III Industrial Trade Policies
- Naheed Kirmani, Lorenzo Pérez, Shailendra Anjaria, and Zubair Iqbal
- Published Date:
- November 1982
This section reviews the principal trends in the evolution of international trade in manufactures, discusses briefly some estimates of levels of protection, and describes recent trade actions and pressures for protection in selected sectors in the major trading nations. The coverage of countries and sectors is selective. Certain reported administrative or ad hoc actions in some countries in recent months, such as delays in customs clearance or administrative tightening of import licensing practices, are difficult to verify and are not covered. In addition, the quality of information on some types of restrictions such as “voluntary” export restraint arrangements varies between countries or sectors. Accordingly, the information presented in this section is intended to be illustrative of recent changes in the commercial policy stance of major countries. Owing to their importance in world trade, the emphasis is on actions in the United States, the European Community, and Japan. This has been supplemented by information on trade actions of other major trading nations.
Trade Trends in Industrial Products
Trade in manufactures, accounting for 55 per cent of world trade, has grown erratically since 1973. After a period of relatively stable growth averaging over 5 per cent during 1977–79, the volume of world exports grew by 3½ per cent in 1980 and by 3 per cent in 1981.17 Industrial countries’ share of trade in manufactures has remained relatively constant at over 80 per cent. During 1973–80, the share of non-oil exporting developing countries increased by 2 percentage points to 8.7 per cent, while the share of Eastern trading countries declined by a similar amount. Trade among industrial countries at present accounts for two thirds of total trade in manufactures, compared with about three fourths in 1973. Between 1973 and 1977, oil exporting developing countries absorbed an increasing share of world exports; since then, their share has declined from 10.3 per cent to 9 per cent in 1980. In contrast, the share of world exports destined for non-oil developing countries has increased steadily during 1973–80, from 14½ per cent to 17 per cent. As already noted, all major country groups have benefited from wider markets for manufactures in the non-oil developing countries.
Engineering products (mainly machinery, equipment, and vehicles) continue to dominate world trade in manufactures, accounting for about 54 per cent of the total. The main shifts in commodity composition between 1973 and 1980 were an increase in the share of chemicals and “other consumer goods,” whereas the shares of iron and steel and textiles declined to 7 per cent and 5 per cent, respectively (Table 11).
In early 1981, new restrictions were introduced in the automobile sector. Motor vehicles (including automotive parts) account for 12 per cent of world trade in manufactures, and industrial countries’ exports of motor vehicles account for nearly 15 per cent of their intratrade in manufactures (Tables 11 and 12). The recent restrictive actions are a response to the rapid shift in the pattern of demand toward more energy-efficient automobiles in the wake of the successive increases in energy costs and a secular decline in demand for motor vehicles in industrial countries. These factors led to sharp production declines from 1979 in all industrial countries except Japan and Spain (Tables 13 and 14). The declines were particularly rapid in the United States (30 per cent) and Canada (15 per cent). In 1980 the share of imports in apparent consumption rose from 61 per cent to 67 per cent in Canada, and from 25 per cent to 34 per cent in the United States. In the European Community the share of imports in apparent consumption remained unchanged at about 47 per cent in 1980. Reflecting its high degree of competitiveness, Japan increased its production during that year by 15 per cent. Japanese and certain European producers, who had already specialized in the production of energy-efficient automobiles, were able to capture an increasing share of the markets in the United States, Canada, Australia, and some other European countries.
The emerging overcapacity and unemployment in Canada, the United States, and certain member countries of the Community led to pressures for protection against automobile imports from Japan. For the automobile industry in these countries to be competitive, a major restructuring effort requiring large investments is believed to be essential. Investment expenditures planned by the industry for the five-year period 1980–85 total some $80 billion in the United States and some $30 billion in the European Community. Reflecting the general slowdown in world demand, and the restrictions introduced, Japanese exports of automobiles in 1981 grew by 14 per cent, compared with an increase of about one third in the previous year.
Even though the share of the European Community in total world production increased in 1980, the Community’s industry continued to weaken as the Japanese penetration in the Community’s market increased and the Community’s exports to non-Community countries declined further. Imports of passenger cars from Japan increased by 18 per cent in 1980; the increase was particularly marked in the Benelux countries (Belgium, the Netherlands, and Luxembourg), where it registered a 27 per cent rise (Table 15). These developments precipitated demands for protection against Japanese imports in late 1980, and in January 1981 Japanese manufacturers were asked informally to exercise moderation in their exports to the Federal Republic of Germany and the Benelux countries. In addition, the Community in February 1981 placed the import of certain motor vehicles originating in Japan under Community surveillance for 1981; the surveillance was subsequently extended through 1982.18
Following Japan’s voluntary export restraint arrangement with the United States, further informal understandings were given by Japan to certain member countries of the Community. In June 1981 Japan communicated to the authorities of the Federal Republic of Germany that Japanese passenger car exports to the country were forecast to increase by 10 per cent in 1981. While no forecasts were made at that time for 1982, Japan indicated that such exports would not be disruptive. Japan also informed the Benelux countries of the forecast that passenger car exports to these countries would not reach 1980 levels. It was understood that in 1981 its passenger car exports to Belgium would be 7 per cent lower than in 1980, while exports to Luxembourg and the Netherlands would remain unchanged at about the 1980 level. In fact, owing to market conditions, German imports from Japan in 1981 were almost unchanged from 1980 while those of Belgium were about 11 per cent lower than in 1980. In January 1982, Japan forecast that its exports to the Federal Republic of Germany and Belgium would be moderate for the year.
Pressures for protection in this sector were also felt in other member countries of the Community, some of which have maintained various restrictions on imports from Japan for several years. Since 1956, Italy has imposed an annual quantitative limit of 2,200 units on the import of Japanese passenger cars. In January 1982, Italy, under Article 115 of the Treaty of Rome, suspended until June 30, 1982 all indirect importation of Japanese cars through other member countries of the Community. France continued to maintain a de facto stabilization of Japanese automobile sales on the domestic market at about 3 per cent of total sales. Japanese and British automobile producers have for several years held regular consultations aimed at regulating the supply of Japanese cars in the U.K. market, and Japanese exporters have exercised prudence in their shipments to the United Kingdom in order to avoid disruption. In July 1981, British and Japanese producers agreed to maintain the Japanese share of the U.K. automobile market below 11 per cent in 1981; this extended an agreement reached between manufacturers in 1980.
In late 1981 and early 1982, the Community sought and obtained assurances from the Japanese authorities that there would be a “continued and effective moderation” of Japanese exports to the Community as a whole in 1982 in “sensitive sectors,” including passenger cars.
The U.S. motor vehicle industry has experienced serious economic difficulties in recent years. Following sharp sales declines in 1979 and 1980, motor vehicle sales dropped further in 1981 to the lowest level since 1970. The sales downturn affected primarily U.S.-made vehicles, while sales of imported cars remained strong owing to a consumer preference for smaller, more fuel-efficient, and higher-quality vehicles. The share of imports in apparent consumption of passenger cars, trucks, and buses in the United States increased from 25 per cent in 1979 to 34 per cent in 1980 (Table 13). Unemployment peaked in August 1980, with 32 per cent of the work force laid off; in the following 12 months, U.S. companies rehired more than one third of the production workers furloughed. The losses of the four U.S.-based automobile manufacturers totaled $4.2 billion in 1980—the largest loss ever recorded by a U.S. industry. A partial turnaround was achieved in 1981, aided by cost reduction programs carried out by the companies during the latter part of 1979 and 1980.
Protectionist sentiment surfaced strongly in the United States in 1980. A petition by labor groups for import relief introduced in 1980 was denied by the U.S. International Trade Commission (USITC), which ruled that imports had not been a substantial cause of injury to the domestic industry. Even so, the pressures for protection continued to increase. In early 1981, a bill was introduced in the U.S. Congress to limit automobile imports from Japan by a quota that would have reduced imports by about 15 per cent. As a result of these pressures, in May 1981 the Government of Japan announced a three-year restraint arrangement. During the first year (April 1981–March 1982) Japan’s passenger car exports to the United States would be held at 1.68 million units, compared with actual imports of 1.82 million units during the previous 12-month period. For 1982/83, the announced restraint level was 1.68 million units plus 16.5 per cent of the expected increase in the U.S. apparent consumption in 1982. For the final year of the restraint period, Japan undertook to avoid an export surge, but no quantitative limit was announced.
The terms of the first year of the bilateral arrangement were fulfilled by Japan. The restraint appears to have increased the average unit value of imports, as a result of a shift in Japanese exports to more expensive models. In 1982, U.S. demand is expected to increase only marginally at best. Accordingly, in March 1982 Japan announced its intention to limit shipments of passenger cars during the second year of the arrangement to the same level as in 1981/82. Currently, pressures for further protection still remain high and are linked to the evolution of the overall trade deficit of the United States with Japan. Demands for outright quotas on imports from Japan have proliferated. A legislative proposal has been introduced in the U.S. Congress that would limit Japan’s share of the U.S. market to 14 per cent (equivalent to a further volume reduction of almost 40 per cent). In addition, the U.S. Congress has been asked to consider introduction of local-content legislation requiring Japanese producers to use a specified percentage of U.S.-made parts in vehicles sold in the United States.
The $80 billion investment program of the U.S. automobile industry would involve a doubling of the real level of investment, compared with the previous six years. It aims at extensive redesigning of automobiles, modernization of production facilities, and conversion of production capacity to smaller cars. The industry hopes to recapture its competitiveness through this investment effort. Improvements in labor productivity have roughly kept up with the high wage increases in the automobile industry and, in recent months, U.S. producers have been able to negotiate innovative arrangements with labor groups in which more moderate wage settlements were exchanged for guarantee of job security. These should also be supportive of the industry’s efforts to become more competitive.
The Canadian and U.S. markets for automobiles are highly integrated as a result of the U.S.-Canada Automotive Agreement of 1965. In early 1981, the prospective conclusion of a restraint arrangement between Japan and the United States that could divert exports to Canada led the Canadian authorities to seek a similar arrangement with Japan. In the first quarter of 1981, production of automobiles in Canada was running at an annual rate of 17 per cent below that for 1980. Japanese car sales in Canada increased by about 57 per cent between the first quarters of 1980 and 1981. In June 1981 the Government of Japan announced that the export of passenger vehicles to the Canadian market for the period from April 1, 1981 to March 31, 1982 was forecast to be 5.8 per cent below the level reached in the previous 12 months, implying that such exports would be limited to 174,213 units. It was also decided that the restraint could be continued for the subsequent year following consultations between the two governments; such an extension envisaged a provision for growth based on Japan’s share of the Canadian market in the period April 1, 1980 to March 31, 1981 (16.5 per cent). It was also understood that the Japanese automobile industry would exercise moderation in exports of commercial vehicles to Canada so as not to erode the effect of the restraints on passenger car exports. It was hoped that actions taken by Japan would provide a breathing space for the Canadian automobile industry to complete its restructuring plans and convert its operations to fuel-efficient vehicles.
Contacts are currently under way to reach understandings with the Japanese authorities on imports in 1982/83. The Canadian authorities have requested restraints on commercial vehicles in addition to passenger cars. It has been suggested that an increase in Japan’s imports of automobile parts from Canada and possibly the establishment of assembly plants in Canada should also be part of the new understanding. In any event, foreign producers are being encouraged to establish assembly plants in Canada. In October 1981, Volkswagen, in exchange for duty-free import privileges, agreed to establish a plant in Ontario to produce parts beginning in 1983 and to buy, in addition, parts from independent Canadian parts manufacturers. Under the agreement, Volkswagen in Canada is expected to attain 64 per cent Canadian value added in 1983, which should rise to 85 per cent in 1987.
Japan abolished quantitative import restrictions on motor vehicles in 1965; the import duty on automobile bodies was eliminated in 1978, and import duties on parts and accessories, which have been generally low, were further reduced in 1981. Nevertheless, imports in recent years have been less than 1 per cent of apparent consumption. In 1981, imports of motor vehicles declined sharply; while exports from the Federal Republic of Germany to Japan fell by 16 per cent, exports of other suppliers, including the United States, other members of the European Community, and Sweden, fell by about 43 per cent. The low level of imports has been attributed by foreign suppliers not only to the existence of a highly competitive industry, but also to nontariff barriers that are perceived to obstruct sales. Foreign suppliers complain that Japanese product standards and testing requirements, maintained for domestic reasons and stricter than those in their home markets, sharply drive up prices of foreign cars relative to the prices of Japanese cars, hindering entrance into Japan’s market. Japan’s producers can meet these standard specifications at a lower cost per unit than foreign competitors because they benefit from economies of scale in producing automobiles with these specifications. Recognizing the possible restrictive effects of inspection procedures, the Government of Japan in early 1982 liberalized the system; henceforth, inspectors would be dispatched for inspection to a larger number of countries. For example, certain motor vehicles originating in the Federal Republic of Germany would not be subject to testing on arrival in Japan. Regarding exports, the basic policy is not to expand sales in foreign markets in a way that provokes import restrictions.
The motor vehicle industry in Australia is the largest engineering industry, accounting directly for 6.5 per cent of manufacturing employment and having significant linkages with other industry sectors. In recent years the Australian industry has suffered from a decline in competitiveness vis-à-vis foreign producers, especially Japan, and from the shift in consumer preference to smaller vehicles. The Australian Industries Assistance Commission (IAC) in its 1981 report attributed the decline in competitiveness to significant cost disabilities in component production, and the relatively large number of manufacturers and vehicle models produced in relation to the size of the market.19 The IAC estimated that passenger vehicle purchasers paid an additional $A 1 billion in 1980 to support the industry.
A government assistance program to the motor vehicle industry, in existence since the mid-1970s, is expected to remain in effect until the end of 1984. The main policy instrument is the Motor Vehicle Manufacturing Plan, which requires vehicle manufacturers to maintain local content at 85 per cent on a company-average basis. The Plan is supported by domestic market sharing arrangements that reserve about 80 per cent of the passenger car market for local producers by applying quantitative restrictions on imports. An import tariff of 57 per cent on fully assembled automobiles and higher tariffs on components are imposed. In March 1982 export facilitation arrangements were introduced in the Plan, under which vehicle and component producers earn local-content credit through increases in export sales.
In 1981, the IAC recommended that the Motor Vehicle Manufacturing Plan, the 80/20 market sharing policy, and quantitative restrictions be discontinued beginning in 1985. It also recommended that tariff duties on passenger motor vehicles and components be progressively reduced from 60 per cent to 50 per cent by 1990. In December 1981 the Australian Government announced its post-1984 program for the motor vehicle industry, which was considerably less ambitious than that recommended by the IAC.
Globally, the steel industry continues to be characterized by overcapacity, which became more pronounced since 1974 because capacity was expanded, while production and demand, after peaking in 1979, declined owing to the economic slowdown. In the past 18 months, these problems were exacerbated by the frequency of swings in the market outlook because of the economic uncertainties. The emergence of new steel producers in some of the developing countries, including Brazil, Korea, and Mexico, has increased the need for adjustment in some of the OECD countries; the new suppliers, which established newer and more efficient plants, were increasingly able to supply certain steel products at prices lower than the efficient traditional producers, including Japan.
Reflecting these trends, crude steel production in the world is estimated to have fallen by 1.5 per cent in 1981; in the OECD countries, it declined by about 1.7 per cent (Table 16). There was little adjustment in installed capacity in the OECD countries; therefore, given the fall in demand, overall capacity utilization was lower than in 1980, even though in the United States capacity utilization improved (Table 17). Employment in the steel sector in the OECD countries declined by 5 per cent in 1981. In 1982 world production is forecast to decline further by 1 per cent, and world capacity utilization is expected to decline from about 69 per cent in 1981 to 67 per cent. While net exports of the OECD countries in 1981 remained virtually unchanged, the European Community’s net exports (excluding intra-Community exports) rose by 31 per cent while those of Japan declined (Table 18). Most of the Community’s increased exports were destined for the United States, whose net imports rose by 50 per cent. For 1982, the Community’s net exports are expected to decline by some 10 per cent owing to uncertainties in the U.S. market, while little change is expected in the positions of Japan and the United States.
In the past decade, the trade and structural adjustment problems of the steel sector of industrial countries have been addressed by the OECD. In recent years, OECD countries have expressed interest in having major developing country producers participate in the work of the OECD Steel Committee. Mexico recently agreed to establish a liaison with the Committee.
Despite the adoption in December 1977 of a “steel crisis plan” aimed at supporting domestic prices at a level that would allow an orderly rationalization of the Community’s production capacity, market conditions continued to deteriorate in the Community and led to the declaration in October 1980 of a state of “manifest crisis.” A system of compulsory production quotas was instituted under Article 58 of the European Coal and Steel Community Treaty for the period through June 30, 1981. Products subjected to quotas included crude steel and four categories of rolled products; certain specialty steel products were made subject to production monitoring. In June 1981, the Commission of the European Communities decided to extend the system of production quotas through June 30, 1982. A system of mandatory production quotas was established for hot-rolled wide strip steel and related products, concrete reinforcing bars, and merchant bars; these products account for about three fifths of the Community’s steel output. Following agreement among the principal producers to apply voluntary reductions in the production of reversing-mill plate and wide flats and heavy sections during the period July 1, 1981 to June 30, 1982, mandatory production ceilings were lifted on these products. A voluntary agreement was also reached on wire rods. Production quotas, determined quarterly on the basis of “reference levels,” were targeted to reduce production between 10 per cent and 30 per cent. In order to restore balance between domestic supply and demand, the Commission also determines the proportion of production that may be placed on the domestic market, allowing for foreseeable trends. To ensure the effectiveness of the quota system, production or deliveries in the Community’s market in excess of quota are liable to fines proportional to the excess tonnage. Notwithstanding a 9 per cent decline in apparent consumption during 1981, there was only a modest 2 per cent production decline in overall crude steel production (Table 16). In June 1982, the mandatory production quotas were extended for another year to mid-1983, and a compulsory quota on wire rods was introduced. Also in June 1982, it was agreed to cut back capacity by a further 30 million tons over the next three years from the current level.
The system of production quotas has been supplemented by measures aimed at maintaining orderly price conditions. The Commission stepped up its checks on observance of pricing rules and in July 1981 extended the price obligations applicable to Community producers to traders and distributors. A marked improvement in exports permitted some increases in administered prices in late 1981.
Internal measures on production and prices are complemented by external measures aimed at maintaining traditional trade flows and price monitoring. Imports are subject to either bilateral arrangements or to price undertakings according to whether or not the Commission has concluded arrangements with supplier countries. Existing bilateral arrangements with 13 supplier countries were extended in 1981.20 Under these arrangements, steel exporting countries were provided quantitative targets consistent with the maintenance of stable internal prices. Exporting countries were also permitted limited discounts from internal prices. The bilateral arrangements originally called for a reduction in import volume in 1981 of 15 per cent from 1980 levels; however, because of stronger-than-expected demand conditions during the first half of 1981, import limits under these arrangements were raised, and the cutback from the 1980 import levels was reduced to 12.5 per cent. For 1982 the Commission extended the arrangements with the 13 supplier countries and concluded an additional arrangement with Korea; the permissible import quantities in 1982 were higher than in 1981 and were set at 9 per cent below the 1980 levels. Imports from countries other than those involved in bilateral arrangements could be subject to antidumping actions if sold at prices below the internal prices. The Commission’s decision in 1980 to introduce surveillance on imports in 1981 was extended until December 31, 1982. New basic import prices for certain iron and steel products provided for increases on average of 7 per cent for bulk steel products, 10 per cent for special steel, and 5.5 per cent for pig iron and ferromanganese from January 1, 1982.
In its Resolution of March 26–27, 1981, the Council of Ministers outlined policy guidelines for restoring normal market conditions over the medium term; the objective of these guidelines was that, in the medium term, undertakings should be profitable without recourse to state aids. The Resolution laid down a number of criteria for the provision of state aids, including their limitation to undertakings with specific restructuring programs, progressive reduction and phasing out, transparency and advance notification, and avoidance of excess capacity creation and distortions of competition. Based on these criteria, in August 1981 the Commission adopted a new aids code to replace the code of February 1980. The new code, which is applicable until the end of 1985, establishes a timetable for the progressive phasing out of aids; these must be notified to the Commission by September 30, 1982, authorized by July 1, 1983, and with certain exceptions, eliminated by December 31, 1985. Aids may be granted only to undertakings engaged in restructuring programs leading to capacity reductions, and the extent of aid must be proportional to the restructuring effort. The new code also strengthens provisions for greater transparency and notification to enable improved monitoring by the Commission. State aids have included loan write-offs, grants, loan guarantees, and concessional loans.
The internal and external measures in place in 1981 contributed to limited improvement in conditions faced by the steel industry. The rapid price declines observed in 1980 were arrested at the beginning of 1981. Net exports of the Community expanded by about 31 per cent in 1981 as a result of both a substantial cutback in imports (the import penetration ratio declined from 12 per cent to 9.5 per cent) and an 11 per cent increase in gross exports. Capacity utilization averaged 63 per cent in 1981, compared with 58 per cent in the last quarter of 1980, and the level of employment declined by 10 per cent. However, installed capacity declined only slightly.
The embedded technology of the U.S. steel industry and the increase in labor costs relative to shipping and raw material costs have led to recurrent strains on the U.S. competitive position and to pressures for protection; the latter have also been aggravated by the perception that foreign competitors benefit from government subsidization. In 1968, voluntary restraint arrangements were negotiated on basic carbon steel for a five-year period. In 1976, three-year import quotas on certain specialty steel were introduced. In 1977, the recommendations of the Solomon report21 were adopted to promote structural adjustment. As part of the adopted program, a trigger price mechanism was introduced to expedite investigations of dumped or subsidized imports. According to the U.S. industry, its difficulties during 1978–80 were largely the result of unfair foreign competition against which the trigger price mechanism did not provide sufficient protection. In March 1980, U.S. producers filed major antidumping complaints against European producers; this led the U.S. Government to suspend the trigger price mechanism.
In September 1980, the U.S. authorities announced additional measures to help revitalize the domestic steel industry and reintroduced the trigger price mechanism. Trigger price levels were raised by 12 per cent, and the mechanism was adapted to permit a closer monitoring of sudden increases in steel imports (the anti-surge mechanism). Subsequently, the U.S. steel industry dropped its dumping complaints.
Notwithstanding the efforts to protect and restructure the industry, U.S. steel production declined from 132 million tons in 1974 to 102 million tons in 1980; during the same period apparent consumption fell from 146 million tons to 118 million tons, and employment dropped by 18 per cent. Following the implementation of the trigger price mechanism, steel imports declined and their share in apparent consumption fell to 16 per cent in 1980. In 1981, steel production increased modestly, particularly in the first half. Subsequently, steel production fell owing to declining activity in the automobile, appliances, and construction industries; this decline continued into 1982. There has been considerable variation in capacity utilization; during the first half of 1981 capacity utilization reached 90 per cent, but declined to 60 per cent by the end of 1981. With the softening in the demand for steel in 1981, price competition intensified, foreign steel suppliers were able to lower their prices, and import penetration increased to 19 per cent.
Against this background, in 1981 domestic producers renewed the campaign to limit what they perceived as unfair foreign competition. In November 1981, the U.S. Government initiated several antidumping and countervailing duty investigations.22 At the same time, the preclearance procedures of the trigger price mechanism, by which foreign exporters could obtain permission to ship steel to the United States below established trigger prices if their costs of production were lower, were abolished. Trigger prices were unchanged for the first quarter of 1982 from the level of the second half of 1981. On December 22, 1981, the USITC, in a preliminary ruling, upheld the complaint of injury as a result of dumping or subsidization in four of the five cases filed in November. Simultaneously, discussions were held between the United States and the European Community, aimed at reaching some understandings regarding steel trade. Following failure of these negotiations, in January 1982, eight major U.S. firms filed 92 complaints against alleged dumping and subsidization by nine countries on four major categories of steel imports valued at some $1.6 billion.23 It is estimated that at least one half of the European Community’s steel exports to the United States were affected by the complaints filed. After the filing of the complaints, the U.S. authorities once again suspended the trigger price mechanism.
Although the USITC dismissed, in February 1982, 54 of the 92 antidumping and countervailing duty complaints, the 38 cases not dismissed represented the bulk of steel imports covered by the initial complaints. In June 1982, the U.S. Department of Commerce reached a preliminary decision to levy penalties on steel imports from nine countries, including seven from the Community, in order to offset the effects of subsidization. The determinations affected 3.9 million tons of U.S. steel imports valued at $1.4 billion, equivalent to about 20 per cent of U.S. imports and about 4 per cent of apparent consumption. The ruling required importers to post a cash deposit or bond equal to the estimated subsidy, which varied by commodity and country. According to the official U.S. estimate, the subsidy element in exports was calculated to be in the range of 2–22 per cent for Belgium, 0.5–9 per cent for the Federal Republic of Germany, 20–30 per cent for France, 10–12 per cent for South Africa, and 2–40 per cent for the United Kingdom. The subsidy was estimated at 8.6 per cent for Brazil, 18.3 per cent for Italy, 0.7 per cent for Luxembourg, and 0.6 per cent for the Netherlands. If the final subsidy and injury rulings (expected in August and October 1982) are affirmative, countervailing duties to offset subsidies will be levied.
Trade frictions also persist in the specialty steel sector. An orderly marketing arrangement with Japan and import quotas on other specialty steel suppliers were allowed to expire in early 1980. However, an import monitoring program was established in 1981 for the products that had been covered by import quotas. After an import surge in the third quarter of 1981, antidumping investigations were begun on imports of several products.24
In the period since 1977, when price regulation was first introduced for imports, there have been important shifts in U.S. trade policy on steel. First, the difficulty of attempting to regulate import prices is now more generally recognized. Second, as imports from Japan have stabilized at 6 per cent to 7 per cent of domestic production, industry complaints about import competition from Japan have become less frequent. Third, foreign subsidization of steel has become a major new issue of concern in the past two years. In U.S. law, provisions relating to countervailing actions against foreign export subsidies and domestic subsidies are generally parallel. As the latter are widely prevalent—and more difficult to dismantle because GATT provisions on domestic subsidies are less stringent than those on export subsidies—recourse to U.S. law in the face of increased import penetration has been regarded as the only major course of action open to U.S. industry. This is in accordance with official U.S. trade policy objectives, which include effective enforcement of U.S. trade laws, consistent with international agreements. In recent months, bilateral discussions between U.S. and European Community officials have been aimed at reaching understandings on steel trade issues; these have reportedly included the possibility of negotiated restraints on the Community’s exports to the United States. Finally, production capacities in some developing countries have been expanded rapidly, and imports from nontraditional suppliers have increased their share of the U.S. market.
The Canadian steel industry is currently highly competitive, owing to major investments and modernization of plants undertaken in the last two decades. Canadian steel exports are mostly directed toward the United States, while the United States supplies about two fifths of Canadian imports; thus the North American market is highly integrated. Until the suspension of the U.S. trigger price mechanism, Canadian producers were able to ship steel to the United States under the “preclearance” procedure, which entitled them to sell at below established import prices without triggering antidumping investigations.
In 1978, Canada introduced benchmark prices as a monitoring mechanism in order to protect against possible diversion of steel trade to Canada following the introduction of the trigger price mechanism in the United States and the Davignon Plan in the European Community. Actual import prices were monitored against reference prices based upon selling prices in the exporting countries. Although violation of the benchmark prices did not trigger antidumping investigations or duties, their existence may have had a cautionary effect on exports to Canada.
In 1981, apparent steel consumption recovered owing to stockbuilding induced by a prolonged strike at Canada’s largest steel producer. Steel imports also rose rapidly (by 80 per cent over 1980). In early 1982, steel demand fell off sharply, owing to a fall in oil exploration investment, a slowdown in construction activity, and higher interest rates. The difficulties of the Canadian steel industry are largely attributable to cyclical factors, rather than to structural problems experienced in the European Community and the United States.
In 1981, the Antidumping Tribunal determined the existence of material injury to domestic producers from the dumping of brass-coated steel wire from Belgium and Spain. In early 1982, the Tribunal made a finding of material injury on steel rules from the United States.
Textiles and Clothing
The average growth of world production of textiles fell from 5 per cent to 1.5 per cent and that of clothing from 4 per cent to 2 per cent between 1963–73 and 1973–80. Industrial countries’ production of textiles and clothing together declined during 1973–80, while developing countries’ production grew by 2.5–3.0 per cent per year. Reflecting sluggish demand, world production of textiles remained unchanged in 1980, compared with a growth rate of 3.5 per cent in 1979, while world production of clothing declined slightly (Table 19).
The shares of textiles and clothing in world trade in manufactures have remained unchanged at about 5 per cent and 4 per cent, respectively, for several years (Table 11). The shares of industrial countries and developing countries have also remained virtually unchanged at about 60 per cent and 25 per cent, respectively (Table 2). Since 1976 developing countries have accounted for about 20 per cent of world textile exports and about 37 per cent of world clothing exports.
The export performance of countries exporting textiles and clothing varied widely in 1980. Available data indicate that total trade in textiles and clothing grew by 19 per cent in value terms; of this, the value of imports subject to the Multifiber Arrangement (MFA) grew by only 3 per cent. In volume terms, total trade grew by only 2 per cent. Exports of textiles and clothing have accounted for about 11 per cent of the total exports of developing countries in recent years. On the import side, the value of textile imports by the European Community grew by 7 per cent in 1980, or only one fourth of the growth of the previous two years, and the value of clothing imports grew by 15 per cent, or about one half the rate of the previous two years. The value of U.S. imports grew faster in 1980 than in the previous year. Imports by the Community and the United States from developing countries expanded faster than their imports from industrial countries. Even though Japan does not apply any formal restrictions on imports of textiles and clothing, its imports from all sources declined sharply. Japan’s imports of textiles fell by 29 per cent and 8 per cent from developing countries and industrial countries, respectively; its imports of clothing declined by 27 per cent and 4 per cent from developing countries and industrial countries, respectively (Table 20).
The industry accounts for some 7 per cent of manufacturing output and about 9 per cent of manufacturing employment. The European Community is the world’s largest exporter and importer of textiles and clothing. In the face of relatively stagnant demand—the increase in real consumption has averaged 1 per cent annually since 1973—and increasing competition from external suppliers, adjustment pressures in the Community’s textile and clothing industry have been intense and some adjustment has taken place. During 1973–80, production of both textiles and clothing declined, on average, by about 1 per cent per annum, and employment fell by 25 per cent. Import values have increased considerably over the past several years, although the growth of imports has decelerated. The import penetration ratio almost doubled from 1973 to 1979 to a level of 41 per cent if intra-Community trade is taken into account.
The Community’s policy in the textile and clothing industry comprises both internal and external measures. The former are geared to the promotion of structural adjustment, including elimination of excess capacity, modernization, and research and development activities. In order to facilitate structural adjustment, the Community provides financial support through various financial funds.
The external objectives of the Community’s textile policy are geared to the prevention of market disruption. Under MFA II (1977–81) the objective was to stabilize import penetration ratios, particularly for products with a high level of penetration. On the basis of the rates of import penetration in 1976, the Council of Ministers set annual growth rates for imports. For eight categories comprising sensitive products, which accounted for over half of the volume of imports of MFA products, the Council set internal global ceilings for all imports from “low-cost” countries. The aim was to stabilize import penetration for some of the Group I products, which were considered most sensitive, and to allow for a “reasonable” increase in penetration ratios for other products. The global ceilings were allocated between member states by a burden-sharing formula established by the Council in 1974 and intended to achieve an equitable and balanced distribution of the import burden among them. The global ceilings, which were distributed among supplying developing countries, allowed access up to agreed limitation levels to those countries with which agreements were reached, while reserving some indicative levels for all other “low-cost” countries. Growth rates of global ceilings for the Community as a whole for 1978–82 vary from 0.25 per cent to 6 per cent. This compares with the MFA norm of 6 per cent growth (see below).
Under MFA II, the Community maintained bilateral agreements with 26 “low-cost” countries that were signatories to the MFA. In addition, it concluded broadly similar arrangements with certain suppliers that are not parties to the MFA (including Bulgaria and China). Most of the agreements, which extend through 1982, set quotas for the import of certain products and all defined import levels at which the Community can initiate consultations with a view to setting quotas for other products (the “basket exit” or “basket extractor” procedure, so-called because the products not initially subject to quota are said to be “in the basket”). The agreements provide provisions for checks on the origin of imports, which were strengthened in 1981.
In order to ensure that individual member quotas are not exceeded because of the free circulation of goods within the Community, Article 115 of the Treaty of Rome provides for restrictions on intra-Community trade that can be invoked by the Community’s members. Recourse to Article 115 with respect to products in the textile and clothing sector were approved on 166 occasions in 1981, compared with 222 cases approved in 1980; most of the approvals were for France, Ireland, and Italy. The frequency of use of Article 115 provisions is a reflection of the extent to which the individual quotas under bilateral agreements were actually binding.
From 1976 to 1980, the average annual rate of growth of import volume from the nonpreferential countries and areas that had concluded bilateral agreements with the Commission of the European Communities was 2.3 per cent for all MFA products and 0.8 per cent for the eight categories of “sensitive” products. Imports from the four principal MFA suppliers—Brazil, Hong Kong, India, and Korea—grew on average by 1.2 per cent annually, compared with an increase of 3.4 per cent achieved by other suppliers. Hong Kong continues to be the largest supplier of clothing products to the Community, while imports from Korea have leveled off since 1978.
During the 12-month period to October 1981, several changes were introduced in the Community’s bilateral agreements with countries not having preferential trade agreements with the Community.25 Agreements with 21 countries and areas26 were revised to take into account the accession of Greece to the Community—the quota levels for 1981 and 1982-were increased, and the basis for calculation of the Community’s “basket exit” level was increased by 2 per cent with effect from January 1, 1981. Also, agreements with 14 countries and areas were modified to introduce new restraints. Some of the modifications included: (1) an agreement with Hungary wherein quotas were introduced on imports of cotton yarn into Benelux and Italy and gloves into France; (2) the introduction of quotas on Korean exports of textile fabrics (impregnated, coated, covered, or laminated) to the United Kingdom beginning October 1, 1980, of briefs and slips to Benelux, and embroidery, etc., and petticoats to France beginning January 1, 1981: (3) an agreement with Pakistan to restrain its exports of bed linen to Italy and women’s knitted pyjamas to France for a three-year period beginning in 1980’, and of skirts to the United Kingdom during 1981–82; and (4) an agreement with Thailand to restrain its exports of track suits, dresses, and skirts to the United Kingdom during 1981–82, and exports of anoraks to France, pyjamas to Benelux, track suits to Benelux and Denmark, and dresses to the Community during 1981–82. The growth rates of new restraint levels were below 6 per cent in the agreements with Brazil, Macao, Malaysia, Romania, and Singapore. The Community also concluded a new agreement with Czechoslovakia for 1981–82, which replaced unilateral restraints previously maintained by member states; 40 categories for the Community as a whole and 11 categories applying to some member countries were placed under restraint, including all categories of products in Group I, and various other clothing and textile items. A large number of individual limits provided for growth of less than 6 per cent.
In parallel with the agreements with MFA signatories, the Community has established arrangements with countries linked to it by preferential trade agreements—namely, the Mediterranean countries and certain African, Caribbean, and Pacific (ACP) countries. These agreements include provisions that, in principle, guarantee unrestricted access to the Community for their industrial products, subject to a safeguard clause that allows the Community to restrict imports under certain circumstances. The Community has concluded a series of temporary short-term arrangements with most of the Mediterranean countries, based on a system of administrative cooperation and enabling monitoring of textile trade by reference to historical levels. The arrangements include a provision for consultations in the event of abrupt surges in trade flows; they are generally not as restrictive as the “basket exit” system applicable to MFA countries. Imports from Mediterranean countries rose between 1976 and 1979 at an annual rate of 7.4 per cent for all products, and by 4.4 per cent annually for the highly sensitive categories. Imports from the ACP countries increased at an average annual rate of 8.2 per cent and 4.5 per cent, respectively, but their share in the Community’s imports did not exceed 2 per cent.
In view of certain difficulties experienced in negotiating safeguard provisions with several preferential countries, in 1981 the Commission of the European Communities examined a new approach for arrangements on textiles and clothing with them. The approach envisages, internally, the establishment of specific “preferential” internal global ceilings for sensitive products, with a reserve available to permit flexibility, and seeks to ensure, externally, observance of ceilings through improved administrative cooperation and consultations with supplying countries when certain levels were reached. With regard to industrial countries, the Community maintains no quantitative restrictions on textile imports. Traditionally, the Community has had a positive trade balance with these countries as a group, although in 1979 and 1980 it experienced a trade deficit with the United States. Between 1977 and 1980 imports of textiles and clothing from industrial countries increased at average annual rates of 16 per cent and 19 per cent, respectively, in value terms.
As to policy beyond 1982, global import ceilings, based on the 1982 access levels, are expected to be set for the period 1983–86 to cover imports from MFA and preferential countries and areas, including those coming in under the “outward processing” system, which is applicable to textile and clothing products reimported into the Community after being processed in third countries. While the Community has accepted the new protocol of extension of the MFA, it has stated that its participation will be subject to satisfactory conclusion of new bilateral agreements. Negotiations on such agreements are currently under way, and the Commission is expected to report to the Council of Ministers by September 30, 1982 on the progress achieved; the Council’s decision on participation in the MFA will be based on this report. Negotiation and implementation of the agreements will be influenced by two main requirements that the Community emphasized during the MFA III negotiations—namely, a reduction in exports of the “dominant suppliers” (including Hong Kong, Macao, and Korea) in the sensitive products category and regulation of sudden sharp surges of imports within quota levels. The agreements are expected to retain the “basket exit” feature.
Production in the U.S. textile and clothing industry (as measured by shipments) increased by 1 per cent annually during 1972–81. This, combined with the introduction of labor-saving technology, led to a marked decline in employment. In the textile industry, employment fell by 2 per cent annually over this period, while in the clothing industry it declined by 1.2 per cent. In value terms, the ratio of imports to shipments remained essentially unchanged in the textile sector, while in the clothing industry it virtually doubled during 1972–81. In 1979, the overall import penetration ratio in textiles and clothing was 11 per cent in volume terms.
The United States limits the import of textiles and clothing through bilateral agreements with 22 countries and areas, of which 20 are with MFA signatories; an agreement with China was negotiated under Section 204 of the Agricultural Act of 1950.27 Countries with which bilateral agreements are maintained supply about four fifths of U.S. imports of textiles and clothing. The bilateral agreements are generally quite comprehensive as to product coverage. In a few cases (China, the Dominican Republic, Sri Lanka, and Yugoslavia), the bilateral agreements cover only a few product categories. Brazil limits exports of cotton products, and its exports of man-made fiber products are subject only to a consultation requirement. The agreement with Japan is in principle a consultative one, but specific limits are applied for some categories following consultations. In 1979, only one third of U.S. imports were in quota categories that were filled 80 per cent or more. Three main suppliers accounted for more than three fourths of the shipments in the categories that were filled more than 80 per cent (mostly shirts, blouses, sweaters, and trousers).
During the 12 months to October 1981, the United States amended 12 of its bilateral agreements and extended the agreements with Romania and Yugoslavia, providing for both specific limits and consultation limits. The amended agreements with Colombia, Hong Kong, Korea, Mexico, and Romania are generally more restrictive; for example, consultation clauses have been replaced by specific limits, or transfers between quotas have been made less flexible.
In 1981, the United States began to renegotiate the bilateral agreements that were due to expire in 1982. In January 1981, the agreements with Malaysia and Poland were renegotiated for a period of four years. The agreement with Poland provides for 6 per cent annual growth each year for the most important restricted categories, and the agreement with Malaysia establishes annual growth limits of up to 6.5 per cent. The agreement with Singapore was renegotiated in August 1981 and provided for 12 per cent growth for two categories, including apparel, during the first year, to be reduced to 6 per cent during the second and third years; for wool products, growth was limited to 2 per cent in the first year and 1 per cent subsequently. A new agreement negotiated with Mauritius in October 1981 provided for a reduction in imports. In December 1981, the agreements with Mexico and Pakistan were extended for four years and five years, respectively. Both provide for annual growth rates of up to 7 per cent. In early 1982, agreements were renegotiated with Brazil, Colombia, Haiti, Hong Kong, and Japan. Negotiations are also being held with others, such as Korea.
Under MFA III, it is expected that the United States will seek relatively more restrictive agreements with its dominant suppliers, such as Hong Kong and Korea. Bilateral agreements with some smaller suppliers could also be more restrictive than in the past, since the MFA protocol of extension contains more explicit provisions for limiting import surges from countries with underfilled quotas.
The Canadian textile and clothing industry is characterized by a relatively efficient capital-intensive textile sector comprising a few large firms and a relatively inefficient labor-intensive clothing sector comprising a large number of small firms. Canada’s import restrictions in the textile and clothing sector reflect this structural difference and, as a result, virtually all clothing imports but only one tenth of textile imports from “low-cost” countries are restricted. In June 1981, the Canadian Government announced a five-year Can$250 million assistance program for the textile and clothing industry. This program is aimed at providing new employment opportunities in communities affected by industrial adjustment, helping displaced workers take advantage of new opportunities, and assisting in the modernization of viable firms. The adjustment effort is to be supported by the maintenance of protection from low-cost imports over the five-year period.
The 17 bilateral restraint arrangements maintained by Canada under MFA II were due to expire at the end of 1981. Negotiations were, therefore, launched on their renewal before agreement was reached on the extension of the MFA. Thirteen bilateral arrangements with low-cost countries and areas have so far been negotiated for the 1982–86 period, based on the framework established by the 1979 bilateral arrangements. Ten of these arrangements are with the MFA signatories (such as Hong Kong, Hungary, India, Korea, Macao, Malaysia, the Philippines. Poland, Romania, and Thailand) under Article 4 of the MFA, while the remaining are with non-MFA signatories, including Bulgaria and China. Of these, ten arrangements have been negotiated for five years; one-year interim arrangements pending negotiation of five-year arrangements were negotiated with Hong Kong, Hungary, and India. Altogether, these arrangements cover about 95 per cent of the anticipated low-cost Canadian imports of clothing in 1982. Bilateral arrangements with the other four low-cost exporters (Czechoslovakia, Pakistan, Singapore, and Sri Lanka) are yet to be concluded.
The new bilateral arrangements permit some relaxation of import restraints, allowing for an overall growth rate of 4 per cent per annum for all countries, including 2.9 per cent for major suppliers; the pre-1982 arrangements allowed for an overall growth rate of 3.3 per cent, including a growth rate of 3 per cent for major suppliers. Except for low value-added products such as yarns and woven fabrics, the growth rates under these arrangements have been kept well below the MFA norm of 6 per cent. For certain countries, restraints are supplemented by consultation levels. Under this provision, governments of exporting countries enter into consultation with Canada with a view to reaching agreement on an appropriate level of restraint for a product subject to consultation whenever limitation is considered necessary to eliminate the risk of market disruption.
The Australian textile and clothing industry has experienced sustained import pressure since 1973. Subsequently, extensive restrictions were introduced under GATT Article XIX and now cover almost all commodities in this sector. The principal form of restriction is tariff quotas. From 1975 to 1980 domestic clothing production protected by quota rose from about 40 per cent to 90 per cent of the total; and the proportion of textile production so protected rose from 20 per cent in 1974 to 30 per cent in 1979.
In April 1980, Australia’s Industries Assistance Commission concluded that continuation of existing levels of assistance in the textile and clothing sector could not be justified in the long term. It felt that the process of adjustment was being delayed by the availability of assistance, and it recommended reductions in such assistance.
In January 1982, the Government commenced a new seven-year program whose aim is to permit a modest amount of trade liberalization by broadly maintaining the quota arrangements prevailing in 1980, introducing some changes to allow for increased flexibility in the quota system, and providing for a controlled increase in imports. The extent of the increases in each period will be determined by the application of a quota expansion factor averaging about 2 per cent per annum of existing imports and a market growth factor based on advice received from the Textiles, Clothing, and Footwear Advisory Committee. In the textile and clothing industry, tariff quotas will apply to an increased range of clothing and household textile products, while import quotas for most yarns and most fabrics will be replaced by domestic subsidies. A new preference scheme for developing countries will also apply to textiles and clothing, thus giving developing countries the opportunity to raise their share of the Australian market.
Since 1978, Norway, which is not a signatory to the MFA, has applied restrictions on textiles and clothing under GATT Article XIX. In September 1981, Norway announced the prolongation of the global import quotas for six months to June 1982. The quotas for the first half of 1982 were established, taking into account average imports during 1978–80 from India and Malaysia, with which bilateral agreements lapsed at the end of 1981. The resulting increase in quota levels for the nine categories under restriction ranged from 1 per cent to 128 per cent.
The MFA, which came into effect on January 1, 1974 for an initial period of four years, covered textile manufactures of cotton, wool, and man-made fibers. The stated objectives of the MFA are to achieve the expansion and the progressive liberalization of world trade in textile products, while at the same time avoiding disruptive effects in individual markets and in individual lines of production in both importing and exporting countries. By defining the features of permitted bilateral or unilateral restrictions on textiles and clothing, the MFA seeks to ensure that the interests of both exporting and importing countries are safeguarded, on the one hand, by authorizing importing countries to protect their domestic industries from market disruption caused by imports and, on the other, by specifying in advance the maximum permissible degree of restrictiveness of import regimes in the importing countries that would still allow developing countries’ exports to grow at a reasonable rate.
The MFA envisages essentially two types of restrictions: (1) those under Article 3, which permit bilateral or unilateral restrictions as a result of market disruption, and (2) those under Article 4, which provide for bilateral agreements for the purpose of eliminating the risks of market disruption. In effect, these Articles provide for a volume growth norm of at least 6 per cent annually in export categories restricted under the MFA. Table 21 lists the bilateral agreements in effect under Article 4 during 1977–81.
The MFA was renewed for a further period of four years beginning January 1, 1978 through a protocol of extension without amending the text of the original agreement (MFA II). To accommodate the interests of importing countries, the protocol included an understanding that restraints or bilateral agreements concluded under Articles 3 and 4 could include the possibility of “jointly agreed reasonable departures from particular elements in particular cases.” This, in effect, allowed bilateral agreements to provide for export growth of less than 6 per cent under the MFA. The “reasonable departures” clause could also apply to the “flexibility” provisions of the MFA—i.e., the provisions that permit switching between individual quota categories (“swing”), carry-over of unutilized quota to the following year, or borrowing (“carry forward”) of next year’s quota.
In the context of the negotiations on a second extension of the MFA during 1980–81, the developing countries argued that restrictions under MFA II had been applied in such a way as to frustrate the objective of increasing their earnings from exports of textiles and clothing. They were especially critical of the application of the “reasonable departures” clause, which had been used more extensively than they had originally envisaged. The developing countries’ position was that, because the MFA was intended to be a temporary derogation of GATT rules, it was imperative to consider reverting to normal GATT discipline in this sector.
Nearly all developed participating countries considered that the MFA had generally achieved its stated objectives and had avoided the disorderly conditions that would have prevailed if importing countries had unilaterally imposed import restrictions on developing countries’ exports. Under MFA II, developing countries’ trade surplus in textiles and clothing had increased rapidly, while employment in the developed countries had shrunk in the context of slow economic growth and rising import penetration in a number of product lines exported by developing countries. The importing countries were prepared to substitute the “reasonable departures” clause for more precise criteria permitting limitation of export growth rates to below 6 per cent; but they considered it essential, given the expected stagnation in demand, that MFA III should allow them to limit the growth of imports to less than 6 per cent, particularly from dominant developing country or area suppliers, such as Hong Kong and Korea.
After considerable debate, the GATT Textiles Committee agreed in December 1981 to extend the MFA for a further period of four years and seven months to July 31, 1986. A new protocol of extension was agreed, but the original MFA text was not amended. The main points covered by the protocol of extension of MFA III may be summarized as follows:
1. Reference to “reasonable departures” is deleted and, instead, the protocol of extension allows for a growth rate lower than 6 per cent to be agreed in exceptional cases.
2. The Textiles Committee noted in paragraph 6 of the Protocol “the important rôle of and the goodwill expressed by certain exporting participants now predominant in the exporting of textile products in all three fibres covered by the Arrangement in finding and contributing to mutually acceptable solutions to particular problems relative to particularly large restraint levels arising out of the application of the Arrangement as extended by the Protocol.” Thus, stricter terms of access may be applied to “dominant” suppliers.
3. Another provision in paragraph 10 of the Protocol deals with the problem of sudden increases in imports of products with underutilized quotas by providing room for additional safeguard action in the event of sharp and substantial increases in imports within the agreed quotas. If additional safeguard actions are implemented, equitable and quantifiable compensation to the exporting participant should be given as agreed by both parties concerned.
4. The remainder of the 24-paragraph Protocol contains a variety of provisions relating to restraints on exports of small suppliers, importing countries with small markets whose “minimum viable production” may be threatened, special consideration for cotton-producing exporting countries, and problems of circumvention caused by transshipment or rerouting of exports.
An assessment of the restrictiveness of the new protocol of extension of the MFA III—and certainly a comparison of its main features with those of MFA II—is difficult, for several reasons. First, the practical significance of understandings included in the protocol of extension is unclear because the MFA itself continues to be in effect without amendment. Second, any assessment would also have to take account of the country viewpoints and negotiating objectives outlined during the course of the discussions; these differed in some important respects between individual importing countries. Third, it appears that under MFA III, even more so than in the past, “restrictiveness” will be determined in bilateral negotiations, because the more detailed provisions of the protocol of extension are subject to a rather wide range of interpretations.
Notwithstanding the difficulties of assessing the restrictiveness of the MFA, for several reasons prospects for trade liberalization in this sector do not appear to be bright. First, pressures for protection of this sector in the industrial countries remain generally high and, given the past history and poor medium-term prospects for growth of consumption, no significant liberalization of restrictions is expected during the lifetime of MFA III. To the extent that protectionist pressures are directed particularly at the dominant suppliers, there is a real risk that the most efficient developing country suppliers will be penalized more severely. Second, the inherent complexity of the restrictive arrangements has created uncertainty for exporters. This hinders trade expansion and may be particularly detrimental to smaller suppliers with relatively limited administrative and technical expertise. Third, the fact that market shares have become more permanent between different exporting countries appears to have contributed to a weakening of pressures for trade liberalization in this sector. Under conditions of slow growth of markets, security of access to markets (whatever the level of access) tends to create strong interests in the preservation of market shares, irrespective of developments in comparative costs.
Problems in the shipbuilding sector originate primarily from the rapid emergence of excess capacity and slower-than-desired adjustment in capacity associated with government subsidies and aid programs. Despite continuing efforts at modernizing the shipbuilding industry and reducing installed capacity in the industrial countries under the auspices of the OECD Working Party on Shipbuilding, the world market position at the end of 1981 showed little improvement over previous years. Production of ships increased by 35 per cent in 1981, based primarily on large orders placed in 1979 and 1980 (Table 22). This reflected primarily the increased demand for dry bulk cargo. Future prospects for significant recovery in demand are not bright; new orders for ships leveled off in 1981 (Table 23). The employment level in OECD countries continued to decline; it stood at 100,000 in 1981, or almost one half of the level of 1975.
Reflecting a rapid restructuring of its shipyards, Japan increased its share in total world production (in gross tons) successively, from 34 per cent in 1979 to 48 per cent and 51 per cent in the two subsequent years. Its share of new orders placed with shipbuilders in the OECD countries rose from 61 per cent in 1979 (or 51 per cent in compensated gross tons) to 70 per cent in 1980 and 1981 (or 60 per cent in compensated gross tons), while that of other members of the OECD Working Party on Shipbuilding declined from 39 per cent in 1979 to 30 per cent in 1980 and 1981. European countries have, on several occasions, expressed their concern that this trend in new orders taken by Japanese shipyards is inconsistent with informal understandings on equitable distribution of the adjustment burden (50 per cent of the total in compensated gross tons28), and may be compounding the difficulties of European shipyards. In recent years, certain developing countries, such as Brazil and Korea, have increasingly become important manufacturers of ships; these two countries accounted for 10 per cent of all merchant ships completed during 1981. These countries have also started encountering difficulties on account of sluggish demand, and capacity utilization is reported to have fallen. Collaboration between these countries and OECD members on structural adjustment issues has so far been limited.
The OECD General Guidelines for Government Policies in the Shipbuilding Industry are aimed at a gradual reduction of measures of assistance to the shipbuilding industry which distort trade and discourage capacity adjustment, such as national aids, subsidized export credits, and discriminatory government procurement practices. In 1981 the OECD Working Party on Shipbuilding revised the understanding on export credits for ships. Its main features include the following: (1) the duration of credit cannot exceed 8½ years from the ships’ delivery (ten years for natural gas tankers); (2) the initial downpayment, to be made at the latest at delivery, must be at least 20 per cent of the contract price; (3) the interest rate cannot be lower than 8 per cent for credits receiving official support; and (4) the granting of more favorable conditions is subject to prior notification to members of the Working Party. The Working Party is currently endeavoring to seek an upward adjustment in interest rates applicable to ship exports; a major difficulty has been that interest rates prevailing in Japan, the dominant ship producer, would be below the revised minimum rate in the understanding.
In the recent past, reductions in production capacity and restructuring of the industry appear to have slowed down. In addition, subsidization of ship production in some developing countries has made some industrial countries more reluctant to reduce their own subsidies. Even so, it is generally accepted that efforts for speedy adjustment must continue.
In April 1981, the European Community adopted the fifth directive on shipbuilding for the period through 1982. The directive extended the Commission’s powers of scrutiny and approval over national aids to the shipbuilding industry and authorized the Commission of the European Communities to regulate incentive aids to shipowners. The aims of the Community policy are to prevent aids to shipowners from sheltering the industry from market conditions and to permit rescue and crisis aids only if they are linked to capacity reductions and form part of a policy to increase industry competitiveness to enable it ultimately to operate without aid.
Within this general framework, aids to shipbuilding are decided at the national level and have remained largely unchanged over the last two years. France continued to apply the policy of basic aid to shipyards initiated in 1977 into 1979 and 1980. During 1978–80 installed capacity was reduced somewhat, the target for order books was lowered by about 6 per cent, and employment fell by 27 per cent. Under new arrangements adopted for 1981–82, direct aid for new orders for small yards would be limited to 10 per cent of the contract price, with a maximum of 20 per cent in exceptional cases such as serious unemployment; aids for medium-sized and large-sized yards could reach 20 per cent of the contract price. Capacity reductions in the United Kingdom led to a fall in employment in the nationalized shipbuilding sector by one half between 1977 and 1981. The Shipbuilding Intervention Fund, which subsidizes construction of merchant vessels, was to have terminated at end-1981; however, it was extended to July 15, 1982. The maximum amount of assistance which may be offered from this fund has been reduced from 30 per cent of contract price up to the end of 1981 to 20 per cent for the latest extension. Up to July 31, 1981, total assistance supplied through this fund amounted to £204 million. In addition, various forms of government guarantees continue to be provided to national shipyards. The national aid policies in other member countries of the Community have remained largely unchanged.
In 1978, Japan initiated a structural adjustment program for its shipbuilding industry, with the objective of reducing the industry’s productive capacity by 35 per cent (3.4 million converted gross tons). Associated with the capacity reduction scheme, a cartel (the Designated Shipbuilding Enterprises Stabilization Association) was established to allocate new ship orders for a temporary period while the adjustment program was implemented. This cartel covered 90 per cent of domestic production capacity. For shipbuilders agreeing to reduce production and installed capacity within the cartel, certain facilities were made available, including an insurance scheme set up to guarantee loans arranged to finance the scrapping of excess capacity and adjustment assistance to support workers displaced by these activities. By 1980, installed capacity had been reduced by more than 35 per cent, and by 1981 the production of shipyards that had joined the cartel had been reduced to about half of their peak levels of production. As a result, the cartel was discontinued in April 1982, and the Japanese Government also decided to discontinue interest rate differential subsidies for new shipbuilding projects beginning with fiscal year 1982. Despite the significant production cutbacks, the excess of usable capacity over demand is currently estimated at 14 per cent of installed capacity.
In order to avoid any sudden surge in production that could disrupt the weak world market, the Ministry of International Trade and Industry and the Ministry of Transportation have adopted a policy of keeping a close watch on ship production in Japan. According to official forecasts, production will decline gradually from about 5 million compensated gross tons to about 4.5 million in 1983 before rising to 5.25 million in 1985.
Under the Merchant Marine Act of 1936, construction differential subsidies are paid to U.S. shipbuilders for the construction of ships to be used in the foreign commerce of the United States. The Act also establishes other qualifying requirements for the construction differential subsidy. The construction differential is calculated as the difference between the cost of construction in a foreign shipyard and a U.S. shipyard. The subsidy, which may not exceed 50 per cent of domestic shipbuilding costs, is intended to encourage the growth and maintenance of the merchant marine and the shipbuilding industry. Subsidy outlays under the program amounted to some $150 million in 1978, $200 million in 1979, and $260 million in 1980. In September 1980, ships worth almost $1 billion were under construction, on which the estimated subsidy was $482 million.
The United States also provides an operating differential subsidy under a program for which until recently only U.S.-built vessels were eligible. Under a 1981 amendment to the Merchant Marine Act, an operator receiving or applying for an operating differential subsidy may be authorized to acquire foreign-built vessels when no funds are available in the construction differential subsidy account.
In Norway, a grant has been available to shipyards for contracts with Norwegian shipowners since 1979; the rate of grant has been progressively reduced from 20 per cent of contract price in 1979 to 12 per cent in the second half of 1980. In 1981, the grant was converted into a lump sum of 350 million Norwegian kroner, divided among the yards according to each yard’s share of new building capacity. This was equivalent to a subsidy of at most 9 per cent of the contract price. For 1982 the subsidy was reduced to NKr 225 million, equivalent to a maximum of 5 per cent of the contract price.
Spain plans to reduce installed capacity by 45 per cent over the next five years. However, in view of the depressed conditions of demand, grants to ships for export equivalent to 9.5 per cent of the contract price were extended to 1982. The subsidized credit scheme to finance the construction of ships, scheduled to expire in 1980, was extended.
The European Community has recognized the need for restructuring its electronics industry in order to promote specialization, but this process has been slower than expected. In view of the sharp increase in import penetration of television sets and components in 1979 and 1980, the Community instituted import surveillance in March 1981 for the remainder of the year on television sets, cathode tubes, and some categories of machine tools (including numerically controlled machine tools) originating in Japan. This was aimed at monitoring developments in order to respond more swiftly to a need to apply safeguard measures. Although imports of color television sets declined by 2 per cent in 1981, imports of television tubes rose by 10 per cent, and the import surveillance of television sets and tubes was extended through 1982. An agreement was reached between the Community and Japan in 1981 to produce videotapes under joint ventures in Europe. France reduced its quota of 88,000 color television units on imports from Japan to 84,000 units in 1982. Quantitative limits are also maintained on the French direct imports of radios and cassette recorders from Korea, and in January 1982 France imposed a ban on the import of radios from Hong Kong. Actions under Article 115 of the Treaty of Rome to limit free circulation of goods within the Community have included electronic products.
The high technology electronics industry in the Community is relatively less developed than it is in Japan and the United States. In some member countries, concerted efforts are being made with support from national governments to bridge the technological gap.
The consumer electronics sector has come under protectionist pressures in the United States since the early 1970s because of increasing competition from suppliers such as Japan and Korea. The settlement of a 1971 antidumping case on imports of color television sets from Japan was challenged in the courts by U.S. producers in 1981; however, the courts ruled against increasing the antidumping duties. Two previously existing orderly marketing arrangements on color television sets lapsed on June 30, 1982
In the area of high-technology electronic products, there has been increasing concern about the dominance of Japan in the production of semiconductors, such as computer memory chips. The memory chips are used by the semiconductor industry to produce the building blocks of computers and other electronic devices. Japan’s share of the world market of 16K random access memory chips was about 40 per cent in 1979. By the end of 1981 its share of the new generation 64K random access memory chips reached 70 per cent of the world market. Japan and the United States agreed in 1981 to lower their tariffs on semiconductors to 4.2 per cent from April 1982, six years in advance of the timetable negotiated in the MTN. Trade frictions may multiply if the pace of technological change accelerates, and if Japan succeeds in maintaining or increasing its share of the world market. In early 1982, the U.S. Government commissioned a study of the U.S. competitive position in a broad range of high-technology items, such as aerospace equipment, semiconductors, and machine tools. There are indications that major Japanese semiconductor manufacturers have been voluntarily restraining export sales to the United States to about 50 per cent of their output. Moreover, five Japanese producers have already established assembly plants in the United States as a means of reducing trade tensions. A U.S.-Japan Working Group on high technology was set up in April 1982 to address problems of industrial cooperation, access to government-sponsored research and development, the flow of patents and technology, and mutual market access. Recognizing the potential for frictions in this area, the summit meeting in Versailles in 1982 called for greater collaboration among industrial countries in the field of high technology.
Footwear and Other Leather Products
In the late 1970s the footwear industry in the European Community came under strong pressure owing to increased import penetration, especially by developing countries, and a stagnation in production and exports. The share of imports in apparent consumption rose from 20 per cent in 1975 to 30 per cent in 1980 (Table 24). Production, after remaining stable up to 1978, rose by 10 per cent in 1979, but fell in 1980 by about 8 per cent, owing to a decline in exports by 24 per cent, mainly from Italy. Some recovery in domestic industry appears to have occurred in 1981 as imports from the major suppliers registered steep declines. Exports from Italy, where about one half of the Community’s footwear production originates, recovered somewhat in 1981.
In 1981, the Community investigated subsidized imports of women’s footwear from Brazil. The investigation was terminated in November when Brazil tendered a price undertaking. As a general policy, the Community has maintained close contacts with its major developing country and area suppliers, including Hong Kong, Korea, and China. While there are no formal restraint agreements with these suppliers, the contacts serve to persuade these countries of the desirability of avoiding excessive increases in exports that could disrupt the Community’s market. Separately, certain member countries maintain restrictions on imports from these countries. Ireland and the United Kingdom negotiated bilateral export restraints with Korea in 1979. In early 1982, France was authorized by the Commission of the European Communities to impose a quantitative import limit for the year on sport shoes originating in China.
Structural adjustment and modernization in the footwear industry in the Community has been made difficult by the existence of a very large number of small firms that cannot be reached by the existing restructuring programs. Also, it has been disrupted by an increase in prices of raw materials following restrictions on exports of leather by exporting countries over the last two to three years.
U.S. production of nonrubber footwear has been declining in recent years and fell by 5 per cent in volume terms in 1981. The ratio of imports to apparent consumption has been about 50 per cent (Table 25). The orderly marketing arrangements with two main suppliers on nonrubber footwear expired on June 30, 1981, even through the USITC had recommended continuation of import relief measures for a further two years. However, it was reported subsequently that exports from the two countries would continue to be restricted. The self-imposed restraints have now lapsed.
In May 1981, it was determined that the U.S. industry was being injured by subsidized imports from Uruguay, and a countervailing duty of 26 per cent was imposed. Subsequently, the countervailing duty order was revoked, after Uruguay agreed to eliminate the export subsidy. In another case, a countervailing duty of 5 per cent was imposed on subsidized imports of leather wearing apparel imports from Mexico. Following complaints by U.S. manufacturers that a ban on leather exports enabled South American manufacturers to compete unfairly, the U.S. Government in late 1980 negotiated a phaseout of the export ban with Argentina, Brazil, and Uruguay.
The Canadian footwear industry came under strains in the 1970s when domestic consumption declined and imports of certain types of footwear continued to grow strongly. While domestic producers were able to hold about 70 per cent of the leather footwear market, over 80 per cent of the nonleather footwear industry was captured by competitors from abroad, mainly by two or three suppliers.
In 1977 a global import quota on footwear imports was introduced for a period of three years, covering leather and nonleather footwear (excluding canvas footwear). This led to a moderation in imports, and the import penetration ratio was stabilized at 57 per cent in volume terms in 1980. The global quota was extended for one year beginning in November 1980 as an interim measure while Canada’s Antidumping Tribunal began an inquiry to determine whether imports were injuring the domestic industry. In March 1981, the Tribunal determined that leather footwear production in Canada could compete adequately with imports from industrial and state trading countries with the existing 25 per cent import duty. However, it determined that nonleather footwear imports that originated primarily in developing countries could cause injury to domestic industry. In December 1981, the Canadian Government discontinued the global quota on leather footwear, but decided to maintain the global quota on nonleather footwear (this time including canvas footwear) for three years. The new quota is based on imports during the period from April 1980 to March 1981 and provides for a 3 per cent annual growth rate in volume terms. At the same time, the Canadian Government announced that structural adjustment assistance would be provided through the Canadian Industrial Renewal Board. The Canadian footwear industry has reacted negatively to the liberalization of the quota on the grounds that leather and nonleather footwear are readily substitutable and that developing countries are becoming increasingly competitive in producing better quality nonleather shoes.
The Australian footwear industry has been subject to intense import competition since 1973, and Australia operated an import licensing scheme from 1974 through 1980 for most footwear imports under Article XIX of the GATT. In August 1980, in conjunction with the import liberalization program for the textile and clothing sector, the import licensing scheme for the footwear industry was substituted by tariff quotas. The tariff quotas are expected to be increased gradually. The preference scheme that has been developed for textiles and clothing will also apply for footwear.
GATT, international Trade, 1980/81 (Geneva, 1981).
In the first quarter of 1981, imports from Japan grew at an annual rate of 59 per cent in the Federal Republic of Germany, 41 per cent in the Netherlands, and 29 per cent in Belgium and Luxembourg.
Government of Australia, Passenger Motor Vehicles and Components—Post-1984 Assistance Arrangements, Industries Assistance Commission Report No. 267 (Canberra: Australian Government Publishing Service, June 24, 1981).
In 1981 the Community maintained bilateral agreements with Australia, Austria, Brazil, Bulgaria, Czechoslovakia, Finland, Hungary, Japan, Norway, Poland, Romania, Spain, and Sweden.
U.S. Interagency Task Force on the Steel Industry, chaired by Anthony Solomon, Report to the President: A Comprehensive Program for the Steel Industry (Washington, 1977).
An antidumping investigation was launched on carbon steel imports from Romania, and countervailing duty investigations were launched on carbon steel imports from Belgium, Brazil, and South Africa and hot-rolled steel sheet from France.
The exporting countries involved were Belgium, Brazil, France, the Federal Republic of Germany, Italy, Luxembourg, the Netherlands, Romania, and the United Kingdom. The four main categories of steel involved were carbon plate, hot-rolled sheet and strip, cold-rolled sheet and strip, and structural steel.
The investigations covered stainless steel sheet and strip from France and the Federal Republic of Germany, stainless steel pipe and tube from Belgium, the Federal Republic of Germany, and Italy, and alloy tool steel from Brazil. Complaints were also lodged by the industry against subsidized tool and stainless steel imports from Austria, France, Italy, Sweden, and the United Kingdom. In a separate action, U.S. producers filed a countervailing duty complaint against imports of stainless steel bar and rod products from Spain.
Based on GATT, Activities of the Textiles Surveillance Body (21 September 1980–31 October 1981). Report to the Textiles Committee by the Textiles Surveillance Body, COM.TEX/SB/742 (Geneva, November 9, 1981).
Argentina, Bangladesh, Brazil, Colombia, Egypt, Guatemala, Haiti, Hong Kong, India, Korea, Macao, Malaysia, Pakistan, Peru, the Philippines, Poland, Romania, Singapore, Sri Lanka, Thailand, and Uruguay.
The 20 agreements negotiated under the provisions of the MFA were with Brazil, Colombia, Costa Rica, the Dominican Republic, Haiti, Hong Kong, India, Japan, Korea, Macao, Malaysia, Mexico, Pakistan, the Philippines, Poland. Romania, Singapore, Sri Lanka, Thailand, and Yugoslavia.
Equivalent to Japan’s share of OECD new sales orders in terms of compensated gross tons in the mid-1970s.