A. Tackling Restrictive Trade Regimes

9. Despite significant gains in trade liberalization over past decades there is a sizable “unfinished agenda.” Table 1 provides a perspective on how trade regimes for merchandise trade have evolved between 1997 and 2004, as measured by regional averages as well as for the ten most restrictive economies in each region. The Fund’s advice in this area is premised on the voluminous theoretical and empirical literature in support of trade liberalization, which suggests that trade restrictions result in the misallocation of resources, constrain private sector- and export-led growth, and can lead to entrenched corruption and poor governance. And while the direct link between trade and the income of the poor continues to be debated, to the extent that trade reform promotes growth, it can make important contributions to poverty reduction.⁷ Political economy or fiscal revenue considerations can, of course, dictate temporary deviations from standard advice (as set out in Annex II), and Fund missions have tended to be sensitive to such constraints.

Table 1.

Trade Restrictiveness Index (TRI) Ratings and Average Tariffs by Region¹

Source: Trade Policy Information Database.

¹The first columns under each heading represent totals for the region as a whole; the second (in italics) represents the average for the ten countries with the most restrictive regimes in each region.

²The TRI, which is a synthetic index of both tariff and NTBs, rates countries on a scale of 1 to 10, with 10 the most restrictive. For a description, see the companion paper, Review of the IMF’s Trade Restrictiveness Index, SM/05/57. See also paragraph 7 above.

Table 1.

Trade Restrictiveness Index (TRI) Ratings and Average Tariffs by Region¹

	1997				2004
	Simple Average Tariff (in percent)		TRI Rating2		Simple Average Tariff (in percent)		TRI Rating2
	All countries	Ten most restrictive	All countries	Ten most restrictive	All countries	Ten most restrictive	All countries	Ten most restrictive
AFR	22	32	5.9	9.1	17	26	4.2	6.8
APD	14	26	4.9	7.3	11	21	4.1	6.6
EUR	11	16	4.2	5.8	7	11	3.8	4.7
MCD	17	30	5.4	8.8	12	23	4.0	7.0
WHD	13	18	4.6	6.2	12	18	4.1	5.5

Source: Trade Policy Information Database.

¹The first columns under each heading represent totals for the region as a whole; the second (in italics) represents the average for the ten countries with the most restrictive regimes in each region.

²The TRI, which is a synthetic index of both tariff and NTBs, rates countries on a scale of 1 to 10, with 10 the most restrictive. For a description, see the companion paper, Review of the IMF’s Trade Restrictiveness Index, SM/05/57. See also paragraph 7 above.

View Table

Table 1.

Trade Restrictiveness Index (TRI) Ratings and Average Tariffs by Region¹

	1997				2004
	Simple Average Tariff (in percent)		TRI Rating2		Simple Average Tariff (in percent)		TRI Rating2
	All countries	Ten most restrictive	All countries	Ten most restrictive	All countries	Ten most restrictive	All countries	Ten most restrictive
AFR	22	32	5.9	9.1	17	26	4.2	6.8
APD	14	26	4.9	7.3	11	21	4.1	6.6
EUR	11	16	4.2	5.8	7	11	3.8	4.7
MCD	17	30	5.4	8.8	12	23	4.0	7.0
WHD	13	18	4.6	6.2	12	18	4.1	5.5

Source: Trade Policy Information Database.

¹The first columns under each heading represent totals for the region as a whole; the second (in italics) represents the average for the ten countries with the most restrictive regimes in each region.

²The TRI, which is a synthetic index of both tariff and NTBs, rates countries on a scale of 1 to 10, with 10 the most restrictive. For a description, see the companion paper, Review of the IMF’s Trade Restrictiveness Index, SM/05/57. See also paragraph 7 above.

10. Given the diversity of the Fund’s membership, tackling impediments to trade entails differences in emphasis for different groups.⁸ As shown in Table 1, while trade barriers have declined across regions, they remain high in a subset of countries which thus face the challenge of broad-ranging trade reforms. In countries with more open overall trade regimes, challenges tend to be more issue-specific. Key measures might include moving toward relatively low and uniform tariffs, limiting exemptions, and eliminating NTBs to trade and restrictions on exports. Developing countries are often concerned about the implications of tariff reforms for government revenues. Designing a trade liberalization strategy that avoids government revenue losses can be a challenge, as many countries have few other tax instruments to rely on.⁹ For the large trading nations, in addition to the cost to themselves of restricting trade, the spillovers of their policies on the global trading system—and especially on poorer countries—can matter greatly and should help inform the reform agenda. Although WTO negotiations will, if successful, curtail some of the more distortionary subsidies, peak tariffs and tariff escalation, policies with significant third-country impact are bound to remain prominent (including contingent forms of protection, such as safeguard and antidumping action).

11. In many low-income countries, PRSPs should represent a focal point for policy and assistance towards growth and external sustainability, yet few contain a coherent strategy for trade. This is unfortunate, not least since the participatory nature of PRSPs could allow the authorities to develop public support for trade reforms and facilitate their implementation by linking policy actions with budgetary resources and donor support. The trade content of PRSPs shows a shift in countries’ trade-related priorities toward trade facilitation and regional and global integration strategies. However, the discussion often appears incomplete. For instance, as shown in Table 2, PRSPs in several of the countries with moderately restrictive trade regimes do not discuss reforms to tariffs or NTBs (and where they do, they often lack substance). Policy coherence in some PRSPs seems tenuous, as they simultaneously advocate export-promotion and import-substitution policies. The discussion of integration strategies tends to lack specifics and practical measures. And there is little analysis of the poverty implications of trade policies, or of their link to growth.¹⁰

Table 2.

Trade Policy Content of PRSPs as of End-2004

(38 countries covered)

¹Trade restrictiveness index 1-4 liberal, 5-6 moderately restrictive, 7-10 restrictive

²Excludes discussion of trade facilitation and bilateral/regional integration.

Table 2.

Trade Policy Content of PRSPs as of End-2004

(38 countries covered)

Nature of Trade Regime1	Number of Countries	Discussion of trade policy regime2
Liberal	24	9
Moderately restrictive	11	5
Restrictive	3	3

¹Trade restrictiveness index 1-4 liberal, 5-6 moderately restrictive, 7-10 restrictive

²Excludes discussion of trade facilitation and bilateral/regional integration.

View Table

Table 2.

Trade Policy Content of PRSPs as of End-2004

(38 countries covered)

Nature of Trade Regime1	Number of Countries	Discussion of trade policy regime2
Liberal	24	9
Moderately restrictive	11	5
Restrictive	3	3

¹Trade restrictiveness index 1-4 liberal, 5-6 moderately restrictive, 7-10 restrictive

²Excludes discussion of trade facilitation and bilateral/regional integration.

12. An increasingly prominent part of the trade policy debate is the liberalization of international trade in services. Restrictions on services trade are not reflected in Table 1, and indeed, there has been a dearth of readily available information in this area. Yet, services are an increasingly important component of world trade, and many services are meshed closely with the production and trade of merchandise. Their availability, cost and quality can be key determinants of competitiveness. Available estimates suggest that the tariff-equivalent of protection in services sectors can be high (Table 3). The liberalization of services trade has tended to proceed on a unilateral basis, but since the 1990s, services have also become a subject of multilateral and regional trade negotiations.¹¹

Table 3.

Estimates of the Impact of Protection in Various Services Sectors

Source: OECD (2004), based on simulations with the GTAP model.

Table 3.

Estimates of the Impact of Protection in Various Services Sectors

	Direct Impact on Service Price of Trade and Regulatory Restrictions (in percent)
Foreign providers in:	OECD	Brazil	Russia	Thailand	Average Developing Countries
	Banking	3	18	7	11	3
Distribution services	3	2	4	6	2
Electricity supply	12	16	17	11	14
Telecommunications	6	4	7	19	31
Maritime transport	2	9	11	4	5
Professional services	6	9	3	4	6

Source: OECD (2004), based on simulations with the GTAP model.

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Table 3.

Estimates of the Impact of Protection in Various Services Sectors

	Direct Impact on Service Price of Trade and Regulatory Restrictions (in percent)
Foreign providers in:	OECD	Brazil	Russia	Thailand	Average Developing Countries
	Banking	3	18	7	11	3
Distribution services	3	2	4	6	2
Electricity supply	12	16	17	11	14
Telecommunications	6	4	7	19	31
Maritime transport	2	9	11	4	5
Professional services	6	9	3	4	6

Source: OECD (2004), based on simulations with the GTAP model.

13. The challenge of addressing restrictive trade policies unilaterally is likely to retain much of its relevance—across all income groups. Commitments on most-favored-nation (MFN) tariffs in the Doha Round may set the stage for certain reductions in applied tariffs. But the combination of special and differential treatment clauses and large gaps between bound and applied rates is likely to limit the impact on most developing countries, and liberalization outside the WTO framework will remain a key driver of openness, including for services.¹²

B. The Multilateral Reform Agenda

14. The WTO’s Doha Development Agenda (DDA) was established in December 2001, with a broad mandate to liberalize trade. The Doha Round was tasked with opening markets effectively across the whole spectrum of tradable goods and services, to strengthen the rules of the multilateral trading system, and to address the concerns of developing countries, including capacity-building needs. A suitably ambitious Doha Round is expected to boost global incomes and growth—as have previous rounds under the GATT—and integrate poorer developing countries more deeply with the global economy.¹³ Systemically, it would help to further entrench the principles of multilateralism.

15. The success of the Doha Round is clearly not yet assured. While a framework for negotiating modalities was agreed in August 2004, pro-Doha lobbies in key industrial countries remain weak, and a segment of the developing world is fundamentally unconvinced of the benefits of multilateral liberalization. Time, however, is running short. The year 2007 is considered by many to represent the ultimate deadline for the Round since the U.S. administration may find it hard to renew its negotiating authority under the Trade Promotion Act. The international community’s declared fight on poverty is a further cause for urgency. There is a close correspondence between key items on the Doha agenda and some of the Millennium Development Goals (MDGs), which set, inter alia, operational objectives for industrial country trade liberalization, as part of a global partnership aimed at eradicating extreme poverty and promoting sustainable development. The implementation of trade-related MDG targets has so far been hampered by slow progress in the multilateral trade negotiations.

16. While promising considerable benefits overall, the Doha Round has raised concerns among some developing countries that their balance of payments might suffer in the short term. The typically narrow export base and heavy reliance on a few key commodities make developing countries particularly vulnerable to changes in the trade policies of their partner countries. Three types of concerns have been prominent in recent years: the erosion of market access preferences as a result of MFN liberalization; the impact of the phasing-out of textiles quotas in early 2005; and changes in the food terms of trade following a reduction in farm subsidies. Figure 1 provides a perspective on preference erosion, whose effects are concentrated on a small number of countries. The end of textiles quotas is potentially quite disruptive for countries whose export markets were sheltered by the quotas from more competitive suppliers (although textiles producers in some countries have, over recent months, demonstrated the ability to adjust to the new circumstances). And world market prices for certain agricultural commodities may rise as a result of trade reforms, increasing the bills of net food importers.

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Percent Change in Average Export Unit Values Following a 40 Percent Cut in Preference Margins

(in percent of exports in 2001; export supply elasticity = 1)

Citation: Policy Papers 2005, 035; 10.5089/9781498331876.007.A001

Sources: Alexandraki and Lankes, IMF Working Paper:WP/04/169. Subramanian, paper for WTO: WT/TF/COH/14.

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C. Regional Integration Initiatives

17. Regional trade arrangements, in the form of both multi-country and bilateral trade arrangements, have proliferated in recent years. As of November, 2004, 150 RTAs had been notified to the GATT/WTO and were in force, with 100 entering into force since January 1, 1995 when the WTO was established (Figure 2, which also includes inactive RTAs).¹⁴ The nature of these arrangements varies greatly, and many—including recent North-South agreements—have gone beyond the standard template for free trade agreements in earlier decades by including provisions on services, investment, labor and environment regulations, and cooperation in domestic policies.

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Evolution of Regional Trade Agreements, 1948–2002

(Number of RTAs notified to GATT/WTO)

Citation: Policy Papers 2005, 035; 10.5089/9781498331876.007.A001

Source: WTO Secretariat.

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18. The proliferation of RTAs reflects their growing acceptance by countries in virtually every income group. Proponents present a variety of arguments in favor of RTAs, including trade creation, the prospect of deeper economic integration through “WTO-plus” commitments, and political and security considerations that do not lend themselves easily to cost-benefit assessments on purely economic grounds. Furthermore, as the number of RTAs grows, countries fear being left on a weaker competitive footing if they do not themselves enter into such agreements.

19. Nonetheless, most of the economics profession has been skeptical. Trade preferences for regional partners can lead to intra-regional trade replacing less efficient national production (trade creation), but also to the replacement of more competitive imports from third countries (trade diversion). Trade diversion can easily dominate, such as when MFN barriers are high. Empirical studies cast doubt on whether RTAs improve global welfare. Figure 3, which compares the potential benefits under a particular scenario from one recent study, illustrates how outcomes under multilateral and preferential liberalization can differ significantly. Most RTAs contain numerous exemptions for sensitive products; restrictive rules of origin and competing standards in overlapping agreements raise transaction costs; their negotiation absorbs administrative capacity that is scarce in poor countries and competes with the Doha Round; and certain non-trade aspects of RTAs are of dubious value for developing countries. Above all, RTAs could lower support for multilateral liberalization by making traders comfortable with the status quo.

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Bilateral Agreements vs. Global Trade Reform

(Percent change in real incomes in 2015 compared to baseline)

Citation: Policy Papers 2005, 035; 10.5089/9781498331876.007.A001

Source: World Bank, Global Economic Prospects 2005.Note: Results are from general equilibrium simulations with the GTAP model. The darker bars represent real income changes in the respective region in a situation in which all countries agree bilateral preferential trade terms with the Quad countries (Canada, EU, Japan, and the United States), while the lighter bars report results for multilateral (global) liberalization. Note that the value for bilateral agreements with middle-income countries is zero.

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20. Since new RTAs are likely to be agreed, their design is critically important. WTO rules require that countries forming an RTA not raise trade barriers against outside countries, and that the RTA eliminate internal trade barriers on “substantially all trade.” These rules, however, have proven to be too vague to be effectively enforced, and as yet relatively little attention has been given to strengthening them. A practical issue is how to maximize the potential benefits of RTAs while limiting potential costs. Best practices in the design of RTAs have recently been reviewed by the World Bank in its Global Economic Prospects 2005.

A. Surveillance

General policy

22. The Fund’s policy on trade-related surveillance has been most recently reviewed by the Executive Board in the context of the 2004 Biennial Surveillance Review.^{15 16} Directors reiterated that, beyond the core issues in surveillance, the selection of topics in it should be based on macroeconomic relevance. Directors also called for the inclusion in Article IV consultations for systemically important countries, of conditions and policies affecting the global or regional economic outlook. Specifically, they encouraged a more “selective coverage of trade matters, focused on issues that have an important influence on stability and growth prospects.”

23. Within this framework, there remains a need for judgment in selecting particular trade policy issues for discussion. Drawing on the identification of trade issues in Section II, Table 4 sets out key considerations in operationalizing this framework. One could, of course, attempt to create more mechanical rules based on numerical benchmarks; however, that would reduce often diverse circumstances to a single dimension and limit the necessary room for judgment. Still, numerical benchmarks can provide helpful markers, for instance in judging whether the trade policy environment is so distorted as to warrant a deeper analysis and discussion in the staff report, or whether a country should be considered to be “vulnerable” to external trade policy shocks.

Table 4.

Coverage of Trade Issues in Article IV Staff Reports—Considerations

Table 4.

Coverage of Trade Issues in Article IV Staff Reports—Considerations

	Trade issue	When to cover in staff report?
Reform of trade regime
	Merchandise trade	Decision to report based on degree of restrictiveness/distortion of trade regime and importance of policy changes during reporting period; staff could use benchmark levels, e.g., of average tariff rates or an index of the trade policy stance, to determine a “presumption” of coverage.
	Services trade	In principle as for merchandise trade reform; special attention to financial services trade, and to trade negotiations at the regional and global level that might affect the regulatory framework for services.
	Fiscal aspects and customs administration	Criteria as for other fiscal revenue sources; cover if significant enough to require adjustment in other revenues or in public expenditure.Spill-over effectsCover where measurable impact on world prices or exports of other countries; prima facie evidence includes prominence in trade disputes or negotiations.
Multilateral agenda
	WTO negotiations	Report on initiatives in which country plays a central role, either as a proponent or defensively; report on overall strategy if country is a leading player in the multilateral negotiations.
	Macro vulnerabilities	Presumption that should be covered if country meets certain criteria related to vulnerability to preference erosion, food terms of trade changes, or the expiry of textiles quotas.17
Regional trade initiatives		No easy benchmarks, but presumption that should report where trade creation/diversion is significant, the agreement entails regulatory changes in areas of importance from a growth/stability perspective, or there are significant changes in institutions (e.g. the ability of a country to set tariffs or collect customs duties).

View Table

Table 4.

Coverage of Trade Issues in Article IV Staff Reports—Considerations

	Trade issue	When to cover in staff report?
Reform of trade regime
	Merchandise trade	Decision to report based on degree of restrictiveness/distortion of trade regime and importance of policy changes during reporting period; staff could use benchmark levels, e.g., of average tariff rates or an index of the trade policy stance, to determine a “presumption” of coverage.
	Services trade	In principle as for merchandise trade reform; special attention to financial services trade, and to trade negotiations at the regional and global level that might affect the regulatory framework for services.
	Fiscal aspects and customs administration	Criteria as for other fiscal revenue sources; cover if significant enough to require adjustment in other revenues or in public expenditure.Spill-over effectsCover where measurable impact on world prices or exports of other countries; prima facie evidence includes prominence in trade disputes or negotiations.
Multilateral agenda
	WTO negotiations	Report on initiatives in which country plays a central role, either as a proponent or defensively; report on overall strategy if country is a leading player in the multilateral negotiations.
	Macro vulnerabilities	Presumption that should be covered if country meets certain criteria related to vulnerability to preference erosion, food terms of trade changes, or the expiry of textiles quotas.17
Regional trade initiatives		No easy benchmarks, but presumption that should report where trade creation/diversion is significant, the agreement entails regulatory changes in areas of importance from a growth/stability perspective, or there are significant changes in institutions (e.g. the ability of a country to set tariffs or collect customs duties).

24. Apart from deciding whether to cover particular trade matters in surveillance, the question arises at what level—bilateral, regional or multilateral—to cover them. As in other policy areas, a dialogue on regional and global issues is important where the cross-country experience can inform policy recommendations, or institutions at the regional or global level influence the policy development in individual countries. In addition, governments have, in the context of customs and economic unions, decided to pool sovereignty over certain trade and regulatory policy decisions. It would be logical to conduct a policy dialogue at the level where the relevant trade decisions are taken.

Bilateral surveillance

25. One way to assess the coverage of trade issues in bilateral surveillance is to examine whether it has been consistent with the macrorelevance criteria. For purposes of this review, Article IV staff reports issued in 2004 were assessed for the adequacy of trade content. The judgment of “adequacy” was based on the list of considerations set out in Table 4. This portion of the review assessed: (i) whether coverage of a particular trade area was warranted, and (ii) whether a particular trade area was indeed covered in the report. Regarding the coverage of reforms to the merchandise trade regime, coverage was judged “adequate” either if staff reports highlighted reform needs for countries with a restrictive trade regime, or if they did not discuss trade reforms in countries with open trade regimes. Conversely, coverage may be considered “excessive” if trade policy was discussed for countries with relatively open trade regimes without providing a justification from a broader economic perspective, or “insufficient” if it was not discussed but should have been in view of the distortionary trade regime.¹⁸ Equivalent criteria were applied to other trade issues. Results are reported in Table 5.

Table 5.

Coverage of Trade Issues in Recent Article IV Staff Reports

Source: Based on review of 108 Article IV staff reports issued in 2004.

¹Based on considerations in Table 4.

Table 5.

Coverage of Trade Issues in Recent Article IV Staff Reports

		Coverage Warranted1		Coverage Unnecessary1
		Covered	Not Covered	Covered	Not Covered
		(in percent of reports reviewed)
Reform of trade regime		48.6	10.3	15.0	26.2
	High income countries	30.0	0.0	20.0	50.0
	Middle income countries	50.0	20.8	6.3	22.9
	Low income countries	65.5	3.4	24.1	6.9
Multilateral & regional agenda		40.8	12.2	7.0	39.9
	High income countries	48.3	10.0	16.7	25.0
	Middle income countries	41.7	10.4	3.1	44.8
	Low income countries	31.6	17.5	3.54	7.4
Macro vulnerability		9.0	14.0	0.6	76.0
	High income countries	0.0	11.1	1.18	7.8
	Middle income countries	11.9	17.5	0.7	69.9
	Low income countries	13.8	11.5	0.0	74.7

Source: Based on review of 108 Article IV staff reports issued in 2004.

¹Based on considerations in Table 4.

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Table 5.

Coverage of Trade Issues in Recent Article IV Staff Reports

		Coverage Warranted1		Coverage Unnecessary1
		Covered	Not Covered	Covered	Not Covered
		(in percent of reports reviewed)
Reform of trade regime		48.6	10.3	15.0	26.2
	High income countries	30.0	0.0	20.0	50.0
	Middle income countries	50.0	20.8	6.3	22.9
	Low income countries	65.5	3.4	24.1	6.9
Multilateral & regional agenda		40.8	12.2	7.0	39.9
	High income countries	48.3	10.0	16.7	25.0
	Middle income countries	41.7	10.4	3.1	44.8
	Low income countries	31.6	17.5	3.54	7.4
Macro vulnerability		9.0	14.0	0.6	76.0
	High income countries	0.0	11.1	1.18	7.8
	Middle income countries	11.9	17.5	0.7	69.9
	Low income countries	13.8	11.5	0.0	74.7

Source: Based on review of 108 Article IV staff reports issued in 2004.

¹Based on considerations in Table 4.

26. While this approach reveals some basic patterns, it is a coarse filter. Since it represents an ex post application of informal considerations for selectivity, the results cannot be taken to represent an assessment of Fund policy implementation. More importantly, the review offers no insight into the quality of the trade discussions in staff reports. A particular analysis might be wrong in substance but could still be judged “adequate” in terms of the criteria of the present review. The content of Fund advice in Article IV staff reports is briefly summarized in Box 1, and Annex II presents existing staff guidance in this area.

27. This document review indicates that, in around three-quarters of the cases, trade issues were adequately covered in Article IV staff reports. Nevertheless, it also reveals distinct patterns in coverage across country groups, and scope to fine-tune coverage to achieve still greater selectivity. The considerations set out in Table 4 could be helpful in this regard for country missions. The results are consistent with the 2004 Biennial Surveillance Review but offer additional perspectives.

28. The share of reporting judged to be adequate ranged from 70 to 80 percent for the coverage of merchandise trade regimes and related reform needs. In the remaining cases the coverage of trade issues was out of line with the presumptive macrorelevance of the problems. While for high-income countries the percentage of reporting was not “adequate” in only around 20 percent of cases, it was very significant—almost 40 percent—if measured as a proportion of cases in which these reforms received coverage in staff reports. The proportion for low-income countries was similar. In virtually all these cases, the judgment of the review was that the discussion did not meet the macro-relevance test and should have been dropped. For middle-income countries, in turn, the most prominent problem was the converse—in 30 percent of cases in which reforms should have been covered, they were not. While excessive coverage would seem generally to be a question of differences in approach that might be addressed through common standards and criteria, insufficient coverage also reflects a preponderance of more immediate vulnerabilities (in the face of document size limits and resource constraints), and the absence of specialized knowledge and information that may be required to engage with country authorities in any depth. Steps that might help in tackling the latter problem could include selected training activities, and intensifying the knowledge transfer from other institutions, in particular the World Bank (see Section IV).

29. Coverage of other trade issues was generally appropriate, with overall margins of “adequacy” higher than for reforms of the merchandise trade regime. Nevertheless, across income groups, trade-related vulnerabilities (both fiscal and balance of payments) were frequently not covered when they might have been, especially in light of the expiry of textiles quotas and potential tariff revenue losses from regional trade arrangements in countries heavily dependent on such revenue.¹⁹ Since these vulnerabilities are linked to processes of liberalization that are underway or forthcoming, their importance for the Fund is set to rise over the coming period. Again, some of the problem may be due to insufficient information and skills, and existing internal training and dissemination activities—including seminars and country-specific analytical support—should continue.

30. While limited to the “Quad” countries (see Box 1), the discussion of policy spillovers seemed largely adequate. A separate review of trends over the period 2000–04 suggests that the coverage of trade issues in general, and specifically of the “spillover effects” of Quad policies, had strengthened considerably, in both staff reports and selected issues papers—the spillover perspective was still unusual at the start of that period.²⁰ Reporting on the authorities’ positions and key initiatives in the Doha Round was also appropriate for this group of countries. At the same time, there was no discussion of policy spillovers for large developing countries, and coverage of positions taken in multilateral talks was often thin. Yet, the trade policies of several non-OECD countries, such as Brazil, China, South Africa and Russia, can matter greatly either globally or for neighboring countries. The analysis of the systemic impact of trade policies could thus be expanded to cover a broader range of countries.

31. Attention to trade restrictions or reforms in services was virtually absent throughout.²¹ Service sector reform generally has attracted attention in the Fund’s work, but not trade in services per se.²² There are two reasons why the Fund may need to consider this issue more systematically. First, because of the economic distortions associated with restrictive trade regimes in services, as discussed above. And second, because of a growing overlap between services trade negotiations and traditional areas of Fund advice. For example, services trade negotiations can influence the pace and sequencing of financial sector liberalization and thus financial vulnerability (through market access and other measures), shape standards of regulatory transparency, and influence capital account regimes (e.g., transfers associated with cross-border provision of financial services or foreign establishment). The weak coverage in this area may be largely due to the dearth of available information on services restrictions and their economic impact. Similarly, services trade negotiations tend to be opaque and the bottom line in terms of liberalization frequently hard to assess. Both of these problems also made it difficult during the review to judge whether there should have been coverage in individual cases. Nevertheless, work on services trade is intensifying, especially at the OECD and the World Bank, and the information is likely to improve. This, together with improved dissemination, should support appropriate attention to the issue in Fund surveillance going forward.

Trade coverage in low-income countries—the Integrated Framework

32. The provision of trade diagnostics and advice in the LICs has also followed an additional track, separate from the Article IV process. The Fund has coordinated its trade policy work in LICs with other international partners, in a joint effort to promote the mainstreaming of trade in poverty reduction strategies and trade-related capacity building. At the core of this agenda has been the Fund’s involvement in the Integrated Framework (IF). Substantive Fund input into the IF process has been principally through the Diagnostic Trade Integration Studies (DTIS). The DTIS, prepared for LDCs under the leadership of the World Bank, include macroeconomic sections usually contributed by Fund staff, as well as detailed reviews of the trade environment that set out priority policies and projects for the authorities and donors. As of end-2004, some 14 DTIS had been finalized since 2002, and 14 more were in the pipeline.²³ By design, the IF and PRSP processes are closely integrated at the national level, and the DTIS, which are discussed at participatory national workshops, provide an opportunity to help “mainstream” trade policy into poverty reduction strategies. Overall, this is a relatively low-resource activity for the Fund which exploits nicely the complementary strengths of the Bretton Woods, UN institutions, and the WTO, and which is firmly rooted in a participatory and country-owned philosophy of development.

33. In practice, however, and despite progress, a recent review of the IF process concluded that national ownership and the link to PRSPs remain tenuous.²⁴ This was evident from the discussion in Section II (Table 2). An important part of the explanation is that the DTIS are relatively new—the first ones were finalized at the end of 2001, and most are less than two years old—and PRSP production follows its own cycle. Future PRSPs may better reflect the results of the IF. Furthermore, non-LDC low-income countries are not covered by the IF. Internally, the IF continues to struggle with capacity bottlenecks, in-country coordination and, especially, donor follow-up. More consistent flagging of trade reform needs in Joint Staff Assessment Notes (JSANs) would be helpful, but of course it is a matter for countries to decide whether to include such policies in their PRSPs. The low visibility accorded to trade in past PRSPs should be seen in the light of the broader weaknesses in the medium-term orientation of PRSPs, an issue that will be examined in the 2005 PRSP Review.²⁵

Regional perspective

34. The Fund’s regional dialogue on trade issues is less extensive than at the bilateral level, but has gained some momentum in recent years. The focus of this work has been RTAs and other regional integration initiatives. Regular consultations with regional trade bodies on the basis of staff reports to the Board have been undertaken with CEMAC and WAEMU (periodically since 1998), the European Union (annually since 2000), and CARICOM (since 2004). While focused on currency issues, these have also covered regional trade policies. The EU consultations take place formally under Article IV of the Fund’s Articles of Agreement, and a similar approach is envisaged for CEMAC and WAEMU.²⁶ In addition to these direct consultations, however, the examination of trade issues at the regional level has taken a number of other forms, reflecting some experimentation on the part of staff. During 2004 alone, trade and related issues have been central in three regional workshops with officials, other initiatives at the regional level (such as CIS-7 and Central Asian Regional Economic Cooperation), and the Sub-Saharan African and Middle East and North Africa Regional Economic Outlooks.

35. Conducting a review of each RTA from a regional perspective would not be needed and clearly beyond the Fund’s capabilities, but would be a necessary supplement to bilateral discussions with members in cases where trade-policy decision-making is transferred to the regional level. Apart from the European Union, CEMAC and WAEMU, this transfer has occurred or is scheduled to begin in the Andean Community, CARICOM, East African Community, Gulf Cooperation Council, Mercosur, and SACU, as well as plans for COMESA, SADC, and the Eurasian Economic Community, to varying degrees. Once all these agreements are fully implemented, they will cover a total of over 100 countries (Table 6). Depending on the extent to which these institutions replace decision-making at the national level, this constellation could create a large “blind spot” in surveillance in some regions with fairly restrictive trade regimes, or whose impact on international trade and clout in global trade negotiations has been growing. As a first step in exploring modalities for addressing this concern, a practical, low-cost, approach could be for the staff to consult routinely with the secretariat of the regional trade initiative on the occasion of an Article IV mission to the country in which the secretariat is located. At the same time, judgment will need to be exercised at the bilateral level on whether coverage of trade policies could be deemphasized, taking into account the nature of decision-making at the center and the engagement of individual members in trade policy formulation.

Table 6.

Existing and Planned Customs Unions and Economic Communities

Sources: Article IV staff reports and staff estimates.

Table 6.

Existing and Planned Customs Unions and Economic Communities

	Number of Members	Average Tariff
Andean Community (ANCOM)	5	11.2
Caribbean Community and Common Market (CARICOM)	15	15.2
Central African Economic and Monetary Community (CEMAC)	6	19.5
Common Market for Eastern and Southern Africa (COMESA)	20	17.2
East African Community (EAC)	3	19.6
Eurasian Economic Community (EAEC)	5	8.7
European Union (EU)	25	6.5
Gulf Cooperation Council (GCC)	6	5.0
Southern African Customs Union (SACU)	5	11.4
Southern African Development Community (SADC)	14	14.3
Southern Cone Common Market (Mercosur)	4	10.6
West African Economic and Monetary Union (WAEMU)	8	14.6

Sources: Article IV staff reports and staff estimates.

View Table

Table 6.

Existing and Planned Customs Unions and Economic Communities

	Number of Members	Average Tariff
Andean Community (ANCOM)	5	11.2
Caribbean Community and Common Market (CARICOM)	15	15.2
Central African Economic and Monetary Community (CEMAC)	6	19.5
Common Market for Eastern and Southern Africa (COMESA)	20	17.2
East African Community (EAC)	3	19.6
Eurasian Economic Community (EAEC)	5	8.7
European Union (EU)	25	6.5
Gulf Cooperation Council (GCC)	6	5.0
Southern African Customs Union (SACU)	5	11.4
Southern African Development Community (SADC)	14	14.3
Southern Cone Common Market (Mercosur)	4	10.6
West African Economic and Monetary Union (WAEMU)	8	14.6

Sources: Article IV staff reports and staff estimates.

36. Regionalism is, of course, a much broader phenomenon and the Fund may have to form a view on RTAs—or aspects of RTAs—well before they are negotiated. As has been typical of the Fund’s advice in the past, the primary emphasis should naturally remain on the merits of multilateral trade liberalization, as the economics in support of such an approach are far more compelling than those in favor of RTAs. Existing staff guidance on trade policy, including RTAs, is summarized in Annex II. Nevertheless, given the increasingly central role that RTAs are playing in many countries’ development strategies, the Fund should be prepared to help members assess the potential costs and benefits of these arrangements in areas of Fund expertise, such as fiscal implications, and provisions on investment and financial services. The Fund may also want to encourage a set of “best practices” for RTAs—including comprehensive coverage, a transparent approach to rules and standards, and an outward orientation entailing a reduction in the common external tariffs. A Board seminar is scheduled for the Spring of 2005 to review the Fund’s approach toward RTAs.

Multilateral “Surveillance”

37. Fund surveillance of trade issues at the multilateral level has taken two main forms. First, the World Economic Outlook (WEO). Trade topics covered in the WEO have touched on a broad segment of the global trade agenda in recent years (Table 7). These include issues surrounding the WTO’s Doha Round, the impact on the global economy of China’s emergence as a trade power, and an analysis of the relationship between trade and financial integration.

Table 7.

Recent Coverage of Trade Issues in the WEO

Source: World Economic Outlook, various issues.

Table 7.

Recent Coverage of Trade Issues in the WEO

Topic	WEO Edition
Critics of a New Trade Round	October 2001
How Do Industrial Country Agricultural Policies Affect Developing Countries?	September 2002
The Gravity Model of International Trade	September 2002
Vertical Specialization in the Global Economy	September 2002
Trade and Growth	September 2002
Trade and Financial Integration	September 2002
China's Emergence and its Impact on the Global Economy	April 2004
Quantifying the International Impact of China's WTO Accession?	April 2004
Risks to the Multilateral Trading System	April 2004

Source: World Economic Outlook, various issues.

View Table

Table 7.

Recent Coverage of Trade Issues in the WEO

Topic	WEO Edition
Critics of a New Trade Round	October 2001
How Do Industrial Country Agricultural Policies Affect Developing Countries?	September 2002
The Gravity Model of International Trade	September 2002
Vertical Specialization in the Global Economy	September 2002
Trade and Growth	September 2002
Trade and Financial Integration	September 2002
China's Emergence and its Impact on the Global Economy	April 2004
Quantifying the International Impact of China's WTO Accession?	April 2004
Risks to the Multilateral Trading System	April 2004

Source: World Economic Outlook, various issues.

38. The second focus at the multilateral level has been work in support of the WTO’s Doha Round. Starting during the run-up to the Doha Ministerial of the WTO in late 2001, the Fund developed a range of activities in support of the Round (overview in Box 3). At the surveillance level,²⁷ these have included Board and Board Committee reviews of the issues at stake, and research papers on core IMF issues prepared for the WTO at the request of its Secretariat. Throughout this work, the Fund has underlined the importance and the benefits for its members of a timely and ambitious Doha Round agreement.

39. It is hard to define a standard against which to assess the appropriateness of the Fund’s work in this area. The engagement in support of multilateral trade reforms represents a strategic choice by the Fund, and the ultimate test of this strategy is the continuing support for it by the Fund’s governing bodies. Nevertheless, work at the multilateral level can also crucially complement bilateral surveillance where trade policies have joint and systemic effects, such as in agriculture.

B. Fund-Supported Programs

40. Trade policy has been a frequent component of Fund-supported programs and, more recently, concerns over the balance of payments impacts of certain trade policy changes have motivated the introduction of the Trade Integration Mechanism (TIM). Trends in trade-related program conditionality under Fund-supported programs since 1990 are reviewed in a companion paper (see Review of Trade Conditionality in Fund-Supported Programs, SM/05/57 Supplement 1) and this section provides only a summary of the results. Similarly, the TIM was only recently approved by the Board and the implementation experience is still short. This paper limits itself to the brief description in Box 4.

41. Trade-related conditionality is governed by the general policies on the use of Fund resources.²⁸ It is therefore subject to the standards set forth in the Guidelines on Conditionality, and in particular the requirement that the measure covered by conditionality should be of critical importance for achieving the goals of the member’s program or for monitoring the program.²⁹ Given the structural nature of many trade policies, one would expect this standard to be more often met in medium-term programs with a growth orientation than in short-term stabilization programs. Nevertheless, trade instruments can also be critical in pursuing fiscal and governance objectives (e.g., by tackling duty exemptions and customs administration).

42. What constitutes a trade measure of “critical importance” for achieving the goals of a program varies with circumstances. One key consideration is, of course, the degree to which the existing trade policies distort economic decisions, as reflected, e.g., in the extent to which a country has a relatively open or restrictive trade regime. In practice, the share of programs with tariff or NTB-related conditionality for countries that rated “5” or more restrictive on the Fund’s TRI was significantly higher than in countries rating “4” or better (Table 8).³⁰ However, while a review of empirical studies of the link between trade liberalization and growth (the program goal that would be most often associated with trade reforms) offers a preponderance of evidence in support of a positive relationship, it yields no “threshold” levels of trade restrictiveness that might guide a decision on whether specific trade reforms are “critical” for program objectives. Furthermore, individual measures that do not show up in broader indices may be sufficiently disruptive—to growth, stability or governance objectives—as to warrant being tackled under a program. As in the surveillance case, the inclusion of trade measures among the structural conditions under Fund-supported programs should be judged on a case-by-case basis.³¹

Table 8.

Incidence of Conditionality on Tariffs and NTBs in Fund Programs¹

¹Sample of 138 programs for 34 countries reviewed in companion paper: Review of Trade Condiitonality in Fund-Supported Programs, forthcoming.

Table 8.

Incidence of Conditionality on Tariffs and NTBs in Fund Programs¹

	1990-2000		2001-04
	Programs had tariff or NTB conditions		Programs had tariff or NTB conditions
	Yes	No	Yes	No
Countries/periods Rating 5 or worse on TRI	75%	25%	27%	73%
Countries/periods Rating 4 or better on TRI	50%	50%	20%	80%

¹Sample of 138 programs for 34 countries reviewed in companion paper: Review of Trade Condiitonality in Fund-Supported Programs, forthcoming.

View Table

Table 8.

Incidence of Conditionality on Tariffs and NTBs in Fund Programs¹

	1990-2000		2001-04
	Programs had tariff or NTB conditions		Programs had tariff or NTB conditions
	Yes	No	Yes	No
Countries/periods Rating 5 or worse on TRI	75%	25%	27%	73%
Countries/periods Rating 4 or better on TRI	50%	50%	20%	80%

¹Sample of 138 programs for 34 countries reviewed in companion paper: Review of Trade Condiitonality in Fund-Supported Programs, forthcoming.

43. A companion paper contains a review of patterns and trends in the nature and design of Fund-supported trade reform during 1990–2004. The review describes trade conditions across countries and programs, the types of trade reform advocated, and the implementation rate of such reforms for a sample of 34 member countries that had Fund-supported programs (Stand-By Arrangements, or arrangements under the EFF and PRGF) during this period. Consistent with earlier studies, the implementation track record of Fund trade conditionality was very good.

44. Perhaps the most striking finding was the changes in trade-related conditionality over time. The incidence of trade-related conditionality increased from 55 percent of programs with at least one condition in the pre-1995 period to 70 percent in 1998–2000, and then fell to 46 percent during 2001–04.³² The recent decline is consistent with the results for growth-oriented conditionality more generally reported in the Review of the 2002 Conditionality Guidelines (SM/05/81). Although the review does not specifically control for the quality and “intensity” of conditions, the data give no indication that these have systematically changed over time.

45. At the same time, the nature of trade-related measures shifted radically, from an initial main focus on NTBs, to tariff reforms, and more recently to reforms of customs administrations (Figure 5). As a result, while more than 60 percent of program conditions in the mid-1990s related to the traditional instruments of trade policy (tariffs and NTBs), only 10 percent—of a smaller total—did so after 2001. Customs measures were driven as often by fiscal as by trade reform considerations—where made explicit, revenue was an important motive in 53 percent of cases over the 1990-2004 period, economic efficiency and streamlining in 58 percent, and governance in 22 percent of cases.

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Trade Conditionality, by Measure

(1990–2004, in percent of total)

Citation: Policy Papers 2005, 035; 10.5089/9781498331876.007.A001

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46. These trends are associated with three developments which are hard to disentangle. First, trade liberalization in the 1990s, including in the context of Fund-supported programs, led to more open and transparent trade regimes in many developing countries, and the focus shifted toward “second generation” administrative and institutional reforms. Second, the trends reflect the clear articulation of the “critical importance” test under the Conditionality Guidelines of 2002 (preliminary guidelines on streamlining structural conditionality had been issued two years earlier). Table 8 provides some support for this proposition: even controlling for whether trade regimes were relatively open or restrictive, the incidence of tariff and NTB conditionality declined sharply during 2001–2004 compared with the period 1990-2000. A program in a country with a restrictive regime was three times more likely than one in a more open economy to contain such conditions during 1990–2000, than in 2001–2004. However, a third factor may have been at play as well, namely the Doha Round negotiations begun in 2001, and may have made governments reluctant to commit to unilateral liberalization.³³

47. The sharp drop in traditional trade policy conditionality raises the question whether the scope for trade policy reforms that are critical for longer-term program objectives might have been curtailed. As part of a broader package of policy and institutional reforms, the impact of trade reforms on stability and growth over time can certainly be critical, although the particulars will vary with country circumstances. However, despite the strong evidence linking open trade and growth generally, it can be difficult to establish this link for specific measures, and over particular time-frames. Perhaps more fundamentally, as trade reforms may not be perceived as time-sensitive nor particularly urgent, they are liable to be screened out of the “critical list” (especially if the implicit time-frame for achieving critical goals is understood to be the duration of the arrangement). The parallel Review of the 2002 Conditionality Guidelines discusses this issue in a broader context.

A. IMF and World Bank

50. The respective roles of the Bank and the Fund are governed principally by their mandates and guided by understandings in various joint reports. The 1989 “Concordat” between the Managing Director and the World Bank President guides the work of the staffs. It provides specific guidance on the division of activities between the institutions based on an approach of primary responsibilities.³⁴ While identifying trade and structural reform as among the Bank’s “primary responsibilities,” the Concordat stated that each institution “must be allowed to explore their legitimate concerns with regard to macroeconomic and structural issues,” albeit relying as much as possible on analysis and monitoring of the other institution with the primary responsibility.³⁵ Procedures for collaboration have been improved over the years, as reflected in periodic Board reports on Fund/Bank Collaboration; in particular, trade policy was identified as an area of overlapping responsibility in a 1998 joint report following the Asian crisis and external evaluation of the ESAF.³⁶

51. While the Fund’s primary focus has been on the impact of the trading system on external viability and growth, the Bank has both a broader development perspective and sector-specific expertise. The Bank’s trade strategy currently envisages engagement at three levels:

• First, helping to catalyze a Doha Round outcome that promotes developing country growth and poverty reduction to the maximum extent. In this area, joint Bank-Fund initiatives have been particularly prominent, including communication by the managements of the two institutions and a joint paper on market access.³⁷ On sectoral aspects of the negotiations, especially agriculture, the regulatory agenda and global outcomes, the Fund has drawn extensively on the Bank’s expertise.

• Second, helping developing countries integrate pro-poor trade policies into their national development strategies, placing special emphasis on countries’ ability to seize opportunities from trade reform, on capacity building, and on tackling social and sectoral adjustment issues. The Bank has taken the lead in preparing diagnostic trade integration studies under the IF, with the Fund providing inputs in its areas of expertise (e.g., fiscal policies and competitiveness).

• Third, helping to shape the growing agenda on regionalism and providing members policy advice in this area. The Bank has developed a broad intellectual leadership on this issue, while the Fund has specialist expertise on certain aspects (such as the fiscal, transfers, currency and general macro dimensions). There is thus considerable scope to draw on each other’s work which can be further exploited in future.

52. Although the general principles of division of labor between the Bank and the Fund are broadly clear, the distinctions cannot always be maintained in operational practice. As in other areas, in meeting surveillance and UFR needs outside its core expertise, the Fund seeks to draw on the Bank’s work, but of course the Fund cannot expect “on-demand delivery” and specific inputs are thus not always perfectly synchronized. The review reveals the following patterns in the division of labor at the operational level:

• The Bank often takes the lead on trade reform in cases where there are complex and detailed reforms or industry- and sector-specific trade policies in which the Bank has recognized expertise, for example, telecommunications, transportation, energy, and agriculture.

• The Fund would take the lead when the Bank’s operations do not address trade policy, or when the Fund is providing technical assistance on the reform and administration of trade and other taxes. A closer look at the trade component in Fund program work during the 1990s reveals frequent interaction between the Bank and the Fund in the field (see Review of Trade Conditionality in Fund-Supported Programs, SM/05/57, Supplement 1). The two institutions’ advice on trade tends to be consistent—cases of reported disagreement are rare.

• The Bank’s operational reach is geographically more limited than the Fund’s. For a broad swath of the membership—including developed countries but also many developing countries that have graduated from Bank lending—the Bank has no vehicle for policy dialogue that is comparable to the Fund’s surveillance function. As a result, there is less scope for the Fund to draw on the Bank’s work.

53. The scope for improvement in the two institutions’ collaboration in the trade area lies less in tackling avoidable duplication—there is little—and more in the Fund’s drawing to the extent possible on the Bank’s expertise. Even though both the Bank (e.g., in its Country Assistance Strategy (CAS)) and the Fund (in its Article IV consultation) might be reviewing the trade policies of a particular country, the Fund would not be in a position to simply drop this review as long as its surveillance mandate and existing policies require it. Similar considerations apply in program work.³⁸ But it is obviously desirable that the Bank’s (often more detailed) analyses inform the work of the Fund. While relatively straightforward in the CAS example, there is also considerable cross-country or informal knowledge that is less easily accessible. One approach being explored is to promote more systematic interaction between Bank regional trade coordinators and Fund mission teams.

B. IMF and WTO

54. The WTO creates and enforces a rules-based system for the conduct of trade relations among its members. The WTO is a member-driven organization: it acts at the initiative of members, for example, in determining trade policies through multilateral trade negotiations, the dispute settlement mechanism, or the accession process. Through the “binding” of negotiated tariff concessions and the enforcement of agreed rules, the WTO improves security and predictability of market access in world trade. While there are various fora for discussion of members’ trade policies, these meetings do not provide authority to determine whether a member’s policies are consistent with its obligations. Rather, obligations in particular cases are enforced through a dispute settlement process that is triggered by an aggrieved member and resolved under the WTO dispute settlement mechanism, which permits trade sanctions for breaches of WTO obligations.

55. WTO commitments determine maximum amounts of protection, not optimal levels from the point of view of economic efficiency. Furthermore, certain aspects of trade policy with significant structural and macroeconomic implications are not subject to firm disciplines. Such areas include export taxes, state trading monopolies, tariff dispersion, and tariff exemptions. Thus, members can, and often do, go beyond their commitments—autonomously or under Fund/Bank supported programs, outside the framework of the WTO. Indeed, the issue of appropriate “credit” in trade negotiations for autonomous liberalization has been discussed in the context of the Doha Round.

56. While the WTO reviews trade policy generally through Trade Policy Reviews (TPRs), such reviews cannot replace members’ obligations under Article IV surveillance. The objectives of the TPRs—periodic reviews of members’ trade policies—are three-fold: to increase transparency and understanding of countries' trade policies and practices, through regular monitoring; to improve the quality of public and intergovernmental debate on trade issues; and to enable a multilateral assessment of the effects of policies on the world trading system. While for the Quad countries, TPRs take place on a biennial cycle, the periodicity is four or six years in most cases, so that their focus lies on medium to long-term trade policy changes rather than on the short-term economic adjustment process. Country-level TPRs are conducted on the basis of two documents, one prepared by the authorities of the member country concerned and the other by the WTO Secretariat, and involve a peer review process during which other WTO members' advice and concerns can be registered. The WTO Secretariat document has become increasingly analytical as the Secretariat has gained experience and won greater leeway from WTO members in providing objective advice and analysis. The WTO Secretariat nonetheless operates within much narrower confines in this respect than does the Fund staff in its preparation of Staff Reports, and the Secretariat focuses uniquely on the impact of trade policies on trade. And, while the WTO TPRs are a valuable input into the Fund’s activities, the Fund remains responsible for integrating such information into its overall economic analysis and assessment where required under surveillance and warranted under other policies.

57. Various provisions in the WTO agreements and the Fund’s Articles direct the organizations to work together and address overlapping jurisdiction to avoid conflicting rights and obligations of common members under international law. The delineation of the WTO’s and the Fund’s jurisdictions over trade and exchange measures, respectively, is discussed in the Annex. Article X of the Fund’s Articles instructs the Fund to cooperate with other international organizations in related fields. The GATT and the WTO Agreements provide that the WTO shall consult the Fund and accept its determinations in specified areas.⁴⁰ Apart from jurisdictional issues,⁴¹ this requirement also extends to the Fund’s expertise in balance of payments matters—the WTO’s charter directs it to ask the Fund to determine the adequacy of a member’s reserves and the vulnerability of its external position in assessing whether the member is properly imposing restrictions for balance of payments reasons that are otherwise inconsistent with WTO obligations. The Fund’s Executive Board must approve both jurisdictional and balance of payments determinations communicated to the WTO (see also Box 6).

58. Other aspects of the WTO Agreements overlap with key areas of the Fund’s work outside its jurisdiction under Article VIII. Besides its provisions on current payments and transfers, the General Agreement on Trade in Services (GATS) regulates certain capital movements associated with specific commitments. Fund Article IV consultation discussions necessarily consider the effects of capital flows as they are increasingly important means of allocating savings, promoting growth and facilitating balance of payments adjustment. The GATS also includes market access commitments in financial services, a core area for the Fund. Fund staff have shared experiences under FSAP reviews with the WTO Secretariat and membership.⁴² As commitments under GATS provisions deepen through successive negotiating rounds, consideration could be given to enhanced collaboration, such as research on developing country issues, and possibly the more detailed articulation of the relationship of the two institutions’ responsibilities in financial services generally.