Chapter

II Evolving Framework for International Trade

Author(s):
Naheed Kirmani, Shailendra Anjaria, and Arne Petersen
Published Date:
July 1985
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Introduction

In the past several years, increased international attention has been given to maintaining and improving the liberal world trading order, especially in the GATT, which, with its 90 members accounting for 85 percent of world trade, provides the central framework of rules, rights, and obligations governing international trade. Tokyo Round codes have been accepted by virtually all industrial countries and several developing countries (Table 6).

The declaration adopted by the GATT Contracting Parties in November 1982 recognized that the multilateral trading system was seriously endangered and that protectionist pressures had multiplied, disregard of GATT disciplines had increased, and shortcomings in the functioning of the GATT system had been accentuated. GATT contracting parties agreed, individually and jointly, to undertake

… to make determined efforts to ensure that trade policies and measures are consistent with GATT principles and rules and to resist protectionist pressures in the formulation and implementation of national trade policy and in proposing legislation; and also to refrain from taking or maintaining any measures inconsistent with GATT and to make determined efforts to avoid measures which would limit or distort international trade.36

Trade policy and protectionism have been addressed also in the OECD, UNCTAD, the Commonwealth Group, the Interim and Development Committees, and elsewhere.37 This section reviews the key developments stemming from the adoption by the GATT and the OECD of a wide-ranging program of discussion, analysis, and consultation.

Quantitative Restrictions and Other Nontariff Measures

A newly created GATT Group on Quantitative Restrictions and Other Non-Tariff Measures embarked on a comprehensive review in November 1983, aimed at compiling measures, reviewing their conformity with the GATT, and establishing a basis for eliminating illegal measures and liberalizing others. The Group had no negotiating mandate per se.

Broadly, GATT rules do not permit contracting parties to apply quantitative restrictions; tariffs are recognized as the main instrument of protection. The GATT does provide, however, for specified exceptions under which quantitative restrictions may be maintained. Since the early 1970s, governments have recognized the importance of liberalizing nontariff restrictions.

The Group compiled two sets of comprehensive information on nontariff measures, one based on “self notifications” by contracting parties applying them, and the other on “reverse notifications” by contracting parties of measures applied by other contracting parties.38 Only 2 of the 90 contracting parties reported that they maintained no quantitative restrictions. The principal GATT provisions under which contracting parties justify the maintenance of quantitative restrictions are (a) agricultural import restrictions, including those linked to limitation of domestic agricultural production (Article XI:2(c)); (b) restrictions associated with state-trading enterprises (Article XVII); (c) balance of payments restrictions (Articles XII and XVIII:B); (d) restrictions associated with governmental assistance to promote the establishment of an industry (Article XVIII:C); (e) restrictions to safeguard domestic industry from injurious import competition (Article XIX); (f) restrictions under one of several “general exceptions” provided for in the GATT (Article XX); (g) restrictions on national security grounds (Article XXI); (h) restrictions under waivers granted by the Contracting Parties (Article XXV:5); and (i) restrictions under the Protocol of Provisional Application, Protocols of Accession, and the Agreement on Import Licensing Procedures.

For at least some of their quantitative restrictions, 49 of the 84 notifying contracting parties invoked no specific GATT provision. The Group suggested that, in cases where no GATT justification was advanced, the working hypothesis would be that the restriction was not in conformity with the GATT, and, in other cases, the hypothesis would be that it was in conformity with the GATT, so long as this was not challenged by another contracting party.

As regards nontariff measures other than quantitative restrictions, the Group compiled an inventory of some 400 notifications, including those relating to government aids, government procurement, state trading, customs valuation, consular formalities, technical barriers and standards, testing requirements, marking and labeling requirements, surcharges, port taxes, and border tax adjustments (Table 7). It was noted that this was not a comprehensive inventory of all nontariff measures, but a listing of problems governments wished to raise in the GATT. In some cases, the countries maintaining the measures suggested that the measures either did not restrict trade or did not unnecessarily restrict trade.

The GATT Secretariat suggested possible techniques to liberalize quantitative restrictions and other nontariff measures or to bring them into conformity with GATT provisions. The techniques to liberalize quantitative restrictions could range from immediate elimination to a standstill, combined with progressive liberalization and elimination.

Different techniques could be used for different types of quantitative restrictions, depending, for example, on whether the measures were considered to conform with the GATT. The techniques suggested to bring quantitative restrictions into conformity with the GATT ranged from invocation of GATT provisions permitting the maintenance of quantitative restrictions to replacement of quantitative restrictions by permissible restrictions such as tariffs. The main techniques identified for liberalizing other nontariff measures were for contracting parties to follow a request-and-offer procedure, or to agree on new interpretations or multilateral rules in order to reduce their restrictive effects on trade.

The Group also considered possible actions on quantitative restrictions affecting products of export interest to developing countries. Examples of alternative techniques were immediate removal of quantitative restrictions; increasing the share of a quota allocated to developing countries more rapidly than to other countries; more rapid liberalization on a most-favored-nation basis of restrictions affecting developing countries; and periodic reviews of possibilities for action on products of interest to developing countries.

The session of the Contracting Parties in November 1984 agreed that, by the end of April 1985, contracting parties would make specific written proposals on ways to eliminate quantitative restrictions inconsistent with the GATT or to bring them into conformity with the GATT. The Group’s findings and conclusions will be considered at the next session of the Contracting Parties.

Safeguards

A crucial element in the international discussion of nontariff barriers is the question of safeguards—namely, the GATT provisions that govern the temporary imposition of import restrictions.39 In practice, governments have often found the injury and the nondiscrimination provisions of Article XIX to be too onerous, and many governments have imposed bilateral (discriminatory) restrictions that are inconsistent with the GATT. Table 9 illustrates that only a few contracting parties have taken safeguard actions since 1978.

Recognizing the need for an effective multilateral safeguard system, the 1973–79 Tokyo Round negotiations considered how trade discipline in this area could be strengthened. Controversy arose among governments on whether discrimination should be sanctioned under the GATT, albeit under stringent conditions and strict international surveillance, or whether the principle of nondiscrimination should be reinforced by eliminating safeguard actions inconsistent with the GATT. The Tokyo Round did not resolve this issue; no agreement on new disciplines in safeguards was possible, and the discussions on this subject were continued after 1979.

Despite subsequent intensive efforts in the GATT, agreement on safeguards is still elusive, owing principally to different views on the question of discrimination. Meanwhile, restrictions outside the GATT, particularly those in the form of bilateral export restraint arrangements, which generally are not formally notified to the GATT, have proliferated. According to a recent tabulation by the GATT Secretariat, new voluntary export restraints, orderly marketing arrangements, and export forecasts involving 13 exporting and 6 importing countries were reported during April–September 1984; in addition, 41 of the bilateral restraints on trade introduced since 1978 are still in force.40 Furthermore, since 1980, an increasing number of GATT members have shown interest in compensation trade or countertrade arrangements; in the same six-month period, the GATT Secretariat reported that eight such arrangements came to its attention. The majority of specific countertrade arrangements are negotiated on an intercompany basis, and this is one reason why they are so difficult to treat.41

The issue of the supposed legality or illegality of measures, particularly bilateral restraints, also impinges on the discussions on safeguards. If the GATT were formally to accept bilateral restrictions, one of its main principles would be compromised; greater transparency and surveillance of restrictions might be achieved, but only at the risk of encouraging further proliferation of bilateral restrictions. On the other hand, the status quo, while it may have exercised a braking influence on the use of bilateral restrictions in some countries, has, overall, not prevented illegal or gray area measures in the GATT from proliferating; trade actions of this type almost entirely escape international scrutiny. One reason may be a general weakening of support for the unconditional most-favored-nation principle of the GATT; some governments that have traditionally regarded this principle as a cornerstone of the multilateral system appear to be more willing, in practice, to acquiesce in bilateral restrictions.

The current status of the discussions on the safeguards issue was outlined in a report by the GATT Director-General on his own responsibility to the November 1984 session of the Contracting Parties. The report states that it cannot be argued both that the multilateral trading system should be preserved and that GATT Article XIX should be applied on a discriminatory basis.

Agriculture

Since the GATT’s inception, trade measures have been applied more extensively and more restrictively in the agricultural sector than in manufactures. The General Agreement itself in a few instances provides certain exceptions for agricultural trade, and, more fundamentally, liberal trade in agricultural products has not been accepted as a policy objective per se by countries accounting for the bulk of world trade in agricultural products.42 A significant advance at the 1982 GATT ministerial meeting was the establishment of a Committee on Trade in Agriculture to carry out an examination of trade measures affecting agriculture, with a view to achieving greater liberalization in agricultural trade.

The Committee examined trade measures and agricultural subsidies of 41 countries and the Community.43 During the deliberations, divergent views emerged on many substantive issues. Some countries felt the Committee’s mandate was to improve compliance with existing rules rather than to develop new disciplines. Some major traditional agricultural exporters stressed the importance of introducing stricter rules, particularly on import and export measures, and on individual support price levels. On subsidies, some countries stressed that all subsidies, including domestic subsidies, had an influence on production and international trade, while others attached priority to prohibiting export subsidies. All countries recognized the link between domestic agricultural policies and the openness of the trading system. Most took the view that, while domestic policies as such were not internationally negotiable, the General Agreement already constrains the use of import restrictions and export subsidies, in particular by linking them to measures to limit domestic production. Thus, the linkages already existing under the relevant GATT provisions could be strengthened further to provide clearer definition of the permissible limits to the impact of domestic agricultural policies on trade.

Important differences of view also emerged on other questions, such as the consistency of variable import levies with GATT provisions which do not explicitly mention them; the treatment, in the trade liberalization context, of restrictions maintained under GATT waivers, which, by virtue of the waiver, are legal under the GATT; the impact of phytosanitary regulations on agricultural trade; and the treatment of voluntary export restraints under existing or reinforced GATT rules.

The conclusions reached after two years of deliberation by the Committee on Trade in Agriculture, which were endorsed by the November 1984 session of the Contracting Parties, envisage a three-pronged approach to the question of agricultural trade liberalization. It was agreed that future negotiations should (1) bring all quantitative restrictions and other trade measures within the purview of strengthened GATT rules; (2) bring all subsidies, including agricultural subsidies, under GATT purview, and introduce disciplines on agricultural export subsidies in parallel, on “an approach based on improvements in the existing framework of rules and disciplines,” as well as on “an approach based on a general prohibition subject to carefully defined exceptions”; and (3) minimize the adverse trade effects of sanitary and phytosanitary regulations.44

In presenting the conclusions of the Committee on Trade in Agriculture to the Contracting Parties late in 1984, its chairman noted that

[i]n reaching this agreement, the European Communities recalled that the 1982 Ministerial Declaration covered a certain number of areas and made its definitive approval of the recommendations conditional on an overall assessment of the results achieved in these other areas.45

Given the technical complexity and political difficulty of issues in agricultural trade, the recent progress is generally viewed as a meaningful and essential first step toward eventual liberalization.

Work on agricultural policies and trade issues has also been intensified in the OECD. A study by the OECD (1982) concluded that adjustments in domestic agricultural policies could best take place within a concerted multilateral approach, aimed at integrating agricultural trade more fully with the multilateral trading system. The OECD Secretariat is currently embarked on a major study and research effort on agricultural trade issues. The study contains three elements: (1) an analysis of the approaches and methods for a balanced and gradual reduction of protection for agriculture, which is carried out with the help of a multi-commodity and multi-country model; (2) an examination of relevant national policies and measures which have a significant bearing on agricultural trade, which is carried out through in-depth country studies; and (3) an analysis of the most appropriate methods for improving the functioning of the world agricultural market.

Trade Relations Between Developed and Developing Countries

In compliance with the 1982 ministerial mandate, the GATT Committee on Trade and Development initiated a substantial work program in 1983. This involved (1) examination of how contracting parties are putting into practice the provisions of Part IV of the General Agreement, which includes an undertaking by developed countries to strive to reduce trade barriers affecting developing countries and to refrain from establishing new ones; (2) review of the operation of the GATT enabling clause agreed in 1979, which provides the legal basis for generalized preferences in favor of developing countries and encourages developing countries to assume greater GATT obligations “with the progressive development of their economies and improvement in their trade situation”; and (3) an examination of the prospects for increasing trade between developed and developing countries under the GATT.46 Also, consultations have been held on tropical products and the possibility of eliminating barriers to trade in this area. Separately, the Working Party on Textiles and Clothing is considering the possibilities of returning to normal GATT rules in the textiles and clothing sectors after the expiration of the current Multifiber Arrangement.

Several past changes in GSP schemes were reviewed by the Committee. By 1984, all preference-giving countries had extended their GSP schemes beyond 1985. In particular, Canada extended its preference scheme to mid-1994 and the United States to 1993. A number of preference-giving countries (including Austria, Canada, and Switzerland) lowered their GSP tariff rates on eligible products on which MFN duty rates were also reduced. Some preference-giving countries improved GSP treatment of products originating in the least developed countries, in particular by broadening the definition of least developed countries and expanding the coverage of items eligible for duty-free GSP treatment. Japan notified improvements and modifications in its GSP scheme, including an increase in the total amount of ceilings on industrial products for the 1984 fiscal year by about 55 percent.

In reviewing the GATT enabling clause, several developed countries suggested that its main objective—namely, to authorize temporary departures from the MFN principle of the GATT in order to allow preferential treatment of developing countries—could be served effectively only if it encouraged more advanced developing countries to phase out progressively their use of preferential treatment. They argued in favor of additional differentiation among developing countries in the degree of preferential treatment received, and the degree of reciprocity expected, owing to the wide variation in trade and development performance among individual developing countries. It was agreed that the Committee on Trade and Development would continue to keep the operation of the enabling clause under review.

To carry out its examination of the implementation of Part IV, the Committee on Trade and Development embarked on individual country consultations for the first time in 1983. So far, consultations have been held with Austria, the European Community, Finland, Hungary, Japan, Norway, Sweden, and the United States, as well as with several members of the Latin American Integration Association (LAIA)—Argentina, Brazil, Chile, Colombia, Peru, and Uruguay. In 1985, consultations are planned with Australia, Canada, New Zealand, and Switzerland. It was agreed that developed countries had a special responsibility to implement Part IV provisions and participate in Part IV consultations. Developing countries also had a role, and it was agreed that the Part IV consultations should cover developing countries as well.47

In the consultations with developed countries, developing countries expressed varying concerns about specific aspects of the trade policies of the developed countries. These related to the structure of imports by most-favored-nation and preferential tariff treatment (see, for example, Tables 6870), GSP schemes and policy toward “graduation” of countries or products from preferential treatment, nontariff measures in sectors of interest to developing countries (such as textiles and clothing), tariff escalation, the application of internal fiscal levies on primary products mainly imported from developing countries, and special measures being applied to improve export prospects of the least developed countries. In the consultation with LAIA members, the discussion focused on measures being taken in the LAIA to promote trade prospects of the relatively less advanced developing countries within the region.

The Committee on Trade and Development also considered the prospects for increasing trade between developed and developing countries on the basis of a comprehensive GATT Secretariat study.48 The study noted that trade policy factors—in particular, the postwar movement toward trade liberalization—had played a major role in the expansion of trade between developed and developing countries. With the onset of the global recession, developing countries’ exports began to be more severely affected both by direct restrictions, such as export restraint and orderly marketing arrangements, and by the wider deterioration in the trade policy environment, including increased resort to domestic and export subsidies. It identified trade policies in both developed and developing countries that their trading partners considered impediments to trade expansion. The study expressed doubts that protectionist pressures could be expected to subside as economic recovery progressed and suggested that GATT contracting parties could improve the prospects for trade expansion by joint action aimed at liberalizing trade. It referred to the steady evolution that had already taken place in the rules of the GATT toward accommodating the special interests and difficulties of the developing countries. Several developing countries had participated increasingly in the negotiating process and had assumed higher levels of commitment through tariff bindings and accession to GATT codes negotiated in the Tokyo Round.

The GATT Secretariat study suggested that, in any new initiative aimed at further trade liberalization, a logical first step could be a rollback of recent restrictions on exports of developing countries. Developing countries could continue to improve prospects for trade with industrial countries to the extent that they could simplify their import regimes, make them more transparent, stabilize levels of protection, and progressively lower excessive protection. Finally, the GATT Secretariat paper noted that various GATT provisions included an element of flexibility that could be utilized to encourage fuller participation in the GATT system by developing countries. For example, developing countries could obtain time-bound exemptions from certain GATT commitments, or stage the implementation of measures. Furthermore, under the GATT provisions relating to import restrictions for development purposes, commitments by developing countries could be revised or temporarily suspended in certain circumstances. During the Committee’s discussion, it was recognized that the issues and approaches outlined in the GATT Secretariat paper should continue to be considered in the Committee.

Restrictions for Balance of Payments Purposes

The GATT contains two main provisions permitting the imposition of trade restrictions for balance of payments purposes. Article XII authorizes such restrictions by developed contracting parties, and Article XVIII:B contains similar provisions for developing countries. Full consultations under Article XII are conducted annually by the GATT Committee on Balance of Payments Restrictions. Under Article XVIII:B, the Committee schedules consultations under simplified procedures every other year; the Committee may, however, request full consultations in any particular case. Fund background documentation is supplied to the Contracting Parties for all consultations, and a Fund statement is made on the occasion of full consultations.

Since 1983, consultations have been held with two GATT members—Hungary and Nigeria—for the first time. Hungary has subsequently announced its decision to eliminate restrictions for balance of payments purposes and to disinvoke Article XII. In 1985, consultations will be held with Colombia for the first time and with Argentina for the first time since 1978. Table 10 provides a list of GATT balance of payments consultations held in recent years.

The primary focus of GATT balance of payments consultations is on the balance of payments situation and prospects of the consulting country, and the justification advanced for the use of restrictions; the Fund statement is designed to assist this aspect of the consultation process. In addition, the GATT consultations provide committee members with an opportunity to examine the restrictive system of the consulting country in some detail. The conclusions of the Committee on each consultation are forwarded to the GATT Council.

The Committee, in its consultations, is also charged with taking account of all factors, both internal and external, which affect the balance of payments position of the consulting country. Although the importance of such factors, including access to markets, has been recognized in some past consultations, only recently have they been given concrete consideration. In December 1983, at the initiative of Brazil, the Committee’s examination included consideration of the external trade environment facing Brazil. To deal with the problem of access to markets, the representative of Brazil made specific proposals for action by Brazil’s major trading partners, including (a) a rollback of import restrictions inconsistent with the GATT that affected products of interest to developing countries; (b) suspension, for the duration of the adjustment program agreed upon with the Fund, of safeguard actions on products exported by a developing country consulting in the Committee; (c) avoidance, for the duration of the Fund program, of countervailing or antidumping duties on products exported by these developing countries. The Committee agreed that members should jointly consider this issue in the broader GATT context and that they would reflect further on Brazil’s proposals. Following Brazil’s initiative, there was a general discussion in the Committee of how the external trading environment confronting consulting countries could be given greater weight in the Committee’s work. A report, which contained some proposals for possible actions which partner countries could take in favor of expansion of consulting countries’ trade on a multilateral basis, was delivered to the GATT Council by the chairman of the Committee. At the October 1984 meeting, Brazil expressed regret that no concrete results had thus far been achieved as a result of the bilateral contacts with trading partners that it had launched following its December 1983 initiative in the Committee.

In October 1984, the external trade environment facing Korea was considered by the Committee in the consultation with that country. The Committee welcomed a special study on the effects of protectionism presented by Korea, and agreed to carefully consider it further. More recently, Chile, supported by Colombia, suggested that the Committee on Balance of Payments Restrictions should consider the possibility of holding advance discussions prior to the introduction of import restrictions by a consulting country. The purpose of such discussions would be to explore the possibility of some actions by its trading partners to improve the consulting country’s export prospects, and thus possibly obviate or mitigate the need to introduce restrictions for balance of payments purposes. This suggestion is under discussion in the Committee.

Subsidies

Following the first oil price shock, subsidies grew in importance in most OECD countries. Chart 1 shows their evolution in selected industrial countries and the European Community. Pressures for government intervention and subsidies have been high in specific sectors such as steel, agriculture, shipbuilding, and textiles and clothing. Although some understandings have been reached on greater discipline in subsidization (for example, in the European Community and in the OECD) in specific sectors, they have not yet been translated into actual reductions in government aids to ailing industries.

Chart 1.Comparison of Public Subsidies1 to Enterprises in Selected Industrial Countries and the European Community

(As a percentage of gross domestic product)

Sources: Organization for Economic Cooperation and Development, National Accounts of OECD Countries, various issues; EUROSTAT, National Accounts ESA-Aggregates.

1Subsidies: 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, however, are capital transfers to cover losses, accumulated over several years, and cancellation of debts or investment grants.

The issue of how subsidies should be defined remains open. If a broad measure of what constitutes a subsidy is used, the incidence of subsidization may be much higher than that shown by the definition used in Chart 1. For example, in a recent study for the Federal Republic of Germany, Schmidt (1984) broadened the definition to include not only current payments by the Federal Government, but also other subsidy payments by the Federal Government (in particular, one-time grants to enterprises), subsidy payments by other levels of government, and payments through special national and Community funds. The estimates also included the value of tax relief granted to enterprises. Thus, for 1981, the study arrived at an estimate for total subsidization of about DM 102 billion, comprising DM 70 billion in direct financial aids and DM 32 billion in tax relief, compared with the conventional estimate of DM 30 billion. The study also found that the growth rates since 1973 for both measures of subsidization averaged approximately 8 percent annually.

The complexities of improving the effectiveness of international disciplines on subsidization are reflected in the recent discussions on this subject in the GATT, the OECD, and elsewhere. The GATT Code on Subsidies and Countervailing Duties, agreed upon at the Tokyo Round, sought to improve and codify subsidy practices and disciplines. As a general principle, the code prohibits export subsidies on manufactured products; it also provides an illustrative, nonexhaustive list of practices that constitute export subsidies. The code does not prohibit domestic subsidies but enjoins countries to avoid domestic subsidies that have adverse trade effects on other countries and permits the latter to offset these adverse trade effects through countervailing duties.

In the past three years, the Committee on Subsidies and Countervailing Measures, established to oversee the operation of the subsidies code, has attempted to define and make more operational the specific obligations of code signatories. Attention has focused especially on two issues: how to deal with export subsidies on agricultural products and how to apply the rules on subsidies to developing countries.

The issue of agricultural export subsidies arose in a case brought before a GATT subsidies code panel by the United States, which contended that the Community’s subsidized sales of wheat flour in several individual markets had contributed to a loss in the U.S. market share, and that these Community practices were contrary to the GATT stipulation that agricultural export subsidies should not be applied in a manner that resulted in the subsidizing country “having more than an equitable share of world trade” in that product.49 In its March 1983 report, the panel characterized the Community’s export refunds for wheat flour as a subsidy under the GATT. However, the panel was unable to conclude that the Community’s increased share represented “more than an equitable share” under the GATT code. The panel suggested that disputes in the area of agricultural export subsidies could only be resolved by strengthening the provisions of the code.

In another case brought before a panel, the United States complained about the Community’s subsidization of wheat used to produce pasta exported by the Community.50 The main issue concerned the use of a rebate on wheat used as an input in the manufacture of pasta. The Community contended that the rebate on wheat was designed only to bring the European wheat price, protected by a variable levy, down to the world price. The U.S. view, however, was that, since European pasta manufacturers were not permitted to buy wheat at the world price from foreign sources, the export industry (pasta) was a conduit for enlarging the size of the subsidized activity (wheat), and the practice should be considered to be an export subsidy. The May 1983 panel report accepted the U.S. position. In both the wheat flour and the pasta cases, consultations on the panel reports are continuing in the Committee on Subsidies and Countervailing Measures. These and other recent cases are illustrative of the practical difficulties of agreeing on, and applying, operationally meaningful guidelines in the complex field of subsidy practices.

A further set of issues relates to the participation of developing countries in the GATT disciplines in the area of subsidies. For the developing countries, Article 14 of the Code on Subsidies and Countervailing Duties recognizes that “subsidies are an integral part of economic development programmes of developing countries,” and, accordingly, the code “shall not prevent developing country signatories from adopting measures and policies to assist their industries, including those in the export sector.”

In practice, domestic producers in industrial countries requiring relief against subsidized imports from developing countries seek redress primarily under national legislation. National legislation of code signatories is subject to multilateral review in the GATT Committee on Subsidies and Countervailing Measures. U.S. legislation mandates the application of the injury criterion to subsidy cases only for GATT code signatories (and to seven countries that had bilateral treaties with the United States but were not GATT members). In addition, the United States does not recognize a developing country as a signatory unless there is a commitment by that country to phase out or freeze its export subsidies.

In the past few years, there has been increased resort to countervailing duty petitions and investigations in a number of countries—the sharpest rise occurring in the United States (Table 11). This partly reflects the extensive resort to countervailing duty petitions in the steel sector in the United States. More generally, recourse to the legal system is strongly embedded in the attitudes of U.S. firms; in addition, with the implementation of, and publicity related to, the subsidies code, countervailing duty petitions may have been considered by affected firms as a first line of investigation of the possibilities of protection. Procedures for dealing with unfair competition have also been strengthened in other countries, including Canada and the Community.

As to the remedies available to producers injured by subsidized foreign competition, the main remedy authorized by the GATT (namely, the countervailing duty) is designed to precisely offset the injurious effect of a foreign subsidy. As an authorized exception to the broad GATT principle of nondiscrimination, countervailing duties on a given product may be imposed at different rates on different suppliers.51 In lieu of the countervailing duty, the code allows an equivalent price undertaking by the exporter, or some other “equivalent understanding.” While procedures have long existed for assessing the extent of the subsidy and the size of the countervailing duty, it is difficult, if not impossible, to determine accurately the quantity restriction that would be “equivalent” to a countervailing duty. When countervailing duty investigations are resolved through bilaterally agreed export restraints on quantities or market shares (even when this is the option preferred by the exporter, as often happens), the traditional distinction between the concepts of “fair” and “unfair” competition may be blurred, and what otherwise would be a legal action recognized by the GATT may assume the character of a “gray area” measure.

The recent rash of complaints about subsidization (and dumping) has led some countries to complain of harassment. It is acknowledged that filing a complaint of unfair competition can, by itself, have a negative effect on the trade flow by lessening the certainty of future access to the export market and by imposing considerable legal costs on the respondent.52 In several GATT forums, developing countries have suggested that the scope for automaticity in the response of industrial countries to industry petitions should be reduced.53 The industrial countries view provisions in domestic legislation for relief from unfair competition as a legitimate response to subsidized and dumped imports authorized under the General Agreement. Some observers have suggested that recourse by industry and labor groups to the provisions against unfair trade may have been made somewhat easier under amended domestic procedures applied since the Tokyo Round. Of the 21 signatories to the GATT code on subsidies, only six (Australia, Canada, Chile, the European Community, Japan, and the United States) took countervailing duty actions in the period January 1983–June 30, 1984. This suggests the difficulty that any attempt to harmonize approaches and procedures internationally in this area is likely to entail.

In recent years, the OECD Arrangement on Guidelines for Officially Supported Export Credits has been substantially revised to reduce the subsidy element in government export credit guarantees. Under the GATT subsidies code, export credit practices conforming to the OECD Arrangement do not constitute a prohibited export subsidy. In October 1983, the minimum interest rate allowed under the OECD Arrangement, which had been adjusted periodically in the light of market developments since 1981, became subject to an automatic adjustment mechanism. Minimum rates are adjusted every six months to reflect changes in market long-term bond rates in the United States, the Federal Republic of Germany, the United Kingdom, France, and Japan, provided the weighted interest rate movement is at least 50 basis points since the previous change. Two unresolved issues relating to the OECD Arrangement are its inclusion of mixed export credits and concessional financing packages, and the minimum interest rate provisions applicable to so-called low interest rate countries. These issues remain under discussion in the OECD.

Services

The issue of trade in services has gained prominence in recent years. Following extensive initial study and deliberation, the United States has taken the lead in suggesting that high priority should be accorded to bringing trade in services within the GATT rules. At their November 1982 meeting, GATT ministers decided to recommend that each contracting party with an interest in services undertake a national examination of the issues in the sector and invited contracting parties to exchange information on such matters among themselves through, inter alia, international organizations such as the GATT. To date, 13 studies on services have been submitted to the GATT.54 At the November 1984 session of the Contracting Parties, it was agreed, after considerable discussion, to organize the exchange of information on services in the GATT with the support of the GATT Secretariat. The Contracting Parties also decided to review the results of national examinations, along with the information and comments provided by relevant international organizations, at their next session. At that time, they are expected also to consider “whether any multilateral action in these is appropriate and desirable.”55

The issue of whether services should be dealt with in the GATT context remains controversial. The question of whether some—or all—individual service sectors should receive priority attention in any new round of trade negotiations also remains unresolved. Most industrial countries have expressed their willingness to consider options and to begin international discussions with a view at least to clarifying the potential parameters or approaches in respect of trade in services. Table 12 shows the service sectors identified in four of the national studies. The studies provide indicators of the importance of service sectors to the national economy and to international trade and summarize the main features of existing legislation governing the services sector, including in particular whether special barriers exist to international trade in services.

The U.S. submission, which is one of the most comprehensive national studies available on this subject, identifies certain conceptual issues that would need to be addressed in an international context. First, the existence of natural monopolies in some service industries is noted. The question is raised whether government monopolies discriminate between domestic and foreign purchasing firms, or, where public service monopolies are allowed to compete with private firms in providing services not covered by the monopoly, whether foreign private competitors are not unduly disadvantaged. Second, the study draws a distinction between “investment” in services and “trade” in services. For example, the provision of data processing services by a computer center located abroad may be considered to be a “trade” activity, while similar services provided locally by a foreign-owned firm may be regarded as an “investment” activity. Third, the study draws a distinction between the broader issue of immigration and labor movement across borders and the more limited issue of facilitating the movement of people engaged in international sales and providing technical and professional services.

The U.K. study identifies several practices in the services sector that place suppliers of services originating abroad at a competitive disadvantage. Restrictions in the services sector may take different forms, but they have similar effects. For example, they may be imposed on the movement of funds, either across the board or in individual sectors, or on the movement of labor, for example, through regulations limiting the entry of professionally qualified foreign nationals. Restrictions on the flow of information (e.g., regulations on transborder data flows) may limit free trade in services. Other possible barriers include restrictions on consumers and industries limiting purchase of foreign services, discrimination in public procurement, and availability of state aids or tax holidays for local firms. The U.K. study suggests that any international approach to services problems should consider services as a whole rather than only addressing the special problems of individual sectors.

Trade Policy Surveillance

Since the November 1982 ministerial meeting, the GATT has stepped up its monitoring and surveillance of developments in the trading system. By the end of 1984, eight special sessions of the GATT Council had been held to conduct this review. Since early 1984, the GATT Secretariat has prepared more extensive background documents providing the basis for the special Council discussions. A major premise underlying the discussions is that greater transparency in national trade policy actions will contribute to resisting protectionist pressures and maintaining a liberal world trading order. Many governments expressed the view during these discussions that protectionist pressures had continued to mount, even during the recent period of economic recovery, and that greater efforts were required to resist protectionism.

As part of the Tokyo Round decisions, the GATT Consultative Group of Eighteen was established as a permanent body in 1979 to assist the Contracting Parties with their responsibilities to maintain trade policies consistent with GATT objectives, to forestall sudden disturbances that could threaten the multilateral trading system and the international adjustment process, and to facilitate coordination between the Fund and the GATT in this context. In 1983–84, the Group reviewed the degree to which governments had adhered to the political commitments of the 1982 ministerial declaration, and discussed several other issues, including subsidies, structural adjustment, countertrade, and dispute settlement.

The Group also considered the links between trade policy and the international financial system. It emphasized that trade problems and negotiations should be dealt with under the aegis of the GATT and conform to GATT principles. It was generally accepted in the discussions that developed countries had a responsibility to liberalize access to their markets for developing countries’ exports, in order to ease debt problems of developing countries and contribute to their development. However, it was stated that the ability to maintain such a positive attitude depended in part on the readiness of the developing countries themselves to maintain relatively liberal trade policies and to enlarge trade opportunities for their partners. The Group underlined “the impact of large budget deficits and high interest rates on the debt burden of developing countries.”56

The Consultative Group of Eighteen also supported GATT contacts with the Fund and the Bank, which it believed would “sensitize the ‘constituencies’ of the three institutions to the linkages between the subjects which are their primary concern, while respecting their different fields of competence.”57

In May 1984, the OECD governments agreed to advance the implementation of the Tokyo Round tariff reductions by one year. This agreement was subject to completion of the requisite domestic procedures. The OECD ministers also expressed the hope that it would be possible to achieve the final reduction in tariff cuts, scheduled for 1987, in 1986. In addition, OECD member countries that did not already provide duty- and quota-free access for all imports from the least developed countries would seek to move further in that direction.58

The proposed acceleration of Tokyo Round tariff cuts has not yet been fully implemented. Action by the United States will depend on congressional approval. As already noted, the European Community has announced that it will advance the tariff reductions for products of interest to the developing countries but that the timing of the remaining advance cuts will depend on action by the United States. In addition, the Community has announced proposals for liberalizing certain quantitative restrictions. Austria, Finland, Norway, Sweden, and Switzerland implemented the accelerated schedule as of January 1, 1985. Japan has implemented from April 1, 1985, its Tokyo Round tariff reduction advanced by two years on agricultural products related to the developing countries and industrial products, and by one year on other agricultural products. The accelerated tariff reduction by OECD countries is generally regarded as a positive, confidence-building measure; its main result will be to lower the average tariff on industrial products by less than 1 percentage point from its current level of about 5½ percent.

At the 1984 OECD Council, ministers also agreed on an extensive work program aimed at developing “specific proposals for individual and collective action.”59

Other Issues

Natural Resource Products

At the initiative of Canada and some developing countries, a GATT Working Party on Trade in Certain Natural Resource Products was established in early 1984. The Working Party is conducting an examination of tariff and nontariff barriers to trade in nonferrous metals and minerals, forestry products, and fish and fish products, with a view to recommending possible solutions to trade problems in these sectors. The nonferrous metals and minerals under study include zinc and lead, copper, nickel, tin, and aluminum.

Dispute Settlement

In recent years, there has been increased recourse to GATT dispute settlement procedures (Table 13 provides a list of panels established in the GATT). Considerable attention has also been focused on improving these procedures. The November 1984 session of the Contracting Parties endorsed a proposal authorizing the Director-General of the GATT to appoint nongovernmental persons to GATT panels in the event that countries in a panel dispute failed to agree on its composition under certain circumstances.

The GATT Council also considered how to improve its surveillance role with respect to the implementation of panel reports. The improvements would be aimed at encouraging greater compliance by contracting parties to panel recommendations. In the past, panel opinions have on occasion not been accepted by the contracting party whose trade measures or policies were deemed to be inconsistent under a panel finding.

GATT, Ministerial Declaration, Adopted on 29 November 1982, Document L/5424 (November 29, 1982), p. 3.

GATT, Report (1984)of the Group on Quantitative Restrictions and Other Non-Tariff Measures, Document L/5713 (October 26, 1984).

Under GATT Article XIX, a contracting party may impose import restrictions either by raising tariffs or through quantitative measures if, “as a result of unforeseen developments and of the effect of the obligations … under this Agreement, including tariff concessions, any 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.” Safeguard actions under Article XIX are expected to be nondiscriminatory.

GATT, Developments in the Trading System, April 1984–September 1984—Note by the Secretariat, Document C/W/448, Rev. 1 (December 18, 1984).

See also Part Two, Section V, of this paper.

For a more detailed discussion of the international framework for the conduct of international trade, see Anjaria and others (1983), Appendix I.

GATT, Summary of Points Raised During the Meeting from 5 to 8 March 1984, Document AG/W/6 (March 16, 1984); Meeting of Committee at Senior Policy Level, 2–3 April 1984—Note by the Secretariat, Document AG/W/7 (May 11, 1984); Draft Recommendation—Explanatory Note by the Secretariat, Document AG/W/9 (June 26, 1984); Report by the Chairman of the Committee on Trade in Agriculture, Document L/5733 (November 19, 1984); Minutes of the Meetings Held from 4 to 13 October and from 28 to 30 November 1983, Document AG/M/3 (February 29, 1984). The countries examined were Argentina, Australia, Austria, Bangladesh, Brazil, Canada, Chile, Colombia, Cuba, Czechoslovakia, Egypt, Finland, Hungary, Iceland, India, Indonesia, Israel, Ivory Coast, Jamaica, Japan, Kenya, the Republic of Korea, Malaysia, New Zealand, Nigeria, Norway, Pakistan, Peru, the Philippines, Poland, Portugal, Romania, South Africa, Spain, Sweden, Switzerland, Thailand, Turkey, the United States, Uruguay, and Yugoslavia.

GATT, Committee on Trade in Agriculture. Recommendations Adopted by the Committee Meeting at Senior Policy Level on 15 November 1984, Document L/5732 (November 16, 1984).

GATT, Report by the Chairman of the Committee on Trade in Agriculture, Document L/5733 (November 19, 1984).

GATT, Agreements Relating to the Framework for the Conduct of International Trade (Geneva, 1979).

GATT Article XXXVII:4 states: “Less-developed contracting parties agree to take appropriate action in implementation of the provisions of Part IV for the benefit of the trade of other lessdeveloped contracting parties, in so far as such action is consistent with their individual present and future development, financial and trade needs taking into account past trade developments as well as the trade interests of less-developed contracting parties as a whole.” 48 GATT, Prospects for Increasing Trade Between Developed and Developing Countries—Note by the Secretariat, Document COM.TD/W/412 and Add. 1 (August 8, 1984).

GATT, Prospects for Increasing Trade Between Developed and Developing Countries—Note by the Secretariat, Document COM.TD/W/412 and Add. 1 (August 8, 1984).

GATT, Report (1984) of the Committee on Subsidies and Countervailing Measures, Document L/5719 (November 21, 1984); and Hufbauer and Erb (1984), pp. 37–41.

Antidumping duties also fall within the category of permitted selective (discriminatory) measures, as do compensatory withdrawals of concessions occasioned by a safeguard action under Article XIX that does not lead to compensatory trade concessions on other products by the restricting country.

This does not apply only to developing country exports. For example, the Canadian lumber industry, which had been found in the United Stales to have a subsidy margin of a fraction of 1 percent, is estimated to have spent some Can$500,000 in defending its case.

GATT, Proceedings of the Fifty-Third Session, Document COM.TD/118 (November 12, 1984), p. 15.

The national studies cover Canada, Denmark, the European Community, Finland, the Federal Republic of Germany, Italy, Japan, the Netherlands, Norway, Sweden, Switzerland, the United Kingdom, and the United States.

GATT, Services, Document W.40/7 (November 29, 1984).

GATT, Consultative Group of Eighteen: Report to the Council of Representatives, Document L/5721 (November 6, 1984), p. 2.

Ibid., p. 3.

OECD Press Release, Press/A(84)28 (May 18, 1984).

Ibid. At the April 1985 Council meeting, ministers emphasized the importance of achieving further progress in relaxing and dismantling existing trade restrictions. Member countries were expected to submit, by mid-October 1985, proposals on all measures which could be phased out progressively over a fixed period; a report on results achieved was expected to be presented to the 1986 OECD Council (OECD Press Release, Press/A(85)31, April 12, 1985).

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