Abstract

The architects of the postwar international economic order had foreseen the creation of three institutions: the International Monetary Fund (IMF), the World Bank, and the International Trade Organization (ITO). The IMF and the World Bank were established, but the ITO never came into existence. All that remained of the ITO was its chapter on commercial policy, which entered into effect for 23 countries in 1947 as the General Agreement on Tariffs and Trade (GATT).

The architects of the postwar international economic order had foreseen the creation of three institutions: the International Monetary Fund (IMF), the World Bank, and the International Trade Organization (ITO). The IMF and the World Bank were established, but the ITO never came into existence. All that remained of the ITO was its chapter on commercial policy, which entered into effect for 23 countries in 1947 as the General Agreement on Tariffs and Trade (GATT).

The Need for the World Trade Organization

The GATT was originally conceived as a provisional agreement to be reconsidered upon the establishment of the ITO. As a result, the original text of the GATT does not contain a complete institutional design. Over time, however, the GATT acquired many of the attributes of such an organization. On the basis of a general clause providing for the contracting parties to “meet from time to time to give effect to those provisions of this Agreement which involve joint action,”1 the GATT contracting parties developed organs through which to act, concluded treaties with sovereign governments (e.g., protocols of accession), and acquired the services of a Secretariat.

Since the GATT already functioned as an international trade organization, why did the Uruguay Round negotiators consider it necessary to create a new organization to replace the GATT? Having successfully overseen the Uruguay Round, why was the GATT not entrusted with the management of the results of this Round?

The answers to these questions are to be found in the lessons the negotiators learned from previous rounds. Prior to the Tokyo Round, the major result of multilateral trade negotiations was the lowering of tariffs undertaken by participants, mainly the major traders, whose benefits were extended to all contracting parties under the GATT obligation to accord most-favored-nation treatment. In addition to such tariff commitments, the Tokyo Round produced a set of agreements governing the use of nontariff measures. These agreements were separate from the GATT, whose contracting parties were under no legal obligation to sign them. Fewer than one-third of GATT contracting parties accepted these agreements, and most developing countries chose not to.2 This experience raised serious questions about the GATT’s ability to adapt to new needs by simply adding to its legal system new agreements among which each contracting party can choose.

More generally, the experience of the Tokyo Round reinforced the perception among trade policymakers that the operation of the MFN clause made it more difficult to achieve results in multilateral trade negotiations. While the MFN clause had a trade-liberalizing effect since new market access opportunities were made available to all exporters, the automatic extension of these benefits reduced the capacity of governments to make liberalization commitments. Since a country’s exporters could reap these benefits irrespective of their government’s trade policies, there was little leverage that could be applied on protectionist lobbies to argue in favor of domestic liberalization.

To resolve this dilemma, the Uruguay Round negotiators decided to make the benefits of the multilateral trading system available only to those who accepted the totality of the results of the round as a “single undertaking,” replacing all previous undertakings. This new treaty would be presented to GATT contracting parties on a “take-it-or-leave-it” basis. The management of the single undertaking could not, however, be entrusted to an organization—the GATT—whose members were not bound by the new rules. If the substantive rights and obligations under the GATT were to be replaced, the GATT as an institution had to be replaced as well. These considerations gave rise to the creation of the WTO.

Structure of the Agreement Establishing the WTO

The Agreement Establishing the WTO is a short one, containing just 16 articles. These provide for the establishment of an organization, attribute certain competencies to that organization, and set out its institutional and procedural structure. Attached to the Agreement are the substantive results of the Uruguay Round in the form of “annexes”; Annex 1 covers the multilateral trade agreements in the areas of goods (1A), services (1B), and intellectual property (1C); Annex 2 covers the dispute settlement procedures; Annex 3 covers the trade policy review mechanism; and Annex 4 covers the plurilateral agreements on government procurement, civil aircraft, dairy, and meat.3

The tasks of the WTO include overseeing the implementation of the agreements reached in the Uruguay Round, the administration of the dispute settlement procedures and the trade policy review mechanism, and cooperation with the IMF and World Bank. The WTO’s supreme organ is the Ministerial Conference, composed of representatives of all member governments. The Conference is required to meet at least once every two years; the first such meeting is scheduled to take place in Singapore at the end of 1996. In between meetings of the Ministerial Conference, its functions are carried out by the General Council.

The General Council convenes as the General Council or as the Dispute Settlement Body or as the Trade Policy Review Body. Under the General Council are the three specialized councils overseeing the multilateral agreements in the area of goods, services, and intellectual property protection. In addition, the Agreement Establishing the WTO provides for three committees—already in existence under the GATT 1947—to cover Trade and Development, Balance of Payments Restrictions, and Budget, Finance, and Administration. The institutional structure of the WTO is serviced by a Secretariat headed by a Director-General.

The Ministerial Conference and General Council have the authority to make decisions on all matters not specifically assigned to other organs of the WTO. The governing body of the WTO may also take decisions on any matter assigned to a subsidiary organ at the request of a WTO Member. This ensures that matters that cannot be resolved in their assigned forum are passed on to a higher level; at the same time, the principle of subsidiarity is respected in order to prevent the higher-level body from interfering with the functions assigned to the lower-level body.

The Agreement Establishing the WTO states that the practice of decision making by consensus under GATT 1947 shall be continued in the WTO. This provision does not, however, imply that consensus is necessary for decisions to be made in the WTO; it simply states that recourse to voting should be avoided whenever possible. When a consensus cannot be reached, the agreements contain rules for decisions by vote on the basis of one vote per country.4 Waivers, for instance, require approval by at least three-fourths of the members.

Of particular significance in the WTO’s decision-making rules is the fact that amendments to the WTO Agreement that change the substantive rights and obligations of its members are binding only on states that have accepted them.5 This aspect of the WTO means that no new policy obligation can be imposed on a WTO member without its consent. This feature leaves the WTO in a very similar position to the GATT in the Tokyo Round with respect to achieving multilateral acceptance of the agreements reached in future rounds of negotiations: new agreements reached under the auspices of the WTO will be binding only on those countries that have accepted them. It is therefore likely that trade negotiators will find it necessary to end a major future round of negotiations with a new “single undertaking” replacing that of the WTO.

Legal Issues in the Transition from the GATT to the WTO

Annex 1A of the Agreement Establishing the WTO incorporates the GATT and the legal instruments and decisions adopted by the contracting parties up until January 1, 1995, the date of the entry into force of the WTO. The GATT and the legal instruments and decisions adopted under it, as well as six understandings on GATT provisions negotiated during the Uruguay Round, and the Uruguay Round protocol on market access are referred to as “GATT 1994” in the WTO Agreement.

The WTO is, however, legally distinct from the existing GATT, referred to as “GATT 1947.” The old GATT will remain in existence until the end of 1995 in order to permit its contracting parties to finalize the domestic ratification of the WTO Agreement and become WTO members. Those contracting parties that have not become WTO members by the end of 1995 will then be left without the protection of the multilateral trading rules. Fortunately, most of the GATT contracting parties have already ratified the WTO Agreement within a surprisingly short period of time.

The legal coexistence of GATT 1947 and the WTO is not without its problems. Since the WTO incorporates the GATT, it also incorporates the GATT’s cornerstone principle of nondiscrimination. Since the MFN clause requires the benefits of trade negotiations to be extended to all contracting parties without conditions, it would therefore have required WTO members to extend benefits in the goods area even to GATT contracting parties that had not become WTO members. Overcoming this possibility of “free-riding” was the reason for the creation of the WTO; at the same time, a period of legal coexistence was required to permit the completion of domestic ratification. To overcome this problem, the GATT contracting parties decided to accord each other a waiver permitting the withdrawal of WTO benefits from non-WTO members.

Another issue raised by the legal coexistence of GATT 1947 and the WTO is the different scope of rights and obligations in the area of trade in goods under these two instruments. For instance, the WTO Agreement provides for the phase-out of import and export restrictions affecting trade in textiles and clothing that are illegal under GATT 1947. Similarly, the tariffication of import restraints affecting agricultural products has required the lifting of tariff rates subject to bindings in previous GATT negotiating rounds. While the overall purpose of these WTO provisions is a laudable one—to permit the liberalization of trade in textiles and clothing and in agricultural products—their effect is to provide a legal cover for some measures that are illegal under GATT 1947. To overcome this dilemma, GATT contracting parties decided to grant a waiver permitting contracting parties to take those measures that they are permitted to take under the WTO Agreement.

A third problem that was identified for the transition from the GATT to the WTO was the potential for disputes to be brought separately under each forum, a form of double jeopardy. Here, the contracting parties decided that rights under the GATT dispute settlement system would not be available if a dispute was already being pursued under the WTO.

Conclusion

The WTO has been described as an enormous change in the institutional framework for international economic relations. However, to a large extent, the WTO represents a formalization of the practices that emerged under the GATT. This continuity is evident in the area of decision making, but also in other areas. For instance, the WTO has taken over as its own the staff of the GATT Secretariat and has adopted the same financial regulations.

The major change the WTO represents is the unification of all trade policy and trade-related matters under a single institutional framework. The multitier multilateral trade order that emerged from the Tokyo Round, under which different contracting parties were bound by different rules, has been replaced by an order under which, in principle, the same rules apply to all. Subject matters that were linked in the negotiations have now been legally linked as a balance of rights and obligations across goods, services, and intellectual property protection. Violations of the rules in one area can now be responded to by suspensions of obligations in another area. This is likely to raise the issues arising in the WTO to higher political levels and foster decision making less influenced by sectoral interests.

This unification of subject matters will have a profound impact on the manner in which governments decide trade policies. Each action taken, each position adopted, and each noncompliance contemplated will now be viewed not only in the light of the constellation of interests in one particular area but in the light of the interest of the system as a whole. This in turn is likely to raise the issues arising under the WTO to a higher political level and foster decision making less influenced by narrow sectoral interests. The historical significance of the WTO Agreement may therefore lie not so much in the institutional changes it brings about but in the integrated trade order and decisionmaking procedures it makes possible.

Comment

Ellen Frost

When the GATT was created in 1947–48, its scope was more or less limited to things that happened at the border, namely, tariffs and quotas. Over time there has been an expansion of the scope of trade rules, and each new topic added to the trade agenda has required a fairly lengthy period of time before it was ready for formal negotiations. So fifteen or twenty years ago in the OECD there were discussions about services, and there were discussions about intellectual property protection. In each case people said, “Oh no, too vague, you cannot possibly discuss this.” Today we have agreements in both areas. So the topics I am going to talk about are not necessarily ready for discussion in the WTO; in fact, most of them are not. But I think in a historical context they are coming to our agenda. The expansion of the scope of trade rules has received a sudden new emphasis, a twofold stimulus.

The first is, of course, the so-called globalization of business. What does that mean? Everyone talks about it. It means typically that companies locate their activities in a number of countries; they may produce one part in one country and another component somewhere else, and assemble somewhere else, and they may add services from the United States. They do all of this for a global market. Clearly, the old paradigm of products made in one country, put on a ship, and shipped to another country is very much out of date. Nowadays, how companies compete against each other depends a lot on the domestic policies of those countries in which they are located. So domestic policies have become more important from the perspective of globalization.

Second, thanks to the Uruguay Round, tariffs and quotas have been diminishing considerably, exposing domestic policies as occupying a more central place. So there is a kind of government reason and a private sector reason why these new agenda items are surfacing. Characteristically, the United States and the developed countries have been relatively more in the lead in formulating this new agenda. It is not surprising in that their companies tend to be the most active in overseas markets, but in some cases, we are joined by a number of the dynamic developing countries as well.

We have in the United States a particular dynamic that is pushing us to explore these new issues. We measured trade as a percentage of GNP, in 1994 exports, imports, and earnings on investment, that is, the current account minus unilateral transfers, and found that it is equivalent to 27 percent of our GNP, up from 13 percent in 1970. So there has been in the last twenty-five years a doubling of the world trade in our economy. There is no going backwards for us as a country, and that is why I think that despite individual pressure groups the momentum is in the direction of market opening.

What is the best way to carry out the new agenda? In terms of process and location I might say a quick word about the OECD. As you know, the OECD is a forum where issues can be “cooked,” so to speak, in advance of negotiations, where consensus can be formed, where principles can be devised, and then an issue can be turned over for more formal negotiation. The obvious limitation of the OECD to date has been its industrial country nature: it consists of 25 countries, of which only two are not classified as industrial: Mexico and the Czech Republic.

The OECD has recently entered into dialogues with so-called dynamic nonmember economies including Brazil, Singapore, Korea, and most recently China. It still remains valuable as a place to discuss emerging trade issues.

If you look at the new issues you can divide them crudely into “old” new issues and “new” new issues. I want to spend more time on the “new” new issues. But let me just quickly list the “old” ones. By old new issues I mean post-Uruguay Round issues that are left over from the Uruguay Round, but they are not new in a conceptual sense. The main ones are investment and services, including financial services, telecommunications, and audiovisual.

In this new world economy, investment is now integrated very closely with trade. Far from exporting jobs, we find that investment is linked closely to the export of goods and is a net driver of global trade. In the United States, we find that investment overseas is linked positively with investment in this country and responds to new opportunities. It is a net job creator. It is likely that at the OECD Ministerial in May 1995 negotiations will be launched on a so-called Multilateral Agreement on Investment (MAI), trying to raise standards above and beyond what was negotiated in the Uruguay Round. This will be an exciting opportunity for OECD members and nonmembers alike—to aim a little bit higher than the agreement on trade-related investment measures (TRIMs) that was negotiated during the Uruguay Round.

Services is a very dynamically growing sector of world trade. I have read predictions that by 2005 trade in services could actually exceed trade in goods, considering the explosive growth of the travel and tourist business, not to mention insurance and accounting, and all the other kinds of services. In the United States, the export of services is equivalent to about 40 percent of the export of goods and is growing very dynamically. I think we are going to see services catching up to merchandise exports rather quickly. The second biggest service exporter after the United States is France. Besides the United States and France, a number of countries have an interest in raising standards for service exports.

Another old new issue is standards. This has been touched on briefly in other presentations. The challenge is to harmonize or at least allow for some sort of mutual recognition of standards and conformity assessment and the like. A lot of trade in a nitty-gritty sense is bound up with standards.

But I want to devote a little more time to the so-called new new issues, many of which are not very new after all, but in a negotiating sense they are. I want to touch very quickly on five: environment, technology policy, competition policy, regulatory issues, and labor standards.

Trade and the environment is an issue that is here to stay, whether we like it or not. That is to say, there are a number of instances in which a country has acted unilaterally in the name of protecting the environment. The European Union has its problems with leghold traps and animal rights. We have imposed trade restrictions on particular countries for certain environmental reasons. You can look at the environment initiative in the WTO as an opportunity to step back from this growing unilateralism and try to reach some sort of broad consensus on how to address environmental problems outside of your jurisdiction, such as what happens when the trade provisions of an environment agreement conflict with the rights of membership in the WTO. It is a very long-term effort; a working group has been created in the WTO. I understand the concern of many in this group that there are protectionist forces at work here. Of course, one cannot deny that there are protectionist forces in the environmental community. But it is certainly the intent of most of the serious governments involved in this issue to try to devise some sort of broad framework for reconciling these different imperatives.

Technology policy does not arise in a single way. Sometimes it pops up as a research and development issue—denying a foreign company access to research and development, for example. The one rather new manifestation of technology policy as a trade issue is biotechnology, genetically modified organisms. In shorthand, we ask ourselves, “When is a tomato not a tomato?” In other words, at what point when you add a gene to a tomato does it cease to be a tomato and become subject to some special regulation that can easily lead to protection? This could be a major issue in agricultural trade, especially between the United States and Europe. So there is a range of issues here that arise because governments realize that knowledge and technology are competitive advantages and they try through various means to subsidize technology development. That is why we have rules on subsidies and why we try to limit support in this area to basic research. But it is an issue that deserves a little more attention.

Next is the cluster of regulatory issues, broadly speaking. Excessive regulation can be a barrier to market access for a number of reasons. Sometimes the regulations are not open, so one solution is transparency. Sometimes the regulations lend themselves to bribery, a serious problem, so there is a need to discuss anticorruption measures. Again, transparency is one possible solution. Privatization is, of course, also helpful. Then there is the issue of good governance: how do corporations run themselves, how do governments run themselves, and how can we strike the right balance between the governments’ need to regulate for purposes of protecting society on the one hand, and on the other hand opening their markets as fully as possible? We see the deregulation debate rather strongly developed now in Japan, where it is estimated that a combination of deregulation and open trade policies could cut consumer costs by as much as 50 percent. There are a number of estimates, but in general there is no real disagreement between American and Japanese experts on the costs of excessive regulations. The problem is the familiar “iron triangle” of regulated industries, members of parliament, and members of the bureaucracy that engage in regulations. And that so-called iron triangle is by no means unique to Japan; we have it here as well.

Regulation is a very significant topic, but once again the trading system right now is not particularly well designed to handle it. There is often criticism of the United States for its use of Section 301 or other unilateral measures. In the case of Japan, we find that some of the barriers that are very real do not lend themselves to WTO dispute settlement cases, because those particular practices are not named in the WTO as being actionable. So regulatory barriers to market access are a problem that I think requires a lot of thought.

Competition policy is, of course, closely related to the deregulation that I have just spoken about. In some ways competition policy is a paradigm for the future of the trading system as a whole. That is to say, in this model of the global economy that I have been sketching, the healthiest outcome, and the one that is best for both national welfare and consumer welfare, is competition. Here we are talking about something a little broader than just antitrust in the legal sense. This makes lawyers nervous, but from a trade policy perspective we do not look just at antitrust and subpoena powers and access to proprietary data. We look more broadly on anticompetitive behavior with trade effects, anticompetitive behavior that has the effect of restricting market access.

The Uruguay Round agreements call for a review of “investment and competition policy” within five years. It is not too early to think about this now. In the United States, we do not have a consensus between our various government departments in this area, and we are somewhat handicapped in that respect. But other governments—I am thinking of Canada, for example—are really ahead of us both in thinking this topic through and promoting it. Clearly, competition policy is the long-run solution to antidumping. If you look at the Australia-New Zealand experience, if you look at the European Union, a long-run solution to the antidumping problem is to establish common competition policies, and that is the main reason why it is going to become so important. We are all very busy filing antidumping cases against each other in a downward spiral. In the North American Free Trade Agreement we are supposed to have a free trade agreement, but Canada and the United States continue to file antidumping cases against each other, which is really not sustainable in the long run. So there are lots of reasons why competition policy is really by far the most important of the various issues that I have named.

Last, but not least, is an issue I think has been exaggerated in importance, certainly exaggerated emotionally, and that is the labor standards question. I disagree with Mr. Blackhurst that this issue is a threat to the developing country workforce. If you formulate the issue in a certain way, that is correct. If you say the purpose of this initiative is to invoke sanctions against countries with lower wages, that is right; I would be the first to admit that. But that is not the intention. The intention is, in the case of the United States anyway, to build political support for the trading system. That may seem strange, but this motive has been around for a long time. Recall that the issue of trade and labor standards has been with us ever since the International Labour Organization (ILO) was formed in 1918.

One of our problems in the United States is that there is a widespread perception that other countries are somehow unfair. In our public debate we have a great deal of difficulty with this particular mood. We would like to be able to resist the worst forms of protectionism by pointing to a broad multilateral consensus on how to handle trade and labor standards. To the extent that there is any formal discussion of this topic, the internationally recognized labor standards at issue are limited to freedom of association, the right to organize and bargain collectively, a minimum age for the employment of children (what that age is, what a child is, is not defined), and freedom from forced or compulsory labor, which is already in the GATT. Nowhere is there a discussion of the existence of low wages in the proposals that I am familiar with. There is also a very widespread acceptance that labor standards must depend on the level of development of a country.

Even so, trade and labor standards is a very sticky and somewhat dangerous topic. Again, like the environment, there are clearly protectionist forces on the political scene, but to put it bluntly, we Americans do not need labor standards to be protectionist. If we wanted to be protectionist, we have lots of ways of being protectionist, and lots of tools. We do not need this. Protectionism is really not our motive in raising this complicated issue. The consensus system remains in effect. There is no way that any country is going to force this issue down the throats of anyone else.

I would like to raise a distinction here that has not gotten attention in the debate, but I think it should. Speaking personally, I think there is a very important and basic distinction between low labor standards that result from low productivity and poverty, on the one hand, and, on the other hand, the deliberate suspension of basic labor laws in an export-processing zone. To my mind that is a very big difference. Those developing countries that are trying sincerely to raise their labor standards, because they want to create a middle class and create decent working conditions, have a reason to be concerned about a deliberate suspension of labor standards in an export-processing zone in a competing country. That suspension could have a trade-diverting or investment-diverting effect. So we look at the labor standards issue not in macro terms, because I do not think there is any evidence that it really affects the overall levels of trade, but in terms of certain industries, where it can be a trade-distorting factor. Should there not be some discussion of this? Should there not be some effort to prevent the competitive downward spiraling of labor standards by a particular government or two that are deliberately trying to distort trade and investment? And if there were such a consensus to develop—and perhaps it cannot be even discussed in the WTO for a long time—would it not make it easier for us as trading nations to resist the most protectionist voices, especially from our unions? We see the issue in that pro-market, pro-trade context, and we are talking about internationally recognized labor standards, not U.S. standards. We are talking very broadly about some minimal set of core standards that most of these countries have subscribed to in the form of the ILO conventions, one way or the other. Can it be abused in the future for protectionist purposes? Sure, just like a lot of things. But to keep it off the agenda entirely just makes it more difficult for us to deal with this very emotional problem.

There may be other issues that you would like to suggest, but environment, technology, competition policy, regulation and labor standards would be the five that we think of as the so-called new new issues. We see a rather long period of time required to discuss these issues and build a consensus. We encourage all of you to try to take part in the debate about post-Uruguay Round issues earlier rather than later, to get in on the ground floor if you can with the concerns that you have. Some of you have sectors in your economy that have become very modern very fast, even if the overall level of development is still relatively low, so you can jump ahead a generation or two conceptually and help us think through these particular issues.

Comment

Grant Taplin

I would like to speak about the role of the Fund in the post-Uruguay Round agenda. These are more my personal views than official views.

The papers of Roessler and Frost are very interesting and cover a wide area. Frost has given us an extensive list of trade policy areas that emerged during the Uruguay Round negotiations, many of which undoubtedly will spill over in due course into the World Trade Organization. Which ones the WTO will pick up and when, and how they will be shared with other agencies, will be determined in large measure by political forces.

To repeat some of what has been said, the areas appear to be trade and trade-related agenda including environmental issues, competition issues, investment policy, technology policy, and free trade agreements. All of these are correctly advanced under the umbrella of globalization. I would like to pick up the discussion and comment on labor standards, as well as two more closely Fund-related issues, namely, capital flows and policy coherence.

Labor standards and trade liberalization. The issue of linkages between labor standards and trade liberalization falls outside the direct mandate of the Fund, but how it unfolds and whether or not it becomes subject to internationally agreed disciplines will undoubtedly have an impact on trade and investment, and therefore the balance of payments and growth prospects of Fund member countries. It should be noted that this is a highly political issue being pressed by a number of major players in the multilateral trading system and being strongly resisted especially, but not exclusively, by developing countries. Even those that are resisting trade-labor standards linkages are also arguing that the WTO should not be engaged to enforce labor standards; that this is the rightful domain of the ILO, but this raises questions about the strength of ILO enforcement instruments. The debate is further complicated by disagreement over whether countries with low wage rates and minimal labor standards do actually have competitive advantages. Lastly, the debate is murky as to what comprises “core” labor standards—those that should be respected as a minimum. In fact, some labor standards identified by some as core ones are actually human rights standards. But, then this would lead to a new trend of thought—which actually has emerged—linking trade concessions to respect for fundamental human rights—economic, social, and cultural rights, including the right to development, and political rights. Some major players already link GSP privileges to human rights and labor issues. Thus one can ask if this is not an overload of the trade policy agenda.

Capital flows. As has already been noted, trade and investment are on the trade policy agenda. In concrete terms, this is reflected in the Agreement on Trade-Related Investment Measures. Of course, this is not a new item on the international agenda—after all the OECD Code of Liberalization of Capital Movements was adopted in 1961. Perhaps these issues have become more pressing in view of the increased globalization of the world economy, and with the modern communications network, capital can move from one country to another almost instantaneously. This volatility of international capital and the role of regulation has been examined by the Bank for International Settlements (BIS); and capital account liberalization is part of the Fund’s policy dialog with member countries. We all recognize that capital surges can complicate economic policy management. With respect to developing countries, capital inflows (and reflows) require appropriate policy responses to safeguard gains made in economic and financial stabilization and establishing the foundations for high-quality economic growth. Depending on the circumstances and the type of flow, the appropriate response is a combination of sterilization, fiscal adjustment, and exchange rate appreciation. In most circumstances, capital flows should be avoided. An additional aspect is that there is no agreed enforceable set of rules covering capital flows (and investments).

In view of globalization, and also recent events, capital flows are on the global agenda. (I do not want to repeat what are widely accepted views that financial market deregulation and liberalization contribute to the efficient distribution of resources globally—as well as internally.) It could be noted that the Fund’s jurisdiction over capital flows largely derives from its surveillance function under Article IV of its Articles of Agreement. I would also note that the Fund’s Articles were framed at a time when capital controls were pervasive, and indeed the Articles permit the Fund to require a country to institute capital controls in certain circumstances—a provision that has never been used. With the experience of this clearly in mind, emphasis was placed on current account liberalization. In short, the Fund has the authority to approve restrictions on current account transactions—existing restrictions can be maintained under Article XIV, and the intensification of existing restrictions and the introduction of new restrictions are subject to Article VIII.

Consideration of capital flows is relevant to post-Uruguay Round issues precisely because commitments in services in the Uruguay Round create obligations to liberalize related current and capital account transactions. In view of this, can conflicts arise between a Fund member’s rights and obligations under the Fund’s Articles of Agreement and its undertakings in the WTO? And if they can, who is to adjudicate the matter? Presumably, a WTO (and Fund) member not fulfilling its WTO commitments can be the object of dispute settlement. Does this in effect transfer to the WTO what some would argue should implicitly be an issue in the Fund’s jurisdiction? As you all know, capital account issues are regularly studied by the Fund staff, and the Fund’s Executive Board will soon (in May 1995) have a new occasion to discuss the Fund’s role. A question that will have to be confronted is whether there is a basis and a will to extend Fund jurisdiction over capital flows without an amendment to the Articles. Moreover, the WTO’s role will have to await actual complaints, and the initiating of dispute settlement procedures—only concerned parties can make complaints and seek relief through dispute settlement, as indicated by Roessler. But it is clear that formulation for rules to govern capital flows will become more urgent. Also, it is an area that will require close cooperation and collaboration between the Fund and the WTO.

Coherence. It is worth recalling the WTO text, Article III, paragraph 2: “With a view to achieving greater coherence in global economic policymaking, the WTO shall cooperate, as appropriate, with the Fund and the World Bank, and World Bank affiliates.” Elements are spelled out in the Declaration on the Contribution of the WTO to Achieving Greater Coherence in Global Economic Policymaking. The basic issue is how to promote improved policy coherence, but the precise meaning of this issue is elusive. Moreover, it has an international dimension as well as a domestic dimension. Let us all agree that we do not want a situation where the policy advice from the Fund to a country is contradictory to that provided by the WTO. Also, we are working out a framework for closer collaboration, to avoid conflict situations, which have been very infrequent in the past. It must also be noted that in certain circumstances certain contractual undertakings by members in the WTO are second-best economics, and that the Fund as the international body mandated to exercise firm surveillance over exchange rate policies of its members is obliged to offer first-best recommendations.

It should also be remembered that countries have the obligation to achieve greater coherence in domestic policies. It may be true that a member’s trade policies can offset the intent of its exchange (and monetary) policies, and vice versa. It is also true that some members of the international community believe and assert that greater stability in the system can be achieved by using the exchange rate as an anchor of policy, where others see greater exchange rates as derived from an appropriate macroeconomic and financial framework. It is likely that this debate will continue, with little meeting of minds.

An additional element of coherence in the minds of some is a closer association at the international level of officials responsible for monetary matters with those responsible for trade matters at the international level. Some of you will have undoubtedly seen the views of the WTO Director General on international policy coordination. I am sure that these issues will figure often in the international debate in the post-Uruguay Round context. But “progress” in this area, however progress is conceived, will once again be dependent on the political will of (the major) member countries.

1

Article XXV(l) of the GATT

2

A decision of the GATT’s contracting parties in 1980 confirmed that contracting parties implementing the Tokyo Round Agreements were required to extend the treatment provided therein even to contracting parties that had not signed them.

3

The plurilateral agreements are binding only on those WTO members that have accepted them. The “single-undertaking” approach thus does not apply to the plurilateral agreements.

4

The European Community is a WTO member, as are its member states, reflecting their shared competence in the areas covered by the WTO Agreement. When the European Community exercises its right to vote, it has the number of votes equal to the number of member states that are members of the WTO.

5

Amendments that do not alter the rights and obligations of members, such as in the procedures, are binding on all members, including those voting against.