Chapter

V Evolving International Trading System

Author(s):
Naheed Kirmani, Lorenzo Pérez, Shailendra Anjaria, and Zubair Iqbal
Published Date:
November 1982
Share
  • ShareShare
Show Summary Details

With the conclusion of the Tokyo Round of Multilateral Trade Negotiations (MTN) in 1979, tariff reductions and a wide-ranging set of new rules governing international trade came into effect. This section highlights these and other principal developments in 1981 and early 1982 in the evolution of the international trading system.

Tariff Reductions

As a result of successive rounds of trade negotiations, tariff barriers to trade in manufactures are relatively low. The second and third annual tariff cuts agreed upon under the Tokyo Round were made in January 1981 and January 1982, respectively. The series of annual tariff reductions will extend to January 1, 1987. The average weighted post-MTN tariff rate for industrial countries is estimated at 4 per cent for semimanufactures, 6.5 per cent for finished manufactures, and 4.7 per cent for all industrial products (Table 49).61 While the averages mask some fairly high tariffs protecting individual import-sensitive industries, tariffs on the whole have declined in importance as barriers to trade. However, the escalation of tariffs remains a problem. Tariff cuts have generally resulted in low or negligible tariffs on raw materials and semiprocessed products and in relatively higher tariffs on manufactures. This appears to be the case especially in textiles, clothing, leather, rubber, footwear, and travel goods (Table 50). In the agricultural sector, tariff concessions were exchanged on 30 per cent of trade in agricultural products, and the reduction on these products amounted to 40 per cent on a weighted average basis.62

Incidence of Nontariff Barriers

Given their varying forms and purposes, it has historically proved very difficult to define what constitutes a nontariff restriction, to assess its quantitative impact on trade, or to negotiate its liberalization. Nontariff barriers take many forms: import licensing arrangements that might be applied with different degrees of restrictiveness; quantitative restrictions in the form of outright prohibitions, import quotas, tariff quotas, voluntary export restraint arrangements, and seasonal import restrictions; surveillance practices that can increase trade uncertainties; sundry charges on imports or internal taxes that may discriminate against imports; standard requirements whose lack of uniformity or arbitrary application may hinder international trade; and government procurement and state trading practices that may discriminate against foreign suppliers. The evolution of certain types of business practices and distribution systems condoned by governments could also encourage discrimination against imports. The initiation of antidumping and countervailing duty investigations can also disrupt trade flows. In general, it is difficult to determine whether such actions have a protectionist motive, particularly because GATT rules establish procedures for the imposition of antidumping and countervailing duties on dumped or subsidized exports. Some indications of recent changes in the overall frequency of antidumping, countervailing, and safeguard actions in countries for which data are available appear in Tables 51 through 55.

A principal problem in assessing the incidence of nontariff measures is that changing demand and supply conditions and product mix can over time increase or reduce the restrictiveness of a given import quota or internal regulation. Moreover, a given restriction, such as a global import quota, may in practice be applied in such a way as to discriminate against a particular supplier even if the formal regulation is, in principle, nondiscriminatory. For this reason, international trading rules tend to rely on initiatives or complaints by affected countries in challenging the restrictiveness of nontariff measures. In the case of bilaterally agreed restraint arrangements, however, such complaints are apt to be brought to international attention only rarely. Thus any description of nontariff barriers and attempt to assess its incidence is bound to be very approximate and even controversial.

Recently, the UNCTAD Secretariat has begun to compile an extensive inventory of nontariff barriers maintained by the major trading nations. The information is based on official sources (including notifications to the GATT) and is intended to serve a number of purposes. If the information is used to estimate the proportion of trade subject to nontariff barriers, the method of aggregating would show an upward bias.63 The estimates are nonetheless generally indicative of the frequency with which nontariff measures may be used by industrial countries.

Tables 56 and 57 summarize the information made available for 1980 by UNCTAD for selected countries and sectors. The nontariff barriers included in Table 56 are: discretionary licensing, variable import levies, global quotas, tariff quotas, voluntary export restraints, and quotas of unspecified kind. Some countries using nontariff barriers quite extensively in the industrial sector include France (discretionary licensing and quotas of unspecified kind); the United States (voluntary export restraints); and Japan (discretionary licensing). Footwear and leather products are among the sectors identified in the inventory as those subject to especially widespread nontariff restrictions. As might be expected, nontariff restrictions are more prevalent in the agricultural sector than in the industrial sector. These data are, of course, not indicative of the severity of the individual restrictions being applied.

Agreements on Nontariff Measures

With the entry into force on January 1, 1981 of the Agreement on Government Procurement and the Customs Valuation Code, all nine of the codes or agreements on nontariff measures concluded during the MTN have now become effective.64 In the past 12 months, several more countries have agreed to adhere to one or more of the MTN codes. Table 58 contains a list of the code signatories.

During the course of 1981, the committees of signatories to each code, set up to oversee the implementation of its provisions, held a series of meetings. In most committees, discussions were focused on examination of national legislation and the implementing of regulations for consistency with the provisions of the relevant GATT code and on notification of national actions or statistical information for the nontariff measures covered. In addition, in several committees, certain technical issues affecting the scope of coverage of the codes were raised. For example, the Committee on Government Procurement examined the issue of whether the Agreement on Government Procurement also covers leasing practices; the Committee on Technical Barriers to Trade considered whether the Agreement on Technical Barriers to Trade obliges signatories to apply its principles not only to final products but also to processes and production methods; and the Committee on Trade in Civil Aircraft discussed whether subsidized financing by governmental institutions in support of foreign sales of civil aircraft was consistent with the undertaking to remove restrictions on trade in civil aircraft as required by the relevant agreement. The discussions of the code committees are generally acknowledged to have contributed directly and indirectly to the maintenance of a certain degree of transparency in national actions and to have provided a basis for a better mutual understanding of national policies and their possible international implications for the sectors and measures covered by the codes.

Rules on Subsidies

The Code on Subsidies and Countervailing Duties was one of the more important codes of conduct emerging from the MTN. Recently, four countries (Australia, Egypt, New Zealand, and Spain) acceded to this code, bringing the number of signatories to 20. There were two main developments in relation to the code that are noteworthy: (1) the settlement of the dispute between India and the United States on the application of the code, and (2) consideration by the Committee on Subsidies and Countervailing Duties of complaints lodged by the United States against certain subsidies in the European Community.

Following the lodging of a complaint by India about the U.S. levy of a countervailing duty against India without the application of a material injury test, a GATT panel had been established in November 1980 to study the matter. On September 30, 1981, India and the United States informed the GATT that, as a result of bilateral consultations, they had reached a satisfactory solution to their dispute, and the GATT panel was dissolved before it had made a determination. The resolution reportedly involves a standstill on export subsidization for a specified period. The United States informed the GATT that it would apply the Code on Subsidies and Countervailing Duties to India beginning in September 1981.

In November 1981, the United States requested formal consultations with the European Community on Community export subsidies on wheat flour. In the U.S. view, the export subsidy was contrary to Article 10 of the Code on Subsidies and Countervailing Duties, under which signatories agree not to grant export subsidies on primary products “in a manner which results in the signatory granting such subsidy having more than an equitable share of world trade in such product.” When the bilateral consultations broke down, the Committee, acting on a U.S. request, established a panel in January 1982 to examine the subsidies maintained by the European Community on the export of wheat flour. This was the first time since the conclusion of the MTN that a panel had been established under any of the MTN codes.65

Another recent dispute between the United States and the Community concerns the latter’s export subsidies on pasta. In April 1982 the Committee on Subsidies and Countervailing Measures decided to establish a panel to examine a complaint by the United States on this matter. In the consultations that were undertaken prior to this decision, complex issues were raised regarding the interpretation and application of the subsidy code. The difficulties stem principally from the differences in the obligations of code signatories with respect to export subsidies for primary products and others, with stricter requirements applying to the latter. They involve, on the one hand, the U.S. contention that, since pasta is a manufactured product, the stricter obligations should apply and, on the other, the Community’s view that the code does not forbid subsidization of a primary product used as an input for a manufactured product.

In recent years, there has been increased international concern about subsidized export credits, which have been limited since 1978 by the OECD Arrangement on Guidelines for Officially Supported Export Credits. For the majority of industrial products, the Arrangement lays down the minimum rates of interest to be charged for such credits as well as the minimum percentage of cash payments and maximum repayment periods. Following the sharp rise in international interest rates in 1979–80, the specified minimum rates involved an increasing element of subsidization and led to calls for renegotiation of the Arrangement to reflect the higher interest rates. However, agreement on new interest rates proved difficult to reach. In May 1980, the minimum interest rates of the Arrangement were raised slightly. In October 1981 they were raised further by 2.25–2.5 percentage points (to a range of 10.0–11.25 per cent); in addition, a single minimum rate of 9.25 per cent was agreed for countries with market rates below 10.0 per cent. In July 1982, new guidelines were agreed for the period until May 1983, under which: (1) minimum interest rates were raised to a range of 10.85–12.4 per cent, except for the category of “relatively poor” borrowing countries where rates were maintained at 10 per cent; (2) for countries with market rates below the normal minimum rate, export credit rates would be fixed at 0.3 per cent above the basic market interest rates prevailing in these countries; and (3) country reclassifications were made in which certain Eastern European and other borrowing countries were moved to the “relatively rich” category while a number of other countries, including certain newly industrialized countries, were moved to the “intermediate” category; increases in interest rates applicable to the new entrants in the latter group were to be effected in two stages. While the latest arrangement will lead to lower subsidization, no agreement of principle has yet been reached on the issue of whether the structure of minimum interest rates included in the guidelines should be adjusted automatically in relation to market interest rates. Instead, provisions have been made for periodic review. The next review is due in the spring of 1983. In connection with the OECD initiatives, some developing countries have raised recently in the GATT the issue of the possible adverse effects of higher interest rates on the developing countries that benefit from subsidized export credits.

The distorting effects on world trade of domestic subsidies have recently received increased international attention.66 This is attributable to several factors. First, with agreement being reached in the MTN on the Code on Subsidies and Countervailing Duties, stronger disciplines have been developed in the area of export subsidies, and attention has therefore shifted to domestic subsidies. Second, the use of domestic subsidies to support ailing industries has become more prevalent in many industrial countries and, against the background of slower growth in world trade, countries have become more concerned about the potential diversion of their exports to countries that support production through subsidies. Third, in the context of intergovernmental discussions on the problems of structural adjustment in industrial countries, subsidies of all forms have been more widely recognized as impeding structural adjustment and hence giving rise to protectionism. Finally, the mounting budgetary costs of subsidization have been increasingly criticized in the context of situations in which greater fiscal discipline is required to control inflation.

Besides direct subsidies for current expenditures, other direct subsidies are given in the form of government capital transfers, including mainly investment grants, cancellation of debts, and coverage of losses accumulated over several years. Their levels and trends have varied substantially among these industrial countries, reflecting different structural problems and long-term policy choices.67 Furthermore, indirect forms of subsidies, such as tax relief in the form of preferential tax rates or allowances deductible from the tax base, interest rate subsidies, preferential credit allocation, and government procurement programs are also common features of the tax systems or financial markets of industrial countries. The size of indirect subsidies may be substantial for some countries.

A partial estimate of the extent of subsidization is provided in Charts 2 and 3, which show the upward trend in current public subsidies in industrial countries as a percentage of GDP during 1970–80. There was a noticeable increase in subsidization coincident with the 1974–75 recession, reflecting increasing government intervention in the context of a deteriorating overall economic situation. These data relate to direct current public subsidies; if indirect subsidies in the form of tax incentives are taken into account, relative country positions may change significantly. Tax subsidy rates (taking into account investment tax credits, cash grants, and accelerated depreciation allowances) on manufacturing fixed investment in 1981 increased sharply in the United States (from 3 to 13 per cent) and by 2–3 percentage points in France, the Netherlands, and the United Kingdom.68

Chart 2.Selected Industrial Countries: Comparison of Public Subsidies1 to Enterprises

(As a percentage of gross domestic product)

Sources: OECD, National Accounts of OECD Countries, various issues; EUROSTAT, National Accounts ESA-Aggregates.

1 Subsidies: All grants on current account made by government (including the European Community’s institutions for member countries of the Community) to private industries and public corporations, and grants made by the public authorities to government enterprises in compensation for operating losses when these losses are the consequence of the policy of the government to maintain prices at a level below costs of production. Not included are, however, capital transfers to cover losses, accumulated over several years, and cancellation of debts or investment grants.

Chart 3.European Community: Comparison of Public Subsidies1 to Enterprises

(As a percentage of gross domestic product)

Sources: OECD, National Accounts of OECD Countries, various issues; and EUROSTAT, National Accounts ESA-Aggregates.

1 See Chart 2, footnote 1.

Whatever its form, subsidization essentially involves an explicit or implicit government decision to alter the relative prices or incomes and profitability of certain firms, industries, regions, or sectors, in comparison with what would have prevailed in the absence of government intervention. Given that governments pursue a variety of economic, social, and political objectives, it would be surprising if these objectives did not run counter, at least occasionally, to the criterion of efficient resource allocation.

The Code on Subsidies and Countervailing Duties obliges signatories to inform each other of their own subsidy practices upon request. The Code recognizes that “subsidies are used by governments to promote important objectives of social and economic policy” and that subsidies “may cause adverse affects to the interests of other signatories.” In addition to the obligations relating specifically to export subsidies, signatories undertake to “seek to avoid causing, through the use of any [emphasis added] subsidy, injury to the domestic industry of another signatory, or serious prejudice to the interests of another signatory.” Signatories are urged, in drawing up their policies and practices on subsidies other than export subsidies, to “also weigh, as far as practicable, taking account of the nature of the particular case, possible adverse effects on trade.”

It is evident that the inclusion in the Code of specific provisions on domestic subsidies represents an important attempt by the principal trading nations to develop a consensus on their regulation. These code provisions remain largely untested, because so far the Committee on Subsidies and Countervailing Duties has not been used as a forum for the discussion of major domestic subsidy practices of signatories.

Rules on Dumping

In the past 12 months, Brazil adhered to the revised Antidumping Code, bringing to 20 the total number of signatories. The revised Code strengthens some of the provisions of the 1967 Antidumping Code, concluded at the end of the Kennedy Round of trade negotiations. Since its establishment, the Committee on Antidumping Practices has discussed the issue of how to deal with the proliferation, often outside the GATT framework, of special antidumping monitoring schemes in industrial sectors. Such schemes may impede trade by setting minimum import prices determined administratively, rather than in relation to the prices prevailing in the most efficient producing country. The basic GATT rule on dumping, set out in Article VI of the General Agreement, is that dumping—sales of a product in an importing country at less than its normal value—is to be condemned if it causes or threatens material injury to an industry. If dumping is found to exist, Article VI authorizes the levying of an antidumping duty equivalent to the established margin of dumping. Under Article 8:4 of the Antidumping Code, as revised in the MTN, signatories may, under certain conditions, impose antidumping duties on imports priced below administratively established “basic prices,” provided injurious dumping has been proved and the basic price does not exceed the lowest normal price in the supplying country, where normal conditions of competition prevail.

The Committee on Antidumping Practices considered whether the provisions of Article 8:4 are adequate to exercise discipline on schemes such as the European Community’s price monitoring system for steel products introduced in December 1977 and the U.S. steel trigger price mechanism in effect during December 1977–March 1980 and October 1980–December 1981. The Code signatories generally recognize that such special schemes, even if technically consistent with the GATT and the Antidumping Code, may have pernicious effects on trade in the sectors to which they apply and, to the extent that they are superimposed on the normal investigative procedure for antidumping cases, may involve discrimination between sectors or supplying countries. With this perspective, a view was expressed that Article 8:4 could be replaced by other provisions or understandings that would directly address the problems posed by special sector-specific national antidumping monitoring schemes and that might provide for the phasing out of existing schemes and a prohibition on the introduction of new ones. However, these issues remain under discussion, since countries not applying such schemes appear to be reluctant to give up their right to establish them if necessary, without obtaining firm assurances that existing schemes would be phased out or eliminated outright.

Balance of Payments Restrictions

GATT Articles XII and XVIII authorize, respectively, developed and developing countries to introduce trade restrictions for balance of payments purposes. As a part of the understandings reached during the MTN, the role of the GATT Committee on Balance of Payments Restrictions, which conducts consultations with GATT members invoking a balance of payments justification for their trade restrictions, was strengthened. Under its Article XV, the GATT consults with the Fund in such cases and must accept the finding of the Fund on the balance of payments justification for the restrictions in question. In 1981 and the first half of 1982, the Committee on Balance of Payments Restrictions conducted 13 country consultations.

In recent years, only a relatively limited number of GATT contracting parties69 have consulted with the Committee on Balance of Payments Restrictions, and most of them have been developing countries invoking the provisions of GATT Article XVIII (Table 59). This reflects the avoidance of trade restrictions for balance of payments purposes by most developed countries. Italy, which introduced an advance deposit requirement on sales of foreign exchange in May 1981, also consulted with the GATT Committee on Balance of Payments Restrictions. The measure involved an exchange restriction under Article VIII of the Fund’s Articles of Agreement. The GATT consultation did not involve formal invocation of Article XII by Italy.

Dispute Settlement

A major achievement of the Tokyo Round was the strengthening of the GATT’s dispute settlement mechanism. Most disputes are settled directly between the countries concerned without being brought before the GATT itself. However, when bilateral discussions fail to produce a settlement, the parties may bring the matter before the GATT Council of Representatives, which can appoint a panel of independent experts to examine such disputes and report its conclusions to the GATT Council. Following the conclusion of the MTN, there has been a sharp increase in the number of trade disputes brought before the GATT. Many of the disputes involve the major trading nations. Since conciliation efforts frequently continue even when panels have been established, complaints may be withdrawn before the conclusion of the panel’s work. A list of GATT panels established since 1978 is given in Table 60.

In 1981, settled disputes included the U.S. complaints concerning treatment by the United Kingdom of poultry imports and Japanese measures affecting imports of manufactured tobacco, and the Brazilian complaint regarding Spanish tariff treatment of unroasted coffee imports.

A novel development in 1981 was the use of conciliation and dispute settlement procedures aimed at “testing” GATT rules in areas where their application is controversial, or at bringing international influence to bear on the resolution of bilateral issues that go beyond the technical violation of GATT rules. This development has implications for the multilateral trading system, because the procedures employed and results obtained in individual cases can set precedents for the future. Moreover, there are risks to the extent that panels are called upon to rule for or against certain practices that are deeply entrenched in national law or policy and whose application cannot be altered for domestic political or social reasons.

In April 1982, the GATT Council decided to establish a panel in response to a U.S. request following failure to reach a satisfactory resolution of the issues raised by the United States regarding the trade implications of the Canadian Foreign Investment Review Act (FIRA). The United States contended that, under the FIRA, investment proposals by a foreign firm were approved by the Canadian authorities only after it had entered into legally binding commitments regarding the percentage of inputs it intended to buy from Canadian producers and the percentage of output it planned to export. The U.S. view was that these trade practices nullified or impaired the benefits accrued to the United States under the GATT and impeded the attainment of GATT objectives. The Canadian view was that trade practices under the FIRA were not inconsistent with Canadian obligations under the GATT.

In April 1982, the European Community made representations to Japan under GATT Article XXIII:1, which sets out the procedures to be followed in resolving problems arising from the nullification or impairment of any objective of the General Agreement.70 Two-way trade between Japan and the European Community in manufactured goods is of the order of $25 billion annually. The Community’s representation expressed its concern that the benefits of successive GATT negotiations with Japan had not been realized owing to a series of factors particular to the Japanese economy that had discouraged imports of products other than raw materials. Among the specific measures identified as falling under Article XXIII:1(b) were standards, testing, and acceptance procedures, and customs procedures. In addition, under Article XXIII:1(c), which refers to the existence of “any other situation” that may cause nullification or impairment of benefits, the Community identified the following features that in its view constituted such a situation: (1) domination of Japanese industry by a few large business groupings with close links among them; (2) the facilitation of modernization and restructuring of industry by high levels of direct and indirect protection that prevailed in Japan until recently; and (3) the insulation of a sui generis currency that does not play a role internationally commensurate with the strength of the Japanese economy.

The Community representation concluded that, as a result of these factors, the Japanese market remained exceptionally difficult for foreign firms to penetrate. This, together with the growth of Japan’s exports to the Community, had led the Community to conclude that the GATT objective of “reciprocal and mutually advantageous arrangements” had not been adequately achieved between the European Community and Japan. While welcoming the recent removal by Japan of certain specific barriers to imports at the frontier, the Community requested, in addition, that the Japanese authorities take determined and swift action positively to promote imports—for example, through guidance to public and private sectors.71 In addition, Japan was requested to provide assurances that, from 1982 on, it would pursue a policy of effective moderation in Japanese exports to the Community in sectors where an increase in Japanese exports would cause significant problems—namely, passenger cars, color television sets and tubes, and certain numerically controlled lathes and machining centers. Following these representations, bilateral Community-Japan consultations were begun in May 1982. In the consultations, Japan contended that the Community’s representations neither were compatible with the established dispute settlement procedures of the GATT nor demonstrated the nullification or impairment of benefits under the GATT or the impediment of the attainment of the GATT objectives.

Agricultural Trade Liberalization

It is widely acknowledged that, although some tariffs were lowered and a few quotas and other restrictions on agricultural products were liberalized, the successive rounds of trade negotiations have not made substantial progress on agricultural protection.72 Additional background information on the evolution of the framework governing trade in agricultural products is provided in Appendix I. The relative importance given to agricultural issues in future discussions and negotiations will be determined by the decisions taken at the GATT ministerial meeting in November 1982. It is evident, however, that legal, historical, and political complexities have impeded liberalization of agricultural trade.

Structural Adjustment Issues

Awareness of the interrelationship between domestic policies affecting resource allocation and the openness of the trading system has led to considerable discussion in international forums on the desirability of promoting structural adjustment and the feasibility of accelerating the process of adjustment by deliberate internationally coordinated actions and decisions. In addition to the OECD initiatives summarized above in Section II, recent discussions at the GATT and UNCTAD have focused on the general policy issues relating to structural adjustment or on policies in individual countries or sectors. A common theme in these discussions has been the importance of maintaining market access while adjustment efforts are under way.

In the GATT, a Working Party on Structural Adjustment and Trade Policy was set up in late 1980. In its report the Working Party concluded that work in the GATT on structural adjustment “should provide for a better understanding of the adjustment process and should aim at facilitating trade policy measures directed toward the expansion of international trade. It should also provide for an examination of the interaction between structural adjustment and the fulfillment of the objectives of the GATT in furthering the expansion and liberalization of trade, including in particular the trade of developing countries.”73 In the light of these objectives, in mid-1981 the GATT Council endorsed a further work program for the Working Party. Its key elements are an analysis and discussion of (1) the relevance of the Articles and instruments of the GATT to the process of structural adjustment; (2) significant modifications in production and trading structures over time and factors relevant to these modifications; and (3) the experience of contracting parties with regard to structural adjustment.74

In March 1981, the UNCTAD Trade and Development Board decided to conduct annual reviews of developments in protectionism and structural adjustment. The first review was conducted at the session held in March 1982, based on documents prepared by the UNCTAD Secretariat on this topic.75 Although some of the analyses and conclusions presented in these documents were not shared by all members of the Board, there was general agreement that the maintenance of an open trade system constituted the best way to promote structural adjustment. It was decided that the matter would be further reviewed by the Board at its twenty-sixth session in March 1983.

Safeguards

The central provision in the General Agreement governing safeguards is contained in GATT Article XIX, which authorizes contracting parties to raise tariffs or introduce quantitative or other restrictions on imports of a product, if that product is being imported “in such increased quantities and under such conditions as to cause or threaten serious injury” to domestic producers of like or directly competitive products. The restriction may be imposed “to the extent and for such time as may be necessary to prevent or remedy” the injury to domestic producers. The contracting party invoking Article XIX is obliged to consult with the Contracting Parties on its action, and to give an opportunity to affected exporters to consult with it. If these consultations do not produce an agreement among the interested contracting parties, the restrictive action may still be taken or continued, but, if it is, the affected contracting parties have the right to retaliate by withdrawing substantially equivalent trade concessions with respect to the country taking the restrictive action. Thus, the initial restriction under Article XIX is intended to be nondiscriminatory, applying to all contracting parties, while the retaliation permitted under this Article may be selective to the country introducing the initial restriction.

This Article has been regarded as being of fundamental importance for maintaining the balance of rights and obligations among contracting parties. By specifying that import restrictions—that would otherwise be in violation of the General Agreement—could be imposed only under specified circumstances (especially “material injury” to domestic producers, which has to be established to the satisfaction of other contracting parties), Article XIX in effect encourages countries to undertake more far-reaching commitments under the GATT to maintain open markets than might otherwise be the case. Moreover, by providing for the possibility of withdrawal of “equivalent concessions,” the Article tends to restrain countries from imposing trade restrictions without substantial cause. In recent years, however, only a few countries have in practice invoked the provisions of Article XIX, and many have introduced restrictions outside Article XIX that they have found to be less constraining. Such restrictions outside GATT Article XIX are usually bilaterally negotiated—and often involve voluntary export restraints—thus enabling countries to escape the multilateral discipline implicit in Article XIX. Table 61 lists the Article XIX safeguard actions taken in recent years. Most of the restrictive measures described above in Sections III and IV have been taken outside the framework of GATT Article XIX and are thus not listed.

In the Tokyo Declaration of 1973, which launched the MTN, contracting parties undertook to

include an examination of the adequacy of the multilateral safeguard system, considering particularly the modalities of application of Article XIX, with a view to furthering trade liberalization and preserving its results.76

In the event, the MTN did not produce agreement on safeguards. In 1979, following the conclusion of the MTN, a GATT Committee on Safeguards was established to carry on the discussions. However, the results of these deliberations have so far been meager. In late 1981 the Director-General of GATT announced his intention of initiating, more systematically than heretofore, in-depth consultations with national delegations in the hope of encouraging a real effort of compromise. The crucial issues in the safeguards negotiations are, first, whether recourse to Article XIX should be permitted on a selective (discriminatory) basis, and second, how multilateral surveillance over safeguard actions could be strengthened in order to ensure that easier recourse to the safeguard provisions is not abused. Should it prove impossible to resolve these questions in the negotiations prior to the November 1982 GATT ministerial meeting, it is to be expected that safeguards will be featured as a prominent issue for discussion in the GATT work program to be agreed upon at that meeting.

Other Trade-Related Issues

Services

Recently, international attention has been focused on issues arising from international trade in services, and particularly on whether new multilaterally agreed rules need to be developed for removing existing barriers and forestalling the emergence of new barriers. A fundamental premise of the argument that the service sector should be brought under greater international discipline is that, both in the domestic economies of the major industrial countries and internationally, the service sector has, over the years, become increasingly important. It has been estimated that the value of international transactions in services (excluding dividends and interest payments) more than doubled in the 1960s, and doubled again between 1970 and 1975. In the last decade, world trade in services grew by 17 per cent annually, compared with a 6 per cent annual growth in world merchandise trade, to reach $650 billion in 1980—about one third of merchandise exports.

International discussion of services originated with U.S. initiatives. The possible problems and issues to be examined cover a broad range of service sectors and a considerable variety of restrictions, as illustrated in Table 62. U.S. officials have expressed their keen desire to begin international consideration of the framework within which subsequent negotiations on services could be conducted. If there were international acceptance of the right of free entry to world service markets consistent with national interests, agreed procedures could be developed for dealing with barriers to services either on a sectoral basis or by type of barrier. The U.S. objective is not to seek uniformity of national rules governing service industries, but rather to ensure that within each country foreign service firms are treated in the same way as national firms.

In the international discussions on services, the United States has pressed for a more rapid consensus in the area of telecommunications, data processing, and information services, in view of the apparent speed with which both OECD and non-OECD countries may be erecting barriers and the rapidity of technological change in this sector. In this sector, as well as in most other services, government regulations and restrictions are motivated by a vast array of considerations and may serve legitimate domestic and social objectives, such as protection of data on grounds of privacy or national security considerations. In the telecommunications sector, services are often provided by a telecommunications monopoly, and its regulation by the government is designed to ensure the reliability of services at reasonable prices. With advances in technology, many governments face difficult choices on the extent to which newer types of telecommunications activity should be regulated (or even confined to the public sector) or left open to competition from foreign firms. In the telecommunications sector, U.S. firms play a dominant role, both financial and technical, and there are prospects for a dramatic worldwide increase in the demand for telecommunication services.

As illustrated by the example of the telecommunications industry, the problems of identifying and limiting restrictions to trade in services involve both technical and policy considerations. For this reason, and because it is far from certain whether problems in the services sectors can or should be addressed primarily from the standpoint of trade policy, in forums such as the GATT and the OECD, or whether they should also involve specialized agencies such as the International Telecommunications Union and the World Intellectual Property Organization, it is evident that considerable time and effort will be required before these issues can be approached systematically at the international level. Meanwhile, the GATT ministerial meeting will provide an opportunity for decisions on the relative priority to be accorded to the service sector in the GATT work program.

Investment Performance Requirements

Broadly defined, investment performance requirements cover a range of regulations imposed by a host government on the operations of a foreign-controlled enterprise in the host country, and cover both the conditions under which investment incentives may be provided and the conditions under which foreign investment is allowed in a country. They include measures ranging from restrictions on remittances of earnings and repatriation of capital to specific requirements governing the sectors or regions in which foreign investment is permitted (Table 63).

Although some aspects of investment performance requirements (such as those involving restrictions on current payments and transfers) are covered by international agreements, recently some countries—in particular the United States—have expressed concern about the adequacy and extent of actual application of existing GATT rules on two specific trade-related investment performance requirements—namely, export requirements (such as an obligation to export a specified minimum percentage or absolute value of annual production) and import substitution requirements, including local content provisions and local value-added requirements. These can both influence the direction of direct investment flows and distort trade—for example, by displacing other countries’ exports in third markets. Recently, the United States requested the GATT Secretariat to prepare an inventory of trade-related investment performance requirements.

Investment performance requirements have also been proposed for inclusion in the GATT work program for the period following the GATT ministerial meeting. The three main issues related to these requirements are: (1) the present incidence of trade-related investment performance requirements; (2) the consistency of these requirements with present GATT rules and MTN codes, such as the Code on Subsidies and Countervailing Duties; and (3) the adequacy of existing GATT rules in this area and the desirability of seeking additional multilateral disciplines in the GATT framework.

In connection with the last point, several contracting parties have questioned whether trade-related investment performance requirements can be dealt with in isolation from the broader issues of private capital flows and the role of transnational corporations—subjects that are under study in various other specialized UN agencies. In July 1980, the Task Force on Private Foreign Investment of the Bank-Fund Development Committee concluded, following an examination of investment performance requirements and incentives, that the central issue with foreign investment incentives and performance requirements was how to reconcile host countries’ legitimate needs to pursue their national interests through their use with the need to ensure that investment capital was channeled to its most productive uses. Trade-related investment performance requirements raise the additional issue of how to identify trade diversion or injury to third countries’ trade interests and how to take steps to prevent or avoid it.

61

Weighted averages for Austria, Canada, the European Community, Finland, Japan, Norway, Sweden, Switzerland, and the United States.

62

GATT, The Tokyo Round of Multilateral Trade Negotiations (Geneva, April 1979), p. 120.

63

Nontariff barriers are normally applied at the tariff line level. Since trade flows are usually reported at a more aggregate level, in estimating the proportion of trade subject to nontariff barriers the assumption is made that the barrier, which in fact applies only to part of a given product group, affects all trade of that product group.

64

The seven agreements that took effect on January 1, 1980 are (1) Code on Subsidies and Countervailing Duties; (2) Agreement on Technical Barriers to Trade; (3) Agreement on Import Licensing Procedures; (4) Revised Antidumping Code; (5) Arrangement Regarding Bovine Meat; (6) International Dairy Arrangement; and (7) Agreement on Trade in Civil Aircraft.

65

Several MTN codes include dispute settlement procedures that are independent of the mechanisms available under the General Agreement itself. An interesting issue, still unresolved, is the degree to which the procedures or findings adopted in code panels establish precedents for regular GATT panels and, to the extent that they may do so, the implications of this for the majority of GATT contracting parties that are not code signatories.

66

The trade effects of different forms of subsidy are discussed in Geoffrey Denton and Seamus O’Cleireacain, Subsidy Issues in International Commerce, Trade Policy Research Center, Thames Essay No. 5 (London, 1972), Appendix I.

67

See Commission of the European Communities, “Some Structural Properties of Subsidies, Investment Incentives, and Energy Taxation,” European Economy, No. 10 (November 1981), pp. 130–43

68

See George F. Kopits, “Fiscal Incentives for Investment in Industrial Countries,” Bulletin for International Fiscal Documentation (Amsterdam), Vol. 35, No. 7 (July 1981), pp. 291–94. In this study, the tax subsidy rate is measured as the difference between the actual tax reduction resulting from the purchase of a plant or a piece of equipment under the country’s tax system and the tax reduction under a neutral system, with the difference expressed as a proportion of the asset price. Tax subsidy rates calculated for individual countries are presented below:

Tax Subsidy Rate on Manufacturing Fixed Investment1(As percentage of asset price)
Country197319801981
Belgium–2.4–2.4–2.4
France1.21.24.4
Germany, Fed. Rep. of–6.7–5.5–5.5
Italy4.15.05.0
Japan–3.4–3.4–3.4
Netherlands–4.34.26.2
United Kingdom9.810.913.1
United States1.33.312.8

A positive value indicates a subsidy; a negative value represents a tax. It is assumed that the income tax rate is 46 per cent, the nominal discount rate is 10 per cent, and the inflation-adjusted discount rate is 5 per cent.

A positive value indicates a subsidy; a negative value represents a tax. It is assumed that the income tax rate is 46 per cent, the nominal discount rate is 10 per cent, and the inflation-adjusted discount rate is 5 per cent.

69

The term “contracting parties” refers to GATT members acting individually. “Contracting Parties” is used in this paper in place of “CONTRACTING PARTIES” as used in GATT official documents to refer to actions by signatory countries as a group.

70

Article XXIII:1 states:

“If any contracting party should consider that any benefit accruing to it directly or indirectly under this Agreement is being nullified or impaired or that the attainment of any objective of the Agreement is being impeded as the result of (a) the failure of another contracting party to carry out its obligations under this Agreement, or (b) the application by another contracting party of any measure, whether or not it conflicts with the provisions of this Agreement, or (c) the existence of any other situation, the contracting party may, with a view to the satisfactory adjustment of the matter, make written representations or proposals to the other contracting party or parties which it considers to be concerned. Any contracting party thus approached shall give sympathetic consideration to the representations or proposals made to it.”

If a satisfactory solution is not reached under Article XXIII: 1, a contracting party may request the establishment of a panel or a working party to consider the matter. The main difference between the two is that a panel consists of independent experts, while the latter generally comprises government representatives, including representatives of the parties to the dispute.

71

In order to strengthen the open trade system, Japan had announced measures to facilitate imports and streamline import procedures in late 1981 and early 1982. The measures included: (1) advancement of scheduled tariff cuts under the MTN agreements on 1,653 items by two years; (2) unilateral reduction of tariff rates on 119 items and elimination of tariffs on 96 industrial products, together covering 2.6 per cent of total imports; and (3) implementation of 67 improvement measures aimed at relaxing nontariff measures, including easier customs inspection procedures, acceptance of foreign test results, and modification of a number of specific barriers affecting particular products. An office of trade ombudsman was established to ensure compliance with new regulations.

72

Instances of liberalization include a zero binding by the European Community in the Kennedy Round on soybeans and expansion of beef quotas by Canada, Japan, and the Community in the Tokyo Round. In addition, there has been a considerable liberalization of tariffs on tropical agricultural products.

73

GATT, Working Party on Structural Adjustment and Trade Policy: Report to the Council, Document L/5120 (March 16, 1981).

74

GATT, Working Party on Structural Adjustment, Meeting on 2 July 1981, Note by the Secretariat, Document L/5177 (July 29, 1981).

75

UNCTAD, Protectionism and Structural Adjustment in the Agricultural and Other Commodity Sectors, TD/B/885 (February 18, 1982); Trends in World Production and Trade, TD/B/887 (January 25, 1982); and Protectionism and Structural Adjustment in the World Economy, TD/B/888 (January 15, 1982).

76

GATT, GATT Activities in 1973 (Geneva, 1974), p. 7.

    Other Resources Citing This Publication