent OECD study. Ford and Suyker (1990) draw on data from the OECD national accounts, the EC surveys of state aids, and the EFTA Secretariat reports to compile cross country data on subsidies. The three data sources differ regarding the sectors covered and the definitions of subsidies used and are therefore not comparable, but they do provide a basis for the analysis of developments within each data set.

The broad trends in industrial country subsidies based on OECD national accounts data compiled by Ford and Suyker are shown in Table A14. These data cover current transfers to the productive sectors as a whole and exclude indirect subsidies, such as tax concessions and expenditures by state and local governments, which vary in importance across countries.36 The data indicate that in most countries total government subsidies (Panel I) increased during the 1970s and the first half of the 1980s when governments intervened to assist industries that had lost price competitiveness but have leveled off or declined since then. Data excluding subsidies to agriculture and food processing show a similar pattern (Panel II). The overall subsidy rate in OECD countries and in the major seven countries has stabilized at about IV; percent of GDP; for OECD Europe, the subsidy rate is nearly 3 percent of GDP. Subsidy rates differ significantly across countries. Industrial subsidization is highest in Sweden and Norway and lowest in the United States and Japan. Canada and the European countries record industrial subsidy rates in the range of 2 to 4 percent of GDP. In terms of claims on budgetary expenditures (Panel III), current transfers to industry are about 1 percent of outlays in the United States, but 3 to 5 percent of outlays in the other major industrial countries.

New Zealand and the United Kingdom showed the most dramatic reversal in subsidies to industry during the 1980s, as a result of policies to reduce government intervention in their economies through deregulation and privatization. Norway also reduced direct subsidies to producers from the early 1980s, although support remains high and sector specific. After 1984, subsidy rates declined in Canada and Australia where policies have been reoriented to expedite adjustment in declining industries; in other countries, subsidies to industry were relatively stable or increased. Data on the sectoral composition of subsidies (Table A15) show that in most countries the agricultural sector is more heavily subsidized than the industrial sector and that, within industry, transport, communications, and housing tend to attract higher subsidies than other industries.

Box 1Trade-Related Work Program of the OECD

The Organization for Economic Cooperation and Development (OECD) has an extensive work program on trade-related issues involving a number of its Committees. Below is an outline of the ongoing work related to the functioning of the trade system and the OECD’s future work program as set out in the communiqué of the OECD ministerial meeting of June 1991. The Trade Committee of the OECD played an important role in developing the agendas for the past two GATT rounds of trade negotiations (Tokyo Round and Uruguay Round), and it is expected that many of the issues included in the future work program will be on the agenda for the next round of trade negotiations.

Subsidies

The Agriculture Committee has contributed significantly to the process of agricultural reform by monitoring developments and policies in agriculture, developing standardized measures of agricultural support, and analyzing the economic, social, and environmental effects of changes in agricultural support and protection policies. The June ministerial meeting called for a continuation of this work.

During the past two years the Industry Committee has intensified its work on standardizing and quantifying industrial subsidies. The development of measures of industrial subsidization that are comparable across countries is the first step toward strengthening disciplines on subsidies that distort trade. The Economic Policy Committee has also initiated a small pilot project to develop measures of effective rates of assistance (ERAs). At the June ministerial meeting, the OECD Ministers invited the Organization to systematically monitor industrial subsidies and committed their governments to provide the necessary information.

The Export Credit Group of the Trade Committee is the forum for negotiations on the Export Credit Consensus, which the OECD Secretariat will administer. The Consensus would establish guidelines for the terms and conditions of export credits and limit the use of tied aid credits to commercially unviable projects. The June ministerial meeting called for the conclusion of these negotiations as soon as possible but not later than the end of 1991, and it welcomed a proposed in depth study of export premium systems and structures.

In the OECD Council Working Party on Shipbuilding, negotiations launched in 1989 aim for an agreement that would phase out subsidies to shipbuilding and repair over a short transition period.

Technology and Investment Policies

Ministers acknowledged that government support to corporate research and to “strategic technologies” may create friction at the international level and may affect international access to science and technology. In this regard. Ministers called on the OECD to deepen its analysis of government support to private sector research and development and to “strategic technologies” in order better to understand the policy implications and possible trade and investment distortions. On the basis of this analysis the possible need for guidelines on government support to research and development will be examined. Ministers also requested the OECD to analyze further the issue of equal access for domestic and foreign-controlled firms to publicly funded research, including the desirability of granting access to government-sponsored consortia and programs.

Ministers called on the OECD, taking into account the ongoing negotiations in the General Agreement on Tariffs and Trade (GATT) and in other international forums, to deepen its analysis of policies related to countries’ competitive positions, inter alia, in the fields of innovation, public procurement, public ownership of companies, taxation, and competition, as well as of financial and foreign direct investment and the interconnections between these policies, with a view to limiting the scope for international friction through greater transparency. Ministers asked the OECD, where appropriate, to explore the need for improving existing multilateral instruments and whether there is a need to develop additional “rules of the game.”

The OECD Codes and National Treatment Instrument

The Committee on Capital Movements and Invisible Transactions oversees the implementation of the Codes of Liberalization, which are legal instruments through which the Members commit themselves to the progressive liberalization of capital movements and current invisible transactions. Work is continuously under way to strengthen and extend these codes, which require nondiscrimination on a “best effort” basis.

The Committee on International Investment and Multinational Enterprises oversees the application of the National Treatment Instrument, which forms part of the Declaration and Decisions on International Investment and Multinational Enterprises. The Instrument, which is voluntary, commits OECD countries to nondiscrimination between domestic and foreign-owned firms once they have been established. At the June Ministerial Meeting, it was agreed to reinforce the procedures for implementing existing substantive commitments through notification, examination, and a multilateral framework for dealing with conflicts.

The Future Agenda

The Communiqué of the OECD Ministerial Meeting of June 1991 also called for a new work agenda that would involve enhanced cooperation between the Trade Committee and other committees on emerging issues in the following areas.

Competition Policy

The Committee on Competition Law and Policy is the focus of the analysis and discussion of competition policy. In their communiqué. Ministers asked the OECD to continue its work on the international dimensions of competition policies and on their interaction with policies in other areas, such as trade and industry. They noted that recent work in the OECD on competition law and policy provided the foundation for greater policy convergence and progress toward updating and strengthening the existing rules and arrangements for international cooperation. They invited the relevant committees to pursue actively these matters, including the effectiveness of trade rules in facilitating international competition.

Environmental Policy

Ministers called for improved integration of environmental considerations into all economic sectors and for the OECD to continue its work on analyzing the policy interconnections. They agreed that effective policy integration will require a greater degree of dialogue with and participation from all sectors of society and the economy if environmental goals are to be met effectively and efficiently and to prevent policy conflicts arising in such areas as agriculture, coastal zone management, energy, transport, and, more generally, trade and investment. Ministers endorsed the preliminary views developed by the Trade and Environment Committees on a work program that will underpin further analysis and could lead, in a subsequent stage, to the drawing up of guidelines on ways to protect the environment and preserve the open multilateral system.

Regional Cooperation

Ministers noted that regional integration is another significant area of development in trade relations. It can stimulate the multilateral liberalization process and should be in conformity with international obligations and with the objective of maintaining and strengthening the multilateral trading system. Ministers invited the OECD to continue to monitor developments in the field of regional integration.

The surveys of state aids in the European Community cover more forms of subsidization than the national accounts data. They aim to capture subsidies that potentially distort trade and competition within the EC and include grants, tax concessions (with incomplete coverage), equity participation, soft loans, and loan guarantees.37 Data from the first two surveys show that subsidies have been concentrated in agriculture and declining sectors such as steel, shipbuilding, railways, and coal (in Germany and Spain) (Table A16). The average subsidy rate to manufacturing in the EC declined by 1 percentage point of GDP from the period 1981–86 to 1986–88, owing largely to curbs on subsidies to steel and shipbuilding. In the steel sector, state aids are permitted only for restructuring to reduce capacity; operating subsidies are banned. As a result of these policies, state aids to the steel industry were virtually eliminated among the EC(IO) countries in 1986–88.38 State aids to shipbuilding had risen from 5 percent to 28 percent of operating costs between 1980 and 1987. A Community directive adopted in early 1987 now limits operating subsidies to a proportion of contract value, which is reviewed annually. Under the directive, state aid fell to 20 percent of operating costs in 1990 and will be reduced to 13 percent of such costs in 1991.

Excluding steel and shipbuilding, there was little overall decline in subsidies to manufacturing, but notable reductions in the most recent period were recorded for Italy, the United Kingdom, Denmark, Ireland, and the Netherlands, with offsetting increases in other countries. Differences between these results and those based on the national accounts data are possibly explained by the relative importance of different subsidy instruments (Table A17). Budgetary grants account for the bulk of subsidies in most of the EC and EFTA countries. Exceptions are Germany and Portugal, where tax concessions account for about 60 percent of subsidies, and Austria, which relies mainly on equity participation. Tax concessions are also quite important for Italy, Ireland, and the Netherlands.

Government-financed expenditure on research and development in the industrial sector varies widely across OECD countries (Table A18). It has traditionally been highest in the United States, in part owing to defense-related research contracts, and lowest in Japan. While the share of government-financed research and development has been relatively stable in most countries, total expenditures on research and development have been rising and government support for it has accounted for an increasing share of government assistance to industry, reflecting the shift away from support to declining industries. The major part of government-financed research and development goes to the aerospace industry, where externalities and security issues are considered important. Aerospace has the first or second highest share of government-financed research and development in most countries for which data are available.39

The picture emerging from these data is that the growth of subsidies concentrated in declining sectors that characterized the 1970s and early 1980s has subsided. Countries that have completely reoriented their policies, notably the United Kingdom and New Zealand, have substantially reduced assistance to industry. In some countries, progress has also been made in reducing subsidies to steel and shipbuilding. In other areas, overall assistance to industry was broadly unchanged from the mid-1980s through 1988, and its claim on domestic resources remained relatively large, on the order of 2 to 3 percent of GDP for Canada and European countries and ½ to 1 percent of GDP for the United States and Japan.

Work is under way at the OECD Secretariat to develop internationally comparable data on subsidy rates that could provide a basis for increased multilateral surveillance of public support policies (Box 1). Over the past two years, the ministerial meetings of the OECD have stressed the importance of greater transparency in policies to support industry and work in this area has intensified. The Industry Committee of the OECD is conducting a project to develop more comprehensive and comparable information on subsidies to industry across OECD countries. With the cooperation of member countries, a data base is being assembled for the years 1986 to 1991 covering 800 central government programs in 22 OECD countries; the coverage of local and provincial authorities is thus far incomplete. Preliminary analysis of these data suggests that traditional production subsidies have declined, while subsidies to investment (especially to research and development, high-tech equipment, and technology-related intangibles) seem to be rising. In terms of instruments, the increased support for research and development was mainly in the form of grants and tax concessions; the use of loan guarantee schemes, including those not covered by the OECD Consensus on Export Credits, had also risen. The overall direction of support to industry for OECD countries as a group was less certain because of different developments across countries. A pilot project for the Economic Policy Committee has also been initiated to develop measures of effective rates of assistance.

Multilateral Efforts to Curb Subsidies

Multilateral discipline on subsidies is considered essential to the success of negotiations in multilateral forums to dismantle trade barriers in declining industries. In the Uruguay Round, efforts to strengthen the international rules on subsidies established in the Tokyo Round (the Subsidies Code), which prohibit export subsidies on manufactures, aim to control the trade-distorting effects of subsidies. Key issues in the negotiations concern the definition of subsidies, the circumstances under which subsidies would be permitted, and the rules that would govern countervailing actions. Clear rules and strengthened dispute settlement procedures would go some way toward reducing trade friction arising from government assistance to industry. The U.S.-EC Airbus dispute is a good example of the difficulties encountered under current GATT rules in determining what constitutes an actionable subsidy and in what forum disputes should be settled (Appendix I).

Outside the Uruguay Round, multilateral efforts have been an important factor in fostering adjustment and phasing out assistance to steel and shipbuilding, as well as curbing subsidized export credits. In 1989, President Bush announced the U.S. Steel Liberalization Program, which ultimately aims to establish free-market conditions for international trade in steel. The program involves an extension of the VERs with 19 individual countries and the EC negotiated in 1984 (which would have expired in 1989) through March 1992. In the interim, the United States has concluded bilateral consensus agreements with its major steel trading partners that discipline subsidies and work to reduce or eliminate tariff and nontariff barriers. Negotiations are under way to incorporate these agreements into a multilateral consensus to prohibit most subsidies, eliminate tariffs, and establish a dispute settlement mechanism. The aim is to reach agreement before the end of March 1992 when the existing VERs on steel exports to the United States expire; however, one of the difficulties that has emerged in the talks is that participants are reluctant to commit themselves on issues that might prejudice their positions in the Uruguay Round negotiations on antidumping and subsidies.

In late 1989, negotiations were launched on a new agreement40 to phase out subsidies to the shipbuilding and repair industry. Negotiations are taking place in the OECD Council Working Party on Shipbuilding with the aim of concluding an agreement by the end of 1991. Outstanding issues include, inter alia, the treatment of export credits, domestic credit schemes, and the timetable for phasing out government assistance.

In the OECD’s Export Credit Group, which has 22 industrial country members, negotiations are proceeding on a new Arrangement on Export Credits (Consensus) that would strengthen the most recent agreement concluded in 1987. The Consensus is designed to prevent “destructive competition” for export credit among member countries, whose export credit agencies are in most cases financed by national governments. Under discussion are measures that would reduce trade distortions resulting from tied aid credits and interest subsidies. Since around 1982, export credit agreements have virtually eliminated the average subsidy element on medium-term credits to middle-income countries. As a result, member countries have been using mixed credits and aid to promote exports. A proposed agreement presented at the June 1991 OECD ministerial meeting proved unacceptable and ministers agreed to an end of 1991 deadline for concluding an agreement; this commitment was reiterated at the London economic summit in July.

Trade Policy Developments in Individual Countries

United States

In recent years, the principal objectives of U.S. trade policy have been to strengthen the multilateral trade system by completing the Uruguay Round; to open foreign markets to U.S. goods, services, and investment; and to promote free and “fair” trade.41 These objectives have been pursued through multilateral negotiations, bilateral and regional initiatives, and the unilateral implementation of U.S. trade law. The United States played a major role in launching the Uruguay Round and continues to place highest priority on its successful conclusion as the best means of strengthening the multilateral trade system. It has strongly supported agricultural reform and the extension of GATT disciplines to the new areas: services, trade-related investment, intellectual property; its agricultural offer indicated a readiness to eliminate the 1955 waiver under which it maintains restrictions on certain agricultural products.

In May 1991, the U.S. Congress extended the President’s fast-track negotiating authority through June 1993, removing one obstacle to the resumption of serious negotiations. The fast-track extension also paved the way for negotiation of a North American Free Trade Agreement including the United States, Canada, and Mexico. The United States has supported regional integration in Europe and elsewhere and believes that it can be a force for liberalization when pursued in a GATT-consistent framework. Domestically, the Government has been fairly successful in containing protectionist pressures in the U.S. Congress; however, its unilateral use of U.S. trade law to pry open foreign markets and protect U.S. interests has heightened tensions with trade partners. The United States is a party to two free trade agreements—one with Israel, established in 1985, and one with Canada, effective January 1, 1989—under which it is phasing out tariffs and other trade barriers according to agreed ten-year timetables. Under the U.S.-Canada Free Trade Agreement (FTA), two rounds of accelerated tariff cuts, together covering $8 billion of two-way trade, were completed by mid-1991. While it is too early to assess the economic impact of the partially implemented FTA, reviews of performance during the first two years indicate that both countries consider that implementation has gone smoothly and that the dispute settlement process has worked effectively;42 the number of countervailing and dumping cases declined from 12 in 1989 to 4 in 1990. However, recent disagreements have surfaced over automobile rules of origin (involving imports of Honda Civics by Honda Motor Co. Ltd.’s U.S. subsidiary from its Canadian plant) and the domestic content rule for autos under the U.S. Canada Auto Pact. The United States wants to increase the latter from 50 percent to 60 percent.

In February of 1991, the governments of the United States, Canada, and Mexico announced their intention to pursue a North American Free Trade Agreement (NAFTA), and negotiations began in June. The aim is to eliminate barriers to the flow of goods, services, and investment and to protect intellectual property rights. A number of developing countries have raised concerns about the potential for a NAFTA to divert trade and investment flows and to erode their trade preferences, and various domestic constituencies in the United States and Canada have raised a number of “nontrade” concerns stemming from Mexico’s lower level of income and standard of living. These include differences in environmental and labor standards, health and safety standards, and regulatory and distribution systems that may affect cost competitiveness indirectly and lower environmental and other standards under a free trade agreement.

In June of 1990, President Bush announced the Enterprise for the Americas Initiative (EAI), which seeks to address the interrelated problems of debt, investment, trade, and the environment. In trade, the aims are to successfully conclude the Uruguay Round and reduce barriers to trade and investment in the Western Hemisphere; ultimately, the EAI envisages a hemisphere-wide free trade area. Since the announcement of the EAI, the United States has concluded trade and investment framework agreements with most countries in Central and South America and the Caribbean. Other initiatives in the Western Hemisphere included the permanent extension of the Caribbean Basin Initiative, which provides tariff preferences to Caribbean countries, and the extension of trade preference to the Andean countries (Bolivia, Colombia, Ecuador, and Peru) additional to those available under the GSP.

The implementation of U.S. trade law to open foreign markets was intensified after 1988. Section 301 of the 1974 Trade Act gives the President the right to take action against trade practices deemed unreasonable, unjustifiable, or discriminatory and that burden or restrict U.S. commerce. It covers practices related to trade in goods and services, to U.S. foreign investment, and to the protection of U.S. intellectual property rights. The 1988 Omnibus Trade and Competitiveness Act strengthens Section 301 in several ways: inter alia, it transfers authority to initiate unfair cases from the President to the U.S. Trade Representative (USTR); it requires the USTR, under the “Super” 301 provision, which expired in 1990, to identify priority countries and practices and establish a timetable for the investigation and resolution of identified practices; and it requires the USTR, under “Special” 301, to identify countries that violate U.S. intellectual property rights. The 1988 act also requires identification of countries and practices that restrict U.S. exports of telecommunication equipment and services and U.S. access to foreign government procurement.

Actions taken under the Super and Special 301 provisions of the 1988 Act are summarized in Table A19. In 1989, three countries—Brazil, Japan, and India—were identified as priority countries under Super 301; issues were resolved with Brazil and Japan, but India was identified again in 1990. After consultations with India, USTR decided not to take action since the practices under investigation, which relate to investment measures and access to the insurance market, were being addressed in the Uruguay Round. No priority countries were identified under Special 301 in either 1989 or 1990 because of progress made in ongoing negotiations; however, in 1991, three priority countries were identified for violating U.S. intellectual property rights: China, India, and Thailand. Under the telecommunications provision of the 1988 Act, the EC and Korea were designated as “priority foreign countries” in 1989 and agreements on market access were reached in subsequent negotiations. No countries have been identified as discriminating in government procurement and, thus far, no retaliatory measures have been taken under the Super and Special 301 provisions of the 1988 Trade Act.

Another important development in trade relations was the inauguration in 1989 of the U.S.-Japan Structural Impediments Initiative (SII), which aimed to address fundamental impediments to trade and balance of payments adjustment. Each side identified structural impediments to adjustment in the other country and agreements were reached in June 1990 to deal with them.43 Follow-up procedures call for ongoing discussions and annual progress reports; the first annual report was issued in May 1991. The novel feature of the SII talks is their focus on domestic policies, particularly competition policies and corporate behavior. Five of the six impediments identified by the United States were related to domestic competition policies. Japan identified the shortsighted behavior of U.S. corporations and inadequate investment in research and development and human resources as factors impeding U.S. competitiveness. These developments point to the increased awareness that differences in competition policies and conflicts between competition and trade policies can distort international trade and investment flows. These issues are explored in Appendix II, which examines the interface between trade and competition policies and the efforts under way to harmonize competition policies.

The 1988 Trade Act also authorizes the President to restrict foreign investment that threatens national security (the Exon-Florio amendment). As of May 1991, the Committee on Foreign Investment in the United States had received 560 notices. Of these, 12 transactions were subject to investigation; the President acted in only one case, ordering the divestment of a U.S. aircraft parts manufacturer by the China National Aero-Technology Import and Export Company. On August 17, 1991. President Bush signed a bill providing for permanent reauthorization of the Exon-Florio provision.

Japan

Japan has implemented a series of market-opening measures over the past five years and has eliminated virtually all formal trade barriers to the imports of manufactured goods. Despite this, some of its major trading partners consider that informal practices impede imports, foreign investment, and competition in the domestic market, and this has led to ongoing discussions of market access issues. Largely under pressure from trading partners, Japan has gradually liberalized the imports of beef, citrus fruits, and some other agricultural products, but its agricultural sector remains heavily protected, imposing substantial costs on its economy and causing trade friction with agricultural exporting countries (Section VI). On the export side, Japan has continued to resort frequently to voluntary export restraints and other forms of managed trade to handle disputes with its trading partners, rather than seeking multilateral solutions. In a significant departure from past practice, Japan, in 1988, challenged the GATT legality of the EC’s anticircumvention laws and was supported by the GATT panel ruling reached in 1990.

Japan has been an active participant in the Uruguay Round and is particularly interested in strengthening trade rules in the areas of antidumping, rules of origin, safeguards, and dispute settlement. In the new areas, it seeks to establish disciplines on trade-related investment measures and intellectual property rights. In agriculture, Japan has stressed the importance of food security and its need to maintain self-sufficiency, particularly in rice; in its view, agricultural reforms should first aim to reduce export subsidies.

During the past several years, market-opening measures have been implemented in the context of various initiatives. Under the Action Program for Improved Market Access, in force for three years beginning in July 1985, Japan eliminated or reduced tariffs on over 2,000 items, improved GSP benefits, and simplified standards, certification, and import procedures. In response to a 1988 GATT panel ruling, 10 agricultural items were liberalized. Separate bilateral discussions with the United States and Australia led to progressively larger import quotas for beef and citrus fruit and their eventual replacement with tariffs in April 1991.

The Market-Oriented, Sector-Specific (MOSS) Talks initiated in 1985 with the United States have sought to improve market access on an MFN basis in electronics, telecommunications, pharmaceuticals and medical equipment, forestry products, and auto parts. As part of this ongoing process, in September 1991 Japan and the United States agreed to undertake a joint study of the originating source of auto parts used in U.S. and Japanese cars and to study the problems facing U.S. vehicle and parts makers trying to export to Japan. In 1990, Japan introduced a new program of comprehensive import expansion measures, including tax incentives to import, financial assistance to importers, the elimination or reduction of tariffs on 1,008 industrial products (valued at $13 billion in 1988), and promotional programs to encourage imports.

In response to the relatively rapid growth of domestic demand and the large real appreciation of the yen in 1985–87, Japan’s trade surplus fell sharply during 1988–90 from its 1987 peak. This alleviated protectionist pressures in other countries to some extent, but the recent and prospective widening of Japan’s trade surplus has contributed to a resurgence of protectionist sentiment in the EC, the United States, and in some Asian countries as well. Recent years have also seen a change in the structure of Japan’s imports and exports.44 The rapid growth of manufactured imports has exceeded predictions based on historical relationships, suggesting that market-opening measures may have played a role. While the share of manufactured imports in Japan’s total imports has risen significantly since 1985, the view that the level of Japan’s imports is unusually low by industrial country standards continues to be debated by trade specialists.45

On the export side, total real export growth slowed sharply following the appreciation of the yen, reflecting mainly weak demand for consumer exports, while capital goods exports continued to expand. Corker (1990) suggests that this pattern is consistent with the nearly sixfold increase in Japanese foreign direct investment (FDI) since 1985. The growth of outward investment has been attributed to the appreciation of the yen, which has led to the establishment of overseas production facilities in lower cost Asian countries, and to the circumvention of trade barriers, particularly VERs and antidumping duties, in the United States and the EC. As reviewed above, a high proportion of EC and U.S. antidumping actions are directed against exports from Japan, and Japan maintains the largest number of known voluntary export restraint arrangements (Table A9). The Ministry of International Trade and Industry (MITI) estimated that in 1989, exports covered by restraint agreements accounted for 12½ percent of Japan’s exports (about 29 percent of exports to the United States).46

Japan is also party to “voluntary import expansion” agreements with the United States, which have raised concerns about discriminatory market access. As a result of negotiations under Super 301, Japan and the United States, in March 1990, reached agreements on Japanese Government procurement procedures for satellites and supercomputers. In June 1991, Japan and the United States signed a new agreement replacing the 1986 semiconductor agreement. Inter alia, the new agreement aims to increase Japan’s imports of semiconductors to more than 20 percent of the domestic market by the end of 1992; it also eliminates price monitoring and re-establishes normal antidumping procedures. As part of the agreement, the United States agreed to lift the $165 million in penalty tariffs imposed in 1987 because of Japan’s noncompliance with some provisions of the 1986 agreement.

Japan and the United States also reached agreement in June 1991 on amendments to the 1988 Major Projects Agreement that will add another 17 Japanese construction projects to the original 17 projects included in the agreement and improve the transparency of notification and bidding procedures, as well as dispute settlement procedures. The total value of projects covered by the agreement will increase by $6 billion to nearly $30 billion, compared with public sector construction valued at $165 billion. Only a small portion of this has been bid on to date.

European Community

In the EC, trade policies have been strongly influenced by the objectives of EC 1992, developments in Eastern Europe and the former U.S.S.R., and negotiations in the Uruguay Round. EC 1992 aims to establish a unified internal market by the end of 1992. This is being achieved by the dismantling of remaining intra-EC barriers to the free flow of goods, services, and factors of production and by the mutual recognition of national laws and regulations, subject to agreement on certain essential minimum requirements.

Unification has important implications for trade policies at both the national and EC-wide levels. Under Article 115 of the Treaty of Rome, the EC Commission may authorize import restrictions (VERs, quotas, etc.) against third countries at the national level and permit intra-EC restrictions to prevent indirect imports through other EC countries. Intra-EC barriers will need to be eliminated and trade restrictions at the national level will either be eliminated or replaced by EC-wide measures. Reflecting a tightening of the criteria used by the Commission in assessing member countries’ requests for intra-EC restrictions, total authorizations for such measures declined to 128 in 1988, just over one half of their 1980 level, and to 79 in 1990.

Proposals regarding the phasing out of national restrictions and the EC’s common external regime after 1992 are still under discussion. National restrictions could be replaced by EC-wide measures that are either more or less restrictive on balance than existing national restrictions. Most of these restrictions are in the form of voluntary export restraints or other forms of monitoring. In March 1989, the last date for which detailed data are available, the EC was party to an estimated 173 export restraint arrangements, 96 of which were imposed at the national level. Sixty-three of these agreements involved Japan, and informal consultations between Japan and the EC are progressing toward elimination of VERs by the end of 1992. One outcome of these discussions was the July agreement to convert national VERs on Japan’s automobile exports to EC countries to an EC-wide monitoring arrangement that will limit through 1999 Japan’s exports of automobiles to their current EC-wide level (about 1.25 million units) and permit scheduled growth in sales by “transplants,” Japanese affiliates producing inside the EC. This market-sharing arrangement has elicited calls for a similar arrangement between Japan and the United States in the U.S. Congress.

The Single Market Program and developments in Eastern Europe and the former republics of the U.S.S.R. have led to the prospects of an enlarged EC and other regional preferential trade arrangements. The former German Democratic Republic became part of the EC as a consequence of German unification, and five other countries have formally applied to enter the EC: Austria, Cyprus, Finland, Sweden, and Turkey; their applications will be considered after completion of EC 1992. In June 1990, formal negotiations started between the EC and EFTA toward the creation of a European Economic Area (EEA) by 1993.

Developments in Eastern Europe and the former U.S.S.R. have added to pressures to reform the EC’s Common Agricultural Policy (CAP), which is a major source of friction with the EC’s trading partners. A fundamental reform of the CAP that would substantially reduce its adverse effects on world markets and efficient agricultural producers is considered essential to bring the Uruguay Round to a successful conclusion. The EC is working toward this end, but progress has been slow.

Canada

Since 1984, Canada has reoriented policies to strengthen the role of market forces in its economy through tax reform, deregulation and privatization, and greater openness to foreign trade and investment. In the area of trade policy, liberalization is taking place primarily in the context of regional arrangements. Canada has sought to secure market access and gain the benefits of economies of scale and greater competition through the establishment of the free trade area with the United States, its largest trade partner, and it is now a full and equal partner in the trilateral negotiations between Canada, Mexico, and the United States to establish a NAFTA. Regarding the latter, Canada is interested in securing its interests in the areas of services, intellectual property rights, and dispute settlement procedures and in preserving Canada’s attractiveness as a host for foreign direct investment.

The economic impact of NAFTA on the Canadian economy is not expected to be substantial. Trade with Mexico is relatively small; almost 80 percent of imports from Mexico enter Canada duty free, with auto components making up the largest component. The NAFTA might exclude certain sensitive areas from freer trade: Mexico is interested in excluding the energy sector; the United States wants to restrict labor mobility; and Canada would like to exclude cultural goods.

The Canadian authorities consider that the future complementarity of regional integration with multilateral liberalization will depend on the outcome of the Uruguay Round and the effectiveness of the dispute settlement process; accordingly, it continues to place highest priority on a successful conclusion to the Round. Having opened up to its largest trade partner, Canada has strongly supported the multilateral liberalization of trade and services and strengthened trade rules. In agriculture, Canada is concerned about the escalation of the subsidies war between the United States and the EC, which has become more acute with the increase in the U.S.

Export Enhancement Program to $1.5 billion. As a member of the Cairns Group, Canada has worked for a substantial reduction in trade-distorting agricultural policies, although it wishes to retain its supply management programs covering milk, eggs, and poultry.

With the establishment of Investment Canada in 1985 under the Investment Canada Act, restrictive policies governing foreign investment were reoriented toward a regime that actively promotes foreign investment. Certain restrictions remain in sectors considered “strategic” (oil and gas, uranium, fisheries) and in cultural industries, and Investment Canada continues to review investments above specified thresholds.

Other Industrial Countries

Among the smaller industrial countries, Australia and New Zealand have undertaken the most far-reaching liberalization of trade in the context of comprehensive structural reform programs aimed to deregulate and open their economies to international competition. Traditionally, their levels of protection have been substantially higher than other industrial countries and the proportion of tariff lines that are bound is relatively low by industrial country standards (Tables A5 and A6). As part of the Australia-New Zealand Closer Economic Relations Trade Agreement, these countries achieved free bilateral trade in goods on July 1, 1990, five years ahead of schedule. Free trade has also been achieved in most services.

Australia initiated a five-year trade reform program in 1988. Under the program, tariffs above 15 percent are to be reduced to 15 percent by July 1992; those between 10 and 15 percent are to be reduced to 10 percent. Excepted from these tariff reduction schedules are textiles, clothing, and footwear and passenger motor vehicles, which are to be liberalized more gradually; import quotas on passenger motor vehicles were eliminated in 1988. In March 1991, a second phase of tariff reform was announced that will lower tariffs on passenger motor vehicles from 35 percent in 1992 to 15 percent in 2000; will lift quotas on textiles, clothing, and footwear by March 1, 1992 and reduce the maximum tariff on these items from 55 percent in 1992 to 25 percent by the year 2000; and will reduce assistance to agriculture in line with reforms in manufacturing. It is estimated that completion of the announced reforms will reduce the effective rate of assistance to 5 percent by the end of this decade.

New Zealand initiated comprehensive economic reforms in 1984. On the external side, these included the elimination of most export subsidies and incentive schemes, the phasing out of import licensing (except for some sensitive sectors such as textiles, clothing, and footwear, which are being liberalized in the context of industry plans), a phased 50 percent reduction in tariffs between 1986 and 1992, the lifting of exchange controls, and the liberalization of the foreign investment regime. In 1988, import licensing was abolished for half of the items previously affected and will be entirely eliminated by July 1992. In September 1991, the government announced a further reduction in tariffs by one third between 1992 and 1996, a somewhat slower pace of reform than that proposed by the previous government.

    Other Resources Citing This Publication