This Background Paper on the United States examines the effect of fiscal deficit reduction in the context of the IMF’s multicountry simulation model, on the current account and the real exchange rate. The simulations suggest that, other things being equal, fiscal consolidation will tend to cause the real exchange rate to depreciate in the short term. The paper also estimates a long-term relationship between the real effective exchange rate for the U.S. dollar and a number of variables.

Abstract

This Background Paper on the United States examines the effect of fiscal deficit reduction in the context of the IMF’s multicountry simulation model, on the current account and the real exchange rate. The simulations suggest that, other things being equal, fiscal consolidation will tend to cause the real exchange rate to depreciate in the short term. The paper also estimates a long-term relationship between the real effective exchange rate for the U.S. dollar and a number of variables.

IX. International Trade and Investment Policies 1/

This chapter reviews developments in U.S. international trade and investment policies since July 1994. 2/ The nine sections review selected aspects of: (1) the Uruguay Round agreement; (2) the North American Free Trade Agreement and the Free Trade Area of the Americas; (3) the Asia-Pacific Economic Cooperation Forum; (4) other international agreements and the resolution of trade disputes; (5) import policies and measures; (6) developments under Section 301 and Special 301 (including the U.S.-Japan auto dispute); (7) trade preferences for developing countries; (8) foreign investment policies; and (9) other measures and issues.

1. The Uruguay Round Agreement

The Uruguay Round Agreement was completed and signed in Marrakesh on April 15, 1994. Ratification by the U.S. Congress occurred on December 1 and the agreement was signed by the President on December 8, 1994. Consequently, the United States became a founding member of the new World Trade Organization (WTO) on January 1, 1995. Before the agreement was put to a vote in the Congress, however, the Administration agreed to establish a commission of five federal judges to monitor all WTO dispute-settlement reports that rule against the United States. The U.S. panel is to determine whether in such cases the WTO might have exceeded its authority or acted beyond the scope of the Uruguay Round. Under this agreement, the United States could initiate proceedings to withdraw from the WTO if the commission of judges issued three affirmative decisions in any five-year period. 3/ Under the Uruguay Round Agreement any member of the WTO has the right to withdraw upon six-months notice.

The following subsections briefly review the results of the Uruguay Round for the United States, focusing largely on the agreements in agriculture, and textiles and clothing. Because of the highly distortionary effects of U.S. agriculture policy and quantitative import restrictions maintained under the Multifibre Arrangement (MFA), the United States’ own liberalization in these sectors will produce the greater share of U.S. gains from the Round. Indeed, a recent computable general equilibrium study decomposed the effects of the Round and found that 99 percent of the quantifiable gains from the Round for the United States were attributable to the agreements on agriculture and textiles and clothing. 4/ For the world as a whole, 82 percent of the quantifiable gains were attributable to reforms in these two sectors.

a. Estimated effects of the Uruguay Round on the United States

A number of computable general equilibrium (CGE) models have examined the effects of the Uruguay Round for the United States, and estimates of the increase in real GOP range from 0.05 percent to 1.4 percent. 1/ The simulations showing the strongest effects tend to be those that assume the existence of domestic economies of scale and/or dynamic growth effects. These studies typically incorporate only the readily quantifiable results of the Round (e.g., most favored nation (MFN) tariff cuts, subsidies cuts, and the phased elimination of the MFA), and so are widely believed to understate the full benefits. They do not capture, for example, the effects of strengthened rules or the prospective value of the agreement on trade in services.

A notable exception in this regard is a recent CGE simulation by Brown, Deardorff, and Stern (1995), which attempted to incorporate liberalization of services trade in a simulation of the effects of the Round. The simulations suggested that the services agreement would yield more than 2 1/2 times the increase in real income from the liberalization of trade in industrial products. This result, while noteworthy, should be viewed with more than the usual caution. As the authors point out, what was modeled was not the actual result of the services agreement, but the implications of hypothetical liberalization in services equivalent to that achieved in goods. In this sense, their results reflect the promise of the services agreement as a stepping stone to future liberalization, rather than the results of the services agreement extant. 2/

b. MFN tariff cuts and bindings

In the area of market access commitments in goods, U.S. tariff bindings 1/ across all products are to be cut--phased in five equal yearly installments--by about 40 percent from 6.8 percent to 4 percent on a simple average basis. On a trade-weighted basis, bound tariffs will be cut from 4.9 percent to 3.4 percent on industrial products and from 14.9 percent to 14 percent on agricultural products. 2/ With the January 1, 1995 implementation of the Uruguay Round in the United States, 100 percent of tariff lines on industrial products were bound--99 percent of tariff lines were bound prior to Uruguay Round implementation--and the percentage of MFN tariff lines on these products that enter duty free increased from 10 percent to 40 percent. 3/

c. Textiles and clothing

The phased elimination (over ten years) of the MFA and the integration of trade in textiles and clothing (T&C) into the multilateral trading system is among the most significant achievements of the Uruguay Round for the United States. This assessment reflects the relatively high cost to U.S. consumers of the system of import restraints under the MFA. In a wide range of simulations, with varying elasticity assumptions and alternate simulations assuming either constant and increasing returns to scale, Harrison, Rutherford, and Tarr (1995) decomposed the real-income effects of the Round into those resulting from the agreements on agriculture, T&C, and market access in the manufacturing sectors. The T&C agreement was found to be responsible for between 30 percent and 86 percent of the gains from the Round for the United States. Their base model simulation shows the T&C agreement contributing $7.4 billion (1992 dollars) to U.S. real GDP; 77 percent of the full effect of the Round. 4/

The phased liberalization of T&C will proceed on two fronts. First, as discussed further below, countries must declare in four successive tranches those products it chooses to “integrate” into the General Agreement on Tariffs and Trade (GATT) (1994). 1/ This means either existing quotas are eliminated, or an eligible T&C product for which no quota had been imposed is declared to be integrated. The products selected for integration in each stage are determined by the importing country, subject to the inclusion of items from several broad categories, and may include items that had not been subject to MFA quotas. At the completion of the transition period in the tenth year, all remaining textile and apparel items (49 percent of the total) must be integrated into the GATT/WTO.

The second front on which T&C liberalization will proceed is through a formula for increasing quota growth rates for those products not yet integrated. Growth rates for major supplying countries are to be increased by 16 percent in 1995, by an additional 25 percent after the third year and by a further 27 percent at the beginning of the eighth year. 2/ For example, if the quota growth rate for certain cotton shirts specified in an existing MFA bilateral agreement had been 5 percent, implementation of the Round would require that this quota growth rate be increased to 5.8 percent this year, to 7.25 percent after three years, and to 9.2 percent beginning in the eighth year. In the tenth year, the quota must be lifted. Also during the implementation period, U.S. ad valorem tariffs on T&C imports will decline from 17.2 percent to 15.2 percent on a trade-weighted basis.

Despite the clear importance of the T&C agreement once fully implemented, the competitive environment in the U.S. market for T&C is not likely to change appreciably before the eighth year of implementation (2002). The agreement is structured in a way that permits a substantial delay before quota restrictions are eliminated on the more sensitive, and currently most restricted, T&C imports. Only 33 percent by volume of 1990 imports of T&C must be integrated into the GATT/WTO system during the first two phases (1995-2001) of implementation, and candidates for integration include a large number of items that were not previously under quota. This implies that “integration” in the earlier tranches will typically include products not previously protected under MFA quotas. Indeed, the integration of 49 percent of T&C imports by volume is delayed until the tenth year of implementation (January 1, 2005). Moreover, a U.S. Statement of Administrative Action specifically required that implementation proceed so that integration of the most sensitive products be delayed until the end of the ten-year period. 3/

The upshot is that the T&C agreement stands to significantly improve resource allocation in the United States once fully implemented in ten years. However, it appears that substantive liberalization in T&C will only take place at the end of this period. Indeed, in May 1995 the first quota on imports of a textile product from a former Soviet Republic was imposed on Ukrainian woolen coats. The heavy back-loading of liberalization in the T&C agreement suggests the risk that, when the time comes to take the final and most difficult step, political pressure from the most sensitive T&C sectors for continued protection may result in some form of accommodation, whether through safeguards actions under Article XIX of GATT (1994), antidumping (AD) or countervail actions, or some other measures.

d. The agreement on agriculture

The integration of the agricultural sector into the multilateral trading system will bring some reductions in domestic supports and export subsidies, the replacement of virtually all quantitative restrictions with tariffs, the binding of all agricultural tariffs, and a phased reduction in these tariffs over a six-year (for industrial countries) implementation period. Domestic support for agricultural production must be reduced by 20 percent from a 1986-88 base period and export subsidies must be reduced by 36 percent in terms of budgetary outlays (21 percent in volume) for each product over the six-year implementation period from a 1986-90 base. The agreement also calls on WTO members to begin negotiations toward further liberalization in agriculture in the last year of implementation.

It is noteworthy that, because the base represents a period of particularly high levels of U.S. domestic support for agriculture, the mandated cuts in domestic support will require no reduction from current levels in the United States (USDA, 1994, p. 2). Obligations in the area of “domestic support” for agriculture are set out in Article VI of the Uruguay Round Agreement on Agriculture.

In the simulations by Harrison, Rutherford, and Tarr (1995), the agreement on agriculture contributed from 13.5 percent to 23 percent of the gains to the United States from the Uruguay Round. When the gains from the agriculture liberalization are decomposed into the various elements of the agriculture agreement (tariffication and phased tariff cuts, reductions in export subsidies, and in domestic support), the authors find that by far the greatest effect for the United States comes from the reduction in production subsidies. The overall increase in real GDP attributable to the full agreement on agriculture in their base model is $2.2 billion (1992 dollars), or 23 percent of the full effect of the Round.

2. The North American Free Trade Agreement (NAFTA) and the Free Trade Area of the Americas (FTAA)

During the December 1994 Summit of the Americas held in Miami, a commitment was made to achieve a “Free Trade Area of the Americas” by 2005. This process is expected initially to build on existing regional trade arrangements in the Western Hemisphere through accessions. The action plan released at the Summit envisages an agreement that is comprehensive in scope, covering inter alia, tariffs, services trade, investment, government procurement, subsidies and countervailing duties (CVDs), AD, competition policy, and intellectual property protection.

A Summit of the Americas Trade Ministerial was held in Denver on June 30, 1995. There it was agreed to begin immediately a work program to prepare for the initiation of negotiations for the Free Trade Area of the Americas. The 34 participating nations agreed to ensure that the FTAA will: (i) be fully consistent with the provisions of the WTO; (ii) be balanced and comprehensive in scope, covering among others, all areas included in the Summit of the Americas action plan (see above); (iii) not raise barriers to non-FTAA countries; and (iv) represent a single undertaking 1/ (analogous to the Uruguay Round Agreement). 2/

In order to begin preparations for negotiations, seven working groups were established on: market access; customs procedures and rules of origin; investment; standards and technical barriers to trade; sanitary and phytosanitary measures; subsidies, AD and CVDs; and a working group on “smaller economies.” Each working group is called upon to identify and examine existing trade-related measures in these areas, with a view to identifying possible approaches to negotiations. It was also announced that working groups would be established at a March 1996 Trade Ministerial to be held in Colombia in the areas of government procurement, intellectual property rights, services, and competition policies. The Joint Declaration also emphasized the parties’ commitment to transparency in the FTAA process.

Regarding the expansion of NAFTA, formal negotiations on Chile’s accession to NAFTA were initiated in Toronto on June 7, 1995. At end-June 1995, Congress continued to debate fast-track negotiating authority for the President, which ultimately will be necessary to successfully complete the accession negotiations.

The U.S.-Canada dispute over grain trade continued into 1994. Under the Canada-U.S. Free Trade Agreement (CUSFTA), a Chapter 18 dispute-settlement panel was requested by the United States in May 1992 to contest the Canadian interpretation of “other costs” under Article 701.3 on agricultural subsidies. This dispute involved the pricing practices of the Canadian Wheat Board on durum wheat destined for the United States. A panel decision was reached in February 1993, but the underlying dispute that initiated the panel request continued. The United States had considered since September 1993 whether to seek quotas on Canadian wheat imports under Section 22 of the Agricultural Adjustment Act, 3/ and on January 18, 1994 the President directed the U.S. International Trade Commission (USITC) to investigate whether wheat, wheat flour, and semolina were materially interfering with a U.S. agricultural support program. It was alleged that imports of Canadian wheat have caused the U.S. Department of Agriculture to incur increased outlays in deficiency payments to U.S. farmers. The USITC recommended to the President on July 15, 1994 that import measures be taken under Section 22. In connection with the wheat dispute, the United States also notified GATT Contracting Parties on April 22, 1994 of its intention to impose higher tariffs or tariff-rate quotas on grains (principally wheat and barely) from Canada unless a negotiated solution could be reached in 90 days. 1/ In the event, an agreement was reached on August 1, 1994 that established a tariff-rate quota for certain wheat imports. 2/ On October 13, 1994 the President issued the proclamation implementing the agreed tariff-rate quotas retroactive to September 12, 1994. These measures are scheduled to expire on September 12, 1995.

On April 6, 1994 the United States requested the formation of an extraordinary challenge committee under Article 1904.13 of the NAFTA, in which it challenged certain aspects of an earlier panel ruling on Canadian subsidies of softwood lumber. On August 3, 1994 the Extraordinary Challenge Committee rejected the U.S. appeal and on August 23, 1994 the U.S. Department of Commerce ordered an end to the collection of CVDs on imports of Canadian softwood lumber.

The first request for the formation of a dispute settlement panel under Chapter 19 (AD and countervail disputes) of NAFTA occurred on September 26, 1994. The panel was formed after a petition from U.S. importers and Mexican exporters of leather wearing apparel. The complaint challenges the results of a 1992 administrative review of a countervailing duty (CVD) on leather wearing apparel from Mexico by the U.S. Department of Commerce. The Department of Commerce’s bid to have the case dismissed on jurisdictional grounds was rejected by the panel on April 11, 1995. The panel’s decision is due August 7, 1995.

Another NAFTA dispute settlement panel under Chapter 19 held hearings on April 20, 1995 in Mexico City. That panel, which is comprised of three Mexican and two U.S. experts, was formed when U.S. steel firms alleged that Mexico’s commerce agency acted contrary to Mexican law when on August 2, 1994 it imposed AD duties of 38.21 percent on imports of galvanized steel sheet from the United States. 3/

On April 26, 1995 the Office of the U.S. Trade Representative (USTR) requested consultations under the dispute-settlement mechanism of NAFTA, claiming that Mexico had failed to provide national treatment to United Parcel Service, Federal Express, and Airborne Freight, and other express delivery companies. U.S. express-delivery companies allege that they have been denied licenses to operate large trucks in Mexico. 1/

In line with an agreement reached in December 1993, tripartite working groups are reviewing the rules governing AD, subsidies, and CVDs within the NAFTA with a view to making recommendations for revised NAFTA rules by end-1995. While the groups were constituted in December 1993 at the initiative of Canada, activities were suspended during most of 1994 in order to await the results of the Uruguay Round. In early May 1995, the group met in Washington to review the results of the Round and to examine the lessons learned from two prominent regional trading arrangements that have eliminated the application of AD and CVD on a regional basis. 2/ In these discussions, Canada is seeking greater discipline in the use of AD, while the United States has expressed an interest in restraining the use of subsidies but is strongly opposed to new restraints on the application of AD duties.

3. Asia-Pacific Economic Cooperation Forum (APEC)

Participation in APEC by the United States is intended to enhance the prospects for commerce through initiatives to moderate barriers to trade and investment. 3/ A notable consensus was reached at the APEC Leaders Meeting in Bogor, Indonesia on November 15, 1994 when the “Declaration of Common Resolve” was issued. The Declaration set a goal for APEC to achieve “free and open trade and investment” by 2010 for industrial member countries and by no later than 2020 for developing member countries. APEC Ministers are to produce an action plan before November 1995 when the next Leaders Meeting will be held in Osaka. The Osaka meeting is hoped to produce greater specificity in moving toward the free-trade goals of the Bogor Declaration.

It has been reported frequently that the Bogor initiative was intended to lead to an APEC free trade agreement. However, it has also been suggested instead that it points to broad support for “open regionalism,” which implies a cooperative approach to unilateral liberalization on an MFN basis within APEC. The Declaration and subsequent official statements are broad enough to accommodate either goal.

4. Other international agreements and the resolution of trade disputes

With the accession of Austria, Finland, and Sweden to the EU on January 1, 1995 and the consequent adoption of the EU’s trade regime, MFN tariffs in these countries were raised in some cases beyond bound levels under the GATT/WTO. In line with GATT/WTO rules, U.S. negotiations with the EU on compensation (typically in the form of other tariff cuts) resulted in a six-month interim agreement announced on January 4, 1995, which expired on June 30. Negotiations for a permanent agreement were continuing through end-June 1995.

An investigation was initiated on February 16, 1995 to review telecommunications trade practices in the Republic of Korea. 1/ At issue was a decision by the Korean Government to classify recently upgraded U.S. digital switching equipment as a new product, thereby requiring it to undergo a two-year period of testing before being certified and eligible for government procurement. On March 27, 1995 the dispute was resolved when it was agreed that the new switch could be certified in time to submit bids for the 1995 round of procurement by Korea Telecom. The parties also agreed to establish an experts group to develop criteria for determining when approval is not necessary and to discuss mutual recognition of equipment approval.

a. Agreements reached under the U.S.-Japan Framework talks

After disagreements could not be resolved in the context of the Framework negotiations, Japan was identified under Title VII (government procurement) of the 1988 Trade Act (part of the Section 301 family of U.S. trade laws) on July 31, 1994. 2/ The identification of Japan triggered a 60-day consultation period (establishing a September 31, 1994 deadline), at the end of which, if no agreement was reached, the United States could impose sanctions. Japan indicated it would terminate negotiations under the Framework talks in the area of government procurement if sanctions were imposed. In the event, an agreement was announced on October 1, 1994 and sanctions were averted. The agreement covered government procurement procedures in medical 1/ and telecommunications 2/ equipment, both “priority sectors” under the Framework talks. 3/

Also at end-September 1994, bilateral agreements were reached under the Framework talks in the areas of flat glass and insurance. The agreement on insurance, signed on October 11, 1994, generally commits Japan to enhance the transparency of its regulatory system, to introduce some specific liberalization measures, and to strengthen its antitrust enforcement. A final agreement was reached on December 12, 1994 to improve foreign access to the Japanese flat glass market. Under the agreement, Japanese glass distributors publicly stated their intention to diversify their sources and to avoid discrimination. Japanese glass manufacturers issued a statement supporting diversification in their previously exclusive distribution networks. There is to be a direct role for Japan’s Ministry of Trade and Industry (MITI) in collecting data and insuring diversification. The Government of Japan also intends to promote increased competition in procurement of glass for construction projects. 4/

The Framework working group on intellectual property protection concluded two agreements in 1994. The first agreement, concluded on January 20, 1994, established the right to file patent applications in English and to correct translation errors after patent issuance. The agreement also lengthened the U.S. patent term from 17 to 20 years. The second agreement, signed on August 16, 1994, revised a number of specific practices of the Japanese Patent Office (JPO) and the U.S. Patent and Trademark Office (PTO), such as establishing an accelerated patent examination procedure in the JPO and requiring the PTO to publish pending patent applications 18 months after filing beginning in 1996.

b. Dispute settlement activity under GATT/WTO 1/

A GATT dispute-settlement panel was established on January 25, 1994 following concerns expressed by Brazil, Canada, and others over U.S. legislation signed August 10, 1993 which inter alia established 75 percent local tobacco content for the manufacture of cigarettes. 2/ Complaints also pointed to internal taxes and charges in the form of a “budget-deficit assessment”; a no-net cost assessment on imported flue-cured tobacco identical to that assessed on like domestic tobacco; a requirement that inspection fees for imported tobacco be comparable to those for domestic tobacco. The GATT panel report of August 12, 1994 found both the local content requirement 3/ and the budget-deficit assessment 4/ to be inconsistent with GATT rules. The Panel Report was adopted by the GATT Council on October 4, 1994 and Uruguay Round implementing legislation in the United States ultimately corrected the two contrary measures.

On September 30, 1994 a GATT panel report was issued concerning the EU’s 1993 complaint against certain U.S. taxes and regulations in the domestic market for automobiles. The panel ruled that the U.S. luxury tax on certain autos and the “gas guzzler tax” were not contrary to GATT obligations. 1/ The panel did find, however, that certain aspects of the Corporate Average Fuel Economy (CAFE) regulation were inconsistent with GATT Article 111:4. 2/ Under the pre-WTO procedures, the EU blocked adoption of the report, possibly reflecting dissatisfaction with the panel’s ruling on the U.S. luxury and “gas guzzler” taxes. 3/

Another GATT panel was formed on October 4, 1994 when Venezuela challenged certain U.S. standards for reformulated and conventional gasoline. Venezuela subsequently withdrew its complaint in the GATT and requested consultations in the World Trade Organization (WTO). 4/ After a period of consultations failed to resolve the dispute, it was announced on April 10, 1995 that a WTO panel would be formed. The complaint alleges that U.S. Environmental Protection Agency rules on reformulated gasoline treat imports less favorably than domestically sourced gasoline.

5. Import policies and measures

The Office of the USTR released its annual Title VII review of foreign-government procurement practices on April 29, 1995. 5/ No new countries were identified under the statutory criteria. However, the USTR announced that sanctions imposed under Title VII against the EU in May 1993 would remain in place and that these sanctions would be extended to Austria, Finland, and Sweden as a result of their recent admission to the EU. 1/ The 1995 Title VII decision also indicated that the implementation of the Memorandum of Understanding (MOU) reached with Germany in 1993 would come under enhanced scrutiny. 2/

The USTR raised a number of other issues in its 1995 Title VII review. The USTR considered a number of areas warranting special attention. Cited as a matter of “concern” were certain discriminatory practices in four countries in the area of information technology. 3/ The USTR also cited more generally the problems of “corruption” and nontransparency in foreign government procurement practices and announced the Administration’s intent to “push initiatives” to improve these practices.

During 1994, the U.S. Department of Commerce and the USITC reviewed 41 AD and 6 CVD petitions. This level of activity was virtually unchanged from the previous year. 4/ In 1994, 17 new AD duties (not including suspension agreements) 5/ and one new CVD were imposed. This was substantially fewer than the previous year owing to the unusually high number of new duties in 1993 related to the end of the system of steel voluntary export restraint agreements (VERs) that occurred in 1992. 1/ In 1995, 7 AD and 1 CVD petitions had been filed and 11 new AD duties imposed by May 15.

There were no petitions for emergency protection filed under Section 201 of the 1974 Trade Act in 1994. 2/

6. Developments under Section 301 and special 301 3/

On October 3, 1994 the USTR issued its first “super 301” report to Congress under the executive order that reinstated super 301 in 1994. 4/ No “priority foreign country practices” were identified, but under the “early warning” provisions it was noted that Japan’s practices regarding wood and paper imports may warrant identification in the future.

The USTR released its annual special 301 decision on April 29, 1995, announcing that no countries would be designated at that time as “priority foreign country.” 5/ However, it was also stressed that designation as a priority foreign country could be made any time the facts warrant. Seven individual countries and the EU were placed on the “priority watch list,” with five countries--Brazil, Greece, Japan, Saudi Arabia, and Turkey--subject to out-of-cycle reviews later in the year. 6/ The “watch list” includes 24 countries with four--Argentina, Indonesia, South Africa, and the United Arab Emirates--subject to out-of-cycle reviews. 1/

Seven Section 301 investigations were initiated from June 1994 through July 3, 1995. These included investigations related to China’s intellectual property protection, the EU’s restrictions on banana trade, a related investigation of Costa Rica’s and Colombia’s banana export regimes, Japan’s practices in the after-market for auto parts, Korea’s treatment of meat imports, Canada’s eviction of the U.S.-owned Country Music Television service, and Japan’s practices in the market for photographic film and paper.

a. China

On June 30, 1994 China was designated as a priority foreign country and a special 301 investigation was initiated. After negotiations failed to resolve the differences, on February 4, 1995 the United States announced punitive tariffs set at 100 percent on $1.08 billion of Chinese imports, to be implemented at end-February. In the event, on February 25, 1995 an agreement was reached addressing U.S. concerns on intellectual property protection in China, sanctions were averted and China was removed from the list of priority foreign countries.

b. U.S.-Japan auto dispute

On October 1, 1994 the USTR launched a Section 301 investigation of Japanese practices in the “aftermarket” for auto replacement parts (autos and auto parts are a priority sector in the Framework talks). Fact-finding and further consultation with Japan under Section 301 were to conclude no later than October 1, 1995. The United States focused on three areas of market access in Japan: automobile dealerships; the aftermarket for auto parts; and the market for original equipment auto parts. The United States contended that a number of business practices and regulations discriminated against foreign suppliers in these three areas. On May 10, 1995 the United States notified the WTO of its intent to invoke the organization’s dispute-settlement mechanism in “approximately” 45 days. At the same time, the United States assessed under Section 301 that Japanese policies and practices were “unreasonable” and “discriminatory.” 1/ A list of 13 Japanese luxury vehicles was presented on May 16 by the USTR as candidates for 100 percent punitive tariffs if the dispute was not resolved by June 28, 1995. 2/

The Japanese Government responded by requesting “urgent” consultations with the United States under the auspices of the WTO, a preliminary step in the formation of a dispute-settlement panel. 3/ By early June, the EU and Australia had also asked to participate in these WTO consultations. In public statements, the United States took the position that Section 301 was designed to address issues not covered by the WTO--in this case, alleged acts, practices and regulatory policies that set up barriers to trade in the auto sector. 4/ Other observers emphasized that regardless of whether Japanese policies and practices in the auto sector fall inside or outside the WTO’s jurisdiction, any attempt to redress grievances unilaterally by raising tariffs above bound levels or raising tariffs in a discriminatory fashion is specifically prohibited.

An agreement was reached on June 28, 1995 and sanctions were averted. Under the agreement Japan would undertake some deregulation of its auto repair and inspection system. 1/ The Japanese Ministry of International Trade and Industry would also send letters to Japanese dealers confirming their legal right to sell foreign autos. The Japanese Government and each major Japanese auto manufacturer would appoint a “contact person” who will address dealers’ questions and concerns about their right to sell foreign cars. 2/ U.S. officials also announced voluntary plans by the five major Japanese auto manufacturers to increase their auto production in the United States from 2.1 million to 2.65 million units by 1989 and, as a result of these plans, the USTR estimated the purchase of U.S. auto parts would increase by $6.75 billion by 1998. The USTR also announced that the five major Japanese auto manufacturers planned to purchase $6 billion in foreign parts by 1998 to be used in the production of autos in Japan.

Japanese officials emphasized, however, that U.S. estimates related to voluntary plans of Japanese auto companies were not shared by their Government and were not part of the agreement. Other elements of the agreement included a commitment by the Japanese Government to increase support for the Japan Free Trade Commission (which oversees the administration of antitrust laws) and to take into account a number of U.S. government suggestions regarding the more effective enforcement of Japan’s antimonopoly law, and objective criteria to monitor progress over the life of the agreement. 3/

c. The banana dispute

On October 17, 1994 the USTR initiated a Section 301 investigation of EU practices in the importation of bananas, alleging that EU practices discriminated against U.S. marketing and distribution companies (the petition came from Chiquita Brands International and the Hawaii Banana Industry Association). A preliminary finding was announced by the USTR on January 9, 1995 stating that EU practices were adversely affecting U.S. economic interests. By mid-June 1995, no resolution to the dispute had been reached and talks were continuing.

In a related case, on January 9, 1995 the USTR initiated a Section 301 investigation of the practices of Colombia and Costa Rica in the exportation of bananas to the EU. The investigation centered on a framework agreement negotiated between the EU, Colombia, Costa Rica, Nicaragua, and Venezuela which authorizes the exporting governments to issue export licenses. Such licenses are required, in addition to EU import licenses, in order to gain access to the European market, and Chiquita Brands International (who petitioned the USTR for a Section 301 investigation) argued that the export licensing system was discriminatory. Discussions were continuing at mid-June 1995.

d. Korea

Following a petition from several U.S. meat industry associations on September 30, 1994, the USTR initiated a Section 301 investigation of Korean practices in respect of the importation of certain agricultural products on November 22, 1994. The petition alleged that Korea restricted the importation of U.S. pork and beef products related to shelf-life requirements in violation of a number of bilateral agreements. In late April 1995, the United States announced that it intended to invoke the WTO’s dispute-settlement proceedings unless Korea published a modified food code by April 30. In the event, no agreement was reached and the United States formally notified the WTO in early May 1995 it was seeking consultations--consultations precede the formation of a dispute panel under WTO rules--with Korea over its system of shelf-life requirements.

e. Canada

The USTR announced on February 6, 1995 that a Section 301 investigation was being initiated to consider the decision of the Canadian Radio-Television Telecommunications Commission (CRTC) to end the distribution rights of a U.S. firm, Country Music Television (CMT). CMT had been operating in Canada since 1984. Canadian officials maintain that the broad exemption for cultural industries included in the NAFTA cover the CRTC’s decision. The USTR announced in mid-June 1995 that it was preparing a list of possible trade sanctions that could be imposed if a June 21 deadline was not met.

In the event, on June 21, 1995 the USTR announced a tentative agreement in which the Nashville-based Country Music Television and the Canadian New Country Network would form a single Canadian country music network. The parties expected to conclude the details of the arrangement in 45 days, which would then require the approval of the Canadian Government. The USTR expressed the hope that the eventual implementation of the agreement would provide a basis for terminating the Section 301 investigation.

f. U.S.-Japan film dispute

On May 18, 1995 the Eastman Kodak company petitioned for a Section 301 investigation against Japan charging anticompetitive practices in the market for photographic film and paper. The USTR announced on July 3, 1995 that Kodak’s petition had been accepted and a Section 301 investigation was initiated. The USTR must rule in the next 12 months.

7. Trade preferences for developing countries

At the beginning of 1995, Russia and the Baltic countries received preferential access to the U.S. market under the Generalized System of Preferences (GSP) program. Among the other countries of the former Soviet Union receiving GSP treatment at the beginning of 1995 were Armenia, Belarus, Kazakhstan, Kyrgystan, the Ukraine, and Uzbekistan. Among these, Armenia, Belarus, Kazakhstan, the Ukraine, and Uzbekistan were designated as GSP beneficiaries by the President in 1994. Romania and South Africa were also designated as GSP beneficiaries in 1994 and on March 24, 1995 the United States announced that preferential market access under the GSP program was being extended to the West Bank and Gaza Strip.

The countries of Central Europe are granted GSP treatment under the U.S. Trade Enhancement Initiative for Central Europe. In late 1994, the USTR began investigating the effects on U.S. interests of preferential tariffs accorded to the EU under the EU Association Agreements with the countries of Central Europe. If the review eventually concludes that this preferential access for the EU has, or is likely to have, an adverse effect on U.S. commerce, the USTR will initiate bilateral consultations intended to eliminate the preferences accorded the EU. If these preferences are not eliminated, GSP status may be withdrawn or suspended.

The USTR reported that no annual GSP review of labor practices and intellectual property rights protection was conducted this year. The results of a few ongoing investigations were not available at end-June 1995.

8. Foreign investment

Foreign acquisitions, mergers, and takeovers in the United States are reviewed under the “Exon-Florio provision” of the Defense Production Act. If upon a full investigation by the Committee on Foreign Investment in the United States (CFIUS), the President determines such action would threaten national security, the President may block that action. From June 1994 to end-May 1995, 81 transactions were subject to a 30-day review and no transactions were subject to the more comprehensive 45-day investigation. During this same period, the President did not prohibit any transactions on the basis of CFIUS investigations.

9. Other measures and issues

After the Coordinating Committee on Multilateral Export Controls (COCOM) was formally disbanded at end-March 1994, agreement was reached to work toward completing negotiations on establishing a new multilateral export-control regime focusing on the non-proliferation of weapons. Talks for a replacement regime continued into 1995 and were ongoing at end-May. At that time there was a consensus that the basic parameters for a successor regime had been agreed. Since the dismantling of COCOM, exports of strategically sensitive products have been administered at the national level.

On April 30, 1995 President Clinton announced that most trade and investment with Iran would be embargoed for national security reasons. An executive order was signed by the President on May 9, 1995 detailing these restrictions, which include prohibitions on: (i) all exports to Iran except those for humanitarian purposes; (ii) all imports from Iran except Iranian-origin publications and materials imported for news publications or news broadcast dissemination; (iii) most re-exports to Iran; and (iv) certain financial transactions. Certain bank transactions will be allowed to continue. These restrictions became effective on June 6, 1995.

From July 1994, through June 20, 1995 there were no new notifications by the United States under IMF’s Executive Board Decision No. 144-(52/51). 1/

References

  • Brown, Drusilla, Alan Deardorff, and Robert Stern, (1995), “Computational Analysis of Goods and Services Liberalization in the Uruguay Round,paper presented at The Uruguay Round and the Developing Countries, Washington: The World Bank, January 2627.

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  • Francois, Joseph, Bradley McDonald, and Hakan Nordstrom, (1994), “The Uruguay Round: A Global General Equilibrium Assessment,Centre for Economic Policy Research (CEPR) Discussion Paper (forthcoming).

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  • Francois, Joseph, Bradley McDonald, and Hakan Nordstrom,Assessing the Uruguay Round,paper presented at The Uruguay Round and the Developing Countries, Washington: The World Bank, January 2627.

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  • Halland, Jan, and T.C. Tollefsen, (1994), “The Uruguay Round and Trade in Manufactures and Services: General Equilibrium Simulations of Production, Trade, and Welfare Effects of Liberalization,Centre for Economic Policy Research (CEPR) Discussion Paper 1008.

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  • Harrison, Glen, Thomas Rutherford, and David Tarr, (1995), “Quantifying the Uruguay Round,paper presented at The Uruguay Round and the Developing Countries, Washington: The World Bank, January 2627.

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  • Hoekman, Bernard, (1995), “Tentative First Steps: An Assessment of the Uruguay Round Agreement on Services,paper presented at The Uruguay Round and the Developing Countries, Washington: The World Bank, January 2627.

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  • Schott, Jeffrey, (1994), The Uruguay Round: An Assessment, Institute for International Economics, Washington.

  • U.S. Department of Agriculture (USDA), (1994), “Effects of the Uruguay Round Agreement on U.S. Agricultural Commodities,Office of Economics, Economic Research Service, March.

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1/

Prepared by Michael Leidy.

2/

For earlier actions, see Background Papers, Chapter IX, (SM/94/223).

3/

The Congress would need to enact, and the President sign, a joint resolution disapproving of continued U.S. participation in the WTO.

1/

The low result is from Halland and Tollefsen (1994) and the high result is due to Francois, McDonald, and Nordstrom (1994). Francois, McDonald, and Nordstrom (1995) summarizes the results of a variety of CGE models of the Uruguay Round.

2/

Despite the importance of the General Agreement on Trade in Services (GATS) as an initial step to bringing services trade under multilateral disciplines, the GATS is principally a “standstill” agreement; i.e., an agreement not to impose more restrictive measures in the future. Hoekman (1995), for example, has concluded that no liberalization of services trade was actually accomplished under the Round. Schott (1994, p.100) concedes that most of the country schedules of commitments in services are standstills, but points out that in a “very limited number of service sectors” there was an effective rollback of current barriers.

1/

A tariff binding is an obligation in the GATT/WTO not to raise tariff rates on specific products above a specified level. If a country wishes to breach a tariff binding, it must enter into discussions with other WTO members to find suitable compensation, typically in the form of offsetting tariff reductions on other products. Such bindings help to enhance the sustainability of tariff liberalization.

2/

Reported in Brown, Deardorff, and Stern (1995), based on data from the GATT Integrated Data Base which was compiled by the World Bank.

3/

Reported in Schott (1994, p. 64).

4/

The simulation showing about 30 percent of U.S. gains coming from the textiles and clothing agreement comes from the “steady-state variant” of the model. This attempts to capture the dynamic effects on the equilibrium capital stock in response to an increase in the marginal product of capital due to a more efficient allocation of resources.

1/

Integration implies that full GATT/WTO disciplines will be observed for these products. Once a product is integrated, a WTO member may not impose or maintain import quotas, except under certain GATT/WTO procedures such as emergency protection under Article XIX.

2/

Small producer nations and least developed countries receive somewhat greater increases in quota growth rates.

3/

Federal Register, vol. 60 no. 83, May 1, 1995 (p. 21075).

1/

A “joint undertaking” implies that signatories accept the entirety of the negotiated agreement; i.e., they may not choose to accept only selected pieces of the agreement but must take-or-leave it as a whole.

2/

The details presented here follow the Final Joint Declaration, Summit of the Americas Trade Ministerial, Denver, June 30, 1995.

3/

Under Section 22, the Secretary of Agriculture can recommend quotas if imports are materially interfering with a U.S. agricultural program.

1/

As a result of the notification, under Article 28 of GATT, following a 90-day period in which a negotiated settlement could be reached, the U.S. may unilaterally withdraw or modify one or more of its tariff bindings.

2/

Under the terms of the agreement, there was no change in U.S. tariffs on durum wheat imports of less than 300,000 tons. The United States imposed a tariff of $23/ton on imports of Canadian durum wheat between 300,000 and 450,000 tons; a tariff of $50/ton, intended to be prohibitive, was charged on imports of durum wheat over 450,000 tons and on imports of non-durum wheat over 1,050,000 tons.

3/

A final ruling was expected on July 13, 1995.

1/

The outcome of consultations could not be ascertained by the time this note was completed.

2/

The Australia-New Zealand Closer Economic Relations Trade Agreement (1983) contains provisions for replacing AD with competition laws in bilateral trade. More recently, the European Union (EU) and European Free Trade Area (EFTA) members agreed to no longer apply AD actions against each other, instead applying the EU’s competition rules to EFTA countries in intraregional trade.

3/

The 18-member APEC includes Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, the Philippines, the Republic of Korea, Singapore, Taiwan Province of China, Thailand, and the United States.

1/

The investigation proceeded under Section 1377 of the 1988 Trade Act which requires the USTR to review by March 31 of each year the operation and effectiveness of U.S. telecommunications trade agreements.

2/

See Background Papers, Chapter IX, (SM/93/183) for a brief review of the elements of the July 1993 Framework Agreement.

1/

The agreement on medical equipment procurement requires (i) the use of open and transparent procurement procedures for all procurement above a certain threshold; (ii) procurement officials are to be directed specifically to consider foreign medical technology and services; (iii) procurement decisions are to be made on the basis of “overall greatest value,” instead of the current minimum price system; (iv) public hospitals in Japan are to be required to make available public information about their purchases regardless of value; and (v) the agreement also includes comprehensive complaint mechanisms and procedures for dealing with unfair bids.

2/

In telecommunications, the Japanese Government agreed (i) to provide more detailed information earlier in the process for each year’s procurement needs; (ii) suppliers will be invited to comment on all aspects of the planned purchases (before the request for proposals is finalized); (iii) on technical specifications, the Government will look first to international standards, when available, then give full consideration to de facto international standards; (iv) the Government of Japan will institute “overall best-value” bid evaluation (to ensure contracts are awarded to the best-value bid, not simply the least-cost bid); and (v) the Government of Japan will reduce the number of sole-source contracts (which according to U.S. officials have, in the past, tended to go to Japanese firms).

3/

On May 23, 1994 the United States and Japan agreed to seek improvements in market access in four “priority sectors” (autos and auto parts, insurance, government procurement of telecommunications equipment, and government procurement of medical supplies)

4/

Deputy USTR, Charlene Barshefsky, was quoted as saying that the flat glass agreement was “the first concrete example of an attack” on Japan’s keiretsu system (International Trade Reporter, December 14, 1994, Vol. 11, No. 49, p. 1931).

1/

This section covers selected developments in U.S.-related dispute settlement activity within the GATT/WTO forum. Dispute settlement under GATT auspices occurred either under Articles XXII (Consultation) and XXIII (Nullification and Impairment) of the General Agreement, or under the separate dispute-settlement procedures of the Tokyo Round Codes. Those disputes brought under Articles XXII and XXIII, when they are “adopted,” are adopted by the Contracting Parties. Those brought under the Tokyo Round Agreements are adopted by the relevant Tokyo Round Committee. These separate forums were integrated into a new dispute-settlement system with the implementation of the Uruguay Round Agreement on January 1, 1995.

2/

Section 1105 of the U.S. Omnibus Budget Reconciliation Act of 1993 is alleged to be inconsistent with Article 111:1 (National Treatment on Internal Taxation and Regulation) of GATT. Consultations between the United States and Brazil, also on behalf of Canada, Chile, Colombia, El Salvador, Guatemala, Thailand, Venezuela, and Zimbabwe, preceded the formation of the GATT panel. The EU (which also held consultations with the United States on this matter) and New Zealand supported the request for a panel and expressed interest in making a third-party submission to the panel.

3/

The Panel found that this was an internal quantitative regulation inconsistent with Article 111:5. Under Article 111:5, GATT Contracting Parties may not establish or maintain any internal quantitative regulation relating to the mixture, processing or use of products in specified amounts or proportions which require that the product be supplied from domestic sources.

4/

The Panel found that the 1993 budget deficit assessment was an internal tax contrary to GATT Article 111:2. Article 111:2 states that imported products shall not be subject to internal taxes or other charges in excess of those applied to like domestic products.

1/

Neither one was found inconsistent with GATT Article 111:2 (imports are not to be the subject of internal taxes higher than those applied to like domestic products).

2/

Article 111:4 requires that imports be accorded treatment no less favorable than that given to like domestic products in respect of all laws, regulations, and requirements affecting their internal sale.

3/

Pre-WTO rules allowed any GATT Contracting Party to block the adoption of a panel report. Under WTO procedures, a panel report is adopted automatically unless there is a consensus of members opposing adoption.

4/

A request for consultations is the first formal step toward the formation of a panel in the WTO’s integrated dispute-settlement system.

5/

Title VII of the 1988 Omnibus Trade and Competitiveness Act requires the USTR to submit a yearly report to Congress identifying countries that: (i) are signatories to the GATT Government Procurement Code and are in violation of their obligations; and (ii) signatories and non-signatories to the Code that show a significant and persistent pattern or practice of discrimination in government procurement against the United States with identifiable harm to U.S. businesses, in cases where there are also significant purchases by the U.S. Government of products or services from that country. In those cases involving areas not covered by the Code, following a period of consultations the President is authorized to impose sanctions.

1/

Greece, Portugal, and Spain were excluded from the original Title VII sanctions, and Germany was excluded following a bilateral agreement with the United States. The U.S. sanctions exclude companies in targeted EU states from bidding on certain U.S. government procurement contracts (and contracts tendered by federally owned electrical utilities) for both goods and services.

2/

When the U.S.-EU dispute over the EC Utilities Directive was resolved in April 1993, no agreement was reached with respect to telecommunications procurement and U.S. sanctions were imposed on May 28, 1993. It was announced on June 10, 1993 that the United States had reached a bilateral agreement (the MOU) in which Germany agreed not to adopt discriminatory telecommunications practices in return for excluding Germany from U.S. sanctions.

3/

Australia was cited for alleged discriminatory practices in information technology; Brazil for discriminatory practices in the computer, software, telecommunications, and digital electronics sectors; China for nontransparent procurement practices--although progress over the last year was also noted; and Japan for discriminatory practices in the supercomputer and computer sectors.

4/

In 1993, 42 AD and 3 CVD petitions were reviewed.

5/

Suspension agreements or “price undertakings” occur when exporters subject to an AD investigation agree to cease exports to the United States within six months, or to revise their prices upward so as to eliminate the alleged dumping margin. The AD investigation is renewed if exporters violate the agreement.

1/

With the expiration of the system of steel VERs at end-March 1992, there was a surge in petitions for both AD and CVDs. In most cases, final rulings on granting duties were reached during 1993.

2/

Section 201 of the 1974 Trade Act implements Article XIX (the Safeguards Clause) of the GATT/WTO. It allows emergency protection, on a nondiscriminatory (MFN) basis, to a domestic industry found to be seriously injured by imports.

3/

Section 301 of the Trade Act of 1974, as amended, may be applied to enforce U.S. rights under bilateral and multilateral trade agreements, and to respond to unreasonable, unjustifiable, or discriminatory foreign government practices that burden or restrict U.S. commerce. Under the “special 301” provision of the 1988 Trade Act, the USTR must identify those countries that deny adequate and effective protection of intellectual property rights, or deny fair and equitable market access for persons that rely on intellectual property protection.

4/

The President reinstated by executive order the “super 301” provision of the 1988 Trade Act on March 3, 1994. The original super 301 had expired in 1990. The reinstated super 301 procedure grants discretion to the USTR that was not available under the original version. It also contains an “early warning” provision intended to encourage negotiations before a country is designated as a priority foreign country and a Section 301 investigation begins.

5/

Identification as a “priority foreign country” requires the initiation of a Section 301 investigation within 30 days unless the USTR determines that certain special circumstances prevail.

6/

The priority watch list for 1995 includes Brazil, the EU, Greece, India, Japan, Korea, Saudi Arabia, and Turkey.

1/

Placement on the “priority watch list” or the “watch list” signals that problems exist regarding the protection or enforcement of intellectual property rights or market access for persons relying on intellectual property rights protection.

1/

Under Chapter 1 of Title III of the Trade Act of 1974, as amended (Sections 301 through 310), if the USTR finds a foreign practice to be “unjustifiable” and it also burdens or restricts U.S. commerce, all appropriate and feasible action must be taken to eliminate that practice. However, if the USTR determines that a practice is “unreasonable” or “discriminatory,” the USTR has discretion over whether to take action.

2/

The United States began withholding liquidation of entries on the targeted Japanese vehicles from May 20, 1995 as the threatened tariffs, if imposed, were to be applied retroactively to that date. This implies that U.S. importers of targeted Japanese luxury autos were faced with a contingent liability from May 20 until a decision on sanctions was reached.

3/

Because Japan’s request for consultations was made on an “urgent” basis (pursuant to paragraph 8, Article 4 of the Uruguay Round Understanding on Dispute Settlement), this required the parties to enter into discussions within 10 days from the date of the request. If the consultations failed to settle the dispute within 20 days from the request, the complaining party may have requested the establishment of a panel. Also, in cases of urgency, if a panel had been formed, a decision would have been required within three months, rather than six months as in standard cases. (See Article 12.7 of the Uruguay Round Agreement on Dispute Settlement.)

4/

See, for example, the comments attributed to Mr. Jeffrey Garten, Undersecretary of Commerce for International Trade, reported in the International Trade Reporter, Vol. 12, No. 22, p. 921, May 31, 1995. Also see the discussion in Inside U.S. Trade, Vol. 13(23), June 23, 1995, p. 3.

1/

Under Japanese regulations, any repair to “critical parts” had to be performed by certified garages, which the United States alleged were likely to have ties to Japanese auto manufacturers. The Government of Japan agreed (i) to engage in a one-year review of the critical parts list with the goal of deregulating any parts that are not central to health and safety concerns; (ii) to deregulate struts, shocks, power steering, and trailer hitches immediately; (iii) to a petition procedure to request that a critical part be removed from the list; and (iv) to issue regulations within about one year to establish a “specialized certified garage” system in which a garage may be authorized to repair any combination of vehicle systems on the critical parts list (e.g., mufflers, brakes). The Government of Japan also agreed to reduce the required number of government approved mechanics from three to two for “designated” garages, and from two to one for “certified” garages.

2/

The Japanese Government would also conduct a survey to determine how many and which Japanese dealers were interested in selling foreign vehicles and would use the results of that survey to facilitate joint dealerships.

3/

Both governments will review periodically a detailed set of quantitative and qualitative criteria to assess implementation of the agreement.

1/

Executive Board Decision No. 144-(52/51) provides for a special procedure as an exception to Rule H-1 in the case of exchange restrictions imposed for the preservation of national or international security.

United States: Background Papers
Author: International Monetary Fund