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WORLD ECONOMIC AND FINANCIAL SURVEYS

International Trade Policies

The Uruguay Round and Beyond Volume II. Background Papers

Prepared by a Staff Team led by Naheed Kirmani

Nur Calika

Richard Harmsen

Michael Leidy

Arvind Subramanian

Peter Uimonen

INTERNATIONAL MONETARY FUND

Washington, DC

1994


© 1994 International Monetary Fund

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ISSN 0258-7440

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C ontents

Page

Preface vii

List of Abbreviations ix

I. Economic Implications of the Uruguay Round Richard Harmsen and Arviml Subramanian

Trade Liberalization

cw Areas t)

Strengthened Rules and Institutions I� Preferences 14 Integration Issues 17 Appendix I. Qui<.:k Reference Guide to 1he Resulls of rhc Uruguay Round 20 Appendix II. Summary ofSp�<.:ific Commiuncnh in the Financial Service"

Seer or of Selected Countrie!> 27 Bibliography 30

II. Trade Reforms in Fund-Su ppor·ted Program!> Nur Calika and Uwe Corsepius

Conceptual Framework and Mclhodology Trade Policy Content Trade Policy Conditionality ls�ue" in the Dc�ign ofTradc Rclorm Cone I usion� Bibliography

Ill. Antidumping: Solution nr Problem in the 1990s'? Michael Leidy

Recent Antidumping. Activity Ratiomdes for Antidumping I ncen1 ivc Effects of Aru idurnping Policic-,

Results of the Uruguay Round Conclu\;ion Bihliography

IV. The International Dimension of Competition Policies

32 12 35 40 4.� 51 52

53 53 5X 111 112 65

66

;lrvind Subramanian 6X

Recent Dcvclopmcnl'> 6X

The 1 ccd for International Coopcrauon on Compc1i1ion Policic.., 71,

Ongoing Coopera1ion on Compctilion Policy 7-1 Pos�iblc Future Agenda for Cooperation 75 Appendix I. Competilion Policic' in the Unilcd State\. the European Union.

and Japan 7 6


CONTENTS

Bibliography

V. Trade and the Environment Arvind Subramanian and Peter Uimonen

Environmental lmpact of Trade Liberalization Environment and Competitiveness Bibliography

VI. Regional Trading Arrangements Richard Harmsen alld Michael Leidy

Overview of Recent Developments and Issues European Union

Boxes Section

I. I. 2.

3.

III. I.

IV. I . 2.

3.

v. I.

VI. 1. 2.

3. 4.

Tables Section

North American Free Trade Agreement Appendix I. Regional Trading Arrangements Appendix ll. The European Union: Trade Relations with

Transition and Mediterranean Economies Appendix m. Southern Cone Common Market Appendix IV. Central African Customs and Economic Union Appendix V. The Cross-Border Initiative Appendix VI. ASEAN Free Trade AgTeemem Appendix VII. Asia-Pacific Economic Cooperation Forum Appendix VIII. Gulf Cooperation Council Appendix IX. Economic Cooperation Organization Appendix X. Intra- and Extraregional Trade Flows Bibliography

The Multifiber An·angement Coverage of Preferences Evolution of Special and Differential Treatment

Antidumping: Procedures and Definitions

lllustrative List of Practices Regulated by Competition Policy Survey of Japan ·sCar Distribution System from a Competition

Policy Perspective Impact of Keiretsu: Empirical Evidence

GAIT/WTO Rules and the Environment

Types of Regional Trading Arrangements Static Trade Diversion and Trade Creation: Simple

Numerical Examples Regional Arrangements Under lhe GATT and the W TO Intra- and Extraregional Trade Developments

l. I. Industrial Countries: Uruguay Round Tariff Reductions on Industrial Products by Country

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Contents

2. Industrial Countries: Uruguay Round Tariff Reductions by Sector 3. Tariff Escalation on Industrial Countries' Imports from Developing

Countries 4. Tariff Bindings 5. Developing Economies: Uruguay Round Tariff Reductions on

Industrial Products 6. Transition Economies: Uruguay Round Tariff Reductions on

Industrial Products 7. Exports of Textiles and Clothing 8. Leading Exporters and Importers of Textiles and Clothing 9. Leading Exporters and Importers in World Trade in Commercial

Services, 1992 10. Major [ndustrial Countries' Intellectual Property Income

from Abroad 11. OECD lrnports under the Generalized System of

Preferences (GSP) 12. Imports under Preferential Schemes Other

Than the Generalized System or Preferences 13. Sub-Saharan Africa: Preferences for Non-Oil Exports

in Industrial Countries

n. 1. Stand-By Arrangements and SAF<; Approved 1991-93 and EFFs and ESAFs Approved 1990-93

2. Summary of Trade Regimes 3. Macroeconomic Indicators in Selected Program Countries 4. Sumrmu·y of Conditionality Applied 5. Summary of Trade Reform Measures by Type of Conditionality 6. Comparative Tariff Regimes in Selected Countries

JV. I. Selected Competition Policy Issues i n United States-Japan Bilateral Relations

2. Salient Features of Competition Policies in the United States, European Union, and Japan

VI. I. Sources of Apparent Consumption: EU-9 2. Trade Between Major Participants in the Cross-Border

Initiative, 1992 3. Trade Regimes of Selected Participants in the

Cross-Border Initiative 4. Gulf Cooperation Council: lntra-GCC Export Trade. 1992 5. lntra-ECO Trade or Selected Members. J 992 6. Regional Arrangements: Extraregional lmports as a

Share ofGDP 7. lntraregional Trade as a Share of GOP 8. Extraregional Trade as a Share of GOP

Charts Section

ill. 1. Antidumping Activity 2. Antidumping Activity: Australia, Canada, European Union.

and the United States 3. Distribution of Antidumping Cases

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CONTENTS

4. Aggregate Antidumping Activity, Fourteen Users 5. Concentration of Antidumping Measures in the European Union.

the United States, Canada and Australia as Percentage of Fourteen User Total

6. How Much Protection? Range and Relative Frequency of Final Antidumping Duties

Volume I: Principal Issues

I. Overview

II. Trade Policy Developments, 1990-93

III. The Uruguay Round

IV. Post-Uruguay Round Agenda

V. Role of the Fund

The followmg symbols have been used throughout this paper:

to indicate that data are not available:

to indicate that the figure is zero or less than half the final digit shown. or that the item does not exist:

between years or months (e.g., 1991-92 or January-June) to indicate the years or months covered. including the beginning and ending years or months;

I between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year .

.. Billion ·• means a thousand million.

Minor discrepancies between constituent figures and totals arc due to roundling.

The tenn "country," as u�ed in this paper, doe� not in all ca�e!. refer to a territorial entity that b a �tate as understood by international law and practice: the term also covers some territorial entities that arc not states, but for which statistical data arc maintained and provided internationally on a separate and independent basis.

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Preface

Tills is Volume II of a two-volume study that reviews major issues and developments in the trade area and their implications for Lhe work of the International Monetary Fund. Volume l

provides an overview of the principal issues and development� in the world trading �ystem. Volume II presents more detailed background papers on selected trade and trade-related issues. The study focuses mainly on the period 1990-93 and renects information available as of June 1994. It follows Lhe panern of the Fund staff surveys prepared in 1978, 1981.1982. 1985. 1988. and 1992.1

The study was prepared in the Trade Policy Division of the Policy Development and Review Department (PDR) of the Fund. The principal authors of the study are Naheed Kirmani. Division Chief; Nur Calika. Senior Economist: Richard Harmsen. Michael Leidy, and Arvind Subramanian, Economists: and Peter Uimonen, Research Assistant; they provided major contributions to both volumes of the study. Uwe Corsepius, Economist in the Fund at the time of the preparation of the study. was a major contributor to the background paper on Fund programs in Volume fl. Selected sections in some of the papers in both volumes were prepared by Ali Ibrahim and Clinton Shiells, Economists: and Manmohan Agarwal, Consultant. Michael Da Costa, Senior Economist, provided input to Volume I of the study. Selected sections of some of the papers in Volume II were prepared by Filippo Cartiglia. Economist; and Rosa Alonso i Terme. Summer Intern.

To obtain information and collect views for this paper, the staff held discussions with trade and economics officials in Beijing. Bonn. Brussels (the Commission of the European Communities), Canberra. Jakarta, London. Mexico City, New Delhi, Onawa, Paris, Tokyo, and Washington. In addition. a staff team visited Geneva and Paris for discussions wilh officials at the GATT, fLO. UNCTAD, and the OECD, and consulted the World Bank in Washington. The staff team was assisted by the Fund Office in Europe and the Fund Office in Geneva in some of Lhe discussions in Europe. and by the offices of the Fund resident representative in Beijing. Jakarta. and New Delhi.

The authors are indebted to Jack Boorman, Director, and Anoop Singh, Senior Advisor (PDR) for their guidance in preparation or the study. Acknowledgement is due to numerous colleagues both in the Fund and in other national and international agencies for their willingness to exchange views and provide information. and to Professor Jagdish Bhagwati for helpful comments. The authors are grateful to Lhe editor. Juanita Roushdy of the External Relations Department. and to Joan Wise. Lourdes Alvero, and Suzanne King-Loken for secretarial assistance. The authors alone are responsible for the study; any opinions expressed are theirs and do not necessarily reflect the views of the Fund.

11ntemational Monetary Fund. file Rise in Pmtertwnism. IMF Pamphlet Series. o. 24 (Washmgton. 1978); Tradt• Policy De••elopmem.� inlndustrial Cawrtrie.l, IMF Occa..,ional Paper, No. 5 (Wa!>hington. July 19& I); De1•dopmems in /memational Trade Policy. IMF Occasional Paper. No. 16 (Washrngton, �ccond printing. 1983): Trade Polil'l' Issues and Developments. IMF Occasional Paper, No.3& (Washington. July 1985); ls.\ues and Del'elopmems inlllll'l'llliiWrwl Trade PoliQ•. IMF Occa�ional Paper, No. 63 (Wa�hington, December 1988); and Issues and Del'l'lopmellls in lmema· rrnnal Trade Policy. World Economic and Financial Surveys (Washington, August1992).

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List of Abbreviations

ACP AFTA AMA ANZCERTA APEC A SEAN CACM CAP CARl COM CEPT CBI CFA Franc CMEA COMESA CUSFfA EC ECU EEA ECO EFF EFTA EMS ERS ESAF EU FDI FTA GATS GATT GOP GSP IBRD IDA lEAs IMF roc JFTC MERCOSUR MFA MFN MITI MTN NAFTA NTB NTM OECD OGIL QR SAF SAARC S&D SII

Africa, Caribbean, and Pacific countries ASEAN Free Trade Agreement Anti-Monopoly Act (of Japan) Australia-New Zealand Closer Economic Relations Trade Agreement Asia-Pacific Economic Cooperation Forum Association of South East Asian Nations Central American Common Market Common Agricultural Policy Caribbean Community Common Effective Preferential Tariff Scheme Cross-Border Initiative African Community Franc/African Cooperation Franc Council for Mutual Economic Assistance Common Market for Eastern and Southern Africa Canada-United States Free Trade Agreement European Community European currency unit European Economic Area Economic Cooperation Organization Extended Fund facility European Free Trade Association European Monetary System Export Retention Scheme Enhanced structural adjustment facility European Union Foreign direct investment Free trade area General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross domestic product Generalized System of Preferences lnternational Bank for Reconstruction and Development International Development Association International environmental agreements International Monetary Fund Indian Ocean Commission Japan Fair Trade Commission Southern Cone Common Market Multifiber Arrangement Most favored nation Ministry of International Trade and Industry (of Japan) Multilateral trade negotiations North American Free Trade Agreement Non tariff barrier Nontariff measure Organization for Economic Cooperation and Development Open General Import License Scheme Quantitative restriction Structural adjustment facility South Asian Association for Regional Cooperation Special and differemial treatment Structural impediments initiative

ix


TPRM TRIMs T RJPs TSB UDEAC UNCTAD US lTC VER WTO

LIST OF ABBREVIATIONS

Trade Policy Review Mechanism Trade-related investment measures Trade-related intellecLUal property right� Textile Surveillance Body Central African Customs and Economic Union United Nations Conference on Trade and Development United Stales International Trade Commission Voluntary export restraint World Trade Organization

X


I Economic Implications of the Uruguay Round

Richard Harmsen and Arvind Subramanian 1

T he Final Acr of the Uruguay Round was signed in Marrakesb in April 1994, bringing to a conclusion

lhe eighth and most ambitious set of multilateral trade negotiations. One hundred and twenty-five countries participated in the Round, which will reduce tariff and nontariff barriers to trade in goods, strengthen trade rules and extend multilateral rules to new areasservices and intellectual property-and establish the World Trade Organization. Developing countries participated more actively in lhe negotiations than hitherto and will be more fully integrated into the multilateral trading system after the Round. Thjs paper investigates the economic implications of these different aspects of the Uruguay Round on industrial, developing. and transition economics, based on information available at the time of preparation of the paper. A quick reference guide to the Round provides a synopsis of the main results (Appendix I) and should be read in conjunction with individual sections below.


A number of studies have estimated the implications of the Uruguay Round agreement for global income and trade.l Almost all predated the conclusion of the Round and were, in general, based on assumptions about the likely outcomes with respect to reductions in tariffs on industrial and agricultural products, rather than the final results. Also, estimates of price effects of trade liberalization are confined to the agricultural sector and therefore very partial. Calculations of overall terms of trade effect'>, including the effects of the liberalization of trade in industrial products. are not available.

Annual gains in world income from full implementation are estimated at between $212 billion and $274 billion, of which $78 billion annually would be attributable to developing countries.3 These results, however. provide only a partial picture and likely underestimate

I The principal authors of this paper. 2See, for example. GATT ( 199;\a), Goldin. Knudl.cn. and van dcr

Men�brugghe (1993). and Nguyen. Pt:rroni. and Wigle ( 1993). For a critique of quantitative estimates in extsling �tudiel. of the Round, see IMF(I994).

1See IMF(199�). 1n October 1994.1he GATI' DircctorG�:ncrJI indi· cated that the global mcome gams from lhe Uruguay Round could be in excess of $500 billion. Thb cs1ima1e was based on recent analysis undenaken by I he GATI Secretariat that �ough1 10 capture �orne of the compclltion-enhancing effects of trade libcralizmion in the presence of imperfecl competition and increasing rctumc; to scale.

1

the real gains of the Round. A broader. more qualitative assessment or the impact of trade liberalization is provided below.

Tariffs on Industrial Products

The Uruguay Round agreement will result in significant reductions in the level of bound import tariffs on industrial products and an increase in the coverage of bindings.

Industrial Countries

Under the Round. industrial countries will reduce import-weighted average bound tariffs on indur;trial products4 from 6 percent to 3.6 percent in equal annual installments over a five-year implementation period (with some exceptions)5 (Table I). However, as applied rates arc lower than bound rates in the base period for many industrial countries. the fanner provide a better basis to measure actual liberalization; taking applied rates as a point of departure, import-weighted average tariffs on industrial import� will decline from 5.0 percent to 3.6 percent.6

A closer look at lhe structure of tariff reductions b] groups or industrial products reveals that these have been uneven across sectors (Table 2). The highest proportionate cuts, ranging from about 60 percent to 70 percent (measured in tem1s of bound rates), have been made in sectors where tariff levels were already modest (wood, paper. pulp, and furniture: metals: and nonelectric machinery). More limited cuts, ranging rrom about 20 percent to 25 percent, pertain to sectors that continue to face structural adjustment difficulties and where current levels of protection are high (textiles and clothing:

�Throughoul tim paper. the definilion of indu�trial produch t:xcludcs petroleum.

�Thc,e e�limate� diller from 1ho�e of the GATr ( 1994bJ (6.:\ per· cent and 3.9 percent. re�pecJively). a� GATI defimlion' mclude South Africa among 1he induMrial country category. For �orne coun· tries and 'ome products. the implemenlation period will differ from the norm of five year�.

�>As 111 pas1 MTN�. 1he Uruguay Round tariff cuts will have an impacl on li\cal revenue� 10 I he ex1ent tha1 applied rate� arc broughl down. E\limatJOn of 1he true budgetary CO\ts need� 10 take ;�ccount of 1hc second round effec1s on revenues deriving from the mcomt! gain' gcnera1ed by the Round. In general, reliance on trade taxes <L' J source of govemmenl revenue b nol very significanl in mduMrial cou111ries and lhe ne1 budgetary cost\, 1f any. of the tariff cu1s arc expected to be absorbed wilhout major problem\.


I ECONOMIC IMPLICATIONS OF THE URUGUAY ROUND

Table 1. Industrial Countries: Uruguay Round Tariff Reductions on lndustrial Products by Country '

(In percem}

( I ) (2) (3) Import-Weighted Import-Weighted Import-Weighted

Average Bound Rates, Average Applied Rates, Average Bound Rates, Pre-Uruguay Round Pre-Uruguay Round Post-Uruguay Round

Australia 20.1 10.0 12.2 Austria 10.5 9.0 7 . 1 Canada 9.0 4.9 4.8 European Union 5.7 5.7 3.6 Finland 5.5 5.42 3.8

Iceland 18.2 5.1 1 1 .8 Japan 3.9 1 . 9 1 . 7 New Zealand 23.8 20.4 1 1.9 Norway 3.6 3.6 2.0 Sweden 4.6 3.8 3 . 1

Switzerland 2.2 2.2 1.5 United States 5.4 5.4 3.5 Industrial countries 6.0 5.0 3.6

Sources: Hoda (1994); and IMFstaffestimates. 1These numbers are based on available GATT and IMF data. In cases where only a pan of tariff lines is

bound (columns I and 3), average bound rates are calculated as an average of bound and applied rates. The definition of industrial products excludes petroleum.

2Simple arithmetic mean.

transport equipment; and leather, rubber, footwear, and travel products). Measured in absolute terms, however, tariff cuts in some of these industries are sizable; average tariffs in the textiles and clothing sector will decline by 3.4 percentage points from 1 5. 5 percent to 12.1 percent.

Duty-free imports entering industrial country markets will grow considerably. The average share of trade at zero duty is expected to increase from 20 percent to 43 percent. The growth of the share of duty-free trade wiU be particularly high in sectors such as machinery, metals, mineral products, wood, pulp, paper, furniture and chemical products. However, the share of duty-free trade in the more protected sectors mentioned above will remain relatively low at 4 percent to 21 percent.

Moreover, many products of the highly protected sectors will remain subject to high tariff peaks (defined as tariffs exceeding 15 percent), in particular those of sensitive sectors, such as textiles and clothing. In those sectors subject to more far-reaching liberalization, such as wood, pulp, paper, and furniture, tariff peaks have been reduced significantly or fully eliminated.

Table 3 shows that tariff escalation remains, but at lower levels. For example, the decline in nominal average tariffs on imports of finished industrial products

Table 2. Industrial Countries: Uruguay Round Tariff Reductions by Sector (In percellf}

Wood, pulp, furniture, paper Metals Nonelectric machinery Mineral products Electric machinery Chemicals and photographic supplies Fish and fish products Transport equipment Textiles and clothing

Leather, rubber

Source: GATT (1994b).

Reduction

69 62 60 5 2 47 45 26 23 22

18

Developing Economies with High Export Interest1

Cameroon, Congo, Ghana, Indonesia, Paraguay Bolivia, Cameroon, Sierra Leone, Za'ire, Zimbabwe Mali, Singapore Congo, Sierra Leone, Za'ire, Zimbabwe Malaysia, Singapore Jamaica, Namibia, Niger Belize, Cuba, Ecuador, Honduras

Bangladesh, Egypi, China, Hong Kong, India, Korea, Morocco, Macau. Pakistan, Sri Lanka, Tunisia

Kenya, Nigeria, Paraguay, Uruguay, Cambodia

1This column shows selected developing economies where exports of the mentioned categories of products exceed 20 percent of total exports.

2



rahle 3. Tariff bcalation on Industrial Countries· lmpnrb frnm De\elnpinJ! Countries (/II f'< IF!' I///

Tariff�

Share of Each Stage

PreUruguay

Round

PostUruguay

Round Percentage reduction

All industnal products (excluding petroleum)

Raw materials 22.0 Semimanufactures 21.0 Finished products 57.0

Total 100.0

A II tropical industrial products Raw materials 35.0 Sem1rnanufactures 30.0 Finished products 34.0

Total 1 00.0

Natural resource-based products Raw materials 1 1 .0 Semimanufactures 40.0 Finished products 17.0

Total 100.0

Source: GATT ( 1994b).

from developing countries amounts to 32 percent, somewhat lower than the average tariff reductions on semimanufactures and raw materials (47 percent and 62 percent, respectively).

Develupin� and Trausitiou Cuuutrie,\

Many developing countries continued lheir policies of unilateral trade liberalization, including a reduction in tariffs, in lhe past several years.7 However, prior to the Uruguay Round, they were in general reluctanl to bind lower tariffs�r. in many cases, any tariffs at all-under the GATT (Table 4). As a result of this failure to lock in reforms. a high degree of uncertainty continued to exist about future tariff policies in developing countries. This situation will improve considerably with lhe implementation of lhe Uruguay Round agreement, as many developing countries have undertaken to bind all or a large pan of their tariff lines. The coverage of bindings on industrial products will increase from 14 percent to 61 percent of imports. A number of countries agreed to increase the coverage of tariff bindings from quite low levels to 100 percent (e.g., Argentina. Brazil. Colombia, Jamaica, and Uruguay).

The increased coverage of bindings will result in increased predictability of developing countries' trade regimes but will not lead to actual trade liberalization, as the newly bound tariffs generally exceed currently

'The discussion m th1s section 1s based on GATT { 1994b) data on tariffs that cover selected developing countrie�,

2.1 5.:1 9.1 6.8

0.1 6.3 6.6 4.2

3.1 3.5 7.9 4.0

3

0.8 62.0 2.8 47.0 6.2 32.0 4.3 37,0

0.0 100.0 3.5 44.0 2.6 6 1 . 0 1.9 55.0

2.0 35.0 2.0 43.0 5.9 25.0 2.7 33.0

applied rates (Table 5).x Also, notwithstanding major tariff reductions in recent years, the average level of tariffs and the number of products subject to tariff peaks will remain very high in many developing countries. In some countries (e.g., Indonesia, Jamaica, Tunisia, and Uruguay) the differential between bound and applied rates remains large even after full implementation of the Uruguay Round agreement. There are a few exceptions, notably India, the Philippines, and Thailand. India agreed to bind future tariff reductions that it will implement in the context of a comprehensive reform of its trade regime.

East European countries have also increased the scope of bindings. from 74 percent of imports currently to 96 percent after the implementation of the agreement (Table 4). Further, East European countries will in general reduce lheir applied tariffs (Table 6). An exception is Romania, where applied tariffs are considerably lower than the bindings under the Round.

The impact of the tariff cuts for developing countries' access to industrial country markets is mixed. Developing and transition countries that are likely to gain are those whose exports are heavily biased toward products where tariff cuts are large. The group of exporters that will benefit from high proportionate cuts in tariffs on metals, nonelectric machinery. wood, pulp. paper, and furniture includes Cameroon, Ghana, and

SThu�. the direct budgetary effect� of developing countries' tariff concession� under the Uruguay Round are negligible. In tran�ition economics. the direct effects will vary from zero in Romania to somewhat more �ignificant levels in Hungary.



Table 4. Tar·i ff Bindings

Industrial Products Argicultural Products Percent of tariff I i nes

Pre- Post-Uruguay Uruguay

Round Round

By major country group Industrial countries 78 99 Developing countries 21 73 Transition economies 73 98

By selected region North America 99 100 Latin America 38 100 Western Europe 79 82 Central Europe 63 98 Asia 17 68

Source: GATT (1994b).

countries of the former Soviet Union, although it should be kept in mind, as noted before, that the initial level of tariffs is already quite low for most of these products. The sizable absolute cuts in tariffs on electric machinery and chemicals and photographic supplies will give a boost to exports of countries like Mexico, Malaysia, Singapore, and some Caribbean countries. The cuts in industrial countries' tariffs on tropical industrial products and natural resource-based products (Table 3) will also increase exporr opportunities for a large number of developing countries and transition economies. The group of countries that on the basis of its export structure is less well positioned to benefit from widened market access includes, for example, Ecuador, Honduras, and Kenya. The export earnings of these countries are heavily dependent on industrial products where absolute tariff cuts are limited, such as leather, rubber, footwear, travel goods, fish. and fish products.

Nontariff Barriers on Industrial Products

In most industrial countries, the use of" gray area measures." such as voluntary export restraims (VERs) and import surveillance, against imports of industrial products had increased significantly dUiing the 1 980s to become the most important category of nontariff barriers. The Uruguay Round agreement provides for the virtual elimination of gray area measures within four years after the entry into force of the agreement.9 Signatories are allowed to retain one VER until the end of 1 9 99.


The elimjnation of VERs may have far-reaching implications for future trade policies in industrial coun-

9VERs in the area of textiles and clothing are subject to the provision of the agreement on textiles and clothing.

Percent of Percem of Percem of imports tariff lines imports

Pre- Post- Pre- Post- Pre- Post-Uruguay Uruguay Uruguay Uruguay Uruguay Uruguay

Round Round Round Round Round Round

4

94 99 58 100 81 100 13 6 1 18 100 25 100 74 96 5 1 100 54 100

99 100 92 100 96 100 57 100 36 100 74 100 98 98 45 100 87 100 68 97 45 100 50 100 32 70 17 100 40 100

tries. Nontariff barriers continue to be significant (covering around 14 percent of imports) and often take the fonn of VERs. VERs are often subject to discretionary action by the authorities. They reduce competition and predictability of market access for foreign suppliers, raise prices, and create rents for domestic industries and foreign suppliers with privileged market access.

Various studies confirm the considerable negative effects ofVERs.1° For instance. VERs on Japanese cars in the 1 980s resulted in increases in domestic car prices of 12-20 percent in the United States and the European Union (EU).11 Similar conclusions apply to the U.S. textiles and clothing sectors and the semiconductor trade agreement between Japan and the United States. The elimination of VERs may therefore have considerable positive welfare effects in industrial countries. The full benefits from the elimination of VERs will be felt only if they are not replaced by other forms of protection, such as antidumping measures. Furthermore, as officially sponsored VERs are ended, there is a risk that more industry-to-industry VERs may crop up. Because such actions are nontransparent, vigilance is needed to ensure that the Uruguay Round agreement is implemented in letter and spirit.

Developing and Transition Countries

Given the fact that developing countries and transition economies normally do not impose gray area measures as instruments of trade protection, the elimination of these measures under the Uruguay Round agreement will have little or no immediate impact on their own trade liberalization. The Round will, however, have implications for access to industrial country markets. In

10See Goldberg and Ordover (1991) for a summary of these studies.

liThe EU. which came into effect in 1993, is w;ed in this paper 10 also refer to the European Community.



Table 5. Developing Economies: Uruguay Round Tariff Reductions on Industrial Products• (In perce111)

(1) (2) (3) lmpon-Weighted Import-Weighted Import-Weighted

Average Bound Rates, Average Applied Rates. Average Bound Rates. Pre-Uruguay Round Pre-Uruguay Round Post-Uruguay Round

Argentina 38.2 20.0 30.9 Brazil 40.7 15.0 27.0 Chile 34.9 15.0 24.9 Colombia 44.3 1 1.0 35.3 Costa Rica 54.9 24.02 44.1

El Salvador 34.5 17.82 30.6 Hong Kong 0.0 0.0 0.0 India 71.4 54.0 32.4 Indonesia 20.4 20.4 36.9 Jamaica 16.5 13.6 50.0

Korea 18.0 7.9 8.3 Macau 0.0 0.0 0.0 Malaysia 10.0 9. 1 9.1 Mexico 46.1 13.02 33.7 Peru 34.8 15.3 29.4

Philippines 23.9 23.9 22.5 Singapore 0.4 0.4 5.1 Sri Lanka 28.6 25. 1 28.1 Thailand 35 .8 35.8 28.1 Tunisia 28.3 27.02 40.2

Turkey 25.1 9.72 22.3 Uruguay 20.9 17.0 30.9 Venezuela 50.0 12.0 31.1

Sources: Hod a (1994): and IMF staff estimates. I See Table 1. footnote I. In some cases. column 3 shows higher rates than column I. This is due to the fact

that these figures are calculated as averages of bound and applied rates for unbound items and that the coverage of bindings has been expanded at higher levels than applied rates.

2Simple arithmetic mean.

1992, nearly one tenth of developing countries' exports to industrial countries were covered by gray area measures. Fish and fish products are the group of goods most often hit by restrictions; nearly half of these exports were subject to gray area measures. Other sectors where gray area measures against exports from developing and transition countries are highly significant include footwear, iron and steel, consumer electronics, textiles and clothing, and agriculture (the latter two categories of products are discussed below). The elimination of gray area measures by industrial countries will increase export opportunities for developing countries. Low and Yeats (1994) estimate that the average trade coverage ratio of nontariff measures (NTMs), including quantitative restrictions (QRs) and restrictions under the Multifiber Arrangement (MFA), against imports from developing countries will decline from 18.0 percent at present to 4.2 percent to 5.5 percent after the implementation of the Round.

Agriculture

An outstanding achievement of the Uruguay Round was the integration of the agricultural sector into the

5

multilateral trading system. The agreed reductions in domestic market supports and export subsidization (Appendix I ) will mitigate distortions in world markets and increase export opportunities for more efficient producers.


Given the significant cost of agricultural subsidization in most industrial countries, the welfare gains from liberalization are considerable. Goldin, Knudsen, and van der Mensbrugghe (1993), for instance, estimated the positive impact on GOP of liberalization in line with the Draft Final Act of the Uruguay Round at $57 billion for the EU. $16 billion for Japan, $12 billion for the United States. $9 billion for the European Free Trade Association (EFTA), and about $2 billion for Canada and Australia and New Zealand (1985 prices). Nguyen, Penoni, and Wigle (1993) come to roughly comparable numbers.12

12for a discussion of these studies. see IMF (1994). Note that the studies may overestimate the magniwde of actual liberalization un-



Table 6. Transition Economies: Uruguay Round Tariff Reduction!) on Industrial Products1 (In p;•n·em)

Import-Weighted Average Bound

Rates. PreUruguay Round

Import-Weighted Average Applied

Rates. PreUruguay Round

hnpon-Weighted Average Bound

Rates, PostUruguay Round

Czech Republic Hungary Poland Romama Slova� Republic

4.9 9.6

16.0 I 1.8

4.9

Sources: Hoda (1994); and I MF�taffestimates. 1See Table I, footnote I.

5.72 11.02 11.6� II.!! 5.72.•

3.R 6.9 9.9

33.9 3.R

2Simple average of MFN statutory rates. These averages typiCally differ from import-weighted averages. which explains that average applied rates exceed the pre-Uruguay Round bound rates.

3Excluding the 6 percem import �urcharge in Poland and 10 percent import >urchargc in the Slovak Republic.

In the EU. the costs and distortionary effects of the EU's Common Agricultural Policy (CAP) had already induced EU members to agree on the 1992 CAP reform. The reform provides for a phased shift away from subsidization of production to direct payments to farmers. and significant reductions in guaranteed prices for cereals and beef to be completed in lhe marketing year 1995/96. Scenarios on the future development of agricultural production in the EU made by the European Commission show a significant decline in output of cereals during the 1990s as a result of the CAP reform.t� If events prove that the CAP reform is insufficient to produce lhe outcome required by the Uruguay Round agreement, further measures will be needed.

The implications of the agreement for agricultural policies in the United States seem to be less farreaching. The commitment to reduce trade-distorting domestic supports is expected to have rather limited consequences, because supports for a number of commodities have already been reduced in recent years. Reductions in domestjc intervention prices likely will not exceed I percent a year during the Uruguay Round implementation period.14 The commitment to reduce export subsidies will have consequences for U.S. exports of subsidized commodities (including those under the Export Enhancement Program), which are expected to decrease from baseline program levels by over $500 million a year by the end of the implementation period and beyond. On the other hand, U.S. agricultural ex-

der the Round for three reasons. First. the flexibility allowed in the process of '·tanffication •· of existing QRs may result in higher than actual base tariff rates. implying less liberalization; second. the base tariffs in some major importing countries are also high because world pn ces were generally depressed during the base period (1986-88); and third, the exemption from the required subsidy cuts of support, which is not entirely decoupled from production. would re�ull in less liberalization than assumed in the studies.

13Commission of the European Communities ( 1993a). '4See Advisory Committee on Trade Policy and Negotiation�

(1994).

6

ports (especially grains and animal products) are expected to increase by $1.6 billion to $4.7 billion in 2000.15

The main implications for the Japanese agricultural sector result from commitments on market access for rice. Japan will provide minimum access to the domestic rice market equivalent to 4 percent of domestic consumption (about400,000 metric tons) in lhe first year of implementation (1995). rising to 8 percent of domestic consumption at the end of the six-year period of implementation (2000). The Round's provisions on domestic supports and expo1t subsidies arc not expected to have consequences for Japanese agricultural policies. Japan had already achieved the Round's target on domestic supports by 1992 through cuts in domestic prices and a production limitation program since 1986. Also, Japan does not provide any export subsidies for agriculture.


Developing and transition countries made an important contribution to the security of market access by binding lOO percent of agricultural product tariff lines. However. as a result of the high level of bound tariffs. the direct impact of the Uruguay Round agreement on access to agricultural markets in developing countries is expected to remain limited in the short run. At the same time. a number of food-exporting developing and transition economies stand to gain from higher prices and lower subsidies in industrial countries, such as the members of the Cairns Group, 16 sugar producers (e.g., Cuba, Brazil, Dominican Republic, Thailand), and East European countries (e.g., Bulgaria and Poland). Further, a large number or developing and transition countries with potentially strong agricultural sectors (e.g.,

1�Scc USDA (1994). tbThe Cairn� Group compri�e� Australia. Argentina, Brat.il, Can

ada. Chile, Colombia, Fiji. Hungary.Indonesia, Malaysia, New Zea· land. the Philippines. Thailand, and Uruguay.



China, Kenya. Mexico, South Africa) may benefit from a more liberaliLed and market-oriented environment if they succeed in implementing the needed structural adjustment measures with a view to developing domestic production capacities.

The world market price effects of the expected decrease in supply of temperate zone product<; as a result of agricultural reforms in industrial countries have been the subject of various quantitative studies.17 Although the magnitudes of the estimated price effects differ considerably. most studies show relative price increases for a limited number of heavily protected commodities, notably wheat, rice. meat, dairy products. and sugar. Brandao and Martin (1993), for instance, show that price increases for these products as a result of reduced protection under the agreement could reach 4-10 percent over the medium term.

A concern expressed by developing countries is that higher prices may lead to adverse welfare effects in developing countries that arc net commercial importers of food. Brandao and Martin (1993) identify African and Mediterranean countries (including the Maghreb) as experiencing possible adver!>c effect!>: this is also indicated by Goldin. Knudsen, and van der Mensbrugghe (1993) whose stud) shows possible net welfare losses. for example. for Nigeria 111 and the Mediterranean countries. It should be noted that terms of trade losses resulting from higher food import prices are likely to be offset in most case!> by gain'> in other areas a::. a result of wider acceso, to industrial country markets for product!> that are important to developing countries (<;uch as textiles and clothing and, as noted earlier, agricultural products). Aho. there arc important caveats to the calculations in the above-mentioned studies. which. if taken into account. could change the picture considerably in a more favorable direction. First. the calculations arc all based on the text of the Draft Final Act of the Uruguay Round or other, more general, assumptions that. a� discussed above. imply a higher degree of liberalization in industrial countries than was actually agreed upon in the Final Act of the Uruguay Round. Second, the estimated effects on food prices do not fully take into account the possible <;upply responses of nonsubsidized producers in industrial and developing countries, which could mitigate the price increases considerably.

The partie� to the Uruguay Round agreement have nevertheless rccognitcd that some least-developed and net food-importing developing countries may experience negative effects from the Round. A Ministerial Decision in the Final Act provides for. inter alia. negotiation!> "to establish a level of food aid commitments sufficient to meet the legitimate needs of developing countries during the reform programme," and

.. to

adopt guidelines to ensure that an increasing proportion

'7See Brandaoand Manm (1993). IX Their net re,uh lor ,ub-Saharan Alncan countries i' 7ero.

7

of basic foodo,tuffs i-, provided to least-developed and net food-importing developing countries in fuJJy grant form and/or on appropriate concessional terms ... ·· '9

Textiles and Clothin�

Data on world trade in textiles and clothing are presented in Tables 7 and 8. The Round's agreement will have important effects on these sectors, which have hitherto not been covered by important GAIT rules.


Notwithstanding the continued prevalence of high tariffs and t<lJ'iff peaks, and the very much backloaded integration of the MFA in the multilateral trading sy!.tcm, the welfare gains could be substantial from the abolition of the MFA and the elimination of VERs on textiles and clothing (see Box I for a history of the MFA). De Melo and Tarr ( 1990) estimate that in the United States the welfare costs due to MFA quotas are almost $12 billion (at 1984 prices). The United States International Trade Commiso,ion (USITC (l993a)) estimates that abolition of the MFA. while leaving existing high tariffs in place. would result in a welfare gain in the United States ranging from $9.6 billion to $10.8 billion (at 1991 priceo,), equivalent to about 24 percent of the total value of U.S. textiles and clothing imports. The MFA restraints alone account for over half of the total welfare co::.ts of protection in the United States.

Abolishing the MFA is likely to lead to higher import penetration and employment losscl. in the domestic industries in industrial countries. In the case of the United States, the USITC study estimates that about 37,000 jobs would be lost, mainly in the more heavily protected apparel sector; dividing the estimated economywide welfare gain by the estimated job losses suggest:> that the welfare cost of each job protected by the MFA is about $270.000. For Portugal. the European Commis::.ion. in light of t he likely impact on the weaker segments of the domc•;tic textile and clothing industry, has approved an allocation of ECU 400 million for the modernitation of the Portuguese textile industry. Also. a widening of market accco,o, to developing countries is of particular concern to man) induwial countries. This i'> renected in the Agreement on Textiles and Clothing. which specifies that all members <>hall take such action\ as may be necessary to abide by GAIT 1994 rules and disciplines so as to ··achieve improved access to markets for textile and clothing products through such measures as tariff reductions and bindings, reduction or elimination of non-tariff barriers, and facilitation of cuo,toml.. administra1ive and licensing forn1aJities. "20

t'IScc GAll ( 1994a), p. 395. 2uscc GATT ( 1994a), p. 95.



Table 7. Exports of Textiles and Clothing (In perce/11 of ow11 exports )

Textiles and Textiles Clothing Clothing

1980 1992 1980

World 2.7 3.2 2.0

Industrial coumries Portugal 13.0 7.9 13.6 Italy 5.3 5.7 5.9 Austria 6.1 4.6 3.3 Belgium-Luxembourg 5.5 5.3 1.5 Germany 3.3 3.2 1.5 France 3.0 2.7 2.0 Switzerland 5.1 3.5 1 .2 United Kingdom 2.8 2.3 1.7 Netherlands 3.1 2.1 1 .2 Spain 3.4 2.5 1.5 Japan 3.9 2.1 0.4 United States 1 .7 1 .3 0.6

Developing economies Macau 1 9.2 9.4 78.4 Pakistan 33.5 49.5 3.9 Bangladesh 52.2 15.4 0.2 Mauritius' .17.0 Turkey 1 1 .8 1 1 .0 4.5 Tunisia1 15.4 Chi.na 14.0 10.1 8.9 Hong Kong 9.0 9.2 25.2 Morocco 4.9 4.4 4.4 Indonesia 0.2 9.7 0.4 Korea 1 2.6 10.7 16.8 India 1 3 3 1 4.32 6.9 Thailand 5 . 1 3.8 4 . 1 Uruguay 4 . 1 4.7 1 1 .4 Taiwan Province of China 9.0 9.3 12.3 Colombia 3.4 2.5 3.0 Malaysia 1 . 2 1 . 4 1 . 2 Singapore 1 . 9 1.7 2.2 Brazil 3.3 2.8 0.7

Source: GATT ( 1993c). •Data on textiles are not available; total refers to clothing only. 2The number for textiles refers to 1991.


GATT (1 993a) notes that developing countries' exports to major countries of the Organization for Economic Cooperation and Development (OECD) could increase by 82 percent for textiles and 93 percent for clothing over the ten-year implementation period of the Uruguay Round agreement on textiles and clothing. A major part of the gains will come at the end of the period. Trela and Whalley (1990) estimate that the removal of protection in Canada, the EU, and the United States would gain around $8 billion (in 1 986 prices) for the 34 developing countries included in their study on the assumption of elimination of tariffs and quotas.

Abolishing the MFA will also have important effects on specific groups of developing countries. These effects may work in opposite directions for individual producers and are, in general, hard to measure. First,

8

1992 1980 1992

3.6 4.7 6.8

22.0 26.6 29.9 6.9 1 1 .2 12.6 2.9 9.4 7.5 1.9 7.0 7.2 1.9 4.8 5.1 2.2 5.0 4.9 1.0 6.3 4.5 1.9 4.5 4.2 1.9 4.3 4.0 1 . 1 4.9 3.6

0.2 4.3 2.3 0.9 2.3 2.2

67.8 97.6 77.2 19.9 37.4 69.4 51 .5 52.4 66.9 5 1 . 1 17.0 5 1 . 1. 28.5 16.3 39.5 36.6 15 .4 36.6 19.7 22.9 29.8 16.8 34.2 26.0 20. 1 9.3 24.5 10.8 0.6 20.5

8.8 29.4 19.5 15.9 20.2 30.22 1 1.7 9.2 15.5 10.4 15.5 1 5 . 1 5.1 21.3 14.4 6.4 6.4 8.9 4.6 2.4 6.0 2.9 4. 1 4.6 1.0 4.0 3.8

the existence of binding quota restraints on some countries has probably led to the relocation of production toward less quota-restricted countries. Eliminating MFA restrictions may lead to production being concentrated in more efficient producers (e.g., China and Viet Nam) or new locations. Second, although restraints under the MFA apply to most developing countries, some exporters currently enjoy preferential access to specific markets (e.g., Morocco, Tunisia, and Mexico). Eliminating the MFA may erode their relative competitive position in these markets, but it may expand their trading opportunities in other markets previously restricted. Third, several exporting economies have been able to maintain market shares due to the rigidities of the quota system, notwithstanding declining competitiveness (e.g., Hong Kong and Korea). When the MFA is phased out, these economies may experience a gradual weakening of their


New Areas

Table 8. Leading Exporters and Importers of Textiles and Clothing (Value c.if. in !Jilliom of U.S. dollars: share: in percelll)

Exporters

Germany Italy France United States United Kingdom Netherlands

Hong Kong Domestic Re-ex pons 1

China2 Korea Taiwan Province of

China Indonesia

Importers

Germany United State� France United Kingdom Italy Japan

etherlands Belgium-Luxembourg Spain Canada3

Hong Kong Retained imports4

Source: GATT ( J993c).

Value 1992

13.9 10.2 6.3 5.9 4.3 3.0

1 1 .0 2.2 8.8 8.6 8.2

7.6 2.8

12.4 8.2 7.5 6.9 5.6 4.2 3.6 3.6 2.5 2.5

13.1 4.3

Textiles

Share in world imports/exports

1980 1992

1 1 .4 1 1 .9 7.6 8.7 6.2 5.4 6.8 5.0 5.7 3.7 4. 1 2.5

1.7 1 .9

4.6 7.3 4.0 7.0

3.2 6.5 0.1 2.4

1 1 .9 10.1 4.4 6.7 7.1 6.1 6.2 5.7 4.5 4.6 2.9 3.4 3.9 3.0 4.0 2.9 0.6 2.0 2.2 2.0

3.6 3.5

1World trade figures including re-exports are not available. 21ncludes trade through processing zones. lJmports f.o.b. 4Rctained imports are defined as imports less re-exports.

market positjons as a result of increased competition from more efficient producers.

New Areas

Trade in Services

International transactions in services have become increasingly important in both industrial and developing countries over the last few decades. During the period 1982-92, world exports of services grew at an annual average rate of 9.5 percent, compared with 7.1 percent for merchandise exports. As a result, the share of services in total exports of goods and nonfactor services increased from 17.7 percent in 1982 to 21.1 percent in 1992.2 1

The General Agreement on Trade in Services

21 OECD (1993).

9

Value 1992

8.4 12.2 5.3 4.2 3.7 2.7

20. 1 1 0.0 10.1 16.7 6.8

4.1 3.2

24.8 33.0

9.8 7.9 4.3

I 1.2 5.8 4.2 3.2 2.4

10.3 0.3

Clothing

Share in world imports/exports

1980 1992

7.1 6.4 1 1 .3 9.4

5.7 4.0 3 . 1 3.2 4.6 2.8 2.2 2. 1

1 1 .5 7.6

4.0 1 2.8 7.3 5.2

6.0 3. 1 0.2 2.4

1 9.5 1 8 . 1 16.3 24.0

6.2 7.1 6.7 5.7 1.9 3.1 3.6 8.1 6.7 4.2 4.3 3.0 0.4 2.3 1.7 1 .8

0.9 0.2

(GATS), therefore, represents an important achievement of the Uruguay Round. By setting up a muiUIateral framework based on nondiscrimination and transparency, and by instituting a forum for negotiations of market access among participant countries, the GATS has extended the reach of multilateral rules and disciplines to the services sector, and will thus also provide a stimulus to the world economy by fostering liberalization of trade in services.22

22Libcralization of trade in services takes place through negoti· ated market access and national Lreatment for each of the four modes of supplying services defined in the GATS (Article 1). namely. (I) cross-border supply (the user receives the service from a provider locaLed in another country); (2) consumption abroad (the user consumes the service outside his country of residence); (3) commercial presence (the service provider establishes a facility in the user·s country); and (4) movement of natural persons (the service provider needs the temporary presence of nonresidenl natural persons in the user's country).



Box 1. The Multifiber Arrangement

The textiles and clothing sectors have an important role in world trade, accounting in 1992, respectively, for 3.2 percent and 3.6 percent of world merchandise exports. For several countries, mostly in the developing world, expons of textiles and clothing represent a large share in total merchandise exports (Table 7). In industrial and developing countries, imports and exports of textHes increased in 1990-92, while output generally stagnated or declined. 1n industrial countries, employment in the sectors declined: in the United States it fell by about I percent between 1986 and 1992, and in the European Union it contracted by about 14 percent between 1988 and 1992.1

ln many developing countries, the share of clothing and textiles in total merchanruse exports has changed dramatically during the past decade (Table 8). While existing trade restrictions may have contributed to the observed trends, these long-term fluctuations point to the importance of the textile and clotlling sectors in export-oriented development strategies. ln some countries (e.g .. Bangladesh, China, India, lndonesia, Mauritius, Morocco, and Pakistan), the expansion of the textile and clothing sectors partly reflects industrialization and diversification away from resource-based exports. In other economies (e.g., Hong Kong, Korea, and Taiwan Province of China). the declining relative importance of the textiles and clothing sectors suggests that economies that embraced an export-oriented trade strategy during the 1960s and the 1970s have been able during the past decade to move toward more technologically advanced sectors, reaping the gains of rapid physical and human capital accumulation.

Trade in textiles and clothing has been largely regulated by international agreements over the past thirty-four years. Following the Short-Term (1961-62) and the LongTerm (1962-73) Arrangements, the Multifiber Arrangement (MFA) came into existence. The original MFA (1974-78) was followed by MFA II (1978-81), MFA ill (1982-86) and MFA IV (1986-JuJy 1991). MFA IV was subsequenUy extended three times: first to December 1992, then to December 1993, and recently to December 1994. MFA participants-44 countries in July 1993-accounted in 1992 for some 80 percent of world textiles and clothing exports (excluding iotra-EU rrade).

•see Hutbauer and Elliott (1994), and Commission of the European Communities (1993b).

Industrial countries, the major world suppliers of services (Table 9 ), are expected £O gain significantly from an opening up of markets in this sector. Developing countries, however, over the period 1970-92, have increased their share of exports of services from I I percent to about 15 percent. In addition, revealed comparative advantage indices suggest that a number of developing countries are relatively specialized in services and, therefore, developing countries will have a

10

The MFA's stated objectives were to achieve the expansion and progressive liberalization of world trade in textile products, while at the same time avoiding disruptive effects in individual markets and lines of production. Representing a major departure from the GAIT's principle of nondiscrimination, the MFA envisaged essentially two types of quantity restrictions: (I) those under its Article 3, which permits bilateral or unilateral restrictions as a result of market disruption, and (2) those under Article 4, which provides for bilateral agreements to eliminate the risks of market disruptions. The MFA has "flexibility" provisions that permit switching between individual quota categories (swing), carryover of unutilized quota to the following year, or borrowing (carry forward) of next year's quota. Through the years, the number of participating countries and the product coverage of the Arrangement has expanded. Although quotas generally have been increased annually by I percent for wool products and 6 percent for aU other products, major suppliers are frequently subject to l.ower growth limits. According to the GATT Textile Surveillance Body (TSB), the number of bilateral restraint agreements on expons of textiles and clothing applied under the cover of the MFA was 99 as of July 1992.2

Within the MFA framework, some participating countries (e.g., Austria, Finland, Japan, and Switzerland) impose few restraints, but others (e.g., the European Union and the United States) have been more restrictive. MFA restraints continue to apply almost exclusively to exports from developing countries, as has been the case throughout the life of the Arrangement. Some countries not participating in the MFA (e.g., Sweden) maintain a very liberal trade regime in textile products. In others, several additional constraints on trade are imposed outside the MFA framework, often in nontransparent ways, both by industrial and developing countries. Such constraints include bilateral restraint agreements, quotas applied on imports from specific origins or non-MFA products (e.g., silk), and less formal arrangements between governments, between government and industry, and between industries.

2GATI (1993b). Between July 1992 and July 1993, the TSB was notiued of five additional new agreements.

significant stake in liberalization of trade in services. 23 Indeed, this is reflected by the large number of developing countries (77) that have submitted schedules of commitments in services underthe Uruguay Round.

The composition of trade in services has changed dramatically over the last two decades: the share of total exports of the traditional services consisting of

21See Hockman ( 1994).


New Areas

Table 9. Leading E�por·ter� and Importer-. in \\'orld rradc in Commercial Sen icc'\, 1992 t

£)(p0rtl>

Percentage �hare� in

world export�

Industrial countries United States 16.2 France 10.2 ltaly 6.5 Germany 6.4 United Kingdom 5.5 Japan 5.0 Netherlands 3.6

Industrial countries Germany United States Japan France Italy United Kingdom Netherlands

1m pons

Percentage �hares in

world import�

Spain 3.6 Belgium-Luxembourg

1 1 .3 10.9 9.9 8.5 6.R 4.8 3.6 3.3 2.8 2.2

Belgium-Luxembourg 3.5 Canada Austria 3.0 Spam

Developing economies Developing economic� Singapore 1 . 8 Taiwan Province of China 1.9

1 .5 1 .5 1 .2 1 .2 1 . 1 1.0 0.9 0.8 0.7

Hong Kong 1 . 7 Korea Korea 1 .3 Saudi Arabia Mexico 1 .3 Hong Kong Taiwan Province of China 1. 1 Mexico China 0.9 Singapore Thailand 0.9 Thailand Turkey 0.& China Egypt 0.7 Malaysia Philippines 0.7 Brazil

Transition economics Transition economic� Poland 0.5 Poland 0.4 Czech and Slovak Federal

Republic, former 0.3 Hungary 0.3

Memorandum (in hi/lions of Memorandum (in hi/lions of U.S. dollars) U.S. dollar.�)

World Services Exports 1.000 World Services [mpons 988

Source: GATT { 1993c). 1This table presents the top ten leading exporters and tlte top ten leading Importers among industrial

countries and among developing economies. Some industrial countries not shown in this table actually have higher trade shares than some developing economic� mentioned in the table.

transport and travel has declined in favor of financial services, nonmerchandise insurance, cultural services (films and videos), consulting, and other professional services. In the case of financial services, there has been an increased integration of world markets, reflecting, inter alia, the continued internationalization of business activities through the expansion of multinational corporations, financial innovations, such as the development of complex hedging techniques, rapid progress in telecommunications and information technologies, and reduced exchange and capital controls in both developing and industrial countries.

Industrial and transition countries have included almost all services sectors in their commitments. The sectoral coverage of commitments made by developing countries is in general more limited.

Commitments on financial services made by the United States, the EU, and Japan cover the banking and securities sectors and insurance services. No financial subsectors are exempted fTom lhe scope of the commit-

1 1

ments. By and large, the existing regime for financial services in these three regions i s made applicable to all countries, although in some cases commitments have been made to increase market access. Japan, for example, has offered to gradually O[pen up its pension fund management to foreign firms, and the EU has agreed to make the benefits of the Single Market available to all foreign financial institutions. The United States, however, because it considered liberalization offers by some countries insufficient, decided to limit lhe extent of its liberalization commitments for the time being to a number of basic financial services. Further access will be contingent on other countries providing better access to their financial markets. Negotiations are still continuing with a view to improving offers and are scheduled to be completed within six months after entry into force of the WTO. Appendix li contains a list of limitations on market access and national treatment in the scheduks on financial services for selected industrial and developing countries



(Brazil. the EU, India. Korea, Japan, and the United States).

Intellectual Property Righb

Given the growing importance of intellectual property-based industries in international transactions, the agreement on intellectual property rights (TRIPs) can be considered as one of the most important achievements of the Uruguay Round.


Between 1970 and 1991, intellectual property income from abroad for seven major industrial countries grew from $1.9 billion to $30.0 bill ion (Table 10). In the short run, producers of goods based on intellectual property will benefit through increased sales and profits at the expense of competitors hitherto supplying the market through imitation, and through higher profits as they assert their market position mainly in developing countries. ln the long run. higher levels of intellectual property protection may serve to increase global levels of innovation. creativity, and research and development, thereby lowering production costs and increasing product variety. benefiting coniourner� worldwide.

The major beneficiaries of the TRIPs agreement will be in the high technology industry. the entertainment sector, and the luxury goods industry. High technology industries, such as the pharmaceutical, chemical, and information technology industries. the prime movers of the TRIPs initiative, will benefit from better protection of technology through patent, trade secret, copyright, and computer ··chips'· protection. l n the entertainment sector, producers of sound and video recordings, motion pictures, and publishing will benefit from improved copyright protection. Finally. producers of luxury brand products-perfumes. T-shins. watches-will in general benefit from better enforcement of their trademark against counterfeiting by imitators.


Developing countries, as net importers of technology. were initially reluctant to agree to higher level:, of intellectual property protection because of concems about its potentially adverse impact on prices and welfare. Concerns were most acute in the pharmaceuticals sector because paten! protection has a more decisive impact on market outcomes in this sector.

The economic impact of higher patent protection in pharmaceuticab has static and dynamic dimensions. For a net importer, the static effects are likely to be adverse because patent protection makes the market less competitive, thereby increasing prices and reducing

12

Table 10. Major Industrial Countrie�' Intellectual Property Income from Abroad' 1/11 /uflimt.\ l .S dollor1)

MaJOr induMrial count ric\ Credit Debit

Net

Uniled States Credit De hit

Net

I ntclleciUal propeny llow� a\ a percentage of total services trade

Major industrial count ric� United State�

Source: OECD ( t993).

1970 1980 1990 1991

1.9 1.6 0.3

u 0.2 t.l

4.4 5.7

8.4 7.1 u

5.0 0.7 4.3

3.X 6.9

28.1 23.1

5.0

17.1 3.:2

13.9

5.6 8.3

30.0 24.1

5.9

18.5 4.2

t4.3

5.8 8.X

'Canada. France, Gcm1any. llaly. Japan, Un11ed Kingdom. and the United Slates.

welfare.24 These adverse static effects could in rime be offset by possible dynamic effects in the form of higher research and development induced by stronger patent protection and new incentives for the development of specified pharmaceutical products (if developing countries· markets are sufficiently large to induce higher research and development), which would reduce longrun costs and increase product variety. Also. the riming of the implementation of the TRIPs agreement is such that its fuJJ economic impact on the pharmaceutical sector will only be felt 20 years after the WTO enters into force. Further, developing countries will retain the right to use remedial measures in the event that the patent owner charges very high prices. Higher intellectual property protection would benefit those developing countries that are important exporters of copyrightbased audiovisual products and may serve to attract foreign investment and technology.

Investment Measures

Trade-related investment measures (TRIMs) refer to measures requiring or inducing foreign enterprise� to meet certain yardsticks of performance. The most commonly used TRlMs are local content requirement!>, when a firm must ensure that local inputs are used for a specified amount or share of production: export performance requirements. when a finn must ensure that a specified amount or share of local production be exported; and trade (foreign exchange) balancing require-

2·1 Sec Chin and Grossman ( 1990). Estimate\ for the annual \lillie welfare losses for some developmg countries vary from $67 million to $387 million {Argentina). $220 million 10 $1.3 billion (India), $t53 million to $879 mi llion (Brazil). and $75 mil lion to $428 million {MexiCO). depending on the assumptions (see Subramanian (forthcoming) and Mask us and Konan ( t994}).


Strengthened Rules and Institutions

ments, when a finn must ensure that imports arc not greater than a specified proportion of exports. The Uruguay Round TRIMs agreement prohibits the use of local content requirements and trade and foreign exchange balancing requirements. but not export performance requirements.

TRIMs are employed more commonly by developing than industrial or transition countries. A review of trade regimes of selected developing countries described in the GATT's Trade Policy Review Mechanism reports shows that several countries employed local content requirements in the period 1991-94.25 The requirements were most prevalent in the automotive sector; specification of the extent of local content varied from about 25 percent to 70 percent. Studies show a disparity between the amount of foreign investment theoretically affected by TRIMs and the amount of investment reported by companies as covered by TRJMs. 26 This is because the application of TRlMs by countries is discretionary and hence negotiable: moreover. TRIMs may often not be binding insofar as they requjre a course of action that the fim1 would otherwise pursue.

The elimination of TRIMs will have economic effects broadly similar to liberalization in other areas of trade policy.27 The most frequently used TRIM-local content requirements-when it is binding serves to raise the costs of production by forcing the use of higher-cost. locally produced inputs over imported inputs. For instance, the oil import quota scheme operated by the United States in the 1960s and 1970s, which amounted to a local content requirement, cost the consumers about $5 billion a year. Most of this represented a transfer to domestic oil producers. resulting in a net welfare cost of about $1-2 billion.2s Trade and foreign exchange balancing requirements are conceptually analogous to quantitative restrictions as they have the effect of restricting imports.

Strengthened Rules and Institutions

The Uruguay Round also clarified or strengthened rules with respect to the usc of specific trade policy instruments, notably safeguards. antidumping. and countervailing measures.

Safeguards

The agreement on safeguards provides for the elimination of gray area measures (including VERs). a sunset clause, and procedural requirements, including pub-

:!�These included Banglade�h. Chile. Egypt. Ghana, lndonc�ia. MeXICO. Nigeria, Peru, Philippme�. Senegal. South Africa. Thailand. and Uruguay.

2�>See Evans and Walsh (t994). 27See Grossman (1981) and Krugman and Ob>tfeld { 1988). 28See Krugman and Obstfeld ( 1988).

13

lie notice for hearings. The implications or the elimination of VERs are discussed above. The provisions on the usc of safeguards may both strengthen and weaken discipline in this area. The relatively strict conditions of GATT Article XIX had discouraged use of the safeguards clause and had induced resort to gray area measures such as VERs. To reduce such disincentives. the Uruguay Round modified some aspects of the safeguard clause. Specifically, exporting countries a ffected by a safeguard measure are not allowed to suspend concessions on their side for three years. Also. the new agreement provides for some selectivity, by allowing those safeguard measures that take the form of quantitative restrictions to be imposed only against specific exporting countries. On the other hand, discipline will be strengthened by the increase in transparency, a stTengthening of rules on the provision of evidence of injury, the sunset clause. and, equally important. the requirement of progressive liberalization of the measure if its duration is over one year (see Appendix I).

Antidumping Measures

The Uruguay Round also succeeded in clarifying procedural issues and encouraging enhanced transparency in the area of antidumping measures (Appendix I). The new procedures are designed to enhance the fairness of proceedings. Still uncertain is the extent to which the new rules will substantively alter existing practice� and whether the use of antidumping measures will be appreciably restrained upon implementation of the agreement. Indeed. based on the trend over the la<;t several years in the use of antidumping among traditional industrial country users, and emerging interest in its use among developing countries, there is a risk that resort to antidumping actions may continue to spread during the 1990s.

Subsidies and Countervailing Duties

Under the Uruguay Round agreement on indu!>trial subsidies, actions agrunst subsidies can be taken along two tracks (Appendix I): first, they can be countervailed, pur-;uant to national procedures under which the existence of a subsidy. of injury to a domestic industry, and of a causal link between the two need to be demonstrated.2<> The Uruguay Round does not specify which sub�idies can be countervailed under national law. although it does define two kinds of subsidies that may not be countervailed: ··green box" subsidies (see below) and "de minimis'' subsidies (subsidies less than I percent of the value of the product. and less than 2 percent in the case of developing countries). By implication, all other subsidies are countervailable pursuant to national laws and procedures.

!<)However. the Uruguay Round also �e•� condition� on the;c n<t· tiona! procedures. If countnes do no1 comply wah the�e condition�. they may be \ubject to multilateral challenge.



The second track is those subsidies governed by multilateral procedures. In this connection, the Uruguay Round defines three groups of subsidies: prohibited ("red box"), actionable ("amber box"), and nonactionable subsidies (''green box"). The red box covers export subsidies, including currency retention schemes and subsidized export credits, and subsidies for the use of domestic over imported goods. The amber box covers nonprohibited subsidies that cause injury to a domestic industry, cause nullification or impaim1ent of benefits for other WTO members, or "serious prejudice" to the interests of another member. Serious prejudice arises if the subsidy affects exports to the subsidizing country or to third country markets, or if it leads to significant price undercutting or an increase in the world market share of the subsidizing country. Serious prejudice is presumed to exist in the case of production subsidies exceeding 5 percent of the value of a product, subsidies to cover operating losses of an industry or an enterprise (other than one-time measures to provide time for the development of long-tenn solutions or for social reasons), direct forgiveness of debt, and grants to cover debt repayment. Such subsidies are therefore virtually prohibited. The green box covers subsidies that are not specific to (a group of) enterprises, or that provide support for research activities, assistance to disadvantaged regions, and to environmentaJ adaptation. (Brazil, the EU, India, Korea, The agreement provides for a number of important exceptions for developing countries and transition economies in terms of actions that can be taken against subsidies granted by them pursuant to multilateral procedures (in other words. these exceptions do not apply to countervailing measures that can be taken against such subsidies). Least-developed and developing countries with per capita GNP of less than $1,000 a year need not eliminate export subsidies. 3D Other developing countries and transition economies need to do so after eight and seven years, respectively. Also, developing countries' subsidies arising from debt forgiveness in the context of privatization programs are exempt from the presumption of serious prejudice; transition economies are also exempt, but only for a period of seven years.

The major difference between the Uruguay Round and Tokyo Round agreements on subsidies are first, the Round gives a clearer definition of different types of subsidies that are actionable or nonactionable. Second, it clarifies the concept of serious prejudice and thereby strengthens the disciplines on subsidies. And third, notwithstanding exceptions. the new rules will apply more broadly to developing countries and transition economies (Appendix I). In relation to specifying which subsidies may be countervailed, however, the Uruguay Round agreement is broadly similar to the Tokyo

30This will not apply if such countries have allained "expon competitiveness" in particular products. that b. greater than 3.25 percent share of world trade for a product in two consecutive years.

14

Round agreement. For example, debt forgiveness was countervailable under the Tokyo Round and continues to be so under the Uruguay Round.

The improved definitions and dispute settlement procedure may lead to a reduction in trade distortive state supports in industrial countries. lt is not clear how the exemption of green box subsidies and the longer implementation periods for developing and transition economies will affect future progress in encouraging reduction in subsidies. ln generaL however, the strengthening of procedures and transparency with respect to countervailing measures as well as the exclusion of relatively small subsidies from countervailability may increase discipline, although much will depend on the practical application of the agreement.

Other

The Uruguay Round agreement will also lead to a number of institutional changes, including changes with respect to the Trade Policy Review Mechanism (TPRM), a strengthening of rules on dispute settlement, and the establishment of the World Trade Organization. At the conclusion of the Mid-Tem1 Review of the Uruguay Round in 1989. it was agreed that decisions on the work of dispute panels would no longer be dependent on the consent of the parties to the dispute. The Uruguay Round agreement has further strengthened dispute settlement arrangements by eliminating the right of parties to a dispute to veto the conclusions of the dispute panel and the authorization of the right to retaliate when a country does not comply with a panel ruling; this will lend greater automaticity to dispute settlement procedures. It is expected that this change will strengthen the role of WTO panels in international trade disputes. It is also important that the agreement has limited the scope for unilateraJ action.

P .. eferences

The most-favored-nation (MFN) tariff cuts under the Uruguay Round will lead to a small erosion in the preference margins that beneficiaries currently enjoy under schemes such as the Generalized System of Preferences (GSP). Lome Convemion, and the Mediterranean Agreements (see Box 2); Tables II and 12 present the value of impotts enjoying preference under these schemes. This erosion is less than suggested by the MFN tariff cuts.3 t The impact of preference erosion will vary across groups of countries. The major bene-

11 According to UNCTAD (1994), the reduction in GSP preferential margin� in the EU. United States, and Japan would be 23 percent. 9 percent. and 15 percent. re�pectively (or about 1 8 percent on average. compared with an average MFN tariff cut of bound rates of 40 percent). The differences between the MFN tariff cuts and reduction� in preferential margins are due to the product composition of MFN tariff cuts.


Preferences

Box 2. Coverage of Preferences

The most important existing preferential schemes are the GSl>, under wllich preferences are granted by many industrial countries to at least 130 developing countries, the Lome Convention (granted by the EU to certain African, Caribbean, and Pacific (ACP) developing countries), the Mediterranean Ag.reements (granted by the EU to North African developing countries), and the Caribbean Basin Initiative (granted by the United States to developing countries in the Caribbean). Preferential schemes differ from regional trading arrangements mainly in that the preferences are nonreciprocal. Preferences represent a derogation from the GAIT's MFN principle. This derogation was frrst sanctified by a waiver granted by the Contracting Parties in 1971, and later made permanent under the Enabling Clause of the Tokyo Round in 1979. Other preferential arrangements such as the Caribbean Basin Initiative are covered by waivers from GAIT rules.

The GSP covers a wide range of industrial (excluding textiles and clothing in the case of the U.S. scheme) and agricultural products (excluding some processed agricultural products in the case of the EU scheme). There are numerous conditions attached to the granting of preferences. The Lome Convention grants unrestricted and duty-free access in industrial products, including coal, steel, textiles and clothing: ACP countries also benefit from duty reductions and preferential quantitative access on a number of agricultural products. The Mediterranean Agreements cover a wide range of industrial and agricultural products. The Caribbean Basin Initiative covers most products with the exception of textiles and clotlling. Preferential access takes the form of goods usuaUy being allowed to enter duty free or at lower-thanMFN rates.

The annual average increase in GSP imports of OECD countries between 1976 and 1992 was almost twice that of total imports from all beneficiaries and about 1.5 times that of imports from all sources. Total OECD imports in 1992 from GSP beneficiaries amounted to $426 billion. of which 71 percent represented dutiable imports (Table II). Imports amounting to $77 billion (about 26 percent of dutiable imports) actually received preferential treatment.

ficiaries of preferences (in terms of the value of impons affected) are the more advanced developing countries under the GSP.J2 Furthennore, effective preferential margins are on average higher for these countries as their exports are weighted in favor of higher valueadded products that face higher MFN tariffs. Accordingly, the impact of erosion of preferences due to declining MFN tari ffs is likely to be important for these countries. However, the advanced developing countries in Asia and Latin America will also be major benefici-

'1The least-developed countries account for about I percent of imports that received preferential treatment under the GSP.

15

ExportS of the least-developed countries (excluding ACP countries) that received preferences in OECD markets under the GSP amounted to $1.0 billion, or about 19 percent of these countries' total exportS to OECD markets (UNCTAD (1994)). The EU accounted for the largest share of preferential imports (46 percent, or $35.7 billion) granted by OECD countries, followed by the United States (22 percent or $16.7 biJiion) and Japan (16 percent, or $12.3 billion).

The major beneficiaries of preferences are the more advanced developing countries. The major beneficiaries in each market, listed in order of the magnitude of their exportS that benefit from preferential treatment, are as follows. Ten countries accounted for about 83 percent of the total U.S. imports receiving preferential treatment in 1992 (Mexico, Malaysia, Thailand, Brazil, the Philippines, Indonesia. India, Israel, Venezuela, and Argentina). In the EU, ten beneficiaries accounted for 72 percent of imports receiving preferential treatment in 1989 (China, Brazil, India, Thailand, Indonesia, Hong Kong, Singapore, Kuwait, Romania. and Malaysia). The top nine beneficiaries of the Japanese GSP scheme in 1990 were Korea, China, Taiwan Province of China, Brazil. Hong Kong, Thailand, the Pllilippines, Indonesia, and Chile. The top three beneficiaries accounted for 50 percent of Japanese preferential imports.

The Lome Convention and the Mediterranean Agreements each provided preferences covering over $9 billion of EU imports in 1989 (Table 12). Willie smaller than the GSP in the value of preferential importS affected by preferences. these schemes cover fewer countries (64 and 12 countries, respectively). Under the Lome Convention, preferences are more important in agriculture compared with industry, as a large amount of imports of industrial products from ACP countries face zero MFN tariffs. Under the Mediterranean Agreements, preferences are more important in industrial products as exports of agricultural products are relatively small.

Preferences under the Caribbean Basin Initiative covered $1.5 billion of imports in 1992, or 16 percent of imports from beneficiary countries.

aries of the Round because of market opening in agriculture and textiles.JJ Furthennore, the benefits from MFN cuts are Likely to outweigh any losses from preference erosion, as preferential exports represent about 26 percent of total dutiable exports i n OECD markets.

The African. Caribbean. and Pacific developing countries (ACP) receive preferential treatment affecting about $10 billion of their expons under the Lome

n Advanced developmg countries in any case face the prospect of be•ng graduated out of GSP \Chemes. The European Comm1ssion announced in June 1994 a phaJ.ed graduation of count riel. and sectors from preferential tariff treatment based on a combination of per capita GOP and industrial and expon performance at a �ectoral level.



Table ll. OECO Imports Under the Generalized System of Preferences (GSP) !In hillums of U.S dollars)

GSP Duty-Free lmpon� GSP alo Share of

Total MFN Dutiable Duty-Free Total MFN dutiable Year Import� Import� Import� imports import�

1976 1 36.5 52.0 10.4 7.6 20.0 1986 237.3 160.8 35.6 15.0 22.1 1990 385.0 259.7 54.3 14 . 1 20.9 199 1 1 392.2 263.0 64.1 16.3 24.4 1\1922 426.0 302.9 77.4 IR.2 25.6

Sourct:: UNCTAD( I994). 1 Excluding the Czech Republic, Hun gal). Poland, and the Slovak Republic undenhe EU scheme. lfor Australia and Canada, the figures arc for 1991.

Table U. Imports Under Preferential Schemes Other Than the Generalized System of Preferences (In billions of U.S. dollars)

Caribbean Bas111 Initiative ( 1992) All products

Lome Convention C 1989) All products

Agricultural Industrial

Mediterranean Agreement!. C 1989) All products

Agricultural Industrial

Total Imports

9.4

21 .3 6.5

14.1!

16.5 2.5

14.1

Sources: UNCTAD (1994); and USITC ( 1993b).

Dutiable Import�

7.3

9.1 6.0 3. 1

9.2 1 .3 7.9

Convention and the Caribbean Basin Initiative. Allhough smaller in absolute value than preferences received by the more advanced developing countries, preferential exports account for a larger share of dutiable exports. The actual effect on these counu·ies is nevertheless likely to be small for three reasons. First. preferential margins are on average smaller for these countries because the composition of exports is often weighted in favor of commodities that in any case face low MFN tariffs (Table 13). An 18 percent reduction in preferential margins would entail very small annual expon losses to sub-Saharan African countries.34 Second, the composition of exports of ACP countries suggests that even this estimate could be overstated. Two thirds of the preferences received by ACP countries are in the agricultural sector. which take the fonn of guaranteed quantitative access for exports of ACP countries. The

'J Yeat\ ( 1993) e�timates the value of preferences enjoyed by �libSaharan African countries in OECD markets at $5 bilhon. This 1s calculated as the present discounted value of forgone eKports consequent to the elimination of all preferences. On a rough calculation, the expon losses consequent ro rhe Uruguay Round would be less than 0.3 percent of the value of their exports in 1992.

1 6

requirement In the agriculture agreement of the Uruguay Round to guarantee a certain amount of im· ports as a share of domestic consumption can be met by providing market access to preference-receiving countries in line with their current market shares. Thus, current level� of access and the implicit preference for high-cost exporters can be preserved. Finally, owing to the phase-in of the tariff cuts. the full impact of preference erosion will only be felt five years (industrial products) and six years (agricultural products) after the entry into force of the WTQ.35 There may. however, be a few countries that are overwhelmingly dependent on preferences on industrial products and could. lherefore, be seriously affected by preference erosion. The impact on individual countries will need to be closely monitored in the context of Fund- and Bank-supported programs as lhe Uruguay Round agreement is implemented. Mediterranean countries enjoy preferences affecting $9.2 billion of their exports. Industrial products are lhe major beneficiaries of the preferences (Table 12). While the Uruguay Round would allow for the preservation of existing levels of access in agriculture. it would not do so for industrial products36 For this reason, the overall impact of preference erosion is likely to be more significant for countries under the Mediterranean Agreements. Even so. this impact will be felt gradually over five years after the entry into force of the WTO.

From a forward-looking perspective, it is likely that preferences will continue to be eroded not only as a result of current and post-Uruguay Round multilateral liberalization, but also because of proliferating regional trade liberalization initiatives. Reliance on preferences. even where they have static positive effects. is therefore not a viable long-term strategy for current benefici-

�Sfuture renegotiation of the Lome Convention and the Mediter· ranean Agreements. a process under way currently. could change preference marg111s under those schemes.

36Howcver. preferential treatment to high-co�t c>-porter� embod· ied in guaranteed quotas may be de facto preserved to some .:xrent in textiles and clothing during the transiuon period owmg 10 the back· loaded nawrc of I ibcralization in the�e sector\.


Integration Issues

Table 13. Sub-Saharan Africa: Preferences for Non-Oil Exports in Industrial Countries• (In perc em)

OECD Average European Union United States Japan

African Preference African Preference African Preference African Preference Exporting Country tariff margin2 tariff margin2 tariff margin2 tariff margin2

Angola 0.2 -1.5 0.3 -3.2 0.1 -0.4 1.8 0.0 Botswana 0.3 -2.8 0.1 -2.9 3.5 -1.1 0.0 -2.1 Cameroon 0.4 -2.5 0.1 -2.8 2.1 - I . I 0.0 0.0 Central African Republic 0.2 -2.2 0.2 -2.3 0.0 - J. J 0.0 0.0 Chad 0.4 -2.7 0.2 -2.9 1.6 0.0 2.5 0.0

Congo 0.1 - 1 .4 0.0 -2.2 0.3 -0.6 0.0 0.0 Cote d'lvoire 0.7 -3.1 0.3 -3.3 3.3 -2.0 1.2 -0.5 Ethiopia 0.7 -1.3 0.1 -1.9 2.0 0.4 1.5 -1.3 Gabon 0.6 -2.0 0.0 -2.7 2.9 0.7 0.0 0.0 Ghana 1.0 -2.2 0. 1 -3.1 2.6 -0.9 2.3 0.0

Guinea 0.6 -2.3 0.0 -2.9 1.9 -1.0 1.8 - 1.9 Kenya 0.5 -3.3 0.2 -3.5 3.1 -2.3 2.4 - I . I Liberia 0.6 - 1.7 0.3 -1.9 2.5 - 1 . 1 0.0 -0.3 Madagascar 0.5 -2.0 0.4 -2.7 0.8 -1.0 0.8 -0.2 Malawi 1.1 -2.4 0.1 -3.5 5.4 -0.6 0.0 -0.1

Mali 0.4 -3.4 0.2 -3.5 3.1 -2.2 0.0 - 1.6 Mauritania 1.7 -2.3 0.2 -3.9 1.2 -1.6 3.6 -0.4 Mauritius 1.3 -3.1 0.2 -3.4 6.4 - 1 .8 4.8 - I . I Niger 0.1 -3.0 0.0 -3.0 3.3 -1.6 0.0 0.0 Nigeria 2.7 -0.9 0.1 -2.6 5.2 0.7 3.7 -0.8

Senegal 0.5 -3.3 0.3 -3.5 4.9 -1.2 3.6 0.1 Sierra Leone 0.5 -3.1 0.0 -4.0 2.3 -0.2 2.6 -0.7 Sudan 0.1 -1.5 0.1 -1.9 0.7 - 1 . 0 0.0 0.0 Swaziland 0.8 -4.4 0.5 -4.9 3.5 -1.9 6.7 -3.0 Tanzania 0.1 -2.3 0.0 -2.5 0.0 -2.4 1.4 - 1 .0

Togo 0.3 -2.8 0.2 -2.8 0.2 -2.8 9.8 -0.8 Uganda 0.9 -2.4 0.6 -3.0 2.1 -0.3 0.0 0.0 ZaYre 0.3 -2.1 0.1 -2.4 1.3 -1.1 0.0 -0.5 Zambia 0.3 -1.7 0.5 -2.9 1.4 -1.4 0.0 -0.6 Zimbabwe 0.9 -2.5 0.2 -3.3 4.0 -1.0 1.2 -1.0

Source: Yeats (1993). 1Tariffs are simple (unweighted) averages of nominal duties levied on the country's exports. 2The preference margin is the difference between the simple average tariff on the African country's ex pons and the simple average tariff on

other exporters of the same products.

aries. At the same time, preferences have not been an unmixed blessing. They have been subject to frequent changes, particularly where preferences have led to successful exports, and have therefore not offered a reliable or secure bas.is for export growth. Preferences have also been used as a bargaining tool by industrial countries to secure policy changes in areas such as workers' rights, intellectual property, and services, with unpredictable consequences. While preferences may have a beneficial effect on exports, the superior export performance of the newly industrializing economies has resulted from thei.r outward-oriented growth strategies rather than preferences.37

37The EU market which grants preferences to newly industrializing economies. ACP. and Mediterranean countries witnessed average annual import growth between 1980 and 1989 from these three groups of 12.1 percent, -5.5 percent. and 3.7 percent. respectively (Pohl and Sorsa (1992)).

17

Integration Issues

The Uruguay Round was unique in terms of the breadth and intensity of the developing countries' participation in the negotiating process compared with previous rounds. Ninety-one developing countties participated in the Round, considerably more than in previous Rounds. In the Tokyo Round, preserving special and differential treatment (S&D) had been a high priority for developing countries (Box 3). In the Uruguay Round, however, many developing countries offered tariff concessions, and the least-developed countries will need to do so by April 1995. The most important symbolic indicator of the developing countries' status in the new trading system is their universal adherence to all the multilateral agreements of the Uruguay Round. The principle that all countries should bave broadly similar rights and obligations is thus ensh�ined in the WTO.



Box 3. Evolution of Special and Differential Treatment

Developing countries have traditionally had a special status in the GATI in terms of their rights and obligations relative to industrial countries-the so-called special and differential (S&D) treai.ment. This was legally enshrined in the GAIT in 1965 when Part IV on Trade and Development was added, in the Enabling Clause of the Tokyo Round in 1979,1 and in the Punta del Este Declaration, which launched the Uruguay Round. In essence. S&D treatment had three elements.

First, and foremost, it allowed a greater freedom to take trade restrictive measures than industrial countries. This was a consequence of the pursuit of inward-oriented policies by developing countries coupled with the bargaining framework of the GAIT, which implied that liberalization, being costly ("a concession·· given), should not be required of developing countries. A logical corollary was that even less liberalization should be sought of the least developed countries. This greater freedom to take restrictive measures was reflected in (I) fewer tariff bindings than industrial countries (see Table 4); (2) persistent recourse to QRs for balance-of-payments reasons under Article XVlll:B of the GATT; and (3) fewer commitments in regard to other restrictive measures, such as export and domestic subsidies, import licensing, and government procurement, as reflected in limited adherence by developing countries to the relevant Tokyo Round codes.

Second, developing countries sought preferential access for their exports to the markets of industrial countries; a related feature was the right of developing countries to grant preferences to each other's exports under less stringent conditions than permitted under Article XXIV of the GAIT. These features were enshrined in various GAIT provisions. That developing countries needed preferential access to compete internationally followed in part from the infant industry view of developing country industrialization; but it also resulted from inward-oriented policies that acted as a tax on exports and hence rendered them uncompctitive without preferential access.2

By reserving the right to protect and seek preferential access, developing countries effectively disqualified themselves from participating equally in the GAIT process of bargaining and were consequently unable to seek a reduction in protection in products of particular interest to them-(agriculture. textiles and clothing, and footwear).

1Formally called "Decision on Differential and More Favorable Treatment. Reciprocity and Fuller Participation of Developing Countries."

2Sce Wolf(l987).

In terms of the substantive commitments under the Round, moves toward equality are reflected in the following major areas:

(I) Tariff bindings. As noted earlier, the scope of tariff bindings undertaken by developing countries will

18

The MFA, a system of discriminatory and restrictive measures on exports of textiles and clothing from developing countries, and the wide-ranging quantitative restrictions, variable levies, and export subsidies deployed by several industrial cow1tries in agriculture were testimony to the inability of developing countries to effectively secure liberalization in products of interest to them; this was inherent to the nonreciprocal relationship engendered by S&D treatment. More recently. they were also unable to prevent d1e growing use of contingent protection measures that were increasingly directed at their exports.

ln the middle to late 1980s, however, the status of developing countries in the multilateral trading system underwent a significant change in the direction of fuJler integration. This was spurred by a change in thinking in favor of more outward-oriented policies. often under Fund- and Bank-supponed structural adjustment programs. A large number of developing countries acceded to the GATI. Between 1987 and April 1994, 29 developing countries had acceded to the GAIT compared with 17 in the 20 years preceding 1987. Unlike in the past, a number of developing countries undertook significant liberalization commitments in recent accessions. Further, since 1989. 6 out of 18 developing countries invoking QRs for balance of payments purposes ceased to do so.3 Also, developing countries, confirming their growing status, became more involved in GAIT disputes. Prior to 1988. developing countries had been involved in 14 percent of all disputes; after 1988, more than one in three disputes involved developing countries. Finally, there were increasing moves £Oward "graduation.·• namely, withdrawing the eligibility of certain countries to preferences under the GSP scheme:� The United Slates. for example. withdrew GSP eligibility in 1989 for the four dynamic Asian economies (Hong Kong. Korea, Singapore, and Taiwan Province of China). Graduation was an inevitable concomitant of the underlying rationale for preferences, namely, that their grant was related to the weak competitive position of developing countries: success, therefore, should obviate the need for preferences.

JThis figure understates the extent to which developing countries reduced reliance on QRs for balance of payments purposes because several of them did not notify their QRs to the GATI. and hence did not invoke Article XVIJl:B in the first place.

4 Implicit graduation began even before these countries were officially declared ineligible under the GSP: it took the form of removal of products of expon interest to these countries from the GSP list and more restrictive conditions imposed on them (Lang· hammer and Sapir (1987)).

move closer to the levels achieved by industrial countries.

(2) Quantitative restrictions. Resort to QRs and other trade restrictions for balance of payments reasons under GATT Article XYIII:B has decreased an1ong de-


Integration Issues

veloping countries.38 Under the Uruguay Round, future disciplines on Lhe balance of payments provisions would require emphasis on price-based measures instead of QRs.

(3) Other nontariff measures. Developing countries will in principle have to adhere ro the rule� on subsidies, antidumping. safeguards, TRIMs, import licensing, customs valuation, and technical barriers to trade, although they will have recourse to transitional arrangements (see below).

(4) New areas. Developing countries will have to adhere to the same standards with respect to TRIPs and the same general rules in the area of services.

(5) Integration of sectors of importance to del'eloping countries. As discussed in Box 3, a consequence of S&D treatment was the inability of developing countries to secure nondiscriminatory market opening, according to normal GATT principles, in sectors of importance to Lhem. In the Uruguay Round, developing countries have been able lo correct the anomaly that sectors of interest to them (textiles and clothing, and agriculture) are exempted from the scope of GATT rules.

(6) Preference erosion. As discussed earlier. the decline in most-favored-nation tariffs will erode preferences currently enjoyed by developing countries under schemes such as the GSP, Lome Convention. and the Caribbean Basin Initiative.

The Uruguay Round agreement will nevertheless continue to provide S&D treatment for developing countries in various ways:

( I ) Fewer substantive obligations or greater ji·eedom to take restrictive mea.wres. In several areas (tar-

1KJn 1988. 16 countrie� had invoked the balance of payments cover for trade restriction� under GATT Aniclc XVIII:B, including (year of disinvocation in parentheses): Argentina ( 1991 ). Bungladesh and Brazil ( 1991). Colombia (1992). Egypt and Ghana ( 1 989). India and Korea ( 1989). Nigeria. Pakbtan, and Peru ( 199t), and the Philip· pine�. Sri Lanka, Tunisia. Turkey, and Yugoslavia. Today. the num· ber has been reduced to 10 (Bangladesh. Egypt. India. Nigeria. Pakbtan. the Philippines. Sri Lanka, the Slovak Republic. Tunbia, and Turkey). w1th a few invoking this provision under GATT Anicle XII (Israel, Poland, and South Africa).

19

iffs, agriculture, government procurement. and subsidies), developing countries will continue to have greater freedom to take trade restrictive actions.

(2) Transitional arrangemellfs. The most important element of S&D treatment in the Uruguay Round i!. that developing countries will have longer time periods in assuming the levels of obligations of Lndustrial countries. Important examples include agriculture, TRIPs. TRIMs. subsidies. and safeguards.

(3) Preferential exemption from restrictive trade action. A positive aspect of preferential treatment will be that the standards of trade restrictive actions in certain areas (such as safeguards and countervailing duties) will be higher for imports from developing countries, rendering them less susceptible to such actions.

{4) Technical and financial assistance. Several agreements (e.g .. TRIPs and services) provide for technical assistance to developing and least-developed countries to implement the results of the Uruguay Round. There is also a recognition of the need to assist least-developed and net food-importing countries (in the form of food aid and technical and financial assistance) if they are adversely affected by an increase in the price or reduced availability of food imports.

While the Uruguay Round represents a watershed in the process of fuller integration of developing countrie� in the multilateral trading system, the process is not yet complete. Much remains to be done, both in terms of developing countries· own liberalization efforts and of securing greater market access in areas of interest to them. One important lesson of the Round is that fuller participation-the willingness of countries to commit themselves to international liberalization-has been rewarded in tern1s of locking in unilateral refonns, securing greater market access in crucial areas, and, above all, maintaining and strenglhening a rules-based system that will be vital to ensure the success of developing countries' structural adjustment efforts. Fuller participation is also essential in giving developing countries more effective influence in addressing the policy challenges that lie al1ead, many of which are likely to impinge crucially on developing countries· interests (e.g., trade and the environment, trade and labor <>tandards, and investment rules).


Appendix I

Quick Reference Guide to the Results of the Uruguay Round

Quick Reference Guide to the Results of the l'ruguay Round

Subject Results

I. Tariffs

1 a. lnduMrial country tariffs on industrial products1

I b. Developing country and transiuon economy tariffs on industrial products1

2. Agriculture

2a. Market access

2b. Internal suppon

A. Market Liberalization

Cut� in impon-weightcd average bound tariffs in five equal annual reduction� (with some exceptions). beginnmg with entry into force of the World Trade Organization (WTO) (expected January 1995).

• Fony percent cut in impon-weighted average bound tariff� on all industrial product\ by industrial countries and an increase in tariff' bindings Oegal maximum rates) to cover 98 percent of impons (previously 94 percent). Peaks of over 1.5 percent in tariffs on industrial products reduced from7 percent to 5 percent of all impons. and the weighted average bound tariff i� down from6.3 percent to 3.9 percent.

• Zero-for-zero agreements in ten major sec to� incre�e the �hare of duty-free impons from 20 percent to 43 percem in mdustnal coumnes. Lower-than-average tariff cuts made in sensitive sectors. such a\ textiles. clothing, footwear. and transport equipment.

• lmpon-weighted average bound tariff on industrial sector tropacal products falls from 4.2 percent tO 1.9 percenl. resulting in a 55 percent reduction.

• Bound tariffs on natural resource-based products are cut by 33 percent. reducing the weighted average from 4.0 percent to 2. 7 percent. Larger-than-average gains in �ome metals and minerals. and lower gain� for fish.

Tanff bindings increased from 13 percent to 61 percent of impom by developing countncs and from 74 percent to 96 percent of import� by transition economics.

The stan of a gradual liberalization proccs� in the sector-initially over �ix year� for indu�trial countries and ten years for developing countries. In the final year of the implementation period (defined in the agreemcm as six ye<ars), members agree to engage in negoliataons to continue the refom1 process.

• All nontariff measures. except those justified under normal GATT exception� (e.g .. halance of payments), to be converted to tanffs (tariffication) at the stan of the implementation period. with average tariff cuu; by industrial countries of 36 perccm over �ix years from a 1986-.SR base, and a minimum cut of 15 percent on all tariff lines. There are a few exemptions from the tariffication commitment (utilized by Japan (rice) and Israel (sheepmeat. skim milk powder. and cheese)) and, in these cases, 4 percent of domestic con�urnption in the 1986-8R ba�e period is a minimum access guarantee that must increase by 0.8 percent annually to 8 percelll by the end of the implementation period. This exempt a on will be reviewed tn the linal year of the implementation period.

• Tariffbtndings increased from 81 percemao I 00 percent of am ports in industrial coumnes. from 25 percent to I 00 pcrccm in developing countries. and from 54 percent to I 00 percent tn Lran�ilion economic�. lndu�trial countries cut agricultural tropical product� by 43 percent.

• Minamum import access by tariff quota!. 10 be guaranteed in respect of all tariffied products. If impon!> are less than 3 percent of domestic con�umption in 1986-88 base period. access mu�t increase to at least 3 percent and 5 percem at the beginning and end of the implementation period, rc�pcctivcly. If the access level is greater than 5 percent in the base period. this level of acces� mu�t be maimaincd (current acces�).

• Domestic support, as calculated by the total Aggregate Measurement ofSuppon <AMS 1 for all products tat-en together, must be reduced by 20 percent from a 1986-88 base over the implemental ion period. Domestic suppon� of les� than 5 percent are exempted from the reduction commitment (de minimis prrwi.IWII). The so-called green box sub,idies-ccnaan government service program�. decoupled income suppon. social safety net programs. structural adjustment assistance. environmcmal programs. and regional as�istancc programs-arc exempt t rom reduction commitmcms. Also exempt arc non-dccoupled ancome suppon provided thi� �upport blinked to production-limiting program�.

20


Quick Reference Guide (continued)

Subject

2c. Expon subsidies

2d. Special safeguard

2e. Developing countries

2f. Peace clause

3. Textiles and Clothing

Quick Reference Guide

Results

Expon subsidies must be reduced by 36 percent in value and subsidized exports by 21 percent in volume for each product over the implementation period from a l 986-90 base.ln cenain cases, in the initial years. the reduction commitments can be calculated from a 1991-92 base, and there is some flexibility in phasing the cuts between the second and fifth years.

Special safeguard provisions, triggered by volume increases or price reductions. permit the impo�ition of additional duties up to specified limits. The volume trigger is sensitive to the degree of import penetration. The price trigger is relmed to 1986-88 average prices expressed in domestic currency. The volume trigger leads to the nondiscriminatory application of additional duties, whereas the price trigger leads to additional duties fixed on a consignment· by-consignment basis. Several provisions introduce greater flexibility for dcveloping countries:

• Reductions in tariffs, domestic suppon, and export subsidies are set at two thirds the levels specified above. and spread over ten years.

• Least-developed countries are exempted from all reduction commitments.

• Exemption from the tariffication commitment on any agricultural product that is a primary staple in a traditional diet. subject also to the tariffication exemption provisos mentioned above (utilized by Korea and the Philippines for rice), but with slightly different minimum access commitments. Minimum access must rise from I percent of base period domestic consumption to 4 percent at the beginning of the tenth year.

• Ceiling bindings (legal maximum tariffs set above applied rates) are permitted as the basis from which tariff reductions arc to be calculated during the implementation period. If a ceiling binding is adopted instead oftariffication. the special safeguard remedy (2d) above is not available and the current and minimum access commitments do not apply.

• Exemptions from domestic subsidy commitments when subsidies relate to investment (and are generally available). diversification away from production of illicit narcotic crops and input subsidies for low-income producers. The de minimis provisions on domestic subsidies apply at a I 0 percent level of suppon (5 percent for industrial countries).

• Exemptions from expon subsidy reduction commitments when the subsidies relate to export marketing and transpon.

• Food aid exempted from expon subsidy commitments. provided aid is not tied to commercial exports. complies with Food and Agricultural Organization principles, and is supplied on term� no less favorable than those of the I 986 Food Aid Convention.

• The Ministerial Decision on Measures Concerning the Possible Negative Effects of the Refonn Program on Least-Developed and Net Food-Importing Developing Countries contains provisions on maintaining adequate levels of food aid and preferential treatment in relation to agricultural export credits. It also notes that developing countries may be eligible to draw on the resources of international financial i nst it ut ions under existing faci I it ies, or such faci I it ies as may be established. in order to meet any adjustment needs emanating from the Uruguay Round.

A "peace clause" (nine-yeardurMion) constrains the use of antisubsidy actions. For subsidies excluded from the reduction commitments (the green box subsidies). the measures will be considered nonactionable in terms of countervailing duties and legal challenge in the WTO (on grounds of violation, nullification or impaim1ent. injury, and serious prejudice). For subsidies subject to domestic reduction commitments and expon subsidies. countervailing duties may be levied upon proof of injury or threat thereof. and cenain restraints are imposed on legal challenges.

• Gradual integration of the sector into the WTO/GATT 1994 in a four-stage phaseout over ten years. under the supervision of a Textiles Monitoring Body.

• Products accounting for not less than I 6 percent of total volumes of imports (in tern1s of the stated Harmonized System lines or categories) in I 990 to be integrated into GATT I 994 upon entry into force of the WTO. After the third year of the phaseout period, at least a fun her 17 percent of total I 990 impon volumes of the listed products to be integrated, followed by at least I 8 percent after the seventh year, and the remainder ( 49 percent) at the end of the ten-year period. Each phaseout must encompass products (chosen by the restricting country) from four groups-tops and yarns, fabrics, made-up textiles. and clothing.

• Outstanding quota restrictions shall be expanded by the prevailing (bilaterally negotiated) quota growth rate plus 16 percent annually in the first three years, by 25 percent in the subsequent four years, and by 27 percent in the final three years. Swing. carryover, and carry forward provisions shall continue 10 apply as they do under the MFA.

• A commitment is made to take the necessary anticircumvention measures to deal with transshipment, rerouting. false declaration of origin, and forgery.

21


APPENDIX I QUICK REFERENCE GUIDE TO RESULTS OF URUGUAY ROUND


Subject

1. Safeguards

2. Antidumping

Results

• Establishment of a "transitional safeguard" only on producLS not yet integrated into GATT I 994, which could include products not subject to restriction. This safeguard may be applied selectively to panicular exponers. Safeguards may be maintained for a maximum of three years and phased out over their duration. There is less flexibility in the use of safeguards against small exporters, least-developed coumries, wool producers, outward processors. and cottage industries.

• Provisions to redistribute quotas in favor of quota-constrained and efficient exponers.

B. Rules

• More flexible use of safeguards under tighter disciplines is to be monitored by a newly established Commiuee on Safeguards. Disciplines include specification of procedures for investigation, publication of findings and notification, and relevant criteria for detern1ination of injury and causality. Import quotas for safeguard purposes may discriminate among suppliers only in exceptional circumstances, where impons from a member increase disproportionately.

• Duration of safeguard measures is a maximum of four years in the first instance. but can be extended for a funher maximum period of four years, provided conditions warrant this. appropriate procedures are followed, and there is evidence the industry concerned is adjusting. Degressivity of safeguard measures taken for more than one year is required. Developing countries can maintain measures for a maximum often, instead of eight years.

• Existing safeguards to be eliminated in five to eight years.

• New safeguard measures cannot usually be reintroduced for a period equal to the time they have been previously applied, and in any event not until two years after the previous application of the measure. Developing countries may reimpose safeguard measures after half the time of a previous application, provided the minimum two-year period of nonapplication has elapsed.

• Under specified conditions, no retaliation is foreseen during the first three years during which a measure is applied.

• Developing country exponers accounting for less than 3 percent of a country's impons of a product shall be exempt from safeguard action. provided that all developing members with less than a 3 percent share account for less than a 9 percent share overall.

• VERs and similar measures on ex pons or impons are to be eliminated within four years, although each member has the right to maintain one such measure until the end of 1999. Governments are not to encourage or suppon the adoption of VER-I ike measures by public or private enterprises. A safeguard measure taken in the form of a quota under this agreement could. by mutual consent, be administered by the exporting member.

• Some improved provisions, including those in relation to dumping margin calculations. injury determination. the definition of domestic industry, investigation procedures. and standard of evidence. Tighter disciplines include reducing discretion in the calculation of dumping, specification of panics with standing, of conditions under which provisional measures and price undertakings can be resorted to, of pub I ic notice and judicial review requirements, of refunds of antidumping duties, and of the use of best information available in investigations.

• There are de minimis provisions relating to the margin of dumping (less than 2 percent), the volume of dumped imports {less than 3 percent of imports, or cumulatively 7 percent among exponers supplying Jess than a 3 percent share), and the extent of injury. Cumulation of impons from more than one country in an injury investigation i not permitted under circumstances of de minimis (nor unless circumstances so warrant).

• A "sunset" provision requires that antidumping duties remain in place not longer than five years unless a review demonstrates that the removal of a duty would likely lead to continuation or recurrence of dumping and injury.

• The standard of review provisions could cunail the reach of dispute settlement procedures. In addressing the facts of a case, panels are limited to a consideration of whether facts were properly established and their evaluation unbiased and objective. If these standards are satisfied, a decision by national authorities cannot be ovenurned, even if a panel might have reached a different conclusion. In considering matters of law, in accordance with customary rules of public international law. if there is more than one permissible interpretation, a panel shall find in favor of the national antidumping authorities if their case rests upon one of these interpretations.

• Anticircumvention provisions, allowing for antidumping action against producers that shift the location of production in order to avoid antidumping duties. are not included in the agreement, but remain subject to negotiation.

22


Quick Reference Guide (cuutinued)

Subject

3. Subsidies

4. Preshipment Inspection

5. Rules of Origin


Results

• Subsidies are explicitly defined as involving a financial contribution by the government and being speci fie to certain enterprises or industries (i.e., not generally available). Subsidie� are categorized: (I) prohibited (export subsidies and subsidies favoring the use of domestic over imported goods): (2) actionable (if they cause injury. nullification or impainnent of benefits. or serious prejudice): and (3) nonactionable (nonspecific subsidies, assistance for certain research activities, regional subsidies. and subsidies for environmental adaptation).

• Subsidies that may be countervailed pursuant to national procedures are not specitied, except that they must involve a financial contribution and be specific as defined above. However, two categories of subsidies-nonactionable ((3) above) and de minimis (less than I percent ad valorem, less than 2 percent in the case of developing countries )--cannot be countervailed under national law.

• Serious prejudice is presumed to exist when subsidization of a product exceeds 5 percent. subsidies are used to cover operating losses (except in certain circumstances), or where there is direct debt forgiveness. Nonrecurring subsidies, including debt forgiveness. linked to privatization programs in developing countries are not actionable for serious prejudice or nullification or impairment of benefits.

• Least-developed countries are allowed to maintain export subsidies. as are other developing countries whose per capita income is less than $1,000 a year. Developing countries that arc not. or cease to be, in these categories, arc required to phase out export subsidies within eight years (with the possibility of extension). Developing countries and least-developed countries are exempted from the presumption of serious prejudice. The prohibition of subsidies linked to the use of domestic over imported products shall not apply to developing countries for five years, and to least-developed countries for eight years.

• Economies in transition are granted a seven-year period within which to eliminate prohibited subsidies and are exempted during this period from the presumption of serious prejudice for subsidies on debt forgiveness.

• Export subsidies cannot be increased from I 986 levels, or levels prevailing when the agreement enters into force. and must be removed if export competitiveness is auained (defined as 3.25 percent of world trade in the relevant product for two consecutive years).

• Provisions very similar to those on antidumping are included in the text on countervailing duties. The de minimis provisions establish exemptions for developing countries from countervailing duties when subsidy levels do not exceed 2 percent (or 3 percent if a country accelerates the timetable for eliminating export subsidjes), or import shares are less than 4 percent, and cumulatively among countries benefiting from this provision, less than 9 percent of total imports.

• Creates a framework for dealing with activitie s o f preshipmcnt inspection companies relating to the verification of the quality. quantity. price. and customs classification of goods in the territory of an exporting member.

• Sets out obligations of user govemments on nondiscrimination, transparency. confidentiality and appeals procedure. and nondiscrimination, transparency, and technical assistance commitments of exporter governments. Establishes guide I ines for price verification. and the basis on which comparisons may be made (but leaves customs valuation aside).

• Introduces independent review procedures for disputes between preshipment inspection emities and exporters. Majority decisions are taken by the review body and are binding on both parties.

• Eswblishes disciplines for rules of origin used in nonpreferential commercial policy instruments, explicitly excluding origin rules relating to preferential trading arrangements. Sets out a three-year work program to hannonize nonpreferential rules of origin (in cooperation with the Customs Cooperation Council).

• Disciplines spelled out on transparency. consistency.the use of positive criteria for the definition of origin, transparency, consultation, review, and protection of confidential infonnation. Seeks a common definition of' substantial transformation and creates a presumption in favor of the change in tariff heading criterion over an ad valorem rule or criteria relating to processing operations.

• Contains a Common Declaration on preferential rules of origin that commits members to general disciplines. but not to harmonization.

23




Subject

6. Technical Barriers to Trade

7. Sanitary and Phytosanitary Measures

8. GArr (1994) Articles2

8a. Bound tariff schedule, (Article II: I (b))

8b. Balance of payments provisions (AniclesXII, XIV, XV. XV[JJ:B, and 1979 Declaration on Trade Measures Taken for Balance of Payments Purposes)

8c. State-trading enterprises (Article XVIJ)

8d. Customs unions and free trade areas (Article XXJV)

8e. Waivers from GATT obligations (Article XXV:5)

8f. Renegotiation of tariff bindings (Article XXVOI)

9. Import Licensing

10. Customs Valuation

1. Trade-Related Intellectual Property Rights (TRIPs)

Results

• Technical regulations (mandatory st<UldCLrds) and confom1ity assessment procedures are not to discriminate against imports or between imports from different countries. They should not create unnecessary obstacles 10 trade and hence should not be more trade restrictive than necessary to fulfill a legitimate objective. taking intO account the risks of nonfulfillment. Establishes a code of good practice for the preparation, adoption, and application of voluntary standards.

• Creates a presumption in favor ofhannonized international standards. technical regulations. and confonnity assessment systems, without, however, denying any member the right to establish levels of standards it considers appropriate to fulfill legitimate objectives.

• Extends the coverage of the agreement to subnat ion a I entities and to product-related proce�s and production methods. and establishes new disciplines for voluntary standards.

• Measures related to food safety and animal and plant regulations must not arbitrarily or unjustifiably discriminate between members or be used as disguised trade barriers. They should be applied only to the extent necessary to achieve objectives, be based on scientific principles.

and not be maintained against scientific evidence.

• Measures should be based on international standards. StTicter standards are perrnincd if there is scientific justification or as a consequence of appropriate risk assessment. Stricter standards are not to be more trade restrictive than necessary. given economic and technical feasibility.

• Requirement to include other duties and charges in bound schedules: other duties and charges arc to be bound at the level of the most recent rather than the first negotiation of a tariff.

• Recommendation for the greater usc of price-based measures (e.g., import surcharges) rather than quantitative restrictions.

• Public announcement of time schedules for removal of measures.

• Improved procedures for balance of payments consultations.

• Develops a clearer working definition of state-trading enterprises for notification purposes and makes provision for the review of notifications and countcmotifications.

• Establishes a methodology for the evaluation of duties before and after the fom1ation of regional trading arrangements.

• Sets out clearer criteria for the review of new or enlarged regional trading areas. Interim agreements should lead to full-nedged regional trading areas within ten years.

• Clarifies procedures to be followed when tariff bindings are renegotiated.

• Sets conditions and time limits for waivers in accordance with WTO provisions. All existing waivers arc 10 be termin,ated in two years unless their renewal is agreed upon.

• ew procedures for detem1ination of members with negotiating rights: in addition to established negotiating rights, one additional negotiating right is established-for the member with the highest proportion of the product concerned in its exports.

• Establishes greater clarity on. and expediting for automatic and nonautomatic licenses, strengthening provisions on the administration of licensing procedures. and on publication requirements. Emphasizes that licensing requirements should not in themselves constitute obstacles to trade.

• The Tokyo Round agreement remains unchanged, but a ministerial decision recognizes difficulties faced by some customs administrations in detecting fraud. The decision permits a partial reversal of the burden of proof away from the authorities and onto the importer in cases where doubts persist regarding the transaction value.

• Another ministerial decision reiterates the right of developing countries to retain officially established minimum plfices for valuation purposes undertem1s and conditions agreed to by the members. Developing countries can delay implementation of the customs valuation agreement for a five-year period. which may be extended if conditions so warrant. On the question of valuation of imports by :sole agents, sole distributors. and sole concessionaires, the decision recommends suppo11 and studies from the Customs Cooperation Council.

C. NewAreas

• Establishes standards for the acquisition and protection of intellectual property rights, provisions for their national enforcement, and for multilateral dispute prevention and settlement.

24



Sub·ect

2. Trade-Related investment Measures (TRJMs)

3. Trade in Services


Results

• National treatment and most-favored-nation treatment arc to apply in respect of all intellectual propeny rights covered by the agreement.

• Minimum standards of protection for intellectual propeny are provided in respect of copyright, trademarks. geographical indications, industrial designs, patents, layout designs of integrated circuits. protection of undisclosed information.

• In the patent area, for example. minimum standards provide for patent protection in all areas of technology. including pham1aceuticals. for 20 years. Members cannot require the local working of patents. but can license non-patentees (compulsory licensing) to produce the patented product under ccnain conditions.

• The agreement recognizes the right to control anticompetitive practices and. to this end. provides for consultation and cooperation among members.

• The enforcement provisions are designed to ensure that intellectual propeny rights established under the agreement can be effectively and expeditiously enforced under national law.

• A one-year delay period is envisaged for the implementation of the TRIPs agreement following the establishment of the WTO. Developing countries and transition economics are pennitted to delay implementation for a fun her four years. except for the national treatment and most-favored-nation commitments. Where patent protection is called for in areas of technology not currently protected in developing countries, a grace period of an additional five years is provided in respect of the technologies in question. The least-developed countries are permitted ten years on the same basis, with the possibility of funherextensions. Notwithstanding the above transition provisions, all patentable inventions on pharmaceuticals and agricultural chemical products made after entry into force of the WTO must be protected.

• All TRIMs inconsistent with Anicles [II and XI of GATT 1994 are to be notified within 90 days and eliminated within two years, five years. and seven years for developed, developing. and least-developed countries, respectively; possibility under certain circumstances of an extension of the transit ion period for both developing and least-developed countries.

• An illustrative list of prohibited TRIMs identifies local content requirements and tradebalancing requirements as contrary to Anicle Ill, and foreign exchange balancing and expon limitation requirements as contrary to Article XI.

• Extends multilateral rules to a large segment of world trade (about 20 percent- 25 percent). improves predictability of conditions for investment in service sectors, although many initial liberalization commitments consolidate the status quo in the first instance.

• The General Agreement on Trade in Services (GATS) establishes the nondiscrimination principle. It includes most of the GATT-type provisions for controlled depanures from GATS commitments (regional arrangements. general exceptions. security exceptions, etc.). Specific exemptions from the MFN commitment have been listed by members and shall be reviewed if they are still in existence after five years. In principle, they should be eliminated after ten years. More than 70 countries have registered exemptions from the MFN provision.

• National treatment and conditions of market access are subject to negotiation. Access restrict ions may be defined in terms of mode of delivery (cross-border trade, consumption abroad, commercial presence, movement of service providers). Additional commitments may be negotiated on such maners as professional qualifications, standards, and licensing. All liberalization undenakings negotiated by members are inscribed in their schedules of specific commitments. The GATS provides for progressive liberalization through successive rounds of negotiations, starting not later than five years from the establishment of the WTO. However, shorter deadlines arc provided for negotiations on specific sectOrs (e.g .. natural persons, financial services) and specific subjects (e.g., government procurement, safeguards). • The GATS provides the necessary framework for establishing and maintaining liberalization commitments, including provisions on transparency. domestic service-related regulations and adjudication procedures. and recognition of qualifications and other prerequisites for service suppliers.

• Conrinuing negotiations are called for on provisions relating to safeguards. subsidies. government procurement. and hannonization of domestic regulations.

• While the schedules of commitments of developing countries are more limited in scope than those of industrial countries. the participation of developing countries in services liberalization is expected to continue as a gradual process, in line with the development situation of each member.

• Special annexes and decisions have been drawn up on the movement of natural persons. professional services, financial services. telecommunications, transpon services, and on negotiations relating tO basic telecommunications. These annexes and decisions address the specificities of the sectors and the tem1s and conditions of negotiations in these areas.

25



Quick Reference Guide (concluded)

Subject Result�

I. World Trade Organization ( WTO)

2. Integrated Dispute Settlement

J. Trade Policy Review Mechanism ITPRM)

I. Civil Aircraft

2. Government Procurement

D. Institutional

• Establishe� the legal ba\i� for t he WTO a\ a single, indivibible undenaking requiring adherence to all the agreements on goods (including the GAIT 1994). and the agreement\on services. and TRIPs I only the "PI uri lateral Trade Agreemcnts"'-on civil aircraft and government procurement. and the International Dairy Arrangement and Arrangement Regarding Bovine Meat-remain legally distinct and do not require universal adherence). Mcmber�hip in the WTO is conditional on countries having schedules of conce�siom. and commitments on market acce�'> (induMrial and agricultural produc� and -.crviccs).1

• Regular mmistenal meet1ngs are provided for 111 order 10 improve the effectivene�s of the WTO.

• Collaboration on policy coherence and ongomg cooperation between the WTO and the World Bani. and lmernational Monetary Fund <tre to be strengthened.

• The WTO <�greement mcorporatesconditions forthe grant and review. and lime limits for waivers from WTO obligations.

• The WTO eliminates the grandfathering of existing legislation incom.istent with the GATT. but allowed under the GAIT's Protocol of Prov1sional Application; the only exception will be certain U.S. maritime law\.

• The WTO cnshnncs the smglc undertaking concept by only allowing non application of WTO agreemem� a� a whole; GATr Contracting Panic� can in vol-e nonapplication only if. at the date of entry into force o f t he WTO. nonapplication wa� effective between them.

• The normal practice of decbion making by consensus will continue. with varymg voting majorities where consensus cannot be reached.

• Introduce� greater \peed and automaticity into di�pute �elllemcnt proccdur.:s under fully integrated arrangements (eliminating competing dispute senlernent forums within the �ysteml.

• Provide� greater automaticily in the adoption of repom by dispute 'ett lement panels and 111 the right of retaliation in the event that a member doe� not comply with adopted panel recommendations; this is accomplished by a change in the voting procedure from cons.:nsu� to adopt repon., (or authorize retaliation) to consensus not to do �o.

• Establishes a binding appellate review process.

• Limit' unilateral actions by requiring that multilateral dbpute settlement procedure� mu\t be followed in respect of, and that unilateral determinations must not be made of. violation ol obligation.., of, or nullification or impairn1en1 of benefit\ under, or impediment to the allainment of the objective' of, the Uruguay Round agreements.

• Allows. under pn:scribed conditions, for the possibility of cross-n:taliation. that i'>. retaliating in one sector or agr.:crncm for violations in another.

• Prov1des for greater access by the public to mfonmuion of a nonconlidcntial nature.

• E'>tablishes that members are answerable for noncompliance by �ubnational authontie� wuhm their lerritorie� with WTO obligations.

• TI1e TPRM. which ha� been operating provisionally '>ince 1989. hn� been made pem1ancnt. The scope of trade policy surveillance. through regular reviews of members' policies. has also been widened to encompus� all areas covered by the WTO. including go<xh, \Crvice�. and intellectual propeny.

E. Plurilaleral Trade Agreements�

• This sector is subject to the WTO subs1dics discipline�. with cenain exemption,, and to the di�pulc �cttlement system. Fun her negot iat iono; may rc�ult in disci pi ines add it ion a I to thm.e in the WTO and 1979 colic on 1 radc in c i vi I aircraft.

• The new agreement expand\ coverage to serv1ces and to o;ubcemral leveb of government and to public utilitic�. Procurement covered i' likely to increase tenfold from the current amount of $30 hill ion. Cenain commitment� arc not extended to all other member' or arc only extended on a r.:ciprocity basi�. Many ofthc�e derogation� are likel; 10 be removed a.\ a result of the U.S.EU bilateral agreement in April 1994 and of future negotiations involving other member\.

1Excluding petroleum data on tariff> are hahed on GATT ( 1994b) and cover '>elected develop111g countries. 2A text on nonapplicauon modifies the provisions of GATT 1947. 'The least-developed countries have to submit their �chedule' by April IS. 1995. 4Aithough not fonnall) part of the Umguay Round. negoliation' on civ1l <lircraft and government procurement were undcnal..en within the

t:••rn,. tin,,. fr;1mP

26


Appendix II

Summary of Specific Commitments in the Financial Services Sector of Selected Countries

Summary of Specific Commitments in the Financial Services Sector of Selected Countries'

United States2

European Union

Limitations on Market access

Banking and orherftncmcia/ sen·ices (excluding insurance). No limitations are maintained on the crossborder supply of this category of services. Limitat.ions affect mainly the supply of these services through commercial presence. These limitations include the following: (i) branches of corporations organized under a foreign country's Jaw are not pennitted to carry out credit union, savings bank, home loan. or thrift business activities in the United States; (ii) in order to accept or maintain domestic retail deposits of Jess than $100,000. a foreign bank must (with some exceptions) establish an insured banking subsidiary; (iii) initial entry or expansion by a foreign person through acquisition or cstablishmem is restricted in some states.

Insurance and insurance-related services. No restrictions are maintained on the cross-border supply of this category of services except in the states of Nevada and Maine where some restrict ions apply tO the purchase of reinsurance.

Restrictions in this subsector affect mainly the commercial presence of foreign insurance or insurance-related service providers, and include the following: (i) insurance companies owned or controlled by governments outside the United States are not authorized to conduct business in some states; (ii) some states have no mechanism for licensing initial entry of a non-U.S. insurance company as a subsidiary, unless that company is already licensed in another U.S. state; (iii) U.S. citizenship is required for all or a cenain proponion of the members of the board of directors of licensed companies in some states.

For all subsec10rs. in some EU members, an authorization is required forcenain type or ru110unt of foreign investment.

Banking and otherftnancial services (excluding insurance). In all members states (i) establishment of a specialized management company is required to perfonn the activities of management of unit trusts and investment companies; and (ii) only finl1S having their registered office in the communities can act as depositories of the assets of investment funds.

In some EU members, establishment is required in order to provide cenain types of financial services. These include. for example, the provision of investment advisory services in Belgium, investment research, asset management, and services regarding mergers and acquisitions in Italy. lead management of issues of securities denominated in domestic currency in Germany and the United Kingdom. and securities trading in Belgium. Denmark. Greece. and Spain.

In Ponugal, the establishment of non-EU banks may be subject to an economic need test.

27

Limitations on National Treatment

Banking and orherftnancial services (excluding insurance). No limitations are maintained on the crossborder supply of this category of services. Foreign banks are required to register in order to engage in securities advisory and investment management. This registration involves record maintenance, inspections. submission of reports, and payment of a fee.

Foreign banks cannot be members of the Federal Reserve System. and thus cannot vote for director of a Federal Reserve Bank. Branch, agency, and representative offices of foreign banks are required to be charged for Federal Reserve examinations.

Insurance and in.wrance-relared sen•ices. A federal excise tax is imposed on insurance premiums covering U.S. risks that are paid to companies not registered in the United States.

In some states, agency licenses are issued to nonresidents for only cenain lines of insurance. and a higher fee for nonresidents may be charged.

Banking and otherjinancial sen•ices (exrluding insurance). No limitations arc imposed on the cross-border supply of this category of services. Issues denominated in French francs may be lead managed only by authorized French subsidiaries of foreign banks.

In italy, offices of foreign intennediaries cannot carry out promotional activities in the area of investment in securities.

In the Netherlands, branches and subsidiaries of non-EU banks need permission to lead manage guildersdenominated paper.


APPENDIX II SUMMARY OF SPECIFIC COMMITMENTS

Summary of Specific Commitments (continued)

Japan

Brazil


Insurance and insurance-relmed services. Limitations in this subsector generally involve requircmems that foreign insurance companies be established in the Community, or in the member country in order to be able to supply cenain types of insurance or insurance-related services (e.g .. air transpon insurance in Denmark, Gennany, and Ponugal; insurance of CTF ex pons by residents in Italy. and insurance of risks relating to ground transponation in F rance).

ln some EU countries, the establishment of commercial presence is subject to an authorization, or certain requirements (e.g., a cenain length of prior experience).

Banking and otherflnancial services (excluding insurance). Commercial presence is required for discretionary investment management services as well as for financial/securities futures and options transaction services.

Commercial presence for the purpose of supplying investment trust management services must be through a juridical person established in Japan.

Overseas deposits and trusts contracts denominated in foreign currencies, and over¥ I 00 million value, and those denominated in yen are subject to approval. Cenain services, including trade in payments instruments and foreign exchange. swaps, and factoring may be supplied through authorized foreign exchange banks in Japan. Cross-border supply of these services are in principle subject to approval. Japan maintains restrictions on the assets of pension funds, which could be managed by investment management firms.

Japan has not made standstill commitment regarding the issuance of licenses required for establishing subsidiaries and branch offices. and for granting authorization for licensed service suppliers to expand existing operations or conduct new activities.

Insurance and insurance-related services. Commercial presence is in principle required for insurance contracts covering goods being transponed within Japan and for ships and aircraft of Japanese registration.

Insurance services are not allowed to be supplied through an intermediary in Japan, and establishment of commercial presence as insurance brokers is not allowed.

Japan intends to take measures for making substantial liberalization of cross-border insurance transactions for ships of Japanese registration used for international maritime transportation, and aircraft of Japanese registration, as well as for introducing the insurance brokerage system.

For all subsectors, all foreign capital invested in Brazil must be registered with the Central Bank of Brazil to be eligible for remiuances of profits abroad.

Banking and other financial services (excluding insurance). Brazil has not undenaken commitment to market access for the cross-border supply of this category of services.

Establishment of new branches and subsidiaries of foreign financial institutions. as well as increases in their panicipation in the capital of Brazilian financial institutions. is not pennitted. The number of branches of each foreign bank is limited to the number existing on October 5. 1988.

28


Insurance and insurance-relared sen•ices. No limitations are imposed on the cross-border supply of this category of services.

Italy and Spain have a residence requirement for actuarial profession.

The general agent of an insurance branch will need to have resided in Denmark for the last two years.

Banking and otherflnancial sen-ices (excluding insurance). Deposits taken by branches of foreign banks are not covered by the deposit insurance system.

Japan has not made a standstill commitment regarding the issuance of licenses required for establishing subsidiaries and branch offices. and for granting authorization for licensed service suppliers to expand existing operations or conduct new activities.

Insurance and insurance-related services. No I imitation is imposed on the cross-border supply of this category of services.

Foreign companies are required to retain in yen an amount corresponding to their technical and claim reserves for yen-denominated insurance policies in Japan.

Banking and other financial sen•ices (excluding insurance). Brazil has not undertaken specific commitment to grant national treatment to the cross-border supply of this category of services.

Banks controlled by foreign capital and branches of foreign banks are (i) subject to higher minimum requirements for paid-in-capital and net wonh. and (ii) not allowed to set up automatic reller machines.


Summary of Specific Commitments

Summary of Specific Commitments (concluded)

India

Korea-'


Insurance and insurance-relared sen•ir·es. A special fonn oflegal entity is required when selling up a commercial presence for the purpose of supplying freight, life, propeny, medical care. and liabilities insurance. Foreign panicipation is limited to 50 percent oft he capital of a company and to one third of its voting stock. The establishment of insurance brokcring agencies is restricted to natural persons only. in all the insurance lines mentioned above. Brazil has not undenaken commitment regarding the cross-border supply of these services.

Banking and nrherjlnancial sen•ices (excluding insurance). India has not undertaken commitment with respect to the cross-border supply of this category of services. The amount branches of foreign banks could invest in other financial services companies is subject to ce•1ain limits. Licensing of foreign banks may be denied when the share of these banks in the total assets of the banking system exceeds 1 5 percent.

Insurance and insurance re/ared sen•ices. India has not mnde commitments in this sector, except for freight insurance and reinsurance. For freight insurance, there is no requirement that goods in transit to and from India should be insured with Indian insurance companies only. Reinsurance can be taken with foreign reinsure rs to the extent of the residual uncovered risk after obi igatory or statutory placements domestically with Indian insurance companies.

Foreign investment is subject to certain restrictions, including ceilings on investment in stocks.

For all financial services subsccto rs, cross-border supply of financial services and financial services supplied abroad to Korean consumers may not be settled in Korean currency.

New financial products are subject to approv<tl.

Bankinfi and orher(inancial services (excluding insurance). Korea has not undenaken commitment regarding the cross-border supply of this category of services.

Commercial presence in banking business (including deposit, loan, foreign exchange. seulement, and clearing services) is penni ned only through representative offices and branches. No commitmenr is undenaken regarding financial-leasing services.

Issuance of debentures is prohibited, and limitations apply to deposits and loans in fo reign currency.

Insurance and insurance-re/ared services. Korea has not undertaken commitmem regarding the cross-border supply for this category of services, except for marine export cargo insurance. and reinsurance and retrocession.

The establishment of a commercial presence is subject to an economic need test, and the number of sales offices that can be set up is limited.

No commitment has been made with respect to claim seulement and actuarial businesses.


Insurance and insurance ri!lared services. Brazil has not undertaken specific commitment with respect to the crossborder supply of freight, life. propeny. liability. and medical care insurance.

Banking and mherjinancial sen•ices (excluding insurance). Once licensed. foreign banks are virtually not subject to any restrictions to national treatment, except that they are required to (i) establish a local advisory board. and (ii) publish periodically a consolidated financial statement of their Indian branches.

Insurance and insumnce re/ared services. India has not undenaken commitment to grant national treatment for this category of services.

Banking and orherfinancial sen·ices (excluding insurance). Korea has not undertaken commitmcm regarding the cross-border supply of this category of services.

Securities finns are required to have a minimum amount of operating funds and are not allowed to establish multiple branches.

Insurance and insumnce-relared serl'ices. Ceding insurers are required to reinsure with priority given ro reinsumnce companies established in Korea. except for aviation insurance.

Top executive personnel of insurance establishments are required to reside in Korea.

1 Under the GATS (Pan Ill), countries undenake commitments according to a positive list approach whereby they offer market access and national treatment only for the service industries listed in their schedules, and for each of the four modes of supply, subject ro whatever limitations are included in these schedules.

None of the selected countries in this table has undertaken commitment regarding the presence of natural pe rsons in its territory for the purpose of supplying services, except (subject to certain conditions) for the entry and temporary stay of managers, executives, and specialists.

2The United States, the European Union, and Japan specified their commitments according to the Understanding on Commitments in Fin<m· cia I Services, which establishes an alternative approach (ro the one ser up in Part Ill of the GATS) whereby countries make market access offers in all financial services subsectors and agree to a standstill clause (except where reservations arc taken).

3Korea undertakes a standstill commitment for limitations on market access and national treatment in all financial services listed in its schedule.

29


Bibliography

Advisory Committee on Trade Policy and Negotiations, The Uru.�uay Rou11d of Multilateral Trade Negotiation.\ (Washington: Advisory Commiuec on Trade Policy and Ncgoti<llion:., 1994).

Brandao. Antonio Salazar P., and Will Manin. lmplicatiolls of Agriculwral Trade Liberali:arionfor rile De1·elnping Countries (Washington: World Bank, 1993).

Chin. J., nnd G.M. Grossman. "Intellectual Propcny Rights and North-South Trade." in The Political Economy of lmemarional Trade. Elsays in Ho11or of Roherr E. Baldwin. ed. by R. Jones and A. Krueger (Oxford: Basil Blackwell. 1990).

Commission of the European Communities ( 1 993a). CAP Reform and GATT Compatibility (Bru�sels: CEC. 1993).

--- ( 1 993b), Report on the Competitil·eness of rile European Textile and Clothing Industry, Communication from the Commission to the Council and the European Parliament. COM (93)525 (Brussels: CEC. 1993).

de Melo, Jaime. and David Tarr. "Welfare Costs of U.S. Quotas in Textiles. Steel and Autos." Re1·iew of Eco-1/0mics and Statisrics. Vol. 72. No. 3 (August 1990), pp. 489-97.

Evnns. Phillip, and Jame� Walsh, ·'The EIU Guide to the cw GATT.·· E,·onomisr Intelligence Unir. Research

Report (London. 1994 ). General Agreement on Tariffs and Trade ( 1993a). An Analy

sis of the Proposed Uruguay Round Agreemem, with Particular Emphasis on Aspecrs of lmeresr to Del'e/Op· ing Countries (Geneva: GATT Trade egotialions Comminee. 1993).

--- (1993b). lmemarional Trade and rhe Trading S_prem: Report by the Dtrecror General. 1992-93 (Geneva: GATT, 1993).

--- ( 1 993c), lnternarimwl Trade. 1993: Stati5ricl (Geneva: GATT. 1993).

--- ( 1994a). Final Act Embodying the Results r�f rite Uruguay Round of Multilateral Trade Negntiations (Geneva: GATT Trade Negotiations Commiuec. 1994).

--- ( 1994b). News of the Uruguay Round ofMultilateral Trade Nef!.Otiations (Geneva: GATT. 1994).

Goldberg, Linda, and Janusz A. Ordover. Nontariff Barriers ro Trade and Competition: Theory and £1·idence (Paris: OECD, 1991 ).

Goldin. I.. 0. Knudsen. and D. van dcr Mensbrugghc. Trade Liherali:ation: Global Economic lmplicmioll.\ (Pari!>Washington: OECD-World Bank. 1993).

Gros�man. Gene M .. "The Theory of DomeMic Content Protection and Content Preference,

.. Quarterly .foumal of

Economic:.. Vol. 96. No. 4 (November 1981). pp. 583-603.

Hoda. A .. "Trade Liberalization Result:> of the Uruguay Round." paper preser11ed to The OECD I n formal

30

Workshop on the New World Trading System (Pans. 1994).

Hockman, Bernard, "Conceptual and Political Economy !�sues in Liberalizing International Transactions in Service�." in Analytical and NegotiatinJ.: Issues in the Global Trading System. ed. by Alan Deardorff and Robert Stem (Ann Arbor: University of Michigan Pre:-.�. 1994).

Hulbauer. Gary C .. and Kimberly A. Elliou. Meas11ring the Costs of Pmtectirm in 1/te Unired States (Washington: Inslttute for International Economics, 1994 ).

lniemational Monetary Fund. World Economic Outloof..., World Economic and Financial Surveys (Washington: IMF. May 1994).

Krugman. Paul. and Maurice Obstfeld. lntemarional Economics: Theorv and PoliCI' (Glenview. Illinois: Scott. Foresman and Company, t988).

Langhammer. Rolf. and Andre Sapir. Emnomic Impact of Generali:ed Tariff Preferences (London: Trade Policy Research Center. 1987).

Low, P .. and A. Yeats, Nontariff Measures and Del'eloping C ountrie:,: /las the Umguay Round Lel'l•led the Playing Field'! (unpublished, Washington: World Bank, 1994).

Maskul.>. Keith E., and Deni!.e E. Konan. ''Trade-Related Intellectual Property Rights: Issues and Exploratory Results, .. in A11aly!ical and Negotiating issues in the Global Trading System. ed. by Alan Deardorff and Robert Stem (Ann Arbor: University of Michigan Press. 1994).

guyen, Trien. Carlo Perroni. and Randall Wigle . .. An Evaluation of the Draft Final Act of the Uruguay Round ...

Tlte Economic Journal. Vol. 103 (November 1993). pp. 1540-49.

Organization for Economic Cooperation and Development. Sen·icc•s: Statistic:s on lnrenwtional Transactions (Paris: OECD. 1993).

Pohl. Gerhard, and Piritta Sorl>a. European lntc•gration and Trade wirh the Developing World, Policy and Research Series No. 2 1 (Wa�hington: World Bank. 1992).

Subramanian, A .. "Pulling Some Numbers on the TRIPs Pharmaceutical Debate.·· lnrernarional Joumal of Technology Management ( forthcoming). pp. 1-17.

Trela, Irene, and John Whalley. ''Global Effects of Developed Country Trade Re�triction� on Textiles and Apparel," Economic Journal, Vol. 100 (December 1990). pp. 1 1 90-1205.

United Nations Conference on Trade and Development. Rel'iew of rite Implementation. Maimenance , lmprol'l'nwm and Utili:arinn (�f' tlte Generali:ed System of Preferences (Geneva: UNCTAD. 1994).

U. S. Department of Agriculture. Effects (if the Uruguay Round Agreemenr on U.S. 1\griculwra/ Commodiries (Wa!>hington: USDA. 1994).


Bibliography

U. S. International Trade Comrnil>sion ( l993a), The Economic Effects of Sif!,nificant U.S. /mpnrl Restraints (Washington: USITC. 1993).

--- (1993b), The Year in Trade, 1992: Operation of the Trade Agreemems Pmwam, 44th Report (Washington: US!TC, 1993).

31

Wolf. Martin, "Differential and More Favorable Treatment of Developing Countrie� and the International Trading. System." World Bank Economic Review. Vol. I, No. 4 (September 1987). pp. 647-669.

Yeats, A., What Are the OECD Preferences Worth 10 SuhSaltaran Africa? (mimeo, Washington: World Banl-., 1993).


II Trade Reforms in Fund-Supported Programs

1\ ttr C altka am/ Un e Conepi11.1 J

T radc reform'> arc being increasingly featured in the design or adjU\IlllCnt program!> supported by Fund

resources. This paper reviews the trade policy content of Fund-supported program-; approved in the period 1990-93.:!

Conceptual Framework and Methodology

Open marl\cts arc essential to attaining high-quality growth. A wcll-cstahli\hcd and widely accepted rationale for trade reform i., that an outward-oriented strategy is more liJ...cly 10 as-.i\t in achie\ ing !>UStainahle Iong-tenn growth than an inward-oriented one.

Trade refonn encompa.,..,c.., improving tram.parency. increasmg predictabllit). and liberali1ing the trade policy regime. Tran..,parency i' improved by reducing the complexit) of rcgulat1om. and shifting from quantityto-pricc-ba-.cd mca-.urc ... : predictability i., gained by adhering to a clear and con'>i..,tent direction for tmde polic) and avoiding .,top-go mca.,ure-;: liberaliLation i.., achieved by reducing protectiOn leveb and dispersion thereby mcrea..,ing the role of competitive market force ... at the CXpen'>C of discretionary state intervention. Trade reform help" economic agents to ba!>c their production and invc�tment decision!'. on market price signah. improve!'. rc-.ource allocation. reduces anti-export bia�>, spur., domc.,tic firms to re!'.tructure in the face of foreign competition. and increases national and international welfare through ciTiciency gains. In economics in tramition. it i-. an even more potent instrument in the tran'>formation to market cconomicl>. �

The more difficult que\tion i'>. How much trade refoml i!'. neccs'>ar) and over what period-. should it be achieved? While there i., no one magic level of protection to target, the cxpcnencc of -.ucce\sful refom1er., illu\trate\ what i., achievable. Trade liberalization doe\ entail di..,locatiOn., for the hitherto protected industric\ and the tran.,ition ha\ to he managed in an orderly manner. A funher complicating feature i!-. that in practice trade policy 1nstrumenl\ arc u-,ed not solely for protection and re ... ource allocation objectives (hencefonh referred to a., ·•trade pollc)' ·· objective!'.). but are often used to �;ervc other objectives-such as fi.,cal revenue.

llhc pnnc:Jpal ••u1hor' ol1h1' r••rcr �For a rcVIC\\ ut lradc rcfunn' Jlll'und-,upport..:d prograrm in 1he

�ccond half of 1hc 19l!(h. we Kcll;. \11cGu•rl... :md other' ( 1992) 'Sec IMI-!199-Il.

32

balance ol paymcnl'> management, and income distribution goal.., (henceforth referred to a\ ··nontrade policy·· objectives).

The conceptual framework for trade reform must, therefore, take account of two principle!'.. First. trade policy mu!'.t be cast in terms of medium-term efficiency goals-deviation). to meet short-tenn nontrade policy objectives \hould be kept to a minimum to meet emergenc) .,ituat1on-. and \hould he '>Lrictly temporary. Second. alternative policy uNruments mu\t be instituted to cater to nontrade policy objective\. Translating some aspect<. ol thi.., conceptual frameworJ... into practical polic) guideline-. i., di.,cus'>cd later.

When trade reform 1\ undertaken in the context of a Fund-'>upponed program. it become'> an clement of a comprehcn.,1vc. integrated polic) package aimed at ach1eving noninflatiOnary growth and a vmble external po.,itiOn "'ith a h1gh level of resource uc;e 111 the medium tenn. Such an mtcgrated approach implie..,that the trade refonn 1s like I) to have a greater chance of succe-.s. a .. it i.., likely to be accompanied by complementary macroeconomic and '>tructural measure .... Such measures would aim to C\tabll'>h linancial stability. to deregulate domestic product and factor marJ...et'>. and to improve !he respon-,ivencs'> ol economic agents to relative price change.'>. us well a:-. to improve the efficiency of the public sector and the climate for private sector investment through public expenditure and tax program improvement'>. public cnterpri!'.e and marketing board reform .... and o,o on. Trade reform under Fund-supported programs oltcn provide'> additional benefils to !he member in tcnm ol improving conlidencc and credibility, cataly7ing. other form<, of C\ternal financing. and encouraging capital inllowo,, Including fore1gn direct inve�tment.

Thi.., \UrVC) i.., ba-,cd on a revic"" of the trade policy content ol program\ !-.upponed b) Fund arrangement.., under the \tructural adJU\tment facility <SAFl. enhanced \tructural adJustment facilny <ESAF). extended Fund facllit) <EF+>. and -.tand-b) arrangements. It cover., all SAF .... ESAh. E�F .... and .,land-by arrangement., approved by the E\ecutl' e Board of the Fund between 1991 and 1993 plu-, the three arrangement., under the ESAF approved 111 1990 (Table I). Th1!1 y1eld-. 78 arrangement\ with 59 countric.,, covering 47 -;Land-b) arrangcmcnh, 20 ESAF'>. H EFFs. and 3 SAFs. A multiyear program is counted a' a '>ingle arrangement. The 59 countric" arc cla..,sificd into the following regional groupo,: 14 '"economic., in transition. of which

�5 are


Conceptual Framework and Methodology

Table 1. Stand-By Arrangements and SAFs Appr·oved 1991-93 and EFFs and ESAFs Approved 1990-93 I Dutc oj Appmi'IJI J

Stand-By Arrangemem EFF SAF ESAF

Developing countries Africa

Algeria 6/3/91 Bento 1/25/93 Burkina Faso 3/13/91 3/31/93 Burundi 1 1/13/91 Cameroon 12/20/91 Comoros 6!2 1/9 I Coted'Ivoire 9/20/9 1 Equatorial Guinea 2/3/93 Eth10pia 1 0/28/92 Gabon 9/30/91 Gumea 1 1/6191 Kenya 1 2/22!93 Lc�otho 5/22/91 Mali X/2R/92 Mauritania 12/9/92 Morocco 1/31/92 Mo7ambiquc 6/1/90 Nigeria 1 /9/91 Rwand;� 4/24/9 1 Tanzania 7/29/91 Zimbabwe 1/24/92,9/1 1/92 9/1 1/92

Mia Banglade�h H/1 0/90 India 10/3 l/9 1 Nepal 10/S/92 Papua New Guinea 7/3 1/91 Philippines 2/20/91 Sri Lanka 9/l3NI

Middle Ea.-.t Egypt S/17/91 l)/20/93 Jordan 2/26/92 P<�l,.htan 9/16Jl)3

Western l lembphcre Argentina 7/2WYI 3/:H/92 Barbado� 2n/92 Bran! l/29/92 Co�ta Rica 4/8/l) l. 4/ 1 9/93 Dominica Republic 8/28/9 I , 7/9/9 3 Ecuador 12/1 1/9 1 El Salvador 1/6/92, S/ I 0/93 Guatemala 12/I H/92 Guyana 7/1 'lofl)O 7/13/90 Honduras 7/24/l)2 Jarna1ca 6/28/91 12/ 1 1 /92 Nicaragua 9/1 H/9 1 Panama 2/24/92 Peru l/1 R/93 Uruguay 7/l/92

Economies in transition Ea�tern Europe

Bulgaria 3/15/91 '4/1 7/92 Czecho�lovakia 1 ln/91. 4/3/92.3/1 7/93 Hungary 9/15/93 2/20/91 Poland 3/S/93 4/1 S/9 1 Romania 4/ll /0 I . S/29/\)2

33


II TRADE REFORMS IN FUND-SUPPORTED PROGRAMS

Table I (concluded)

Other Albania Estonia Kyrgyz Republic Lao People's Democr;uic

Republic Latvia Lithuania Moldova Mongolia VietNam

Memorandum items

Swnd-By Arrangement

8/26/92 9!1 6/92. 10!27/93 5/1 2/93

9/ 14/92, 12/15/93 I 0/2 1/92. I 0/22/93 12/1 7/93 10/4/91 10/6/93

Total number of countrie� 59 Total number of arr:mgement� 78

Stnnd-by arrangements (47) EFF� (!\) SAFs (3) ESAFs (20)

EFF SAF ESAF

7/1 4/93

6/4/93

6/25/93

Source: lMF.Imemariona/ Fincwcwl Srarisucs and 7i-ansacrions oft he Fund, various issues. ICzecho�lovakia was replaced by the Czech Republic and the Slovak Republic on January I , 1993.

grouped under Eastern Europe and the rest under ''Other''; the remaining 45 are classified as developing countries, of which 21 are in Africa, 6 in Asia, 3 in the Middle East, and 15 in the Western Hemisphere.4

In this paper, trade reform efforts are assessed by classifying the 59 countries according to the restrictiveness of their trade regimes at the beginning and the end of the period under review, that is. the end of I 990 and the end of 1993. Since different measures of openness only partly capture the protective effect of tariff and nomariff trade barriers, the characterization of trade regimes as "open .. or "restrictive

,. needs to be viewed in the light of the standards used here, rather than in any absolute sense. In general, the standards used here are stricter than those used in previous similar trade surveys. This partly reflects the decline in average protection levels in general as developing and transition economies liberalize their trade regimes. But it also reflects an altempt to take better account of average tariff levels inclusive of the various other charges that add to the cost of imports but that are not evident from data on statutory tariffs alone. Eliminating quantitative import restrictions alone does not justify characterization of the trade regime as open or "liberal," if in fact there exists a variety of import charges and tariffs that could add up to relatively high levels of protection. In this paper, the stance of trade policy is evaluated on the basis of the coverage and intensity of quantitative restrictions and the average level of (the all-inclusive) statutory tariffs.s

�References to ·'program .. countries in thi� paper penain to coun

tries listed in Table l. 5ldeally an assessment of tariff regimes would include average

tariff levels as well a!. dispersion. However. in view of the difficulties

34

The tariff regime is classified i11to three categories ("restrictive." "moderate." and "open"), based on the experience of the successful trade refonners (e.g., in Latin America) and taking into account the average tariff of less than 5 percent prevailing in major industrial countries:

Average Tariffs6

Classification of Tariff Regime

Restrictive

Above 25 percent

Moderate Open

Between 1 0 percent I 1-25 percent or below

Since the classification of the restrictive tariff category is open ended, countries with very high tariffs in 1990 might make substantial progress in reducing tariffs during the period under review. but still not achieve the average tariff levels of the "moderate" category. Hence. the nature of reforms in countries that remained in the restrictive tariff category at the end of 1993 are examined further: in particular. those countries whose average tariffs remained above 40 percent are distinguished from those that were able to reduce average tariffs to a range of25 to 40 percent.

The difficulties of measuring QRs are well documented.7 Wl�ile tariff equivalents of QRs are concep-

of measuring the Iauer aero�> Lhe populmion of countric�. thi� �tudy reltes only on the average statu wry tarifr.

6lncluding other import taxe;,, such a.� surcharges. stati,tical taxes. !heal du1ie�. 'tamp taxe�. service fee�. or consumption Laxe� levied only on 1m ports.

7For a di�cussion of various concepts to measure nomariff barrier�. �ee Kelly. McGuirk, and others! 1992). The commitment� to tanffication ofQRs under the agricultural agreement in the Uruguay Round have helped to focus on the importance of developing a common methodology to mea�urc �uch barriers.


Trade Policy Content

tually appealing, they pose immense data problems, particularly on an economy-wide comparative basis for a large group of countries. Hence. the assessmem here is based on the import and export coverage and the intensity of the respective QRs.s Coverage is measured as the proportion of tariff lines covered by QRs: where this infonnation is not available. the share or imports affected by the QR is used as a proxy.9 Measuring the coverage alone is, however, not sufficient, because various QRs differ in their protective effects; hence, the intensity of the QR needs also to be taken into account. For example. an automatic authorization procedure applied to all imports is less restrictive than outright import bans. QRs are classified as high-, medium-. or lowintensity items. High-intensity practices include, for example, import bans, binding quotas, nonautomatic licensing, and discretionary foreign exchange allocation procedures. Transparent and automatic Licensing procedures and nonbinding quotas, for example, are considered low-intensity QRs. Without complete and reliable information in some cases, judgement is used for the QR classification, yielding the following matrix:

Classification ofQR Regime

ReMrictive Moderate Open

lmponand >25 percent 0-IOpercem 0-25 percent cxpon and any and high and low coverage intensity inten$ity mtensHy

>tO percent I 0-25 percent t 0 percent and and high and medium medium inten>ity inten$ily mtensHy

The next step is to consider the combined effect of QRs and tariffs, in order to measure the overall stance of the trade regime. LiberaJization in one area may still leave major impediments to trade. For example, lowering tariffs will not increase import competition (though it may reduce costs) if quotas remain binding. Similarly. eliminating QRs might not induce further imports if tariffs remain prohibitive (although this does improve transparency). The approach used here is to consider the more restrictive measure, whether tariffs or QRs. as the determinant of the overall stance of the trade regime. Thus, a "restrictive.

, tariff regime (with

average tariffs above 25 percent) combined with an

XQR!, con�idered here are import and expon prohibition�. quota�. licensing. discretionary foreign exchange allocation. and statetradtng monopolies. Other nontariff mea�ures. such as \Wndard\. minimum impon price�. or antidumping dutic�. arc not considered in the classtficatton because information on a comparable basis for the 59 countries is not available. While the excluded mea\ures may in some ca�es operate as imponant barriers to trade, it is unlikely that this has generally affected the classification for most of the coumries reviewed.

"Weighing by import values may underestimate protection levels as the impon levels may themselves be low because of the restrictive impact of prohibitions and quotas.

35

"open·· QR regime would yield a characterization of the overall trade regime as being "restrictive ..

, Accord

ingly. the following matrix guides the determination of the overall trade policy stance:

Combined Trade Policy Stance

Quantitauve Restrictions

Open Moderate ReMricttve

Open Open Tariffs Moderate Moderate

Rcstnctive Resmctivc

Moderate Rc\tricuve Moc.Jerate ReMrictive Restrictive Restrictive

The above approach to the classification of trade regimes implies that relative progress in trade reforms is not measured in tenns of the comparative effort to reduce trade restrictions. but by the levels of protection attained. For example, a country may sharply reduce its average tariffs-say from 100 percent to 50 percentin the period under consideration, and still be classified as restrictive; in contrast, another country may reduce its average tariffs by a small amount-say, from II percent to 9 percent-and shift from the classification "moderate" to "open ... To identify the most restrictive trade regimes remaining at the end of l993 among the countries in the "restrictive·· category. a further benchmark, as indicated above, is used, namely. whether average statutory tariffs (inclusive of other charges) remained above 40 percent.

The analysis of the nature and extent of the trade policy content of Fund-supported programs. and the characterization of the degree of openness of the trade regimes. is made for all program countries, taking account of all the arrangements in the period (i.e., the "population"). Assessing the contribution of trade reform to program progress in terms of macroeconomic or structural adjustment, or establishing empirical causal links is beyond the scope of this paper. A simple characterization of the group of slower and faster reformers among the program countries is attempted in tenns of major macroeconomic variables. The discussion of specific design issues, which is based on a more in-depth scrutiny of a sample group of countries, identifies some macroeconomic developments that have helped shape the design of trade refonn.


There was substantial progress toward market opening under Fund-supported programs in the period under consideration, as developing countries and economies in transition continued trade liberalization begun in the second half of the 1980s or initiated in the 1990s. All 59 program countries liberalized at least some parts of their trade regimes in at least one of their arrangements. Nearly all countries (56) lowered tariffs. and all but six reduced QRs, with most implementing a combination of both.



LiberaliLation of Quantitati' e Re�trictions

The trend toward reduced reliance on QRs observed in the 1980� intensified further in the 1990!->. Many countries narrowed the scope and reduced the intensit) of QRs. The liberaliLatton ot QR� was sufficiently substa�tive to generate a major ... hift in the cla�sification of the1r regime� into the ··open·· category (Table �). � panicuJar. the number of re'>trictive QR regimes tell from 35 to 14 between the end of 1990 and the end of 1993. By the end of 199.3. over two third-. of program countries could claim to have achieved

.. open" QR regimes. compared with less than one fourth only three year<; earlier.

Progres-. in libcra1it.ing QRs was observed across all geographical regions. Particularly in Afri

_ca,

_ex

change system reforms enabled many countn�s n: a shon period of time to eliminate complex quantllallve controls that had been maintained for many years to ensure the admini...trative allocation of foreign exchange. By 199.3. over 60 percent of African program countries had open QR regime'i. while les� than .30 percent maintained restrictive ones. Ethiopia. Mauritania. and Tarvania. for example. all moved from a re..,tricllve to a relattvely open QR regime during 1990 93 b) replacing arbitrary adm!nistrati

_ve for

eign exchange allocation procedu�es. wrth fore1gn �xchange auction .... Tanzania at ... o hmrted the negat1ve li'>t under the open general licen'>e sy'>tem to goods controlled for health and security rea-.on'> and eight luxury item-.. Mauntanra elrminated permit� .. while Tanzania removed hcen,rng a... well as mtntmum prices for export..,. In addJtion,

_a �umber of �ountries

initially in the moderately restncttve QR-regtme category. where licem.ing covered certain products only (e.g .. Cameroon and Morocco). mt�de furt�er p�·ogress in reducing the list of produch .,ttbJeCt to ltcen�t�g and casing authoritation procedures, t�?reby anat�tng an open regime by the end of 1993. A Inca� countnes t�at continued restrictive QR regimes dunng the penod under review included Cote <J'Ivoire. Nigeria. and Zimbabwe. The fiN two made liule progress in liberaliting their extem.ive import prohibitions. lice�se�, and prior authoritation-.. Nigeria. for example. _JUStified it\ QR.., on balance of paymenh grounds 111 the GATT. but the ... c aho constituted an important instrument in encouraging domeo.,tic production: it re\ er�ed it'> initial reform-, of the foreign exchange allocatton ")-,tern. Zimbabwe. on the other hand. made wadual progres'> toward a mark.et-ba-,ed '>)'>tem o! foretgn exchange allocation. b) increasing the ratto under �e export retention scheme and. initially. aho expandtng the open general import license sy-.tem; nevertheless. hy the end of 1 993. imporh not covered by the mo�e liberal foreign exchange allocation procedures sllll comtituted more than a fourth of total importsY'

'"At the hcgmnmg nl 19\14. /.unhahv.c mtn�uccd a number of rcfonn' in It\ C\chungc und [Mymcnt' 'Y'tc:rn, mcludmg the reten-

36

In the We..,tcm llemi'>phere. more countrie), '>tarted the penod \\ith open QR regime.., th�n i� Afr�ca. M�s.t of the remainder quick I) liberalized 111 ltne wtth a shtlt in development <,trateg)' away from reltance on import ,ub ... titution toward export-led growth. By the end of 1993. all but two countrie� maintained "open

.. QR regime'>. Examples of last r�fom1er"

. were Ecuador �nd

1 Jonduras. which, re-.pccllvel). eltmtnated exten-;tve import prohibttion., and prior authorization procedur�s or licensing requirement-.. In some cases (e.g., Braztl and Jamaica). restrictive ltcensing procedures for selective import'> were di-;continued a.., part of ongoing trade reforms. moving the countries from the "'moderate'· to the ·•open .

. QR-regime category. . .

The economic), in transition had the most tmpresstvc record in eliminating QRs. ln 1990, all of these countries (except Poland) relied heavily on 9Rs as part ?r the 'iystcm of central planning. As stat� mvolvement 111

international trade wa� reduced dramallcally. QRs were eliminated aero.,.., the board. By the end of 1993. trade regimes in Ea'>tern Europe and the_ Ba!tic� we

_re largely

free from QR-.. The A-.ian cconormes tn transttton have been '>lower tn elimmating QR�.Iargcly rcnecting continued \tate involvement in foreign trade and \lower progre'>'> 111 c-.,tabli'>htng market-ba..,ed eco�om

_ies.

In meN countnc.., out'>ide the econom1e<. 111 trano.,ttion. QR.., were chtelly imposed on i�port�. a�d thh \\a.'> aho the area where mo.,t of the ltberahzatJon occurred. But there wa.., progres'> al-.,o 111 eliminating QR., on exporl'>. particularly a\ part of the libcralizat!on of the exchange ..,y.,tem., aimed at im�rovmg expo� rncentive'>. For example. Burundi -,ub<.,tlluted export ltcenses for the less restrictive '>Y'>tem of export declarations; Egypt eliminated export bam; and lndi� and Tanzania reduced export licen\ing, quotas. permtt� .

. an? the u�e

of minimum export prices. In the cconomtes tn tran_�•

tion, where exports were tightly controlled at the begtnning or the period under review, s

_ignifi�ant progress

was made in libcraliting export reg1111es. tn close as<;ociation with reform'> in other area<>. notably price liberalization and monetary independence. By the end of 1993. the Baltic countrie'> and mo-.t East European pro

l!ram countrie.., had pha.,cd out QR-, on export�. In other �conomie.., in tran-.,illon. the continued u ... e of re..,triction-. rellected main!) a de'>tre to maintain dome'>tic price.., below world pnce'> for ke) inputs and '>ome con.,umergood ....

Tariff Reform

Jn contra..,! to the '>triking rc..,ult'> on QR liberalilation. progrc.,., on tariff refom1 wa-. modest . In the initjal period. 84 percent of all developing program countnes had average .,tatutory tariff rate� above 25 percent.

tion of export pmcccd' 111 fmc1gn currcnc.> aCCI�Unt\. and '>ignilicantly reduced the �.:overage of1t' 11Cga11vc 11'>1 for Import'>.



Table 2. Summary of Trade Regimes

QR� Tarirls Com billed

ltJ90 1993 1990 1993 199() 1993

Total 59 59 59 Open 14 40 5 Moderate 10 5 lei ReMnctive 35 14 J8

De\ eloping countries 45 45 45 Africa 21 21 21

Open 5 13 0 Moderate t1 2 I Re�Mictive 10 6 20

A-.ia () 6 6 Open () ' () Moderate 2 I () Re�trictivc 4 2 6

Middle Ea�t 3 3 ' ·'

Open I 2 () Modentte () () () RcMrictivc 2 I 3

Wcstem Hcmhphcre 15 15 15 Open 7 1.3 () Moderate 2 I 6 Rc�tric:l ive 6 I 9

Economies in transition 14 14 14 Ea,tern Europe 5 5 'i

Open I 5 3 Moderate ( ) () 1 Rc\tricti ve 4 () n

Other 9 l) 9 Open () -1 2 Moderate () I 7 ReMrictivc 9 -1 ()

Source•: IMF: GATT: and World Bank.

Only seven developing countrie� (six of them in the We�tem Hemisphere) had moderately restrictive tariff regime� (with average rates between II percent and 25 percent) and none had relatively open tariff regime� (i.e .. with average tariffs 10 percent or lower), By the end of 1993, 12 <;hifted from the restrictive to the moderately restrictive tariff category. 26 (nearly 60 percent of the total) remained in the restrictive category. and I achieved an open tariff regime.

Many developing countries in Africa. A!>ia. and the Middle East lowered tariffs in the 1991-93 period, but the reductions were not large enough to bring the average statutory rare to 25 percem or less.11 Tariff<; in c;cveral cases were sharply reduced from prohibitive levels during this period. For example. the average statutory rate (including other charges) fell in Burundi from 51 .5 percent to 40.4 percent. in India from 125 percent to 71 percent. in Kenya from 42 percent t o 34 percem, and in Pakistan from 85 percent to 48 percent. By the end of

"In connection with the CFA franc devaluation. all CFA franc 1one countrie> reduced tariff' con\iderabl) in earl) 1994.

37

59 59 59 5 I 4

:!S 5 21 26 53 3J

45 45 45 21 .21 21

() () 0 4 I 2

17 20 19

6 6 6 0 () () I () I 5 (l 5

3 3 � (} () () I () () 2 ·' .\

15 15 15 I () I

12 -1 12 2 II 2

14 I-I I-I 5 5 5 I I I 4 () -1 (J 4 n l) 9 l) ;\ 0 1 6 () .� () 9 4

1993. nine program developing countries maintained very restrictive tariff regimes with average statutory rates above 40 percent (Bangladesh, Burkina Fa�o. Burundi, Equatorial Guinea. Gabon. India. Mauritania. Pakistan. and Rwanda).

In the Western Hemisphere. countries generally had achieved lower tariff levels compared with other developing countries by the end of 1990. In the early 1990s, six more countrie� in this region moved from the restrictive 10 a moderately re�trictive tariff regime (Bra-7il. Honduras, Jamaica. Nicaragua, Panama. and Uruguay) and one country (Ecuador) achieved an open tariff regime. Significanl tariff reductions were generally undertaken as part of ambitious liberalization programs to restructure and open the economy, often lowering the maximum tariff rate to 20 percent. Being concerned with competitivenes� and export performance. many of these countrie� tried to imitate the Mexican tariff liberalit.ation.1:!

12For a description of Mex ic() \ tra(ll: liberali.tation, \ee LIN!r and Kalter(l992).



In economies in transition, the most important aims of tariff reform were to reorient tariff structures to the needs of market-based economies and to eliminate anomalies inherited from the centrally planned system. The latter included the removal of discretionary exemptions through minimum tariffs and the reduction of excessively high rates on selective goods. While the overall picture does not appear to have changed much from the end of 1990 to the end of 1993, the country composition did change as the tariff regimes of half or the program countries changed category. Tariffs in a number of countries with moderately restrictive regimes at the end of 1990, such as Estonia and Lithuania, were reduced significantly so that they had open tariff regimes by the end of 1993. In contrast, in several countries where tariffs were already low at the end of 1990 (for example, Albania, Bulgaria. Mongolia, and Poland) revenue and protection considerations motivated increases in the statutory average tariff such that these tariff regimes became moderately restrictive by 1993.1'

Expon taxes were rather insignificant and only a minor contributor to total revenue from taxes on international trade in most developing countries (with the exception of some primary goods exporters in Africa). Hence, some countries were able to eliminate them in the 1990-93 period (e.g., Burundi. Ethiopia, except on coffee, and Peru). The importance of export taxes has generally also decreased in economies in transition. In a few cases, new export taxes temporarily replaced QRs and were subsequently eliminated (e.g .. Latvia and the Kyrgyz Republic). In addition. several program countries reduced the anti-export bias of their trade regimes by streamlining and widening the scope of the duty-drawback system (Ethiopia, Nepal, and Papua New Guinea) or improving temporary admission schemes (Honduras).

Overall Stance of Trade Regimes

Combining the stance of tariff and QR regimes provides an indicator of the overall trade policy stance: as mentioned earlier. if one or the components is restrictive. the overall trade regime is considered to be restrictive. On this basis. most of the program countries had restrictive regimes at the end of 1990. five had moderately restrictive trade regimes, and only one (Poland) maintained an open trade regime (Table 2).

During the period under review, the picture changed significantly. By the end or 1993, trade liberalization in 16 countries moved them up to the moderately restrictive category, while 4 even achieved open trade regimes. Only Poland increased its trade restrictions such as to switch from the open to the moderately restrictive category.

Significant trade reforming count-ries can be found in

111n some of the�e cascs impor1 du1ie� were reduced in 1994.

38

every region, but economies in transition and developing countries in the Western Hemisphere made the most visible progress. In most economic" in transition. the overall trade regime had become less restrictive by 1993, as QRs were lifted following the deregulation of the economy and tariffs remained comparatively low (albeit increasing in some cases from their even lower levels in 1990). While many countries in the Western Hemisphere started with high tariffs and binding quantitative restrictions, they were able to reduce both, making the overall trade regime less restrictive than in 1990; notwithstanding this progress, only one (Ecuador) moved to the open category.

ln Africa, much was achieved in phasing out quantitative restrictions but tariffs remained high. often because of revenue reasons: hence. overall trade regimes continued to be largely restrictive. In Asia and the Middle East, trade liberalization was gradual: notwithstanding progress in liberalization during 1991-93. program developing countries in Asia and the Middle East remained largely in the restrictive category.

An interesting question is whether countries that moved up into a less restrictive trade category faced initial conditions that were better than those that did not make such a move. A fuii-Oedged exercise to investigate this issue would need to look into the range or macroeconomic and structural particularities of the slower and the faster refonners. Such a comprehensive review is beyond the scope of this paper. The illustrative exercise below provides infonnation on the macroeconomic indicators associated with slower and faster reformers without esrablishing causal links. Of particular interest is whether the macroeconomic situation of the faster trade refom1ers was noticeably better in the initial period compared with that of the slower reformers; and whether faster reformers faced a deterioration in their macroeconomic situation relative to the slower reformers.

The identification of slow and fast refom1ers is based strictly on the classification of trade regimes in Table 2. Fast reformers arc defined as those that liberalized their trade regimes sufficiently to move the combined (QR plus tariff) trade regime from the restrictive category to (at least) one category above, between 1990 and 1993.14 Slow reformers are defined as those where both the QR and the tariff regimes remained in the restrictive category in both 1990 and 1993.15

H Economic� in 1ran�ition were excluded from 1his illu�tralive C>.· ercise a� most of them engaged in far-reaching change� in 1heir s1ructural and macroeconomic policie' in order to tran\fonn from centrally planned to marke1 economic\. They are 1l1U'> leo.,:, comparable with developing coun1ries. which were ntll engaged in ;uch funtlamcntaltran�fonnmion.

IS A; mentioned earlier. 1he clas�ification of 1rade regimco., in 1hi., pnper does no1 fully take into account 1hc degree of rcfonn elTon. Mca�uring the relative speed of the trade rcfom1 would require deriving a �ingle cardinal indic;uor of trade rcfom1 in each coumry in the popula1ion-an exercise beyond the �cope of 1h1s paper. The



Selected macroeconomic indicators (covering external cun·ent account and fiscal balances, gross reserves, inflation, and trade taxes as a percent of total tax revenue) are presented for the group of slow and fast r�form�r� �as defined above) in Table 3. Tt appears that 111 the mtttal period, slow reformers (as a group) faced larger fiscal and current account deficits than fa<;t refom1ers, a lower level of gross reserves and. of panicular note. grea�er reliance on trade taxes for fiscal revenues. Only wnh respect to inflation was their initial position more fav?rable than that of the fast refom1ers-the latter group tncluded many Latin American countries that were ex periencino triple-digit innation in 1990. Overall, slow refo�ers faced more difficult initial macroeconomic conditions relative to fast rcfonners.

Over the period under review. the currem account positions of the fast reformers deteriorated somewhat, whereas that of the slow reformers improved. However, fast reformers improved their gross reserve positions, in contrast to the slow reformers. where reserves remained unchanged (in term!> of monrhs of imports) in 1993 compared with 1990. A striking feature was that fast reformers were able to reduce considerably their fiscal deficits (as a proportion of GOP) at the same time as their reliance on trade taxes for fiscal revenue also declined significantly. In contrast. the fiscal positions of the slow reformers showed a marginal deterioration while their reliance on trade taxes declined somewhat. Inflation decelerated for both groups.

While causal Jinks should not be drawn from the above exercise, and exogenous factors would certainly have played a role. the macroeconomic characteristics associated with the two groups suggest that fast refom1ers were willing or able to undertake both faster trade reform and fiscal reform, to contain current account deficits, and to attract capital inflows-an approach typically associated with bold. comprehensive macroeconomic-cum-structural reform packages. The slow reformers started ofT with more difficult initial macroeconomic conditions and were willing or able to proceed !,Jfadually with both trade and macroeco��mic reform. Adverse initial macroeconomic cond1t1ons need not unduly slow down initiation of trade reform as long as the country i'> willing or able to adopt a broadbased package

.of macroeconomic an� structural

measures. In parttcular, complemenlary retom1s of domestic tax systems will be necessary so as to reduce reliance on trade taxes. The examples of some fast reformers (Honduras, Jamaica, and Uruguay) show that dependence on trade taxes can be reduced sig_nificantly even within a relatively short (three-year) penod.

Reversals The extent to which trade liberalization induces a

lasting reorientation of production. consumption, and

identification above of ··�low" and ·· fast" refom1ers mu�t be viewed against these limitations.

39

Table 3. Macroeconomic Indicators in Selected Program Countries

Current accoum balance (exclrtdinx offinal trcms/<'n.

Slow Refom1ers1

Fast Refom1ers2

!990 1993 1990 1993

in percelll vfGDP) - 1 1 . 1 -9.1 -5.2 -6.3

Ft,cal balance (in pt·n·em of GDPl -7.4 -7.5 -6.0 -2.2

Gross reserves ( m nw111h1 of imports)

Trade taxe� (fir percem of rota/ mx ret•enue)

Inflation (percelll change in I"O!I.wmcrprin•s)

3.1 3.1

33.1 3 1 .9

3.9 5.5

22.9 [9.7

12.8 8.7 2.299.0 263.9

Sources: National source�: and I MF staff e�timatc�. t Based on the classification in Table 2. the�e countries remained

in the restrictive category for both QRs and tariffs. 2Ba�ed on the classification in Table 2. these countries liberalit.ed

trade renimes �uch as lO move up at least one category in the combined (QR and tarifl) trade �lance to the open or moderately re�.trictivc category.

investment pa!tems depends in part on the sustained implementation of a credible refom1 progran:. T�is im-

. plies adherence to a clear and conststent d1rectton ol tTade policy and to the preannounced targets, as well �s a coherent program of complementary macroeconom�c and structural policies that ensures that trade reform IS

sustainable. If governments partially or fully reverse earlier liberalization. the ripple effects (unless reversals prove to be very short-lived) could go beyond the additional protection provided through the new measures. The credibility and predictability of trade reform is jeopardized and further lobbying for additional prote�tion is encouraged. The extent and nature of reversals tn trade refonn in the 59 program countries in the period under review is discussed below.

In about a fourth ( 13) of the program countries. initial trade reforms were panially reversed.16 All but 3 or these 13 countries increased tariffs or imposed new surcharges on imports, while 4 widened the scope of quantitative restrictions. But only in Poland were the reversals strong enough to induce a shift in the classification of the overall trade regime. 1 '

The sio-ni ficance of trade policy rever!)als varied considerably across countrie�. For example, in the cases of Argentina (the statistical tax) t8 and Algeria and Kenya

lhJn some cases. new liberalization measures were adopted or planned for 1994 (lr later. hut these are not considered here as they fa!! out� ide the period under revie\\.

17Tiu� sh1ft was from the open to the moderately rcstnctive trade category: the reversal has to be viewed again�t the initial sharp liberalization in 1990. which lowered average tariff level� to 5.5 percent. as part of u nliiJOr transformation to a market economy. . . Ill The Argentine authorities have announced that the stallsllcal tax on import' will be eliminated on January I, 1995.



(reimposition of QRs). reversab raised protection for that part of the trade regime by the end of 1993 to levels ">imilar to those at the end of 1990. thereby largely oiT<;etting the progress achieved in between. l n most other countries (e.g., the Philippines. Sri Lanka. and Tanntnia) the scope of reversals was more limited. This renects the fact that. in nearly all of these countries, imports of specific goods or from specific sources were targeted discriminatorily. thereby limiting the average increase. Exceptions were the broader-based, nondiscriminatory increases in tariffs and other charges in Argentina (statistical tax) and in Bulgaria and Poland (import surcharges).

The reasons for the reversals varied. For !'.Orne. the rationale was to safeguard temporari ly the balance of payment!'. and fiscal revenues, in the face of lagging domestic tax refonns or appreciating real exchange rates. However, for most, protection motives played some role. as governments appeared to at least partially accommodate rising domestic pressures for protection. ln some cases. external developments contributed to the reversals. For example, Burkina Faso experienced a large tern1s of trade shock that led to a substantial weakening of the fiscal and balance of payments position in the presence of a fixed exchange rate. In Kenya. a sharp drop in external financing weakened the balance of payments dramatically.

I t is notable that many of the countries concerned had significantly I iberalized their trade regime� just prior to the reversals but were unable to fully sustain the liberalization. While reversals o<.:curred in program countries in nearly all regions, nearly half of all cases involved economies in transition. Many economies in tranc;ition (particularly in the former Soviet Union) had initially low tariffs as their trade relations were governed by QRs and state-trading arrangements. After having eliminated QRs rapidly and comprehensively. some of them faced increasing protectionist pressures or were unable to fully sustain open markets in light of inadequate complementary reforms in otJ1er (nontrade) areas. In some of these cases. reversals at least partly reflected the desire to support the balance of payments and the budget.

Collaboration with the World Bank

Trade policy is an integral pan of both Fund and World Bank lending operations. Consultation and collaboration between the two staffs is particularly necessary and desirable in this area. The procedural requirements or SAFs and ESAFs (in tenns of participation with national authorities in the formulation of policy framework paperc;) provide a vehicle for coordination of Fund and Bank staiJ advice on trade policies for lowincome countries. But in other cases. too, cooperation in the trade area between the two staffs-at headquarters and in the field-reflects the crucial role played by sustained trade refonns in achieving macroeconomic

40

and structural adjustment. Thus, trade reform'> supported by Bank operations need to be consistent with the macroeconomic framework of Fund-supported program": similarly. the success of u·ade liberalization measures init iated by the authorities in cooperation with the Fund is often also dependent on other structural reforms contained in Bank-supported programs.

The review indicates that collaboration in the trade area between Fund and Bank �rafTs ha� been close. I n most cases. Fund staff have consulted Bank �taff or have relied on them for the design of trade reforms incorporated in Fund-supported programs. In many in�tances, the design of Fund-supported adjustment programs has focused on liberalization of QRs and the prerequisite modification� of exchange �y�tems. rather than on the design of tariff reform. Particularly where the latter required comprehensive. resource-intensive studies. Bank �taff often took the lead. With the decline in reliance on QRs, Fund �taff are paying greater attention to tariffs: in some recent cases. Fund-supported programs have included far-reaching tariff reforms as their initiation was considered necessary in the early stages of the program. In many cases of longer-nm. ongoing reforms. where complex sy<,tcms or both tariffs and QRs are being gradually phased out, the World Bank Group has supported trade reforms by lntemational Bank for Recon!'.truction and Development (IBRD) or International Development Association (IDA) lending operations; Btmk staff have consulted Fund i>taff on the fiscal and balance of payments effects of the envisaged trade reforms.

Trade Policy Conditionality

In order to investigate various aspect<., of conditionality on trade policy included in Fund-supported adjustment programs. arrangements were cla�!>ified into three groups: ( I ) whether Fund disbursements under the program were made contingent on the implementation of specific trade measures: (2) whether the government's commitment to trade reform was expressed in the form of a general or specific intent of policy but not tied to disbur!-.cments; (3) whether trade policy measure� were implemented without recourse to the approach in ( I ) or (2). Below is a review of the nature, detem1inants, and implementation of conditionality 011 trade polic.:y. 1\l The review indicates that the nature of conditionality depended mainly on the initial trade policy stance and the existence of ongoing uni lateral (or "autonomous") trade liberalization programs.

Over X5 percent of the 78 <UTangements in this rc-

1''AII Fund-.,upponed program� con1ain a \lllndard ",landMill" trade clau�e that is binding. namely. the avoidance uf introduction nf OC"-, or antcn�il1cation of exi\lmg reMricuom, on import� for balance of paymenb purpo�e�. The discus'>ion here goe' beyond the 'tand't ill provhion� to invcMigatc trade liberalization me<�;,urc�.


Trade Policy Conditionality

Table "'· Summary of Conditionality \pplied

With Po%ible Stated in Official Reforn1 Mea�ure� Con�equences for Document:. as the Taken Without

Dasbur�emcnt Under Government·� Statement of the Arrangement Intention Jntemion Total

Total 34 33 I I 7!\ Stand-by arrangements I :! 28 ll 4H EFFs. ESAF\. SAFs 22 5 3 JO

Oevelopin� countries Africa 12 10 I 23

Stand-by arrangement� (I 7 () 7 EFF�. ESAFs. SAF� 12 3 I 16

Asia 6 0 (l () Stand-by arrangement\ 3 () () J EFF,. ESAFs. SAF� J () () 3

Middle E<l\t 3 I () 4 Stand-by arrangement� 2 I () -� EFFs, ESAFs, SAFs () () I

Western Hemisphere 2 15 3 20 Stand-by arrangement\ 0 1 3 2 15 EFF,, ESAF,, SAFs 2 2 5

Economic� in tran�ition I I 7 7 15 Eastern Europe 4 2 5 I I

Stand-by arrangement' 3 2 4 9 EFFs. ESAFs. SAFs I () I 2

Other 7 5 2 14 Stand-by arrangement� -1 5 2 I I EFF,. ESAFs. SAFs 3 0 () 3

Source�: National sources: and I MF <,tuff cMirnates. Note: EFF = extended fund facility; ESAF = enhanced structural adJUMment racality; SAF = structural

adjU\llncnt facility.

view envisaged some trade policy action ex ante (Table 4). The increased focus on 1rade reform in Fundsupported adjustment programs reflects the general recognition of the importance of structural adjustment as a conrributor to sustainable growth. In the small proportion of cases where ex ante trade policy measures were not included as part of program design (most were stand-by arrangements). trade reform!> did take place and were reported ex post.

In over two fifths of the arrangements. disbursements were linked to implementation of <;pecific trade reforms. In another two fifths or so, governments committed rl1emselves to undertake trade reforms without the use of binding conditionality. In nearly three fourths of all ESAFs, SAFs. and EFFs. trade reform measures were tied to Fund disbursements. Similar conditionality was applicable in only one fourth of the stand-by arrangemems (this is, of course, not surprising given that ESAFs, SAFs, and EFFs by definition pay greater attention to structural clements).

A disaggregation of trade policy measures by type of conditionality shows that binding conditionality wa!-> more often applied to the liberalization of quantitative restrictions than to tariff reform (Table 5). This renects the view that QRs are the more pernicious form of trade restriction. and their removal is often accorded higher

41

priority (particularly at earlier stages of trade reform) than price-based restrictions. lmplemention of reductions in quantitative restrictions was subject to specific conditionality in 40 cases compared with 33 cases related to tariff measures. Nonetheless, program design did pay considerable attention to price-based restrictions. albeit most often in the form of nonbinding government intentions. Where reform of the tariff structure and the system of QRs was considered especially crucial to the success or the structural adjustment component of the program. the measure was often implememed at the stan of the program, in many case<; a!-> pan of the central governmcm·s budget. In many program developing countries, the authorities undertook trade reform mea�ures in addition to those envisaged under Fund-supported adjustment programs. This explains why arrangemenb with developing countries accounted for about 70 percent (12 on tariffs. 15 on QRs) of those trade reform measures taken outside Fund programs, even though developing countries had only four arrangements that did not contain ex ante trade liberalization measures (Table 5 ).

As Table� 4 and 5 !>how. the conditionality applied to trade reforms varied across regions and arrangements. These dil'ferences were attributable to several factors, including the initial <;lance or the trade regime, the



Table 5. Summary of Trade Reform Measures by Type of Conditionality1

With Po��ibfe Swted in Official Refonn Measure:. Consequences for Documents as the Taken Without Pnor

Di�bursements Under Government\ Statement of Reform Measure the Arrangement Intention Intention

All countries Tariffs 33 fi2 20

Reduction 1 4 22 g Comprehensive refonn 8 15 5 Elimination of surcharge 4 5 3 Minimum raised or

exemptions reduced. or both 3 l) I

Other tariff measures 4 I f 3 Quantitative restriction� 40 42 18

Reduction 24 26 I f Comprehensive refornl 7 I I 5 Other I i beraf izat ion

mcfuding exchange system refonn 9 5 2

Economies in transition Tariffs 10 X 8

Reduction 4 4 (} Comprehensive reforn1 5 2 3 Elimination of surcharge 0 I 3 Minimum raised or

exemptions reduced. or both 0 ll

Other tariff measure� I I

Quantitative restrictions 9 9 3 Reduction 4 5 3 Comprehensive refonn 5 4 0 Other liberalization

including exchange system refonn 0 () 0

De,refoping countries Tariff� 23 54 1 2

Reduction 1 0 I H g Comprehensive refonn 3 D 2 Elimination of surcharge 4 4 () Minimum raised or

exemptions reduced. or both 3 9 ()

Other tariff mca\ures 3 10 2

Quantitative re�trictiom J J 33 1 5 Reduction 20 2 1 8 Comprehensive refonn 2 7 5 Other liberalization

including exchange system refonn l) 5 2

Sources: National sources: and lMF staff estimates. 1Single arrange men� arc counted several times if they involved �cvcraf trade measure� at different level'

or conditionality.

strength oflhe member's ongoing unilateral trade liberalization program, and the track record on implementation of reforms. Arrangements with countries with initially restrictive trade regimes were more likely to incorporate specific and binding trade policy conditionality compared with those with open trade regimes. For example, countries with initially restrictive QR regimes accounted for 49 percent of all program developing countries. but their share in arrangements with

42

binding trade conditionality was significantly higher (63 percent). Similarly, all but one of the countries with initially restrictive tariff regimes was subject to some fom1 of binding trade conditionality. In some cases, trade refonn was already sufficiently well covered in the context of Bank-supported lending. In other cases, developing countries initiated their own (and often ambitious) trade reforms, independent of the use of Fund resources, and were willing to cominue with trade tiber-


Issues in Design of Trade Reform

alization without outside persuasion. In still other cases, specific and binding conditionality on trade policy was often used to strengthen the hands of the authorities to carry out difficult reforms and to resist pressures from domestic special interests. In the economies in transition, it was recognized early on that trade refonn would play a crucial role in the requisite radical u·ansfom1ation of their economies: hence. many of the arrangements with these countries contained binding conditionality, in addition to nonbinding trade policy measures intended to be taken by the authorities.

In two thirds of the arrangements, trade reforms were implemented as envisaged in the programs. ln the remaining one third featuring specific and binding conditionality, there was nonobservance of the timing clement of the envisaged trade policy measures; but this was generally not sufficiently serious 10 warrant disruption in disbursements under the arrangements. In some cases. delays in implementation were not a failure of policy, but rather rellected limitations in administrative capacity. In some instances. conditional trade policy measures were judged as having been implemented on the basis of available information at the time, but subsequent data revealed that tJ1ey had been only partially implemented. This indicates the importance of formulating clear and easily monitorable measures.

Issues in the Design of Trade Reform

In fonnulating trade refonns, a number of design issues need to be addressed. For example, the extent and sequencing of trade refonns have to be determined by the authorities in the light of their economic necessity. political feasibility, and administrative capacity. The policy measures need tO be prioritized consistent with the entire package of macroeconomic and structural measures; the prerequisites and complementary measures must be already in place or implemented along with the envisaged trade policy measures; and thought needs to be given on how to deal with the transitional costs of the measures (such as possible temporary rise in unemployment in affected industries) and their acceptance by the public through improved social safety nets. In countries where the administrative capacity is a constraint, this needs to be taken into account in the design of the refonn, at the same time as efforts are made to improve such capacities through technical assistance. Within the trade policy area, the relative emphasis on the different elements needs to be determined. For example. should QRs be eliminated prior to tariff refonns or along with them? Which QRs are the most harmful? Should some sectors be liberalized before others? Should the program target average tariffs or only maximum and minimum rates? Should maximum tariffs on luxury items be left out of the refonns for income distribution reasons? Are tariffs in neighboring countries a reasonable target? Which trade measures should be subject to binding conditionality? How should the conditionality be defined?

43

These and similar questions often come up during program negotiations and monitoring of program implementation.20 Many of the issues have been addressed in varying degrees in past trade policy surveys, and in general and country papers prepared within and outside the Fund.21 Thus, there is consensus that the overal l trade refonn effort is best addressed in the context of a medium-tenn strategy with clearly established and announced immediate and medium-tenn objectives. Such objectives provide conect signals and help avoid uncertainty caused by frequent changes in the trade regime. Firm adherence to a timetable of trade and related liberalization establishes the credibility of the reform effort from the outset and ensures that the relative price structure is actually factored into the decisions of economic agents. Indeed, experience shows that the credibility and the completeness of a refonn program are the most important factors for its success. Sustained liberalization of the trade regime has been most often attained when the timing and scope of refonns is preannounced, quantitative restrictions are removed at the outset of the program, tariff levels and dispersion are reduced, and complementary domestic price, tax, and public enterprise refonns are implemented.

Among other things. this paper review-; selected design issues emanating from the review of trade reforms in Fund-supported adjustment progran1S in 1990-93. The selected issues cover the interaction of trade refonns with the fiscal revenue aspects of programs, and with exchange rate policy: selected aspects in the formulation of QR liberalization; and tariff refonn issues. To investigate these issues, the approach will now shift from a review of the population of programs in 1990-93 to a sample based on the review of the experience with trade liberalization in selected countries.22 Where relevant, examples from the experience of countries outside the sample are also provided to illustrate design issues.

An important lesson emanating from the review of design issues is that trade reform should be geared to medium-tenn efficiency goals. The use of trade policy instruments (tariffs, QRs) for fiscal. balance of payments, or income disrribution reasons is a second-best solution, and should be resorted to only sparingly and

20Th is paper does not deal with design issuelt that could arise from tied aid and donor procurement requirements that may result in some complexities and inefficiencies in impon sourcing: this issue could be importanl in 1he dc�ign of lrade reform in some counlries, for example. in Africa.

••Sec. for example. Kelly. McGuirk. and olhers ( 1992). and IMF (1994}.

22The sample countnes chosen were Argcnuna, Bangladesh, Ethiopia. Poland, Sri Lanka. and Zimbabwe. They represenl ac1ivc trade refonne rs in different regions that faced a variety of trade polrcy rssues as thetr trade regimes underwent signrficant changes rn 1hc 1990:-.



temporarily to meet emergency situations where better alternatives are not available.

Interaction with Other Program Policies

Trade reforms in Fund-supported adjustment programs have formed part of a larger macroeconomic and structural adjustment effort to correct external and internal imbalances and to achieve sustain<tble growth. This effort often includes fiscal adjustment and exchange rate policy measures that, in turn, have important implications for the design and sequencing of trade reforms.

Fiscal Considerations

Trade taxes are not optimal instruments ro raise revenues because they distort production and consumption. Domestic measures, such as lump-sum taxes, income taxes. or commodity taxes (excise, value-added tax (VAT), etc.). applied neutrally to domestically produced and imported goods should be the preferred instruments to raise revenue. In practice. however. governments rely heavily on trade taxes to generate revenue because administrative capacity constraints or insufficiently developed institutions do not permit efficient collection of non trade taxes.

Generating or maintaining fiscal revenue� from trade taxes hao; been a major determinant in shaping tariff policy in many Fund-supported adjustment programs. and particularly in the sample countries. Fiscal considerations often played a key role in limiting the magnitude of tariff reforms and the speed of their implementation. Indeed. it appears that fiscal objectives have overridden trade policy considerat ions in most case:. where conflicts arose between the two. In many cases, limited progress in trade reforms is attributable to shortcomings in fiscal policy implementation. In <>omc of the srunple coumries (e.g., Bangladesh. Sri Lanka, and Zimbabwe) where trade taxes accou111 for a high proportion (e.g., 20-35 percent) of total tax revenue, fiscal considerations resulted in adoption of a ·'gradual'' approach to tariff reform. and in some instances even to temporary tariff increases for revenue reasons. Since Fund-supported adjustmem programs generally target the central government budget-and trade taxes tend to accrue to the central government alonerevenue considerations can drive tariff policy even in countries where trade taxes account for les� than JO percent of total tax revenue. as in Argentina. The crucial link between reform of the domestic tax system and tariff reduction is al'\o illustrated by the experience of the sample countries. For example. Poland introduced an import surcharge and Sri Lanka delayed reduction or the maximum tariff. in part due to the significant public sector deficits and difficulties in timely implememat ion of planned alternative revenue instruments.

The lesson from this experience is that program design needs to explicitly recognize the linkage between

44

fiscal <�nd tr<tde policy. Chances that tariff reforms are implemented-and sustained-can be improved by restructuring the central government's budget early in the reform process with a view to decreasing the relative importance of trade taxes in total revenue. In some cases, this might imply expanding or introducing new instruments, such as mass consumption taxes, particularly where structural adjustment programs aim to reduce already high income and excise taxes. ln other cases, this might require increased attention to the establishment of efficiem tax administration.

If program design makes tariff reforms comingem on the development of alternative revenue sources, a clear and binding timetable for implementation of the latter is desirable. CO!Tective domestic revenue and expenditure measures taken early on in the program period minimize the risk of slippage in tariff refonns. Furthermore. comingency revenue measures outside the trade area should be formulated for use in the event that revenue gaps were to emerge. The particular measures would, of course, need to be geared to the individual country context. The fact that many or the f<tst trade reformers in Latin America have not resorted to tariff increases in spite or budgetary problems might serve as an indication that such revenue measures can be found outside the trade area, provided the necessary fiscal administrative capacity is developed.

This is not to deny that there could arise instance'> where the viability of the overall program could be jeopardi�.:ecl by slippages in the fiscal area. and that it may be infeasible to meet this emergency situation in the short run without resort to trade measures such as import surcharges. In such cases, it would be important to ensure that the deviation from medium-term trade refonn objectives is strictly temporary by including a preannounced and binding timetable for a phased elimination of the surcharge. Adherence to the programmed elimination of the import surchru·ge would be convincing proof of the authoritie!> · medium-term refonn path and that the temporary deviation was a measure of last resort. The frequen1. and sometime!'� prolonged. use of import surcharges in a number of program countrie!> unfortunately suggests that there continues to be too much of a tendency to view thi-; instrument as the first line of defense to contain budgetary deficits in the face of revenue shortfalls or expenditure overruns. Such a perception may itself prove to be a serious impediment to bringing about the domestic political consensu-. for implementing the necessary fund<unentaJ restructuring of the domestic tax base and of expenditures.

It is important to emphasize that a well-designed trade reform need not be inimical to revenue generation. The substitution or tariffs for binding QRs, for example, serves the objectives or transparency and efficiency at the same time a!) revenue!) are enhanced (examples are Latvia and the Philippines). ln many program countries, tax collection rates are well below statutory tariffs, partly rellecting widespread use of ex-



emption!:>.13 Jn addition. very high tariff!> often encourage smuggling, tax evasion. mi!:>classification. corruption. and so on. all of which act to deprive the government of the intended revenue. A well-designed tariff reform would aim to reduce the scope of discretionary exemptions; this in turn. directly improves revenue. The choice of the particular method of reducing tariffs (collapsing the top rate to the next-highest level, or proportional reductions in all rates) also innuenccs revenue. Indeed, it is feasible in some cases that a welldesigned trade reform hac; a "Laffer"' effect c;o that as statutory rates come down. the import tax collection rate increase!>.24 Finally, in a number of comprehensive tariff reforms. minimum rates have been increased at the !:>ame time as maximum rates are brought down. in order to both reduce dispersion and safeguard revenues. While many countries have room ro raise minimum rates. care must be taken that these arc not raised too much (double-digit levels should be avoided), as this not only increases the cost of imported inputs but may also prove a disincentive to export� in the absence of compensatory schemes, such a!:> well-functioning duty drawback systems, temporary admission schemes, or export-processing zones.

Exchange Rates and Exchange Restrictions

Appropriate exchange rate policies are essential to ensure that trade reforms are consistent with balance of payments objectives. Such policies. supported by firm macroeconomic policie!>. reduce the need for maintaining restriction!> to ration foreign exchange. and abo stimulate exports. The effectiveness of exchange rate policies. in turn, is enhanced when complemented by the liberalization of trade and payments regimes.

In a number of countries, trade restrictions have been used to facilitate the administration of restrictive foreign exchange allocation systems and other exchange restrictions. Indeed. exchange and trade restrictions often act as substitutes. and the benefits of liberalizing one may not be fully realized in Lhe absence of liberalization of the other. Effective trade liberalization needs as a prerequisite (or at least as complementary measures) adoption of liberal exchange systems. Pm1 of the !>uccess of Fund-supported adjustmem programs in reducing reliance on QR!:> i!:> attributable to liberalization

��In Egypt. exemption� rcpr..:�cnted nearly 49 p.:rcent of potential tariff revenue in 19!!6: in Bangladesh. the average sllllutory tariff rate in 1992 wa' about 120 percent: whereas the average level of duty collected wa:. h.:\� than 40 percent mo\tl} due to exemption': and for the \ame reason. 111 Kenya. m 1991. import duty collection' as a proportiOn of import value were le�� than a tlmd of the average 1mpor1 tariff.

2•For example. �1mulat1on� �how that revenues would actually increa\e or remain �table if maxmlUm rates are lnwered in Keny

tt

and Paki\lan. re�pecti,•ely. In addition. collection rate<. are generally much htghcr for lower tariffs than lor higher tariffs. so that a combination of a small increase 111 the minimum and large reduction in the maximum might be revenue neutral. See Pritcheu and Sethi ( 1994).

45

of exchange re�trictions. The experience of the sample countries indicates that in Ethiopia and Zimbabwe. for example. reliance on quantitative import restrictions resulted from disequil ibria in the foreign exchange market and the system of administrative allocation of foreign exchange. Progress in removing quantitative import rc�trictions depended on exchange refonn:. that helped alleviate foreign exchange shortages.

Where trade restrictions arc pervasive, providing high levels of protection across significant parts of the economy, the equilibrium exchange rate is likely to he well above the level that would have prevailed in the absence of restriction�. Under these circumstances. trade liberalization may lead to a deterioration in the current account. as the boost to imports (including private consumer demand) is likely to be felt more rapidly than the impact on exports. In the absence of adequate reserve!:>. the trade liberaliLation would norn1ally need to be accompanied by a devaluation to safeguard the balance of payments-the extent of the exchange rate change would depend on the tightness of fiscal and monetary policies. If the trade reform improved confidence so as to generate capital inflows in �ufficient amounts to offset the deterioration in the cun-ent account, a devaluation may not be necessary. at least initially. for immediate balance of payments reasons. However, as domestic industries will generally need time to adjust to the new realities after a major trade reform. a devaluation might still be necessary to avert future balance of payments problem!:>. Where the initial trade restriction!> arc not pervasive, or the trade liberalization is confined to specific input sectors. a devaluation may not be necessary. provided that Jhe improvement in competitiveness deriving from cheaper inputs is translated sufficiently rapidly into higher exports.

Even if quantitative import restrictions are the binding constraint at the beginning of 1he trade reform. tariff policy needs to be coordinated with progres� in exchange rate refonn. High tariffs may not even provide much protection if duties are calculated on the basis of grossly overvalued exchange rate!:>. as occun-ed in Ethiopia. for example. With devaluation of the exchange rate. maintenance of high tariffs may unduly compress import�. Ln Ethiopia, the failure to reduce tariffs with the devaluation in 1992 led to sharp increase<; in import costs; as an interim measure, import duties were calculated on the basis of the old exchange rate. but this jeopardized the fiscal revenue targets.

Pressures for protection are likely to rise in countries experiencing a real exchange rate appreciation due to surges in capital inflows, or where the nominal exchange rate serves as an anchor but inflation remains higher than programmed. Ldeally. the real appreciation would be tackled with appropriate monetary and fiscal policies.25 Jn practice. as pressures for protection from

1� For a di�cu�'ion of real appreciation followmg cap1wt inflow<., �ee Schadler. and other<; ( 1993).



domes I ic producers rise. and trade deficits widen, across-the-board import surcharges. taxes on imports. or other trade restrictions are sometimes used to approximate a real depreciation on the import side. Among the sample countries, Argentina and Poland illustrate this experience. Across-the-board import surcharges or taxes for balance of payments reasons avoid interindustry distortions in the import-substituting sector but penalize exports. Such measures need to be confined to emergency situations and be kept strictly temporary.

Tariff Policy Design

As QRs are dismantled, the focus of trade reforms is turning increasingly to tariff policy. including the appropriate levels and dispersion of tariffs. the relative merits of different averaging techniques from the viewpoint of monitoring, and the issue of sequencing. Below are some considerations in the design of tariff reforms, based in part on a review of the different approaches to such refonns pursued in the sample countries.

Monitorable Targets

A typical consideration in undertaking tariff refotm is to reduce effective protection for final goods, which in many developing countries tends to be high owing to the cascading structure of nominal tariff rates. The concept of effective protection. however. is less useful as a monitorable target; it is not easy to measure as its computation is information intensive, data on input-output coefficients being required for the emire range of products in a tariff schedule. Hence, for all practical purposes, monitorable targets for refom1 need to be fom1UIated in terms of nominal tariffs. This has typically been the case in Fund-supported adjustment programs in recent years. Some Fund-supported programs have targeted average nominal tariff rates (e.g .. Brazil, India, and Moldova).

A key objective of tariff reform is to reduce dispersion by reducing the spread in nominal tariff rates. at the same time as tariff levels are brought down. However, a given average target is consistent with different combinations of the spread of nominal tariffs, and hence undesirably large spreads cannot be ruled out through reliance on a target for the average. The problem is addressed most directly by setting targets for maximum tariffs and the number and level of tariff bands. These targets would naturally also provide bounds for the average tariff level, which would be detennined in the process of allocating products to the di fferent bands in the tariff schedule. Under the circumstances, a target for the average tariff could serve as a supplemental guide in designing the program. to help ensure that product allocation among different bands is not skewed in favor of the higher tariff bands.

46

The average tariff level might be measured in three different ways: the simple average of statutory rates; the import-weighted average of statutory rates; and the average tariff collection rate (which is by definition an import-weighted measure). All these measures contain useful information. but are not equally easily monitorable or equally revealing about the stance of protection. For example, the average collection rate depends not only on the tariff rate. but also on the nature and magnitude of exemptions granted, on preferen tial trade arrangements, and on other instruments such as variable levies. antidumping and countervailing duties, etc., which serve different policy objectives. A low collection rate could thus reflect high de jure exemptions. or an inefficient and dishonest customs administration if there are de facto exemptions (e.g .. tax evasion).26 The average collection rate is. therefore. not directly indicative of the stance of protection. 27

Statutory tariff rates should therefore be the preferred measure. The import-weighted measure may underestimate the extent or protection because products facing high tariffs could enter the calculation with low weights. so that a low import-weighted average statutory rate may itself be the result of high protection.2" Thus, it would seem preferable to measure the extent of tariff protection in terms of the simple average of statutory tariff rates. notwithstanding the usual drawback in averaging associated with outliers. lf the importweighted average is to be used. the base year should be fixed on a recent year. Finally. tariffs need to be measured inclusive of all other charges (e.g .. fees. statistical taxes, surcharges, etc.) so that targeted reductions capture amalgamated rates.

Tarijf Levels and Dispersion

For most developing countries that cannot affect the foreign currency prices of their imports, theoretical considerations caJI for Lero tariffs across the board. However, the optimal tariff structure is nonzero and differentiated if governments want to pursue objectives other than pure welfare maximization.29 Under these circumstances, the theoretically optimal tariff structure should be differentiated according to the price elasticity

2<>A low coilection raiC could thus call for removal of exemptions and for improving customs administrmion, rather than raising statutory tarifflevels.

27The Mance of protection should he measured by the marginal price that an imponcr would have to pay. If there me exemption�. with prohibit ions on resale. the marginal price would be the nominal r:ue rather than the collected rate.

2�The average tariff would preferably be calculated by weighting the statutory lariiTs on a product by liS share m total domestic pro· duct ion. However, due to data limitations in mo�t developing countries. this is not possible to calculate for many of the program countries.

211Tariffs could be used, for example. for revenues. income di�tribution. or balance of payment!> management.



of demand for revenue objectives; according to the stage of processing under a protection objective; and according to the income elasticity of demand under an income distribution objective. Only under a balance of payments objective would theory call for a uniform tariff structure. With regard to the protection objective, however. the difficulties and pitfalls of targeting would suggest that it may be preferable to adopt the alternative approach of broader-based protection with relatively narrow differentiation among sectors.

With regard to other objectives, considerations of political economy. administrative convenience, and lack of information also provide strong argumenLo; against complex and differentiated tariff structures. I f interest groups perceive !hat the authorities arc unwilling to provide too much differentiation in protection, they may refrain from further lobbying to secure greater protection, thereby minimizing rent-seeking costs. Less complex tariff structures can be administered more easily. avoiding cumbersome paperwork. and reducing the incentive to rnisclassify products. Furthern10re, inadequate information about the relevant economic variables suggests that simply designed tariff c;tructures are the preferred option. Simplicity is served by avoiding too many bands: while !here is no firm theoretical basis for precisely choosing 1he number of bands. rules of thumb based on the experience of successful reformers suggest that a few bands (in the range of 3-5) would be appropriate.�o

Tariff structures vary considerably among countries (Table 6). A question frequently encountered relates to the choice of targets for tariff level� and dispersion in the short- to medium-term. The experience of the relatively successful Latin American tariff reformers i!> particularly illusu·ativc in this respect. lt suggests lhat rapid refom1--over a period of2-5 years-is economically and politically feasible. Many Latin American countries had very restriclive tariff regimes in the 1980s but were able to modify their regimes rapidly in the !ale 1980s and early 1990s. While there are exceptions, the broad pattern that emerges from the experience of successful reformers is that they were able to bring down maximum tariffs from very high (sometimes tripledigit) levels to a range of 30-35 percent within three years or so, and subsequently brought these down further to around 20 percent. Several Latin American program31 countries considered in this paper (e.g .. Costa Rica. Ecuador, Guatemala. Peru, Uruguay, and Argentina prior lo the increase in its statistical tax) lowered tariffs generally to the 0-25 percent range, usually with average statutory tariffs between LO percent and J5 per-

'!lThe above issues are covered m more detail in Subramanian. Ibrahim. and Torres-Castro ( 1993).

'1 .. Program" coumries refer to those identified in Table I as havtng emcred into a stand-by. EFF. SAF. or ESAF arrangement with the Fund in 1990-93.

47

cent.�2 They also simplified their tariff su·uctures to sharply reduce the number of tariff bands, in many cases retaining only a few ( 1-5). Similarly, several other (nonprogram) Latin American countries (e.g .. Bolivia, Chile. Colombia, Mexico. and Venezuela) also have achieved simple tariff structures and low or moderate tariff levels over a relatively short period of time.

In many East European countries (a group that could also be considered as fast trade reformers) average ta� iff levels are low or moderate, but tariff dispersion is larger than in most Latin American countries, with maximum tariffs (including surcharges) above 40 percent and minimum tariffs between zero and 8 percent. Agricultural imports carry. on average, significantly higher tariffs than industrial goods (in part IO insulate domestic producers from the effects of subsidized agricultural exports of many industrial countries). Adopting a more gradual approach, a number of (nonprogram) Asian countries have also achieved (over a decade or so) low-to-moderate average rariff levels but. as in the case of Eastern Europe, tariff dispersion continues to be larger than in Latin America. For example. average tariff levels are 10-15 percent in Korea. Malaysia, and Thailand,33 but maximum tariffs are in the range of from 30 percent to 60 percent. A number of program Asian and Middle Eastern countries that have adopted a gradual approach (e.g., Bangladesh. Egypt. and Sri Lanka) or whose major tariff reforms have on I y recently been initiated (e.g., India. Pakistan. and the Philippines) had restrictive tariff regimes with high average and maximum tariffs at the end of 1993.

Most African countries have made only limited progress in reducing tariffs and maintain high average statutory rates (inclusive of other charges). A number of them have moderate average customs tariffs but apply significant other charges (e.g., Malawi, Mali. Morocco, South Africa, and Zimbabwe). Slow progress in tariff reforms has often been attributed to revenue constraints. However, some progran1 countries in Africa and in other regions with similar constraints have made significantly greater progress in lowering tariffs (Benin or Nepal, for example).

Rapid progress in tariff reform is possible even under difficult initial situations, as shown by a comparison of the experience of Bangladesh and Ethiopia. Both countries had initially maximum tariffs well above 100 percent. faced vulnerable exlemal positions, and relied heavily on trade taxes for fiscal revenue�. Ethiopia underlook a major tariff reform in June 1993. lowering the maximum rate to 80 percent and greatly reducing the number of bands and zero-rated ilems; the average stat-

'2Gcnerally, raw materiah and c:apilal good-. not availabledomc'>tically moMiy carry low lariff-. (0-5 percent). while �emifinishcd goods and linishcd goods arc subJected to tariffs of 10-15 percent and 20-25 percent. respccLivcly. Some \ensitive items carry maximum tariffs of 30-35 percent.

"Hong Kong halo no 1mpon tariffs, and m Singapore 91 percent of the tariff line� are duty rrec.



Table 6. Comparative Tariff Regimes in Selected Countries 1 (In percelll)

AvcrageJ (Excluding Number

Other Other'� of Tariff Maxinwm2 Charges) Charges Bandss

Western Hemisphere Argentina 20 I I 1 0 8 Bolivia 10 8 4 3 Brazil 35/40 1 5 6 1 3 Chile 15 I I 0 I Colombia 20/35 I I 0 4 Costa Rica 20127 1 5 I 5 Ecuador 17/37 9 1-2 9 El Salvador 20/30 1 4 5 Guatemala 20/25 1 4 0 5 Honduras 20/25 1 4 5-10 4 Jamaica 30/40 1 4 20-50 7 Mexico 20 1 3 I 4 Peru 25 1 7 2 Uruguay 20 14 0 3 Venezuela 20/30 12 () 4

Asia and Middle East Bangladesh 75/100 42 2.5 10 Egypt 80 42 9 India 85/100 7 1 >9 Indonesia 40/60+ 22 5 6 Korea 30 1 0 0 Malaysia 40/50+ 1 4 0 1 0 Nepal 40/1 1 0 21 7 Pakistan 801250 45 1 2 1 0 Philippines 50/100 26 9 4 Sri Lanka 451100 29 3 4 Thailand 60/200 1 4

Africa Algeria 60!60+ 25 8 Benin 20 4 Burundi 100 36 4 5 Cameroon 140/260 3 1 20 Cote d'lvoire 35 20 Ethiopia 80 29 () 10 Ghana 25 12 0 3 Kenya 60 34 2 I I Malawi 45 2 1 0-100 I I Mali 40/100 23 0-80 3 Morocco 35 23 1 3 9 Nigeria 45/200 28 0-5 > 1 0 Sierra Leone 65 30 3 South Africa 100/100+ 21 5/40 35<' Tanzania 40 29 I 4 Tunisia 41/123 27 5-30 Zimbabwe 35 20 15/20 >3

Economies in transition Albania 30 1 4 5 4 Bulgaria 40 17 3. 5-25 5 Czech Republic 15/80 6 Estonia 10/16 I I 2 Hungary 60/150 13 3

48


Issues In Design of Trade Reform

Table 6 (concluded)

Maximum2

Economies in transition (continued) Latvia 25/60 Lithuania 25/60 Moldova 40/100 Poland 45 Romania 60 Slovakia 15/80

Average' (Excluding

Other Charge�)

3

IY 1 9 (j

Other• Charge�

6 I

10

Number of Tariff Bands5

3 5 7 y

19

Sources: National sources; IMF Annual Report on e.1rhange 1\rrangemems and £xclwnge Restrictions. GATT: and World Bank.

1Status based on information avatlablc in May 1994. 2When two rates are given. the first refe r� to the normal maximum rate and the 'econd refers to the

maximum rate applicable to a few selected items. Rates shown without a slash (/) refer to the normal maximum rate. A plus ( + ) �ign implie� that the maximum rate can be higher for some item�.

'Simple average rate� except for Ethiopia and South Africa where weighted average rates are given. 4 1 ncl udes charges levied exclusively or di scrim inatori I y on i mpons. �Excluding zero rates. 6There are 35 ad valorem rates but 200 ad valtm:.•m equivalent\ if specific and fom1ula dutie\ are taken into

account.

utory tariff was reduced from 41 percent to 29 percent. In contrast, Bangladesh's gradual tariff reform. initiated in 1986, yielded an average (unweighted) nominal rate of protection of 42 percen1 by l993/94. In addition to fear of loss of revenues. the factors cited by the authorities for not progressing faster included concerns about the social and economic costs. associated with resu·ucturing domestic industries and the use of the trade regime to achieve a more equitable income distribution in the absence of alternative direct methods of resource transfers.

The extent and speed of future tariff refonns would naturally need to be tailored to the particular circumstances of each country. Nevertheless. the experience of tariff reform in the successful Latin American countries indicates what is feasible if the refonn is designed well. accompanied by a package of complementary domestic measures. and if its value is explained to the public. For countries currently facing highly distor1ed trade regimes, tariff reform would probably need to proceed in stages within a medium-tem1 framework: the less distorted cases could perhaps proceed faster to reach the level attained by Latin America. A mediumtenn tariff reform could consider the following elements: ( l ) all import taxes and charge!'> should be incorporated into the tariff structure; (2) discretionary exemptions should be removed: (3) the tariff structure should be simplified into a few (preferably within 3-5) bands; (4) the all-inclusive maximum tariff should be significantly lowered with only a short list of exceptions: (5) this should be accompanied by a reduction in the average statutory tariff rate; (6) the tariff reform should be preannounced as a minimum in terms of its medium-tem1 target, and preferably its annual targets LOo (like the multiyear tariff reforms in Brazil, Co-

49

lombia, and Pakistan). Annual targets would need to be worked out with particular attention to the revenue and balance of payments impact of the reform. As mentioned earlier. care has to be taken to contain minimum tariffs to relatively low levels (preferably below double digits) in order to avoid raising costs of raw materials and intermediate inputs and to avoid hurting exports. Minimum tariffs at the higher end (e.g .. around 10 percent) would require an effective duty drawback system to ameliorate the effects on exports (such drawback systems need to be kept administratively simple if they are 10 be effective).

The experience of Latin America suggests that it would be feasible in the first stage to bring down maximum tariffs to levels in the region of 30 percent to 35 percent and reduce average tariffs to a range of 15 percent to 20 percent. Countries that have already simplified and rationalized their tariff structures and reached moderate levels of tariffs could gear their medium-term tariff policy toward a further reduction of average tariffs (e.g., to about 10 percent) and of maximum tariffs (e.g.. to about 20 percent with no exceptions).

In practice, some countries have proceeded much faster than the above scenarios. while others have failed to reach even moderate tariff levels despite many years of reform.

Implications of Regional Integration

A number of countries have increasingly liberalized trade in the context of regional arrangements. This may have implications for their external trade regimes (i.e., vis-a-vis third-country trading partners). Among the sample group of countries, for example. Argentina and



Poland have entered into regional arrangements with some of their major trading partners, aimed at establishing free trade among regional members. Regional trade liberalization may affect tariff policy in a number of ways. Members of a customs union will be bound by the common external tariff, and liberalization with respect to third countries will need to be agreed upon among all the partner countries. Even under a free trade area without a common external tariff, the room for further liberalization on a most-favored-nation (MFN) basis may be limited in the face of revenue constraints and domestic pressures for protection.34 ln fact. tariff increases for protection or revenue purpose� might have to be larger vis-a-vis third countTies as it may not be possible to raise tariffs on imports from members of the regional arrangement.

The above factors need not, however. inhibit further MFN rrade liberalization, as exemplified by recent developments in the Caribbean Community (CARJCOM) and the Central American Common Market, if regional partners are convinced of the beneficial effects of the reform for their countries. In the design of tariff reforms, regional perspectives need to be taken into account in rhe case of countries belonging to a regional trading arrangement.

Quantitative Restrictions

In the sample countries reviewed, QRs were generally maintained for one of two reasons: LO ensure the administrative allocation of foreign exchange and to protect domestic industries. It is generally accepted that QRs are less transparent and more restrictive than tarif'fs. Hence. they should in principle be liberalized at an early stage of trade refom1. A number of counu·ies have considered a one-step removal infeasible and have opted for a phased reduction. Numerical targets for QR reduction need to be precisely defined and monitorable. This is especially important where progress is to be monitored through coverage ratios (such a� proportion of import� or domestic value added). Care must be taken to avoid a bunching of sensitive items for liberalization at the end of the period, as this is often not credible. The exceptions for liberalization must also be precisely defined and limited to a short list for GAITsanctioned reasons such as health. national security, or public morals.

An emerging trend in some progTam (and nonprogram) countries that is disquieting is that as QRs are liberalized (and high tariffs brought down), new forms of protection are introduced, such as variable import levies or increased recourse to antidumping measures; this tends to occur especiaiJy in the agricultural sector. partially offsetting the impact of the QR liberalization.

'4 Further MFN liberaJization might be le�� difficult if the share of a country's trade within the regional arrangement is very largt:. However, for most program developing countries this is not yet the .:ase.

50

Faster progress on liberalization can !>Ometime� be obtained if the QRs are replaced initially by tariff equivalents. which arc subsequently reduced according to a predetem1ined schedule.

In countries where QRs are the result of the foreign exchange allocation process, their removal is intimately tied to reforms of the exchange system. Frequently used strategies include the introduction of an auction market for foreign exchange with a gradually declining negative list (for which the foreign exchange must not be u�ed): gradually expanding an export retention scheme (ERS) by shortening the negative list and increasing the retention ratio: or gradually adding more products to an open general import license system (OGIL). Especially in an early stage of the reform. when the OGJL is rather limited, the ERS has the advantage of limiting discretionary selection of imports for liberalization; under the ERS, importers detennine what they want to import from retained export earnings (although there is usually a negative list). However, if the retained export earnings are nonsalable or the foreign exchange market is relatively thin, the ERS is of little help to importers who do not have their own sources of foreign exchange earnings.

GATT Consistency

The design of trade refonns needs to be consistent with the member's obligations under the GATT (and in future with the new World Trade Organization). An area meriting particular attention is to ensure that GATT tariff '·bindings" arc not violated.Js This could potentially occur, for example. if increases in minimum tariffs are contemplated. lf the tariff increases violate GATT bindings, the country needs to obtain a temporary waiver of its obligations under the GAIT, giving it time to consult with trading partners about appropriate compensation (the Jailer can be provided, for example, by reducing bound rates on other items of interest to its trading partners). In practice. during the review period ( 1 990-93), GATT consistency has not become an issue in the design of Fund-supported adjustment programs. An exception was the case of Egypt.36 Since this occurrence. World Bank and Fund staff have heightened their awareness of potential GATT-incon'iistent measures arising in connection with reforn1 programs and have strengthened their respective institutional review mechanisms so as to better identify such potential problems at an early stage. With the broader reach of

1\A tariff i' "'bound·' in the GAIT when a member undertake' not to incrca�e it above it� bound lt:vcl without compen:.ation to it' GAIT trading partners: a .. binding .. of the statutory import tariff involve� also binding variou� other charges and duties levied on I he particular import item.

111Under Jhe World Bank's stn1ctural adJu:.tmcm loan with Egypt. lhe authoritie� undertook to raise minimum tariffs to 5 percent, to partially offset revenue lo,,e, from the reduction of peak wriffs and to reduce dispersion. This tariff rcfom1 was also incorporated in the Fund-'oupportc.:d progmm.


Conclusions

trade obligations undertaken in the Uruguay Round agreement, including a general increase in the level of bindings. the need to remain alert to this issue is greater than before. Ultimately. national authorities bear the responsibility to ensure that their adoption of policy measures is consistent with their treaty obligation!..

Other potential areas meriting attention include the GAlT's prohibition on import surcharges on bound items (unless the relevant GAlT waiver is obtained). on export subsidies on manufactures. and on trade restrictions for environmental purposes. It is also important to avoid trade remedy laws and practices (antidumping and countervailing) that are inconsistent with GATI rule!..

Conclusions

The main conclusions are listed below. • Significant progresl. was made toward trade re

form under Fund-supported adjustment programs. Between 1990 and 1993, oul of 59 program countries, those with restrictive trade regimes fell from 53 to 33.

• Greater progress was made in liberalizating quantitative restrictions compared with tariff refom1s, but the latter are beginning to get increasing attention under Fund-supported adjustment programs. The slower progress on tariffs was due in pan to continued reliance on international u·ade taxes as a source of budgetary revenues.

• The greatest progress in trade refom1 took place in East European economies in transition and in Latin America.

• The macroeconomic characteristics associated with slow and fast trade refonners suggest that the former faced initial conditions that were more difficult than those of the latter. But fast trade reformers also made faster progress in the macroeconomic ( fi<;cal) area, suggesting probably more willingness or ability to take bolder, comprehensive refom1s.

• Reversals in trade reform (partial or full) were limited ( 13 cases out of 59) and often reflected competitive pressures due to appreciating real exchange rates, lagging domestic tax refon11S, or political difficulty in resisting domestic pressures for protection.

• Over two fifths of the arrangemems contained specific and binding conditionality on trade policy, while another two fifths contained nonbinding commitments or intention on trade reform:,. Specific and binding conditionality was more often applied to liberalizing QRs than to tariff reforms. The incidence of such conditionality depended on a number of factors including the degree of restrictiveness of the initial trade regime and the presence of ongoing unilateral trade liberalization programs being pursued by the authorities independent of Fund programs.

51

The lessons from the review of design issues indicate the foUowing:

• Trade policy must be geared toward medium-term efficiency goals. The usc of trade instruments for nontrade objectives is a second-best :.olurion and should be resorted to only sparingly and temporarily to meet emergency situations where beuer alternatives are not available. The phased elimination of such temporary restrictions should be made a binding condition in programs. Lf trade restrictions are inevitable, acrossthe-board import surcharges are the least distortive measure, but they do penalize exports in the absence of efficient compensatory schemes.

• There have often been conflicts between shortterm fiscal objectives and medium-term trade reform goals. However. a well-designed tariff reform may actually improve the import tax collection rate at the same time as statutory tariff levels come down, at least in the initial stages. Tariff reforms will be sustainable if they are accompanied by a restructuring of the domestic tax base early in the reform process so a:, to decrease reliance on trade taxes.

• Sustainable trade reforms need as a prerequi!.iteor at least as complementary measures-liberalization of exchange systems and exchange rate 11exibility.

• It is essential to devise simple and straightforward monitoring devices on trade policy. and the measures should be consistent with the GATI.

• The extent and speed of trade reform needs. of course, to be Lailored to the individual circumstances of the program country. Nevertheless, the experiences of the successful trade reformers. particularly in Latin America, offer lessons for the design of tariff reforms. Trade reform would involve replacing QRs with tariffs and reducing the latter in phases. Elements of a medium-term tariff reforn1, preferably preannounced, could be to amalgamate various charge:. into the tariff structure, eliminate exemptions, simplify the tariff structure by reducing the number of tariff bands to a few (e.g .. 3-5). reduce average tariffs to moderate levels. and bring down maximum tariffs significantly. Countries that have already simplified tariff structures and achieved moderate tariff levels could gear their medium-term tariff policy toward further reductions in maximum and average tariffs. The experience of Latin America suggests that it is feasible in the first stage to reduce maximum tariffs to a range of between 30 percent and 35 percent, and average tariffs to a range of between 15 percent and 20 percent. And in the subsequent stage, it is feasible to reduce maximum and average tariffs further to 20 percent and about 10 percent, respectively. For countries with high tariff protection (mainly in Asia. Africa, and the Middle East) these scenarios imply reaching the current tariff levels of Latin America by the tum of the century.


Bibliography

General Agreement on Tariffs and Trade, 7i·ade Policy Rel•iew Mechanism (Geneva: GATI Secretariat, various issues).

International Monetary Fund, Annual Report on Exchant<<' Arrangements and Excltangt' Resrricrions (Wru.hington: International Monetary Fund, various issues).

---. lnrenwtional Financial Statisrics (Washington: International Monetary Fund, various issues).

---, Trade Policy Reform in tlte Coumries of the Former Sm·iet Union. lMF Economic Reviews. No. 2 (Washington: lntcmational Monetary Fund, 1994).

---. Transactions oftlte Fund (Washington: International Monetary Fund, various issues).

Kelly, M .. A. McGuirk, and others. Issues and De1•elopments in I nrernational Trade Policy. World Economic and Financial Surveys (Washington: International Monetary Fund. 1992).

52

Loser. C. and E. Kalter, cds., Mex1co: The Srraregy 10

Acltie1'e Sustained Economic Growth, IMF Occasional Paper. No. 99 (Washington: International Monetary Fund. September 1992).

Pritchelt, L., and G. Sethi, ·'TariiT Rates. Tariff Revenue. and Tariff Reform: Some New Facts,·· World Bank £('()nomic Rel'iew, Vol. 8 (January). pp. 1-16.

Schadler, S .. and others, Recem Experiences with Surges in Capitallilflow�. lMF Occasional Paper. No. 108 (Washington: International Monetary Fund, December 1993).

Subramanian. A., A. Ibrahim, and L. Torres-Castro, "Optim<�l Tariffs: Theory and Pmctice, .. IMF Working Paper, WP/93/50 (W<�shington: International Monetary Fund, June 1993).

Thomas. V., J. Nash, and others. Best Practices in Trade Policy Reform (Washington: Oxford University Press for the World Bank. 1991).


III Antidumping: Solution or Problem in the 1990s?

Miclurel Leidy I

A nlidumping is_ by far the �11ost _fr�quently used (GAIT-legal) mstTument ol admm1stered or con

tingent protection2 among industrial countries. and its use has been spreading in recent years with developing countries. and some transition countries. taking an increasing interest in formal antidumping measures. Whether antidumping is 'l problem or a solution in the multilateral trading system depends on what countries aim to achieve through antidumping policies, whether it is an appropriate instrument to achieve these objectives, and whether the benefits appear to justify the implied social costs.

Antidumping as currently practiced has important anticompetitive effects. While some early antidumping laws. in the United States for example, were viewed as extensions of competition (antitrust) policies and were designed to preserve the conditions of competition, no such standard is applicable to antidumping today (Box I). Indeed, under current rules and practice, antidumping protects a privileged class of competitor (i.e .. importcompeting ftrn1s) to the detriment of competition.

This paper examines the frequency, incidence. and country composition of antidumping measures. focusing on the four years since July 1989. It reviews certain theoretical aspects or antidumping policy, including a critical evaluation of the most commonly cited rationales for antidumping and a survey of recent work on its trade-distorting effects. The principal changes to antidumping rules under the Uruguay Round are also discussed. The paper concludes with a brief description of reforms that would help to reconcile amidumping policy with the vision of liberal world trade that underlies the multi lateral trading system.

Recent Antidumping Activity

The last four years have seen virtually every indicator of aggregate antidumping activity rising, with yearly initiations and new detinitive measures (i.e .. antidumping duties and price undertakings) recently sur-

1The principal author. 2Administered protection. sometimes called contingent prOiec

tion. refer� to antidumpmg, countervailing dutlc>. and emergency proteclion under the GATT's principal safeguards clau$e (Article XIX). The tem1 also applies to fom1al government-to-government voluntary expon. restraint agreements (VERs). These forn1' of protection are distingui�hed from directly legislated protection in the fom1 of tariffs. quantitative reMrictions. and other non tariff barriers.

53

passing the previow. peak in activity seen in 1984-85. Several counu·ies used existing antidumping laws for the first time, and others formally instituted new antidumping regimes-thus enhancing the prospect of a further spread of antidumping activity in the future. Traditional users of antidumping also saw an increase in thi� activity.

Much of the recent rise in activity is attributable to the macroeconomic slowdown as well as the sweeping antidumping initiations against various steel products. Regardless, the overall growth in this activity is an important indicator or the recent stance or international trade policies. and highlight& the importance of Uruguay Round efforts to introduce new disciplines in this area.

Antidumping Activity Among Traditional Users

The major users of antidumping over the last decade were Australia, Canada. the European Union (EU). and the United States (Chart I). Chart 2 shows I he stock of antidumping measures in force. initiations. and new measures taken by each of these countries separately since 1989-90. Total initiations among the major users rose from 77 a year in 19R9-90 to 202 in 1992-93 (Chart 2). New definitive antidumping duties increased from 44 in 1989-90 to 105 in 1992-93. The stock of antidumping measures in force rose from 470 in 1989-90 to 573 in 1992-93.

While the stock of outstanding antidumping measures in Australia had been generally high and increasing since 1980, from 1986 through 1989 there was a sharp decline in outstanding measures-the stock was cut by aboul 75 percent during this period.3 From 1990-93, however, measures in force more than tripled. In recent years. initiations and newly imposed definitive duties in Australia have retumed to the high levels of the early-to-rnid-1980s.

Continuing the steady decline since 1988. Canada's stock of outstanding antidumping measures fell from

1This wa, due pnnc1pally to a large jump in the yearly number of revocation� of outstanding antidumping mea�ure�. From 1979-85. a total of 34 old actions were revoked. TI1is compares with SO revocations ml986. 60 in 1987,66 in 1988. and 43 in 1989. The increase 111 revocmions may be attributable to the significant depreciation of the Australian dollar. which improved the compctitivenes� of Australian manufacturer�. as well as to a more active review proce�s by Australian Cu�tom�. These revocation� preceded the existence of a �un�et clause for antidumping mea�ures in Australia !Banks C 1993)).


Ill ANTIDUMPING: SOLUTION OR PROBLEM IN THE 1990s?

Box 1. Antidumping: Procedures and Definitions

The antidumping process is usually initiated with a petition from an import-competing industry claiming dumping-alternatively, the authorities may initiate the process. This sets in motion an investigation lasting typically many months to determine whether two fundamental criteria have been met: (I) dumping has occurred; and (2) the import-competing industry is suffering "material" injury, or the threat of material injury, by reason of the dumped imports.

Dumping exists when a product is sold abroad (introduced into the commerce of another country) at less than "normal value," that is, the export price is less than the comparable price in the home market, in the ordinary course of trade. When sales in the home market are deemed insufficient to permit a proper comparison, the margin of dumping is determined either by looking at a comparable price of a like product exported to an "appropriate·· third country. or by estimating the cost of production in the country of origin plus administrative, selling, other costS, and a margin for profit.

Establishing material injury is not a precise exercise and, as such, fmal determinations are generally regarded as subject to some administrative discretion. The Uruguay Round agreement attempted to clarify some of the rules associated with determining injury but, by the nature of the process, it could not have hoped to succeed in establishing a one-to-one relationship between industry conditions and the outcome of a material injury investigation. Some amount of discretion is inherent. Factors entering into the assessment of injury include, inter alia, industry sales, output, profit, market share, capacity utilization, employment, wages. return on investments, factors affecting domestic prices, the margin of dumping, actual and potential negative effectS on cash flow, and productivity. It is also noteworthy that the "material injury'' standard is generally thought to be less stringent than the "serious injury" Lest applicable to a safeguards action under Article XIX of GAIT/WTO.I

103 in 1990 to 7 1 in 1991, but rose to 80 by June 1993. Canada's yearly antidumping initiations and definitive dmies had also been moving somewhat downward since the early 1980s. but have turned upward since 1990-91.

Since 1983. the stock of antidumping measure$ in force in the United States has increased steadily, from a reported 52 in 1983 to 279 by the end of June 1993. Yearly initiations fluctuated fairly widely over the 1980s but rose steadily from 24 in 1989-90 to 74 in 1992-93. Definitive duties and price undertakings imposed yearly were roughly stable from 1989-92. then rose dramatically d uring the period June 1992-June 1993. This surge in antidumping measures was due in part to the numerous steel-related antidumping petitions following the end-of-March 1992 expiration of voluntary export restraint agreements with 27 steelexporting countries.

54

Tf a preliminary investigation shows that both injury and dumping are present, preliminary measures are taken (typically, duties, or the posting of a cash deposit or bond not to exceed the amount of the preliminary dumping margin). The Uruguay Round agreement specifies that preliminary measures shall not be taken sooner than 60 days from the date of initiation of the investigation. Sometimes investigations are suspended or terminated without the imposition of provisional measures in response to a voluntary undertaking by the exporter to revise its price upward (not to exceed the dumping margin). Such actions are referred to as "price undertakings." The Uruguay Round indicates that such price undertakings shall not be sought or accepted before the authorities have made a preliminary determination of dumping and injury. If the preliminary investigation finds dumping and injury, and if no price undertaking is agreed, the investigation proceeds to its conclusion where a fmal determination on the question of dumping and injury is reached. 1f both are affirmative, a final antidumping duty generally equal to the estimated dumping margin is assessed. Australia, Canada, and the United States, for example, typically impose duties equal to the estimated dumping margin. The European Union has a "lesser-duty rule"; that is, if a duty less than the margin of dumping would be sufficient to remove the injury. that lesser duty is assessed. But some have argued that the lesser-duty rule has led the European Commission to substitute "injury margins determined through a nontransparent process characterized by a high degree of discretion, for realistic dumping margins based on fair comparisons" (Bellis (1989, p. 5)). The Commission estimates that between January 1991 and the end of June 1992 about half of all cases in which final duties were imposed saw duties less than the full dumping margin (GAIT (1993, p. 65)).

1SeeJackson (t989), pp. 236-37.

The European Union began reporting antidumping measures in force against all countries only in 1989. Since that time. aggregate measures in force have remained relatively stable. Prior to 1991-92. the EU was reporting antidumping activity only toward member!> of the Tokyo Round Antidumping Code. Thus the increase in antidumping initiations from 1990-91 to 1991-92 must be interpreted wirh care, as it reflects a number of actions against countries not previously included in the reports. Nevertheless, anridurnping initiation� and definitive duties (or price undertakings) increased in the year ended June 1993.

Much of the recent rise in antidumping ilwestigations in industrial countries was directed toward nonOECD countries (Chart 3). During the period July I. 1991 to June 30. 1992. the proportion of investigations involving non-OECD exporters was 66 percent. 5 1 percent, and 83 percent. respectively for the United States.



Chart I. Antidumping Activity•

-- lmtiatwn\

:>()() -

175-

150-

125-

100-

75-

50-

25-

European Union, 1980-93 150-

125-

100-

75-

50-

2>-�---- .....

() I I

Otfinitn·t• lltllw' --- Nft•tf'tot'\ m}ruc<'

Canada, 1980-93 ,r ............ --, __ ,,"", I ' / '

I ' / \ / \ _ I \

\ \ \ \ \

-17�

-150

-125

- 100

\ _ __ _,,..- 75

I I

1-I

United States, 1980-93

- --

/ I /

/' / / /'

/ __ _.

/ / _..-'

I

I /

/

50

25

()

- 3()()

-250

-2!Xl

-150

- J(Xl

50

() 1'18(}-1)1 1'181-1\3 l'll!+-t\5 191\6-117 1n!!-M') 11)1)(1 1)1 1'>'1! \13 11JS() 1\1

Sour�e: GAlT. Ua\k Jn.,trumcnl' allll Sclcclcu Dm.:umcnh .. \ariou' i"uc' I Before 1991/92. Europc;m Union ligurc' ex dude millillion' anu Ju11c' on non,ignaloric, to lh<' GAlT Anlidumpmg C"nde

Australia, and the EU.4 From mid-1991 through mid-1993 .. 47 percent or all U.S. amidumping case-; were directed toward industrial countries. 38 percent toward developing countric�. and IS percent toward economies in transition.5 In Australia. outstanding antidumping action!> were mostly concentrated against Asian countries. with actions against EU member �talel> the second most prcvalent.6 Australian antidumping ac-

JSce GATI(I993).

�see GATI ( l994b).

"See GATI! l994al.

55

tions against Central and South American States were the third most l'requcm. exceeding those again'it the United States and Canada by a small margin.

While a vast array of product!> have been subjected to antidumping actions. the bulk tend to be concentrated in a few sec1ors. In the EU, antidumping duties in effect in June 1993 were mo!>tly concentrated in chemicals. metals. machinery. textiles. and consumer electronics industries. In the United States. various metals. cement. electrical and nonelectrical machinery. and industrial chemicals saw the highest concentration of outstanding antidumping duties. In Australia. antidumping mea-



Chart 2. \ntidurnping Activity: Aw;tralia. Canada, Euro1>�an Union. and the United States•

Total Antidumping Activity Antiduml>inJ: Mea�ures in For·ce

600- • Definirl•·� durie.r

• ltritiarwns 500- • M�llsures injnru

400-

300-

() 1989-90 1991-92

• Armrtrlia

• Canada

- 0 Europelln U11imt • United Stares

June I 'JlJ{) June I 'I'J J June 1992 June I'I'J3

-3()()

-250

-200

-ISO

- 100

0

Antidumping Initiation., New Antidumpinr,: Duties and Undertakings

l!O-

70-

60-

so-

40-

30-

• Australia

• Canada

0 European Uni01r • United Srates

O June 1990 June 1991 June 1992 Juuc 199J

• AliSrralia

• CantulJJ 0 EurrJ(Jl!lm Union

Ej!J United Stmes

June 1990 Juno 1991

Sc1urce: GATI. Ba�ic ln'>lrumcnh nnd Selected Documcnt�. variou' b'ucs.

- 40

- 35

- 30

- 25

- 20

June 1992 June 199�

1Europenn Union figure> prim to 1991/92 ;:xcludc inillatiun' and dUiic' on nun,ignatune' loGAn· Anudumpmg Cooe.

sures were concentrated in chemicals. machinery and pam., and processed agricultural good!>.

Antidumping Activity Among Nontraditional Users

Beginning in the second half of 1990, aggregate antidumping initiations and definitive measures over a block of 14 users started a strong upward climb that has continued through 1993 (Chart 4).7 This contrasts with

7The sample include� Au�tralia. Austria. Bra7il, Canada. the EU, Finland. lnd1a. Japan. Korea, Mex1co. New Zealand. Poland.

56

the period 1984-90 when total antidumping initiations. and 10 a lesser extent definitive measures, had a downward tTend. However. 1984-85 was also the prcviow, peak in global antidumping activity. and by 1991-92 that peak had been surpassed.

Developing countries and other nomraditional users have begun taking an increasing interest in applying

Sweden. and the Umted State�. In ,lddiuon. the folio" ing coun1ries have recently illlroduced or reacttvatcd anudumpmg leg•slauon: Argentina, Bolivia. Chile. China. Colombia, Egypt, tndonc�ia. brae I. Jamaica, Malay�m. Moroco.:o. Peru. the Philippine�. South Afnca. Thai· land. Trinidad aml Tobago, and Venezuela lLow and Yeats 0994)).



Chart J. Distribution of Antidumping Cases

1 Out..rwuftllr: '""'' t'llll 111 .fum I'J1J3t

(Number of cases)

Eurl>f""an L·ni1>n

(In percent)

European Unum

Uni1cd Stale>

Umwd "'�"''

Snur..:c: GATI

• Industrial

• Del'eloping

0 Tru11sitio11 • Chi11a

C:mnda

• l�tdustria/ • Developing 0 Tra11sithm • China

Can:uJ�

Mcx1w

Au!\tral1u Mexico

-I.JO

- 120

- 100

xo

60

40

:!0

()

70

60

50

.J()

30

:!0

10

()

formal antidumping measure!> of their own." Mexico. for example, had a total of 62 antidumping initiations from mid-1990 through mid-1993. This was about 10 percent of the total9 and almost three times the number of initiations during the previous three year!>. Together. India and Korea had 17 initiations (8 and 9. respectively) and 4 definitive measures (all in Korea) from mid-1990 through mid-1993. While this wa� up from previous years-indeed, India saw its first antidumping initiations in 1991-92-these were rather insignificam against the actions of the major users. evertheless.

�From 1980 through 19!\5, of 1,019 <tntidumping ca'c' initiated and reponed to the GATI, the developmg coumnc� mntatcd none (Finger Cl993b). p . .f). From IY85 through 1989. developing countric> initiated 34 of 539 ca'e�. In :t single year preceding June 30. 1993. Mextco, lndta, Braol. and Korea alone millatcd a total of 3!< ca-,cs: that is. one more than Canada. 1 more than the EU. and a bit more th;m half of U.S. initiations (GATI. Baste 111,\"/rrtmeiiH a11d Selected Docume11ts. vanous 1\Sue,).

'1Thc �ample of 13 countrie' and the EU reponing to GKn had 657 antidumping initiations over thi� three-year period.

57

Chart -4. Agj!"regatc Antidumping Act h. it),

Fourteen llsersl

1986-R7 19liR -8'l

-300

-250

-200

-150

-100

50

()

Source: GATI. B;�,ic ln,trumcnt' and Selt.:cted Document\, \'(JrJOUS ��ue�.

IThc I-I u\er� arc ALL�Iralia. Au,tria. Bra/il. Canada. European Ln10n, Finl<ntd, ln<.lia. Japan, Korc.:a. Mcxu:o. New Zealand. Poland. Sweden. and the Umte<.l Statc�

these tigures are indicative of the tendency for formal antidumping action� to proliferate among a growing number of countries.

A concentration index of antidumping activity (Chart 5) highlightc; the spread of antidumping measure!> beyond the big four since the mid-19R0s. During the early to mid-I 980s the four traditional users of amidumping undertook virtually every formal antidumping action. From the late 1980s to the present, nontraditional user:> have consistently held a share of about 20 percent to 30 percent of total yearly antidumping actions (initiation� and definitive dutie!\) reported to the GATT.

Several factors have contributed to the recent c,pread of antidumping policy to nontraditional users. First, the effectiveness of antidumping as a tool of �elective protection from foreign competition wa� demonstrated by the traditional users throughout the 1980�. and is now being emulated by nontraditional users. Second, recent trade liberalization in some of these countries (e.g .. Brazil. Mexico. and Korea) has put increased pressure on governments to respond to appeals for protection, and antidumping policies help to vent these protectionist pressures. Third. many developing countries have implemented for years measure� �uch as di�cretionary import surcharge�. reference prices. or minimum import prices. often in re-;ponse to allegation'> of dumping. The adoption of formal antidumping regime<; effectively enables developing countries to continue tJ1e protection afforded by these other measures while using <ul internationally sanctioned (GAIT/WTO-Iegal) trade remedy.



Chart 5. Com:entration or Antidumping l\leasurcs in the European Union, the llnited States, Canada, and Australia. a!> Percentage of Fourteen User Total I

1984-85 1986-IS7 1 9KK K9 1\1\10-9) )99l-9l

Sourc.:: GATT. Ba�ic ln,trumcnt- <tlld Scll:ctcd Document,, v�riou� ts,UC\.

RO

(,()

.w

20

0

IThc I-I u'c�"' arc t\u,Jralta, Au,tria. Bratt!, Canada. Furopcan Urmm, Finlan<.l. India. Japan. Korea. M.:xi..:n. Nc" Zc:tland . PolaJl!l. Sweden. an<.lthl! Umtc<.l State>.

How Much Protection Is at Stake'?

A review of the most recent antidumping measures shows a wide range of duties. At the high end. in the United States. for example. recem definitive duties on fen·o-silicon from China. Kazakhstan. Russia. and Ukraine were all in excess of 100 percent: steel wire rope from Mexico was at 112 percent; and professional power tools from Japan faced duties in the neighborhood of 50 percent. Duties of less than 10 percent, however. were also fairly common. Chart 6 gives an indication of the frequency distribution of definitive antidumping duties for the United States, the EU. and Mexico. based on a sample of recent actions.111

As Chart6 shows. it is not uncommon for antidumping duties to be quite high. Like ordinary tariffs. even a small antidumping duty applied to a relatively homogeneous good can have a significant effect on imports. In addition. it is noteworthy that antidumping duties may have a somewhat stronger trade-inhibiting effect than ordinary tariffs. other things equal. because antidumping duties may be increased retroactively. When a duty is assessed (e.g .. in the United States). the importer

lfiThc U .S. and EU llgurc� nrl! ba'>ed on linal dutie' {or price und�:naking\) reponed 10 I he GATT Comrniuee on Antidumping Praclices from July J. 1992 through June 30. 1993. Because Mexico reports dulie' for the entire �lock of out�landing antidumping action,. Jhe fre4uency di�tribulion of anJidumping dutic' for Mexico b based on this stock a� of June 30. 1993.

58

Chari 6. H1n\ J\Iuch Protection'? Range and Rclathe Frequenc) of Final Antidumping 11ulicsl

• Mexkn _ • United States

• Europea11 Union

Rdall\C 1-rcqucucy -!(()

- 7(1

- 6{) - 'iO

- .j()

- ,1()

-20

-I()

{) < t I II �� ·'1 -511 '\I 711 71-'1() >'i(l

Snun:c. GArr. '�mi-unnual repun' 111 Cnmmtllt'<' on Antidumpmg Pratllcc�. Julv I. 1992-Junc I \J93.

•When a r.;ng.: oJ <.lutic' wu, repl)rte<.l for a 'inglc cn,e. a ,jmpk awragc wa, m.cd and trcmed a' unc oh\ci'\:Uiun.

pays. in effect. an estimate (the announced amidumping duty) of the final duty on every unit imported. II

Subject to a request for an annual administrative review by an interested party, the investigating authorities may reassess applicable duties and apply them to pa<>t imports. importing under an antidumping duty thus expose<> importer-; to an open-ended contingent liability.12 The greater the uncertainty in calculating dumping margins-which can be considerable-and the more risk averse importers are, the greater is the tradeinhibiting impact of a given antidumping duty.

Rationales for Antidumping

Antidumping duties. like other trade taxes. generally imply an efficiency loss for lhe imposing t.:oumry and for the world as a whole. In addition. as will be cli">cussed in the next section. the distortions introduced by an antidumping regime can be expected to go well beyond the static efficiency losses underlying outstanding antidumping dutie:.. Whether recent developments in antidumping warrant concern depends on whether countrie� individually or t.:ollet.:tively are better orr with such rules in place than without them. Perhaps the costs or antidumping are more than offset by the benefits or antidumping policies. Whether this might be true depends on the rationale for antidumping.

The rationale is often stated in tem1s of countering an

II Some of the dctatls of current amidurnpmg rules and pracuce� 111 Au�lralia . Canada, the EU. and the United Stale\ ar<' di\CU\'-CU be· IO\\ in the 'eel ion on the result� of1he Uruguay Round.

t2Sec Boltuck. FrancO!\, and Kaplan ( 19\J I).


Rationales for Antidumping

"unfair" !rading practice. Indeed. antidumping and countervailing duty laws arc commonly referred to as "unfair trade law!>." as distinguished from safeguards policies (GATT Article XIX), which are intended to deal with disruption due to ''fairly"' traded goods. Example� of alleged unfair practice" include pricing below cost. international price discrimination, and predatory pricing. Concrete ralionalcs for antidumping policies seek to identify a trade-off between the economic losses caused hy temporary trade re�trictions and longer-term economic gains. Three arguments are typically made in support of antidumping policie'>. The first asserts that dumping may be predatory, and antidumping may be needed to counter the anticompetitive effects of predation. The <;econd points out that dumping may be transitory and that antidumping may help to avoid the costs of temporary structural adjustments induced by unsustainably low prices. The third. and probably most tenable argument for antidumping policies. suggests that antidumping may be needed to help move the political process forward toward greater multilateral trade liberalization, by acting as a safety valve to vent protectionist opposition to liberalization. The merits of these rationales are considered in tum.

Predation

The theory of predatory pricing, whereby a finn or cartel intentionally prices below unit cost until it drive-, rivals from the market and establi!.hes itself as a monopoly. underlies certain prohibition� against price discrimination under competition laws.u Indeed, the United States Antidumping Acl of 1916 was originally viewed as an extension of the Clayton Antitrust Acl and explicitly included a requirement that "intent to injure" or '·intent to restrain,. competition be established a-; a precondition to granting antidumping duties. 14 These clauses were dropped in the Antidumping Act of 1921 and the linkage of antidumping to antitrust ended there. Even so. although evidence of predation or predatory intent is not required in modern antidumping legio;lation. press accounts and popular defenders of antidumping poUcies continue to usc the rhetoric of predation. and implicitly the rationale of competition policies, to support antidumping actions. ls antidumping necessary to counter potential instances of predatory clumping? Several points can be made.

Fir'it. the trading system may require antidumping

''On the i\�ue of compel ilion polil:ic� and am idumping laws. �ce Kelly. McGusrk. and others (IY92). For a review ol the 111\tOr} and recent aucmpts 10 bring a competition pol it:) \tandard 10 U.S. antidumping law�. �cc Dav1dO\� (1991). In lh<.: United Slate�. for example. Section 2 of the Clayton Act, n� amended by the RobJn.,onPalman Act of 1936, prohihil�. in1er alia. price di�crimination wi1hin 1he U.S. provided thai il abo 111Jure�compclilion.

IlSee Davidow (1991) and Finger (1993bl. Unlike the Unilcd States. Ctmada\ original antidumping regime-the world'� fir\t an· lidumping �Y!>lem was introduced 111 Canada in 1\)()-1 <F•nger ( 1993b))-did not establish antidumpmg on an anwru�t foundauon.

59

laws because domestic competition lawo.;, in their current form. cannot adequately addres� inst<mces of foreign predatory pricing. But if this were the objective. antidumping laws should at least make some effort to differentiate between predatory and nonpredatory dumping. The standard of injury �hould be based on actual or threatened injury to competition. This would place antidumping more on par with competition policie:,. where the goal is to protect the condition� of competition rather than the interesh of selected competitors (i.e .. import-competing producers).

Second. there is considerable doubt about the viability of a strategy or predation. For a strategy of predation to work. a fim1 must be able to -.ustain monopoly profits after driving competitors from the market. Jf a market remaim, contestable, I he predator will be unable to 'iet a monopoly price and. thus, be unable to recover the losses incun·ed during the interval or predation. I� Further, dumping cases typically target foreign finns from a number of countries. Even if domestic firms were driven from the market. competition among a multicountry set of foreign rival� would be sufficient lo maintain competitive prices. For these reasons. "economists have routinely dismissed predatory dumping a<> so unlikely that it should not be used to ju<.tify antidumping duties. ''lh

Finally, the empirical evidence on predatory pricing suggest!. that it is al best a rare event. 17 Even laboratOry experimental work whose designed institutions were intended to be conducive to a strategy or predmory pricing found no evidence of such practices. 1X

Whether or not there is a reasonable prospect of predation (and economists do not uniformly reject the po�sibility). l'J if antidumping policies are to guard against predatory behavior. antidumping rules should move toward competition policy cliteri<t.�0This would involve, inter alia. <;ubstituting the current injury standard for one based on injury to competition. Alternatively. there is no rea�on in principle why antidumping should not be eliminated altogether and replaced with suitably amended competition policies. Several recent event!> are illustrative. First, as part or the Australia New Zealand Closer Economic Relations Agreement

i<Sce. for ..:xample. the ui\CU�\iOn in Deardorff ( 19!\9). I�>See Dc;u·dorff 1 JYS9 ). p. 35. 170ECD ( 19R9) argue' th<ll \\hill evidence there is ol predatof}

pricing b largdy anecdotal. It point� out that primary and �ccondal) aJicgauons of predatory pncmg tn U.S anlltruSt Ctl\C'> have I allen significant!) during the ten-year period 1973-8�. And while it aho note' that lhc absence of dear �1ghting' cannot be interpreted a\ conclu,•vc evJdrncc thnt predatory pricmg doe' not exi,t. the \tudy con· elude' that "[p[erhap� all that t:an be ;aid b that c:l\c\ of predation may :srbe but al mo�t only very 111frequcntl) ·· Cp.!! I).

tXScc haac and Smllh (19!15). 1''The theoretical indu.,trial organization lileraturc continue-. to

'tudy condition-. under which predatory pricing might be �uccc�,ful. Improved mcthodolog•c' for identifying predatory sntcnt cmpmcall) have ltl�o hccn pmpo,cd. Sec. for example. Fudcnbcrg. ami Tirole ( 1986) and thc dl!>CU�!>ion in Tirolc ( 1989).

11!Sec Kelly. McGu1rk. and mher;; ( 1992).



(ANZCERTA) both signatories agreed to replace anlidumping with competition law provisions in bilateral trade. Second, EU and European Free Trade Association (EFTA) members recently agreed 10 no longer apply antidumping actions against each other. The EU's competition rules will now apply to EFTA countries in interregional trade.21 Third, with a view to moving closer to a competition policy framework. the CanadaUnited States Free Trade Agreement (CUSFTA) contain a provision calling for the Parties to work toward the replacement of antidumping with a substilute system of rules. This intention was recently carried over to the North American Free Trade Area (NAFTA) at the suggestion of Canada. 22

Sporadic or Transitory Dumping

If dumping is temporary, say, the consequence of a sudden change in exchange rares or a eye! ical dec! ine in the exporter's domestic demand. then resourceallocation adjustmems in response to this relative price change may be wasteful. Once the transitory dumping has passed, exporters would return to a sustainable price. and resources responding to current price signals would return to their predumping allocation. Antidumping policies might be justified as a means to avoid the costs of such circular structural adjustments.

If such a framework were to justify antidumping. anridumping rules should reflect the intent to avoid circular structural adjustment. This suggests that antidumping should not be used, for example, to counter long-term dumping. Yet it is well known that under existing rules antidumping duties sometimes remain in place for ten years or more (see below). Further. ·'safeguards'' provisions are already available ro avoid significant temporary shocks from foreign competition. The reason industTies petition for antidumping rather lhan safeguards (under Article XIX of GATT) is that the injury standard applicable 10 safeguards protecrion ic; generally regarded as imposing a higher threshold of injury. antidumping can be discriminatOiy (i.e., not applied on a most-favored-nation basis).2.' the politics of antidumping are substanrially more favorable to rhe interests of import-competing firms.24 and, unlike safe-

21 See Vcrmulsr (1993). p. 71. 22Scc Aniclc 1907 of1hc CUSFTA. The agrccmcm 1o work wi1hin

a �pecific timetable 10ward the implememation of a �ubMitu1e �y�tem of rules was not onginally carried Jnto the NAFfA. At the Jnitia-11VC of Canada. an agrecmcn1 wa� reached in December l993 to 1ry to negmia1c hy Deccmhcr 31. 1995 ne'' rule!. governing dumping and M.Jbsidie�.

2'The Urugua) Round text on safcguurd� no" allow� lim ired di�criminmion among >uppl icr� under cxccp1ional circum�1ance:-.

�'1 Anudurnpmg acrion� arc linked wirh rhc nouon that wmcrhing "unfair" h being correcteJ. Safeguard ac1ion� Ci!rry no �uch cover. Thu� amidumping provides impon-competing fim1' and protectiongranting governrnents the "balm of labeling the exponer unfair" (Finger ( 1993b). p. 5!!).

60

guards. antidumping has neither a ··compensation requirement" nor the related possibility of retaliation.:!� Because of this. antidumping has become a preferred substitute for safeguards actions. 21i lf antidumping is really about safeguards, antidumping policies need to be reformulated Lo renect that objective (dbcussed further below).

Antidumping as a Safety Val\'e

It has also been e:ugued that safeguards, countervailing duties, and antidumping provisions are needed to help defuse protectionist opposition to trade liberalization. Jn this view. an offer to accommodate appeals for protection through administrative channeb may ease opposition to broad-based liberalization efforts.

Still, if one accepls the proposition !hat a safety valve is needed. the difficulty remain-; in striking the appropriate balance. When broad-based trade liberalization is purchased by granting liberal access to protection by other means (such as antidumping). the risk is that the price will be too high: that one fonn of protection will simply be substituted for another. The frequency of antidumping action� among the four major users and the recent spread of antidumping regimes to developing countries suggest that the cosl of antidumping is not inconsequential, even when measured against the benefits of !he incremental acceleration of multilateral n·ade liberalization it may have helped to induce.

If antidumping is a tool to defuse proteclionisl opposition to liberalization, one should question whether, a�> currently designed and implemented, il is the best tool. and whether there may not be allernative policies to achieve that end at a lower social cost. Indeed. !he safeguards or "escape clause" of the GAIT was itself intended largely to satisfy the need for a protectionist safety valve.27 But antidumping (and other measures. such as VERs) have become substitutes for the safeguards instrument. Further. if antidumping is primari ly a tool to mitigate protectionist pressures. il should not be draped in the fabric of "unfairness." which may serve to legitimize and deepen protectionist pres:-ures.

!� While the GATT (pre-Uruguay Round) did no1 formally require that exporting coun1ries be compensated by a coun1ry invoking the �afeguards dau\e (Anic:k XTX)--only tha1 C'<porung countrie\ he given an opponuni1y 10 con\ ull-in pracrice. countrie\ invoking Article XIX have granted 10 imcrested cxponing counmcs alternative marke1-opcning conce.,\iOJh hy way of compcn,auon. '>O a\ to avord the �uspension of equivalen1 conces�ions or other obligation' (i.e .. retaliation) by the affected exporters. This has been referred to as the "compem.ation requiremen1" (Jackson t ICJ89), pp. 1Ci7-6R). The Uruguay Round agreement on Safeguard� (GATI ( 1994c)) has changed mauer� somewhat. The agreement rndrcatcs that CSecuon lll:16) "member-, concerned may agree on "n� adequate mean' of 1rade compensmion" and. in the evcm agrcemem i' not reachcJ and �UbJCCt to qualified circurnstanccs. the suspcn.,ion ol etturvalent conces\ion' by intercs1cd e:>�poning count ric' i., not to occur during the liN three year� of a safeguard� ac1ion.

lt.Sce. for example. the discussron in Finger and Dhar C 1994}. 27Sec 1he di-,cu.,sion in Jac!-.,on ( 19!!9). pp. 149-54.


Incentive Effects of Antidumping Policies

Part of the attractiveness of antidumping as an instrument of contingent protection is the public relations value or combating "unfair" traders.2X A pure safeguards approach would eliminate any such association.

Incentive Effects of Antidumpin� Policies

Proponents of antidumping argue that since dutie� apply only to a relatively small share of a country's total imports. antidumping policies have inconsequential economy-wide effects. But the economic cost of antidumping policies cannot be evaluated by simply looking at outstanding antidumping duties. Antidumping is not merely a set of duties, it is a sys1em of rules. Like other systems of rules, it generates incentjves: detenent effects, opportunities for manipulation. •·out-of-court settlements,'' and the like. Judging the full economic costs of ani idumping requires close attention to all of this. An emerging literature explores the complex incentive effects of various forms of administered protection. The mere tlueat or prospect of antidumping may be sufficient to introduce systemic market distortions. including strategic export restraint. significant changes in the nature of competition. and spurious injury.2�

Bhagwati ( 1988). Messerlin ( 1989), and others have argued for some time that antidumping produces "harassment effects" on exporter behavior. Indeed, Bhagwati suggests that, "the dramatic rise of such unfarrtrade cases is itself prima facie evidence of their use for harassment of successful foreign suppliers" (Bhagwati ( 1988), p. 48). Petitioning for antidumping, or merely threatening to petition, can act as a means of signaling to foreign competitors to restrain their sales. In a related vein. U.S. auto producers announced in January 1993 that they intended to file comprehensive antidumping petitions against vehicle imports. The next month. three Japanese auto producer� announced price increases for vehicles sold in the United States, and no antidumping petitions were ultimately filed by U.S. manufacturers.3o

Several studies have formalized this harassment el·fect. In a setting of exchange rate uncertainty. where either intentional or accidental dumping may occur, Leidy and Hockman ( 1990) showed that the optimal management of an antidumping threat called for shifting sales from the foreign to the home market. That is, the mere prospect of an antidumping action (a prospect embodied in the antidumping regime) was '\ufficient to induce an exporter to compete less vigorously than

2xsee Finger ( 1992). 298ecause a successful anudumpmg petition need� to sau�fy an

injury criterion, and becau�e rhe indicator� of injury (dome�ric sale�. employment. recent capiral expenditures. profirs. etc.) are largely under the control of petitioning firms. there may be a \hon-run ancenrivc in oligopoli�tic markets to manipulate these indicator\ of injur) ( "spuriou' injury'') in order ro enhance rhe prospect of winning an anridumping order {Leidy and Hoek man (1991) and Bald wan (1992)).

'0See GATT ( 1994b). p. 57.

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otherwise. Similarly, in a setting without uncertainty and somewhat different mark.et characteristics. Webb (1992) abo found that the introduction of an antidumping regime (as opposed to an antidumping duty) wa� sufficienl to induce exporters to cut exports, while import-competing finns would experience higher profits and sales. Staiger and Wolak ( 1992) examined the effect of antidumping Jaws on a monopoly exporter that faces cyclical demand for its product at home and a competitive market abroad. They found that the threat of antidumping generally induces the exporter to reduce capacity and thereby exports, for most realizations of domestic demand. These studies show that an antidumping system may induce systemic trade-inhibiting effects in addition to the transparem effect<; of outstanding antidumping duties. The institutionalization of an antidumping regime may thus create a significant deterrent to vigorous foreign competition.

Many antidumping petitions are withdrawn before a final determination is reached because they are settled by voluntary export restraint agreements.3r This can be likened to an out-of-court settlement in civil suits.1:! Since an antidumping petition can lead to a government-enforced VER, and under certain conditions such a VER may be highly favorable to an exporter, Anderson ( 1992) and Schuknecht and Stephan ( 1994) showed that the threat of antidumping combined with the prospect of a VER may induce an exporter to expand exports and possibly to "dump. ··.:n Yano ( 1989) and Hoekman and Leidy ( 1990) described similar incentives to expand export� induced by the prospect or threat of VERs without directly linking them to antidumping. Thic; pcrvcr-;e incentive effect suggests that systems of antidumping combined with the practice of granting VERs, particularly in the United States and the EU, may have contributed unintentionally to the widespread use of both VERs and antidumping cases in the 1980s.

Still other studies have shown that the structure of competition can be significantly altered by the existence of an antidumping regime. Staiger and Wolak (1989) and ( 1994). Fischer (1992}, Leidy (1994), and Pmsa (1994) have all shown that an antidumping regime can create conditions favorable to collusive outcomes. Staiger and Wolak (1989) and (1994) showed that the threat of antidumping, made credible by occasional petitions (but not necessarily resulting in actual duties), can support more successful collusion and greater market share for domestic fim1s by providing a means of punishing incipient defections from a tacit collusive agreement. Prusa ( 1994) and Leidy ( 1994) in-

�•sec Finger. Hall. and Ncl�on !1982> and Finger and Murray ( 1 993).

'2Sec Pru'a ( 1992).

-''In rhi' '>Cenano. rhe acr of dumping as vaewcd a\ a necessary prior condir ion before government\ will intervene to help negotiate: and enforce a voluntary c:xpon rc�.rraint agreemenr.



\C�Iigarcd rhc di..,torrion\ introduced b} unfair trade l�w.., (antidumping and countervail) in a duopoly setung. Bertrand comperition '-t in the pre'>ence of antidumping wa" '>hO\\ n to inrroduce an effective price noor abO\e the equilibrium price that would prevail. oth�r thing-. equal. in the ab'ience of an antidumping reg1me.'" Under Cournot competition. 16 rhc incenrive to manag� the prospect or threat of ani idumping or countervail produced mdm.try-v. ide restraint of rrade charactcri�tic of a cartel. n Moreover. the de facto cartcl-lil\e equilibrium wa.., �hov. n to be '>table. in the sen�e that it wa\ free of the u�;ual incentives to defect. !his c�111 occur \ince an impon-competing firm has an mcent1ve to enhance the prospect of winning an anti?urnping action by cuning sale:., employment. capacIty. and Other relevant indicators Of injury.JX while the ex�orting firm is motivated to exerci�e export restraint a<, Jt attcmpb to mitigate the antidumping threat. The incentive for joint restraint of trade moves the market outcome in the direction of the collu�ive ..,olurion. even though both firms arc acting uncooperatively. Fischer ( 1992) abo report\ rrade-inl11biting resulrs across a broad '>et of irl'>lrument'> of corllingenr protection including antidumping.

The above-mentioned literature thu<, raises concern., about the po,.,iblc unanticipated .,y-;temic conseque.nce., of "unf;m" rrade law\. The following section rev!ew\ t�e change., m the multilateral rules governing anudumpmg under thl! Urugua) Round.

Results of the Uruguay Round

The Urug�a.Y. Round ne�otiation'> on antidumping rule� w�re diVI!.IVe. Some mdustrial (e.g .. Japan} and devclopmg countric' argued for strong disciplines to curtail future usc or thi.., instrumcnl. Other industrial countries (e.g .. the United States and the EU) resisted weakening of dome'>tic law\. but rather souoh t stronoer di<>�iplinc!. ag�in•;t allempts to circumvent a� tidumpi'ng actlom •. Tl�e fmal compromises reached helped clarify rules an? 111 some re�p�CI., strengthen them. but they a�'o.c?d1�cd man) e>.l'>t.mg practices. thereby probably d1m1111\hll1g prospect<, lor an) ..,igniricant curtailment of future usc of the an11dumping instrumenl. The fol-

'�Ben rand competitinn dt:,nl�' a ,ituatinn 10 '�h�t:h linn' ,ele�:t pnce\. tal..ing a competitor'' pm:e ,eft:l'lion a' !!l'cn. and I he market dctenmnc' 1hc 4uant111e' th;ll dear 1hc marl..cl gl\en 1he ch01ce nf pnCC\.

"Sec Pru'a ( t99-l 1. "'Coumot compe!1tn

�n. in c:ontra'l w Bertrand c:ompellllon. de

'c:ni:JC, " marl..et 'ctung 10 "hllh f1ml' wtcc:t ttU<lnlllll!\. 1al..m!! their compewor\ 4ll<tntll\ �:h01Cc "' !,!1\Cil. and the marl..ct detennine� a markel-c: I caring pnc:e.

''See Lc1d) 1 199-11. '"Spunou' IOJUI) di\WIIIOil' llllroduccd h} I he pro,pect of inJury

r:omm�clll proll.:t:llon were C\ammcd 111 Lcllly antl ttocl..man ( 1991 ). Batd\\ltl ( 199-11 report\ 1n<hrcu empmc:al 'upport forthe .. ,puriou'lllJUry" hypothc'"·

62

Jm, ing rc\ icv .. of the Uruguay Round aoreemenr on antidumping focu'e" on ..,elected are:s of potemial '>igniricancc. 19

De '\1 inimis Pn)\ i<,ion'i

. There arc rwo de minimi'> provision'> (dumping margu1 and market \hare} in Article 5.8 of the Uruguay Round Agreement on antidumping. The fiN de minimi\ provi.,ion require:-. the immediate termination of an antidumping inve:-.tigarion when it i-; determined that the margin of dumping is les'> than 2 percent. The Tok)O Round Antidumping Code specified thai a case sl�ould b� termi1� atcd immediately where ''the margin ol durnp111g . . . t!. negligible"· (Article 5.3):w The difference b rhat a "negligible" margin wa., not defined u�1dcr the Code. In practice. provisional dumping margm), of le.,� rhan 2 percent have been o;carce in mo!>t countries. Establl'>hcd practice in the EU and Canada already con ... idered dumping margin.., of less than 1.5 percent de minimi:-.. Australia. while having no formal de minimi.., margin rule. ha\ on ... cveral� occa!>iom. treated margin'> in the neighborhood of 5 percent as too \mall to impo\e dutic<, . .t I

In the United State\. however. an esrimated dumping margin m or above 0.5 percent.12 i-; treared as sufficient to proceed beyond the prclimmary mvestigation:n B\ explicitly ..,pccifying a de minim1s threshold of 2 pc;cent. rhe Urugua) Round agreement mighr help to re�ucc at the marg111 the capacit) of import-competing l 1rnb to U\C antldumptn!! a'> an 111\trument to haras'> for-eign competitors. �

The <oecond de minimi.., provision requires the tern1ination of an antidumping inve:-.tigation when rhe volume of dumped imporh i-, '·negligible." Thb i� defined to mc�111 "normally" when the volume of imports from a par11cular country account'> for les<, than J percent of tow! imports of the like product. unles!-. collectively such countries account for more than 7 percent of import<>. Again, this is di'>tinguishcd from the requireJ�1ent'i ot� the Tokyo R�uncl Code by the explicit definillon. II. lor e>.amplc. 1mport., account for 30 percent of the marker. only exporter., wirh les.., than a 0.9 percent market \hare will be dropped from the 1nve<>tigation. unk.,.. there arc . ..,ay. three \Uch exponcrs who collectively hold over 2. 1 percent of the dome'ilic market. The United State<; and the EU have commonly dismissed ca�c'> v.hcn 1mport.., were Je.,, than I percent of the do-

'''Suh'C4ll�lll rcl�renc:e' l<lthc llrugua} Round Final -\ct agn:.:mcnt nn anladumpmg I Agreement on lmph:mentation of Amcte \ II ma) � lnund in <iAn 1 t9CJ-Icl.

10<;c� GATI (19X6). p.t J:!. t1 Sce llnrlu.:k ( 199.1!. p. t.5. '-AdmuH,lr<IIIVe pm�cdure' c.an mlp<hC \l!,!lllllcant co't' <Ill c\

JM>rt�r, c�cn '�hen prehnlllllll) duuc' arc le'' than t percent. Bolt �d .. l-ranco1,, and K.1ptan (1991, p. 161!. ar!!uc 1ha1 "l')lmpl) plac· lllg unpon' under hond. even at O.:i percent. can cut utT acce�\ to 1hc U S.1 11ar!..ct ..

1 'Sec Murray C t91Jt l


Results of the Uruguay Round

mcstic market. and Australia has dismissed cases with imports as much as 10 percent:�"' Thus. while there may be some economic effects of the new de minimis import volume rule, they are unlikely to be appreciable.

Sunset Provision

Article 9 of the Tokyo Round Code on Antidumping required that an antidumping duty remain in place only as long a-; necessary to counteract dumping. It required the authorities to review extant dutie� ·'where warranted" on their own initiative or on the request of an interested party who also submitted information supporting the need for a review. Undercurrent practices (e.g., in the United States). an interested party can initiate a review after one year.45 and an antidumping action will be revoked if a party can persuade the authorities that sufficiently changed circumstances warrant it.4(• Thi� approach places the burden of petitioning for revocation on an importer or an exporter, who may be deterred by the nontrivial transactions costs of presenting a case for review. ln practice it has not been unusual for antidumping duties to remain in place for a decade or more.

The Uruguay Round agreement will now require the tennination of antidumping duties not later than five years from imposition. unless a review is requested and detem1ines that the expiration of the duty would likely lead to continuation or recurrence of dumping and injury. Thus the multi lateral rule governing the duration of antidumping duties has gone from '·do nothing <mel a duty continues,,. to ··do nothing and a duty expires.·· The new sunset provision may help to ensure that outstanding antidumping duties are not viewed as virtual long-tenn entitlements by import-competing industries.

Among the principal users of amidumping. Canada, the EU, and Australia already have sunset clauses that conform to the Uruguay Round provision, under which antidumping duties expire automatically after five years.47 As stipulated in the new Uruguay Round agreement, each of these countries also provides for a review of measures upon request by an interested party. The recent experience in Australia migh1 appear to suggest a rather definitive effect of such sunset provisions on the longevity of antidumping measures. As of June 30, 1993, Australia had no outstanding antidumping measures with definitive duties imposed prior to October 1990.48 In the EU. however. only about three

4-'See J-:lorlid. ( 1993), p. 14. •ssee Horlick ( 1989). -'bAn exponer must be able to �how that there were no �ales at

"les� than fair value'' for at leal>! two year<., and no likelihood of a re�umption of �uch sales. Alternatively. an exporter may rcquc�t an injury ruhng to show that the domestic industry would not suffer material injury if the duty were revoked.

47See. for example. Vermulst (1989). GATT ( 1992). GATT {1994a). and GATI ( 1993).

-'XThc duration of Australia'!. �unset provision wa� changed in the Customs Legislation Act of 1992 from three year� to five years (GArr c 1994a)).

63

fourth� of all antidumping measures have expired on �chedule since 1985:49 of the 16 reviews completed between January 1990 and June 1992, 12 resulted in new measures. ln Canada, among the antidumping duties in force on June 30, 1993. 11 of 74 ca'\es had original dates of finding earlier !han 1984. l n the United States. 61 of 26R duties in force at mid-1993 had original order date� prior to 1984. with a number of these dating back to the 1960s.

The new sunset clause means that longstanding actions may now be contested at the multilateral level. rather than simply at the national level. Sunset clauses can be expected to result in the automatic lapse of those measures deemed of insufficient value to the beneficiary industry to warrant petitioning for a review. On the other hand, when an antidumping action has a relatively significant protective effect-and thus is highly di�tortionary-bcaring the transactions costs of a review will tend to be in the interest of the importcompeting industry. and such measures may not be allowed to lapse automatically.

Transparency Provisions

When compared with the Uruguay Round agreement, the Tokyo Round Antidumping Code included rather casual transparency provisions.50 Even so. a fairly high degree of tran!>parency exist!-> in the systems of the four major users. The Uruguay Round agreement call!-. formally for public notice at every stage of an antidumping investigation51 and specifics 1he parameters of such notice. thus potentially alerting interested parties (including consumer groups and user industries) in a timely fashion of antidumping proceedings as they progress. This may help to enhance transparency in the antidumping process and potentially bring a better balance among different interests. It may also serve to enhance the flow of information in support of consultations and multilateral dispute sett1emenl. But the Uruguay Round agreement falls short of requiring a strong public interest clause in antidumping law, which could have mandated national authorities to give balanced consideration to the broader national interest before imposing an antidumping duty. In the United States, the new transparency provision of the Uruguay Round could play some role in bringing somewhat greater balance to the injury investigation, particularly as there appears to be a measurable noneconomic dimension to the final decision. 52 It may also affect, over time. the development of new antidumping rules and procedures that might eventually give voice to down-

�4GATI ( 19�3). p. 70. �oFor example. Article� 6.6 and !1.5 call for public notice (without

elaboration) upon initiation of an antidumping invesrigation and once a preliminary finding has been reached.

�' Anicle 12 of the Unrguay Round Agreement on the Implementation of Article V I b cntilled Puhlic Notice am/ £.,pltllwtwn of Dererminatiom

��see Tharakan and Waelbroeck [ 1994 ).



stream industries and consumer groups hurt by antidumping actions. ln the EU. the community interest provision>' has rarely been used to override a linding of dumping and injury. 5-l Complaints of a lack of transparency have occasionally surfaced, 55 and EU injury decisions appear also to have been influenced by noneconomic motivesY' To the extent that transparency is enhanced by the requirements of the Uruguay Round agreement, this may help improve the functioning of the EU 's community interest provision.

Cumulation and the Determination of Injur)

ln the determination of injury by reason of dumped imports. there has been some disagreement as to whether a small exporter should be caught up in the net of an amidumping action. given that its exports alone could not be responsible for causing material injury. GATI Article VI ( antidumping and countervailing duties) and the Tokyo Round Antidumping Code were both silent on this issue. The Uruguay Round agreement clarified this by explicitly allowing lhe authorities to cumulatively asses� injurious effects over all countries and all exporters found to be dumping (with margins in excess of de minimis), as long as a targeted exporter accounts for a nonnegligible share of import:, (defined above).57

ln practice. Australia. Canada, the EU. the United States. Mexico. and other users of antidumping have all routinely applied cumulation rules to assess injury.ss A number of counrries argued for explicitly prohibiting the practice of cumulation in order to curtail the reach of antidumping. The conditions under which cumulation is now explicitly allowed are not very restrictive and are not likely to appreciably alter existing practice.

New Rules fur Antidumping Panels

Regarding the settlement of antidumping disputes. the Uruguay Round agreement introduced a new qualification that requires dispute settlement panels to accept the judgment of the local investigating authorities. when that judgment is consistent with an unbiased

'1Council Regulation 2423/&S. Article 11( 10) and 12( I). '4Scc. for example. Bcllt' C I989J. Also sec Eyrnann and Schuk

necht ( 1993). p. 230. who point out that "lifn none of the 904 c;�<,e\ ron�idcred during the 19SCb did the Cornmi�'ion rule again!>t the tmposition of antidumping measures on the has is of InJury to users and con�umers ...

'�See. r or exam pie, Nat ion:il Consumer C ounci I ( 199 3 ). ��sec Eymann and Schuknecht ! 1993> and Tharakan and Wael

brocck ( t994). �7The agreement abo \pccifies that a cumulative '"scssmcnt of

the effects oft he tmpons mu�t be "appropmue 111 light of the conditiQns of competition between imported product' and the condttion' ol competition between the imported products and the like domestic produc!'' (Article 3.3). This language would appear to tmpose no concrete constraint on the usc of cumulation.

��see. for example, Bellis (1989), Horlick (1989), Horlick (1993), Magnuo; 1 1989), and Steele (1989).

64

and objective examination of the facts. "even though the panel might have reached a different conclusion. "5° In effect. this means that the panel cannot insi!)t on its own interpretation of the facts if both interpretationll are permissible.

The implications of the new provi-;ion will be clear only after experience with implementation of the Uruguay Round agreement. While the overall dispute setllement proces!> has been strengthened due to the new "negative consensus" rule,oo the new provi�ion for antidumping appears to reduce the authority of antidumping panels to assert a liberal interpretation of the facts.

Bel<m -Cost J>ricin� and the Determination uf "',nrmal Value

GATI Article VI and the Tokyo Round Antidumping Code left a degree or ambiguity in the interpretation of procedures for calculating dumping margins. One source of the problem came from the phrase "in the ordinary course of trade.·· In the calculation of a dumping margin, the export price is compared with the comparable price tnom1al value) "in the ordinary cour<;e of trade .

. in the exporter's home market. Interpretations of

what constitutes the ordinary course of trade led most countries to disregard those prices found to be below average total costs (fixed plus variable) in the exporter's home market.<>' Disregarding price observations below average total costs increases the comparator price in the exporter'<; home market and thus imparts an upward bias to the calculation of dumping margins. However, it is well known that profitmaximizing firms will find it optimal to !>ell at prices below average total costs during periods of c;lack demand, as long as they are able to cover their average variable costs.62 In economic terms. therefore. pricing below average total cost, but above average variable cost. is very much ''in I he ordinary course of trade. ·•

The Untguay Round clarified the rules in thb area by

WAnicle 17.6 of the Urugua) Round agreement on the lrnplernen· tation of Article VI (GAIT. I994c) l><tY\ th:u: '"(i) . . lfthcc-.tabli,hment or the fact' was proper and the evnluullon wa!> unbtascd und objective. even though the panel might have reached a diJT.:rent conclu!>ion. the evaluation -.hall not be overturned. (i i) . . . Where the panel finds that a relevant proviston of the agreement admn� or more th:m one pem1i�siblc interpretation, the panel �hall rind the authoritie' · mea�ure to be in conl(mnity with the agreement if it re"' upon one of those pcrmisstble tnterprctallons. •·

""Under pa\t practice a panel ruling. W:t\ not adopted until a con· 'en\u� wa' re;1ched. Thi' enabled the •·Jo.\ing

.. pany to block or delay approval of panel reports. Under the new WTO procedures. a panel repon wtll be adopted within 60 day' of i•\uancc uniC\\ one of the Partie\ to the dispute �tate\ its intention to appeal. or the WTO Dtspute Seulement Body dectdes by consen�us not 10 adopt the report.

"1 Sec, for example, the di�Cu>sions in Belli\ ( 19!19). Magnu' f 1981J). Steele r t9t;9), and Murray ( 1991 ).

C>"tndeed. in U.S. antitrust ca-.es, only pricing hclow average v:�riahle co't' b con,idered relevant in price dbcrimination cases (Ver· rnulst ( 1 993, p. 72)>.


Conclus1on

explicitly allowing the investigating authorities calculating dumping margins to drop price observationc; in the exponer's home market found to be below average total cost. but subject to certain conditions. The agreement authorizes authorities to reject below-unit-cost sale� in their estimate of ··normal value" only if ... . . such sale� are made within an extended period of time (normally one year but in no case lese; than six months) in substantial quantities (not less than 20 percent of the volume sold in those transactions under consideration for the calculation of normal value) and arc at prices that do not provide for the recovery of all costs within a reasonable period of time."():>

Whether the new clarifications in the Uruguay Round agreement will make a -;ignificant difference can only be known from experience with implementation. Certainly, the new provisions should reduce the automaticity with which below-average-cost observations are excluded. On the other hand. the cyclical downturns that often lead firms to price below unit cost typically last for extended periods. that is, more than six month\. and often more than one year.

Conclusion

The Uruguay Round has improved antidumping di-;cipline<> in several respect'\. The changes are not c;ufficiently fundamentaL however, to generate the expectation of a significant curtailment of resort to anticlumping in the post-Uruguay Round period compared with the recent past. As argued above, economic theory does not support the existence of antidumping pol icy as currently practiced. Economic efficiency considerations suggest the need for users or the antidumping instrument-both traditional and nontraditional-toreappraise the overall economic costs of the proliferation of this instrumcnL and to consider ways of circumscribing it!) use. This i!-> not necessarily infeasible, as suggested by current practices in some countries that have occasionally implemented stricter provisions in their national antidumping legislation (e.g., the use of sunset clauses in Australia. Canada, and the EU. and the lesser-duty rule in lhe EU) than required by the multilateral rule�.

Ideally, antidumping should be placed into a compe-

'•'Sec GArr ( l 944c). Aniclc 2.2.1 of lhc Agreement on lmplemcntm ion of Article VI.

65

tition policy framework,6 .. or replaced by competition law" 'iuitably amended to reach alleged foreign predators. Short of this. the above review poims toward a number of disciplines that might be introduced within the current Mructure of exi�ting antidumping regimes-or regimes �oon 10 be adopted in developing countries and economics in transition. These might include, for example, tightening access to antidumping duties through more stringent de minimis rulec; for dumping margins and market shares. tighter sunset provisions, an unqualified rule against excluding belowcost observation�> in the calculation of dumping margins. and stronger limitations on the practice of cumulation in determining injury. This list of possible technical improvement� is far from exhaustive.6:i

Beyond these technical measures. other. more farreaching refonns have been suggested: (I) require penalties for antidumping petitions whose complaints are adjudicated to have been frivolou�:66 (2) introduce a greater say for consumer groups and downstream industries likely to be hurt by amidumping actions:67 (3) require a CO'>t-benefit analysis to accompany new antidumping aclions;6!1 (4) remove the chapeau or ··unfairness'' that currently accompanies antidumping actions;h9 (5 ) shon of moving to an antitrust framework, competition or antitrust authorities might be given a more active role in evaluating the competitive implications or a propo�ed antidumping action and given a role in the drafting of legal reforms; 70 and (6) limit anti/ dumping measures (and indeed contingent protection more generally) to pure trade-adjustment a!->sistance withoul granting any protective dulics.71 All of these reforms arc intended to reorient antidumping policy from it� current sectoral perspective toward a national perspective.

"''Sec Kelly, McGutrl.. and olhcr..ll991). ··�Sec, for example, Bohuck and Litan ( 1991) ror an cxhaustiv�:

discu,sion of 1he many procedural biase> tn nnlidumptng poltcy a' practiced in lhc U.S.

M•See Bhagwati ( 1988), p. lie\. "'The whole of the public chotec lnerature would recommend

,uch an approach. ''"Finger ( 199:1b) argue> thai proto!CI ion through anudumptng

should be treated 11s an excepuon 10 libcralll:tllon and 1h:u hy rcqutring a tmn,parenl co,l-hencfil analy,i>, I he politic' of con,id<!nng a request for <111 exccp1ion will be more balanced b) \lrengthening lhe voice ol tho'e oppo>cd.

0'1See Finger(l992)and Finger !l993h). ?"See Applebaum ( 1988). 71Scc Baldwin ( l l)94).


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4 ( 1989), pp. 707-23.


IV The International Dimension of Competition Policies

An·ind Suhramanian l

T he globalization of tht: world economy has increased attention on domestic policy in<;trument�

that have tU1 impact on the conditions of competition between domestic and foreign sources of supply (imports and foreign direct investment). Competition policy is one such domestic policy-its formulation and enforcement has led in some cases to trade frictions between countries. The Uruguay Round agreement has widened the scope of domestic policies (subsidies. standards, governmem procurement, <;ervices. intellectual property. and so on.) addressed internationally. At the April 1994 Manakesh meeting concluding the Uruguay Round. a number of countries expressed the view that competition policies should be included in the World Trade Organization\ (WTO) future worl. agenda.

Some aspects or competition policies (e.g .. o.,ubsidies) have featured prominently in the Fund's work. while other aspects (e.g., antitrust policies) have not. The increasing internationalization of competition policy issues and related scope for trade frictions -.uggest that the Fund should be aware of developments in this area and their impact on members.:! This paper focuses on the imernational dimension of competition policy, in particulm· on its trade effects. It discusses recent developments in trade relations that have addressed competition policy issues. the potential for conflict arising from competition policies. ongoing mechanisms for international cooperation on competition policies, and the po�sible element:, of a future agenda for cooperation.

Recent Developments

In this paper. competition policies are defined to include laws and regulations (of economy-wide application) that govern private producer behavior and the market !)tructure within which interactions between producers take place.:'� Aspects of producer behavior covered include practices of individual finns (e.g., pric-

1The principal author. 1Rccem Fund Anicte IV con�ulla11ons with �om�: major mdusmal

countries have addrc\�cd competition policy i'�ue�. �uch u' lhc impact of diMribution ;y,tem� on market emry.

'Thi5 definition cover� amitrust laws 1n lhe Unitt:d Slates and the An11-Monopoty Act tAMA) in Japan. In the ELl. competition policie' are defined more broadly to include �tme aid�. public cmcrprbe'> or others with special pnvilege�. and regulatory policy.

68

ing and advertising) as well as anangementshorizontal and vertical-between firms (Box I). Horizontal arrangements refer to thoo;e between linns selling the same product or group of products (e.g .. price fixing, output restrictions. and cartelization); vertical arrangements refer to those between manufacturers and their supplier�. and manufacturers and their distributors:� Mergers and acquisitions. which have an important effect on market structure because of increasing the concentration of existing capacity. are also covered in this paper.

Competition policies have recently attained greater prominence because of questions related to market entry into Japan (p<U1icularly in the context of trade relation-; between the United States and Japan), the role played by the enforcement of competition policy in the context of implementing the Internal Market Program in the European Union (EU). and certain other developments.

Competition Policy in Japan: Selected Issues

Some of Japan's trading panners have the perception that the conduct of competition policy in Japan has reduced market access for foreign firms in the Japanese market. This perception is reflected. for example, in several U.S. initiatives against Japan. including possible use of domestic legislative tools.s the Structural 1mpediments Initiative (SII) and, more recently. the United States-Japan framework agreernent6 (see Table I for United States-Japan bilateral issues related to competition policy).

1Sector-�pec1Jic regult111011' and law� affecting foreign d1rect m vestment have un impona11t bea nng on competlli<>n. but are 1101 con'idcreu in 1hi� paper. Also excluded from il\ �cope are the cffecl'o on competition of trade polic1c' such a:. antidumping and VER\. For a d1scu.,�•on of thc•c effech. sec Kelly. McGuirk. antl olher� c 1992) and Oruover. Goldberg. and OECD < 1993).

'Section 301 of the U.S. Trade Act ot 19&8 include, in it' defimtiOn of "unrea,nnablc •· praclice� th.: ..... toleration b) a fore1gn government ol',yMematic anlit:ompetitivc activitie' h) private finn' or among private fim1� in the foreign country that have the effect ot re�tncl ing ... acces\ of good� to purcha\ing by \Uch firm.,

.. (a�

qumed in Fing.:r and Fung ( 1994 ), pp. 4-51. <>Formally called the United Swte�-Japan Framework tor a New

Economic Partner, hip. The final rcpon of the Sll called for change' in Japan\ di-.lribution '>Y'>tcm, including deregulation of the rewiling indu�try. beuer enforcement ol the Al1li-Monopoly Act again'>t exclu�i(mary busine'>'> practices, and improved monitoring, particularly nf formal or informal relationship' between compan1e\, referred to in the Japanese context as kem•wt.


Recent Developments

Box 1. Illustrative List of Practices Regulated by Competition Policy

Hori:ontal arrangements refer to arrangements between firms selling the same product or group of products: they include price fixing, output restrictions. and other forms of cartelization.

Vertical arrangemems refer to agreements or relationships between manufacturers and suppliers. and manufacturers and distributors. 1mportant vertical arrangements are:

• tying, when a seller requires that, as a condition for buying one product, the purchaser must buy another product as well;

• exclusil•e dealing. when a seller requires that, as a condition for buying a product. the buyer commits to buy only the items sold by the seller;

• territorial restraints when a seller requires that, as a condition for buying a product for resale (i.e .. acting

Several observations may be made on the nature or trading panners· concerns about Japanese competition policies and the manner of their resolution. Many of them relate to perceptions about inadequate enforcement of domestic competition laws rather than inadequate standards. Japan has taken a variety of measures to improve the general enforcement of competition law�. These include increasing the fine:, fourfold and twentyfold. respectively. for administrative and criminal violations of the Anti-Monopoly Act (AMA). increasing the resources of the Japan Fair Trade Commission (JFTC) (the agency implementing the AMA). and issuance of guidelines clarifying the standard� and enforcement of competition policy, particularly with respect to distribution systems and keiretsu.1 A-:, a consequence of the new regime, the number of formal action� initiated by the JFfC has increased: for example. the number of identified violations of the AMA increased from 7 in 1989 to 31 in 1993. and the first criminal action for violation of the AMA was taken in 1991. lncrea ed enforcement of the AMA has also led to a sharp reduction in the number of exemptions from competition laws granted by Japan.s

Many of the concerns have focused on the potential exclusionary impact of vertical relationships and arrangements between manufacturers and distributors. A central theme in discussions of barriers to trade in Japan

7Pur.;uam to the Sll, the JFTC conducted '>Urvcy� of the Japarh!'>C flat gla�s. paper. auto. and auto pans industncs with a vrcw to a�certaining the exbtencc of exclusionary bu-,ines' practice, bee Box 2).

�Total exemptions have fallen from 1,079 in 1975 to .219 in 1992; till� number rs likely to fall to 71 rn 1994 with the clrminauon olthe exemption� for text ile�-related caneb. The number of expon canch fell from 42 in 1990 to almo't 28 in 1991. all of which exiM a� a means of enforcing VER� and hence likely to be cluninatetl bccau!ic of the Uruguay Round. There is currently one import cartel. compared with four in 19!:!9.

69

as a disu-ibutor), the buyer agrees to resell the product within specified geographic areas;

• resale price mffintenance, when a seller requires that, as a condition for buying a product for resale, the purchaser agrees to resell the product only at a specified price.

Arrangements in technology licensing agreements include:

• patent pooling, where three or more parties each grant an interest in an intellectual property right:

• gram back. when the licensee is required to assign inventions made in the course of working the transferred technology back to the licensor: and

• challenges to validity, when the licensee is prevented from contesting the validity of the intellectual property rights or other rights of lhe licensor.

ha� been that vertical keiretsu involving equity hoiJings by manufacwrers in their distributors, common management. and inducements offered by manufacturers. result in distributor<; choosing not to deal in the products of foreign suppliers even where the latter are competitive<> (see Box 2 for the results of a survey on Ji�tribution of foreign automobile�). Empirical evidence on the trade impact of keiretsu is mixed (sec Box 3). While a few 'illldies show a negative impact of vertical /...eiretsu on imports of manufactured goods. 10 others have challenged these results and the methodology used.11 Furthermore. vertical busine�� relationships are not unique to Japan. Indeed. in some sector� I he level of formal vertical integration is higher in the United States than in Japan, but in the tatter the relationships tend to be informal and les!. transparent.'!

In addition to undertaking efforts to beuer enforce competition policy. Japan ha; attempted to improve access for foreign firms and srimulate import demandthough trading partners have considered such efforts insufficient thus far. In �ome ca�es. enhancement of mar-1-.et acce!.s has taken the form of numerical indicators of foreign market shares (semiconductors) or commitments to specific firms (Motorola). t' Japan has declared its intention to avoid future market opening based on numerical targets.

While evidence on the role of competition policie� in preventing market access may be inconclusive. there remains an extensive net of sector-specific rules and regulations (e.g .. in construction, transportation. tele-

''Sec Berg�tcn and Noland !1993>; and Lawrence 1 199�) 111Sec Lawrence ( 1987). (1991). and 11993). 11Sec Saxonhou�e ( 1991) and ( 1993); und Citrin (}992). 12See Bcrg,len and Noland ( 1993).

11To defuse trade tensions. several Japanc'e car manufacturers recently announced their intention 10 purcha'c cenain amount' or foreign aulu part,.


IV INTERNATIONAL DIMENSION OF COMPETITION POLICIES

Table l. Selected Competition Policy Issue<; in United States-Japan Bilateral Relation!!

b�uc� (Year) 1

I. Under the framcworl.. agreement. the United State:, ha_, rabetl the bsuc or possible exdusionary impact of arrangements between Japane�e manufacturer' and distributor' in autos and auto parK llat gla:,s. and paper indu:,tric:.. ( 1993)

2. The United Stat..:'> alleged that theJapane<,e Government allowed a boycou by Japanese electric utility companies of purc:ha�es of foretgn amorphous metal transformers. and tolerated the refusal by cenain individual Japanese companie' to negotiate sepanue license agreements with the foreign supplier. ( 1990>

3. The Unit..:d State� alleged that the Government of Japan tolerated anticompctitive practices by Japanese com.trm:tion compames. including madequate use of admmistrative me:tsures restricting collusive activities \UCh as bid rigging, impeding '>ales of foreign construction firms. ( 19R8)

4. U.S. :,upplicrs of paper and pap..:r board products complained that alliance:, between producers and distributor:, in Japan tmpede the impom of foreign products. ( 1986)

5. The United States alleged that the Japanese Government created a market slructurc in tht: �cmiconductor indu�try dominated hy u -:mall number of semiconductor-u�ing companie� with �trong mterlockmg ties 111 research and development. production. and sales. which created barrierl> to entry for foreign firn1s. ( 1985)

6. The United States alleged that four tmponcrs of soda a�h formed an impon cartel restricting imports of foreign ,O<Ja '"h mto Japan. ( 1983)

7. The U.S. Justice Department challenged an arrangement between Japanese lirn1s for the exchange of price information alleging that it amounted to fixing price� of tmpons. ( 1982)

Source: Finger and Fung {1994 ).

Re�ult

The Japan Fair Trade Commission (JFTC) has conducted 'urvcy� of the four indu�tries to assess whether pnvatc arrangements and the \tructure of 1he industries (including cros�-holding-. of equity. common management) result in the cxclu'iion of import\ imo the market.

Agreement guaranteeing the purcha.'>e of foreign-made metal transforn1ers.

Agreement tu extend an earl1er agreement between the United State:- and Japan to more construc1ion project\, which provided for 'pectal measures de�igned 10 facilitate foretgn acces� to con-.truct ion projects.

Agreement wa\ reached requiring the Japane;c Government to encourage Japanese paper distnhutof' to increase impom and to enforce effectively the competition law with respect to the paper market. Private sector compliance was to be monitored through JFTC survey\ of the paper industry.

Undertaking by Japanese Government to take measures to improve acccs' for foreign firms. When market access was sub�equcntly determined by the U.S. to be inadequate. an agreement wa-. negotiated that con tamed a relercnce to a 20 percent market \hare for foreign l'irnl\.

Following a complaint by the U.S. Govcrnment,the JFTC mvcstigated the ca�c and determined th:u the cartel violated J:tpancse competition law. The cane I wa:. rcvnl..ed.

The J apanc\e Government tssued an · · adm ini strati vc guidance .. to the defendant comp:mics to refrain from exchanging price infonn:uion.

11ssues rat sed by the U.S. authoriues, or complaints made by U.S. husmcss regarding Japanese competiuon polictes. Year refer' to the date the action was initiated.

communications, and wholesale and retail trade). the elimination of which would lead to greater market access for domestic and foreign firms. The deregulation measures made public by the Japanese Government in June 1994 atlemp t to address the adverse welfare consequences of excessive regulation.

Competition Policy in the EU

Establishing strong competition policy standcu·ds and enforcing rhem have been an important element. in the EU ·s trade and industrial policies.

Extemal Trade Impact

Two examples of recent competition policy actions by the EU Commission serve to illusu-ate their potential trade impact. In 1985, under a block exemption from EU competition laws. car manufacturers and importers were allowed to exercise control over their choice of distributors, and the products handled by the latter (including t.he right to prevent distributors from handling

70

competing products). and were also given the (qualilied) right to detennine the territorial operation of their distributors. Conditions were attached to the grant of the exemption. including the possibility of its revocation if large price differences (greater than 18 percent in the short run or 12 percent for at least one year) emerged between member countries. Mattoo and Mavriodi!. (forthcoming) argue that this block exemption has facilitated the implementation of the 1991 EU-Japan consensus on cars. in panicular in sustaining the market segmentation created by the country-specific VER on Japan.14

While the above exemplifies the potential market access consequences of competition policies, another example points to the possible use of competition policies to promote the competitiveness or EU industries in international competition. In a 1990 decision, the Eu-

11ln granting the exemption. the European Commi��ion cited its potential benefit� to consumer�. including the promotion of compelttion between manufacturers and the as�urance of a reliable network of repair and '>ervice faciliti.:s.


Recent Developments

Box 2. Survey of Japan's Car Distribution System from a Competition Policy Perspective

The Japan Fair Trade Commission (JFTC) in 1993 conducted surveys of distribution practices in four industries-flat glass. paper and paper products. passenger cars, and automobile parts-wiUl a view to ascertaining if such practices raised concerns from a competition policy perspective, leading to exclusion of potential entrants from Lhe market.1 Of particular interest was the exclusion

ary impact on foreign suppliers stemming from arrangements or relationships between domestic car manufacturers and distributors.

The survey covered 9 domestic manufacturers, 9 Japanese subsidiaries of foreign manufacturers. and 3.759 domestic dealers (di�tributors) of passenger cars. It showed that domestic manufacturers had equity holdings in about 16 percent of distributors. were represented through their personnel in the boards of about 13 percent of distributors. and provided loans to about 15 percent of distributors (wilh significant overlap in these indicators).

From a competition policy perspective, one of the critical issues is whether local distributors sell the products of one manufacturer (''exclusive dealing") or also handle competing products. A survey conducted in 1979 showed that most contracts between manufacturers and distribu-

•Japan Fair Trade Commission (1993a). (1993b), (1993c), and (1993d).

ropean Commission granted an exemption from competition laws for a cooperative research and development. production, and marketing venture between two EU companies: the Commission argued that "Community companies ... find it difficult to compete with other larger non-European competitors." and the success of the latter in winning international contracts wa!. adduced to support its case. Is

Impact 011 the llltemal Marker

The increased attention given to competition policies in the European Union results from the recognition that the fruits of a single market without official impediments to trade cannot be fully reaped if private barriers conUnue to distort free competition. An active enforcement of competition rules is therefore an indispensable complement of the Internal Market Program.16 The increased emphasis on merger control, liberalization of public monopolies. and reduction of barriers i n the regulated services sector is a reflection of this notion.

This increasing role of competition policy in ensuring the free movement or goods under Articles 85 and

•�See Sapir. Buigues. and Jacquemin ( 1993). p. 126. 1<>Thc experience of the EU i� instructive on I he: w,e of compcli

tion policy to eliminate barrier� to trade and factor mobilily.

71

tors contained a clause preventing distributors from handling products of competing firms. Guidelines published by the JFTC in 1991 sought to eliminate this clause by persuading manufacturers to write tO their distributors granting Lhcm the freedom to handle products of competing firms (without priorconsullation with domestic manufacturers). The 1993 survey showed, however. that almost halflhe dealers had not received Lhis communication from manufacturers; about 50 percent of dealers did feel that they were expected not to handle competing products. But the survey also showed that in practice about 56 percent of distributors handled imported cars in addition to domestic cars.

Another competition policy-related issue concerned whelher distributors were restricted in Lheir territor ial sales activity by vinue of conditions on territorial allocation imposed by manufacturers. While the AntiMonopoly Act prohibits such territorial allocation. some distributors felt Lhey were not free to sell outside Lheir territory (e.g .• there were rebates attached to respecting territorial allocation). In a few cases, distributors were also forced to sell products Lhat they did not wish to. Thus, overall the JFTC survey concluded that there were some problems, fTom a competition policy perspective, relating to distribution of cars. Domestic manufacturers were expected to take voluntary measures to resolve these problems and the JFTC would continue to monitor developments to ensure that the domestic market remained open.

86 of the Treaty of Rome is reflected in the number of formal decisions of the Commis!.ion relating to these Articles: 163 decisions were taken in the 1980s compared with 115 decisions between 1970 and 1979.17

In light of the sharp increase in mergers and acquisitions involving the EU's top 1.000 finm (from 303 in 1986-87 to 622 in 1989-90) 1 g and the consequent potential for adverse effects on the Internal Market, active and efficient merger control at the EU-wide level assumed greater imponance.

The legal basi� of merger control wa� strengthened with the introduction of the 1989 Merger Control Regulation. The enforcement of merger control on a day-today basis requires the reconciliation of two consideration<>. On the one hand. it is recognized that mergers often lead to increased efficiency and contribute to the adaptation of industries to the new environment created by the Internal Market Program. On the other hand, mergers and acquisitions should not be allowed to establish dominant positions. Between the entry into force of the Regulation in September 1990 and 1993. the Commission has handled 193 notifications. I n the

17See Sapir. Buigucs, and Jacqucmin ( 1993). tK A growing share of lhcse mergers and acquisitions have In

volved operalion� acros� EU member \Ultes and al�o non-EU countries (Jacqucmin ( 1993)).



Box 3. Impact of Keiretsu: Empirical Evidence

ln Japan. corporate groupings involving fonnal or infonnal business relationships between members are commonly tenned keiretsu. Horizontal keiretsu involve affiliations between ftrmS in different induslries. Typically, such groups include manufacturing companies, a lead bank, a trust bank. a trading company. and an insurance company. The nature of relationships include common management, interlocking directorates, joint investment, joint appointment of key personnel, and so on. Vertical keiretsu are composed of similar links between manufacturing companies and their suppliers and distributors.

The debate on the economic impact of keiretsu is whether they represent efficient fonns of corporate organization rendering valuable insurance benefits, facilitating pursuit of efficient long-tenn objectives, and providing (in the case of vertical keiretsu) for an appropriate mix of integration and autonomy in business dealings or whether the closed relationships exclude cntrants-<lomestic and foreign-from the market.

The empirical evidence in favor of the exclusionary hypothesis comes from the work of Lawrence (1987). (1991), and (1993) who analyzes Japanese trade structure in a cross-industry framework. The main results are that keiretsu-horizontal and vertical-have a significant negative impact on imports; however vertical, but not horizontal, keiretsu also positively influence exports. These results, particularly in relation to vertical keiretsu. which are the focus of trade tensions, are compatible with both the efficiency-enhancing and exclusion-resulting hypotheses.

These cross-industry results have been criticized on a number of grounds including the poor explanatory power of the estimated equations, low goodness-of-fit statistics, and sensitivity to the industry coverage.1 In response to

1 Saxonhouse ( 1991) and ( 1993 ).

great majority of cases. no objections were raised. In one case (the intended acquisition in 1991 or the Canadian aircraft producer De Havilland by two European companies (Aerospatialc and Alcnia}), the operation was blocked. This decision was considered as an important precedent in the enforcement of merger control. In eight other instances. the Commission made its consent dependent on the fulfillment of a number of conditions, such as the sale of subsidiaries that. if merged. would create an undesirable dominant position in certain markets.

Extraterritorial Application of U.S. Policy

Another significant deve lopment in the international dimension of competition policies concerns an evolution in the stance of the United States, when it announced in 1992 that the Justice Department would. in appropriate circumstances. challenge foreign business conduct that harmed American exports: the proviso is

72

the critique that cross-industry models do not pennit conclusions about the contribution of keiretsu to Japan ··underimporring" relative to other countries. Lawrence (1991) examines the extent to which keiretsu can explain the observed Japanese import "shortfalls" in an earlier cross-country study, which showed that Japan ··underimported'' relative to other OECD countries. The results indicated a statistically significant positive relationship between vertical keiretsu and shortfalls in manufactured imports, supporting the exclusionary hypothesis. This study has, however, been criticized for a number of deficiencies. The cross-country model underlying the results is misspecilied and subject to simultaneity bias. The same exercise of explaining shortfalls caused by keiretsu when perfonned on an alternative cross-country model by Saxonhouse (1991) shows statistically insigniucant effects of keiretsu. A similar exercise carried out by Noland ( 1992) showed that keiretsu are consistently associated with lower-than-expected imports and higher-than-expected net expons, indicating that they could be efficiencyenhancing or exclusionary or bod1. Funhermore, it has been argued that imports and keiretsu affiliations are jointly detennined so that a negative statistical relationshlp between imports and keiretsu cannot assign causality to the latter. For example, if comparative advantage leads to a manufacturer using domestic rather than foreign suppliers, a vertical keiretsu relationship will develop. In such cases, keiretsu, rather than impeding imports and comparative advantage. ··may be one of the ways comparative advantage gets institutionalized within the economy.''2

The evidence is therefore not conclusive on whether or to what extent keiretsu impede Japanese imports.

2Saxonhouse (1993), p. 37.

that such conduct would need to have violated U.S. antitru-.tlaws if it had occurred in the United States and to have a direct. substantial. and foreseeable effect on U.S. commerce. This decision superseded previous provisions (of the Department of .Justice's 1988 Guidelines). which had been interpreted m. prohibiting challenges to anticompetitive conduct in foreign markets unless there was direct harm to U.S. consumers.19 This enlargement in the scope of U.S. law to extraterritorial conduct was the basis or the action in May 1994 against a U.K. company alleged to have engaged in practices adversely affecting U.S. companies. The specific complaint was that the U.K. company had imposed stringent conditions on companief> that bought licenses for it!> technology. These included restrictions on <>liblicensing and requirements to report back to the licensor any improvements in technology made by the licensee. As a result of this action, exports of firms as


Need for International Cooperation on Competition Polic1es

well as foreign direct investment by U.S. firms in Eastern Europe and southeast Asia are expected lo increase sub�tamially.

In the past, extraterritorial application of U.S. antitrust law has been the object of disputes with several trading partners, and some countries (e.g .. Australia. Canada. and the United Kingdom) have enacted legislation ro block the application of U.S. laws to their domestic industries.2o

Developing Countrie �

Many developing countries have not instituted a legal or administrative framework for competition policie!>, but some are in the process of doing so. a trend likely to be reinforced in the future. Although developing countries may not have competition policies, they have expressed interest in regulating practices of foreign enterprises that might have adverse effect� on their economies.

In the past. developing countries have been active in seeking a code of conduct on restrictive business practices. particularly in relation to agreements licensing the transfer of technology.21 Developing countries· concern stemmed from the possible abuse by multinational enterprises from the exercise of their monopoly power inherent in control over proprietary information. As technology importer:-, abuse of �uch a dominant position could result in higher prices for technology and greater royalties. resulting in a loss of economic welfare. Developing countries also expressed concerns, in the comext of the Uruguay Round investment negotiations (TRIMs). about the negative impact of practices by multinational enterprises that require �ubsidiarie:-. to purchase import� from their parent company rather than sourcing locally and that prevent exporl'> by subsidiaries in order to segment world markets. The exemption from competition laws granted by major industrial coumries for export cartels. which could inllict terms of trade losses on developing countries, is another source of concern.

The Need for International Cooperation on Competition Policies

Scope for Conflict

The preceding di�cussion c,uggesh that competition policies are an increasing feature of international trade relations. The potential for conflict between countries on account of competition policie� goes beyond that suggested by recent developments. The case for international cooperation on competition policies would thus stem not only from a need to manage cun·em ten-

1CJSe�: GAIT ( 1994). 11These effort� arc embodied in UNCTAD'' worl-. (�ec UNCTAD

(1980)and CJ98tJ).

73

sions that reduce global welfare, but aho possible future ones. Conflicts could arise from competition policies in several ways.

Weak or nonexistent competition policy -;tandards could o;erve as de facto industrial policies. by promoting the competitiveness of or giving advantage to domestic industrie� in domestic or foreign markets. The specific competition policy provisions that could entail such consequence� include exemption� for export and import cattels from the provisions of competition law. Export cartel exemptions are found in all competition Jaws (see Appendix 1). They could result in raising export prices. thereby securing a tem1s of trade gain for the exporting country and a corresponding loss for the importing country.12 Another example is exemptions of research and development joint ventures from competition law. In the EU, United States. :md Japan. certain cooperative ventures are promoted despite their -,tatic anticompetitive effect, on the grounds that they increase the incentives for research and development that might otl1erwise be blunted. The lenient treatment so accorded. however, could have effects analogous to subsidization and thu� confer benefit� on domestic firms vis-a-vis foreign rivah23 This is exemplilled in the European Commission ·s deci-;ion on a cooperative research and development venture between European firms described above.

Low standard"> of competition policy could in principle reduce access for foreign finn:. in the market where such standards are low. thereby acting as trade barrier-;. An exclusionary impact could arise through restrictive arrangements between manufacturers and distributors such as exclusive dealerships. preventing distributors from, or reducing their incentives to, purchase foreign products. Conditions in Japan in this respect have in the past been raised as concerns by trading partners. The EU's block exemption for cars also gives ri<>e to market access issues as explained above.

The overall strength of competition policy is determined not merely by the rules but also the effectiveness of their enforcement. As mentioned earlier, trading partners have raised this as an issue of concern in Japan. Weak enforcement of competition policy in the Japanese construction market has featured in U.S.-lapan di-;cussions on competition policy. Recently, the United States filed a �uit in Japan against 53 Japanese companic:- for colluding in bids for construction contracts. It has been argued that weak enforcement of competition policy sustain� collusion. exclude� foreign (and other domestic) companies from the market, and thereby inllates government expenditures and imposes costs on consumers and taxpaycrs.24

The preceding discu�sion exemplifies the manner in which the absolute standards of competition rules could

22Jn fact. VER,. which allov. cxponer; to nppropnalc renh. are enforced 111 Japan by allowing the formation nf export c:lrtcb.

2JScc Gem,l-.i ( t993). 2•Sce McMtllan ( ttJ94).



gi\'C ri)e to friction. llowever. difference� between countne' 10 '>lilndard'> could abo do '>0. even where the Jntcrc-..t\ of different competition authoritie-.. coincide. Thi'> wa., illu'>trated 1n the merger bid for a Canadian a1rcraft company b) two European companie'>. The Canadian and European competition authoritiel> agreed that the world wa-. the relevant antitrust market in evaluating the economic con.,equence-. of the merger. They di'>agreed, however. on the o,tandard for the evaluation ( i.e .. whether the merged entit) would hold a dominant po�ition with the market share it would obtain) and hence arrived at different deci:-.ion'> on the appropriatene�� of approving the merger.

In a variety of instances. competition authorities may not be able to control the activities of finno, whose <;tructure or activitic., may have an anticompetitive effect on the market becau-;e they arc outside the jurisdiction of the relevant authorit iel>. The most obvious examples arc the operation of export cartels or mergers in foreign countrie'> where the relevant firms do not have a presence in the market of the affected country.15 The problem of jurisdiction j.., more acute when anticompetitive practice'> in fore1gn market" are detem1ined to affect a country\ exporto,. Conllict� from overlapping juri.,dictiono, are exemplified in the merger case mentioned abo' e.

The Case for Cooperation

The preceding dio,cuo,)tOn o,how-. that competllJon policic., have the potential for negative imemational spillover�. When u�ed to promote competitiveness of domestic finm .. ... uch policie\ could have the effect of improving the welfare of individual countries. However. given the fact that competition policieo, imrin!>ically address situations of imperfect competition, this welfare gain could be at the expense of other countries. Where competition policies create a tenm of trade gain for one country. they cnttJil a corresponding loss fo; another country: and the appropriation of rents that they facilitate in one country implies a redi'>tribution away from finns in another country. This gives rise to the familiar ··prisoner\ dilemma·· rationale for cooperation: each country is beuer off if it employ-. competition policies to secure national ad\'antage, but the pursuit of such a '>trategy by all countries renders them collectively woro;e off. Cooperation then is a way of precommiuing countnco, to avo1d )Uch collectively welfaredeteriorating outcome�.

The discuo,)ion abo shov.<,, however. that there is a cla�s of '>ituationo, where competition policies have effects -.imilar to those of protectionio;t trade policies: they could reduce market acceso; for foreign o;uppliers that also mducc� welfare Jo.,..,e, for domestic con-

25 Amuru\t jumdktion '' well recognitcd ror p<�rtie' O\\ mng <1�sch (e.g .. <1 nnuonat \Ub�tdJaryJ wuhin the nation admini<>tcring the l:1w but not for parttc' over whom JUri,dicuon would be ba,ed on a competittvc effect realitcd M>lety through 1mporh.

74

... umer'>. Lnilatcral llbcralit.ation of competition policie\ that would ehmmate barnero, to entrv and auoment - 0 nallonal welfare \hould be pur<o,ued: international coop-eration could prm1dc addllional incentive., (e.g .. when tradmg partner., abo undertake '>imilar liberalization) for countne' w adopt policies that are welfareenhancing from a national per-.pective.

Ongoing Cooperation on Competition Policy

There arc ... cveral ongoing initiatives-multilateral and bilateral-aimed at c;ecuring greater inremational cooperation on competition policy.

The Final Act of the Uruguay Round contains provisions on competition policy in three agreements: traderelated inve ... tmcnt mea�ure� (TRIMs). trade-related aspects of intellectual property rights (TRIPs). and the General Agreement on Trade in Service<. (GATS). The TRIM� agreement provide-. for a review. to be conducted within five yean. of it-. entry into force. v. hich would 1nter alia con-.idcr whether the agreement should be complemented with provi .. iono; on competition policy.

The TRIP' agreement containc; provisions on the control ol antJcompetHJvc practice'> or conditiom in contractual liceno,c� relating to the tran\fer of technology or of other propnetar) information. The agreement recognite'. the nght\ of countrieo, to regulate \uch practiCe'> through their dome.,lic law\. It abo provide-. for con�ultations and exchange of information between govemment\ where there i� reason to believe that licen�ing practice'> or conditions con.,titute an abu!)e and have an adverse effect on competition in the relevant market.

The GATS agreement contains provisions on consultation and exchange of information similar to those in the TRIP� agreement. In addition, it requires countries to en�ure that monopoly o,ervice providers do not abuse their position in activities outside the scope of their monopoly privilege.

In addition to the work done in the past in this area. the OECD ha'> un cxtem1ve work program on the interface between trade and competition policies. This includes a study on the economic effects of antidumping. a project on the convergence of competition policieo, I hat would embody the con'>ell\U\ that has been reached within the OECD on thi., Js..,uc. and a qudy on control of merger' and .,1mplifying merger procedures. The propo!-.ed program of worf... in the next two years aims at identifying wayo, in v. hich competition policy approaches can be used to emure that buo.,ine�s practices do not unduly impede market acces., and to analyze the potential benefits of tighter disciplines regarding trade Intervention ... that have anticompetitive effects.

In addition to multilateral initiative�. there are several bilateral agreements intended to facilitate international enforcement of competition policy. For example,


Possible Future Agenda for Cooperation

the 1991 United State!>-EU agreement. based on the role of "comity,,. or mutual respect for the sovereignty and interests of other states. aims "to promote cooperation and coordination and lessen the possibility or impact of difference between the Parties in the application of their competition l aws. ''26 Both authorities have agreed to take into account the other parties' interests. and to exchange information. subject to certain conditions; however, neither party i:. obliged to respond positively to calls for enforcement from the other party.

Possible Future Agenda for Cooperation

The discussion in the preceding sections demonstrates that. in recent years. trade friction� emanaling from competition policies have grown. Although in practice many of these have involved Japan. the potential for conflict between other countries exists. as competition policies could have negative international spillovers. Problems could arise because weak standards or enforcement can be used as indu�trial policy to favor domestic firms over foreign firms; they could also effectively act as trade barriers, impeding market access. There is a case for international cooperation based on the argument that if each country pursued defensive competition policies. all countries might be worse off.

21•As quoted in Jacquemin (1993). p. tJ9. TI1e United States has similar agreement� with Au�tralia and w1th Canada.

75

At present. there is no agreement on what a future agenda would include, and it i!-. clear that work in the initial <>tages will need to identify the is:,ues and concerns of countries with a view to detern1ining the approach and content:-. or future cooperation.27 In terms of the approach. there arc several possibilities. An ambitious approach would be to agree to commonly applicable multilateral :-.tandards. rules for national enforcement, and multilateral dispute settlement procedures.211 The experience of the EU in using competition policy to eliminate intra-EU barriers to trade and factor mobility is in<>tructive as a possible approach for multilateral cooperation in the future, although certain special features. including the supranational authority of the EU's implementing agencies. might preclude the rcplicability of this approach. An alternative would be to undertake multilateral commitments conceming enforcement of exisling national competition policies and exchange of information to assist international enforcement of competition policies. The objectives. pace. and forum for future economic cooperation arc also likely to be conditioned by the position of developing countries and the time frame for adoption by them of national competition policies.

27 An Important a�pect that could be cons1dercd is how to incorpo· rate amidumping into a competition policy framcv.orJ.., thereby n:n· dering it le�� usceptible to protectioni�t abuse.

2XThis approach wa� adopted 10 the Uruguay Round agreement on imellectual property.


Appendix I

Competition Policies in the United States, the European Union, and Japan

T his appendix delineate!> the salient feature!> of competition policies in the three major industrial

country ju1isdictions (Table 2). A broad comparison would yield the following conclusions.

First, the structure of enforcement varies among the three jurisdictions. The United States relics more on a judicial system with court!> ultimately clarifying and enforcing the rules. while the EU and Japan rely more on an administrative system with substantial administrative discretion regarding antitrust enforcement. Private parties initiate more <;uits in the United Swtes than in the EU and Japan.

Second, the United States has placed greater emphasis on regulating the structure of market� than the EU and Japan: however, since the enactment of merger control guidelines. the attention to structure has increased considerably in the EU.n

Third, the three jurisdictions have very similar regulations on horizonral arrangements, such as price fixing and output sharing, which are prohibited outright (i.e .. under a per se standard).73 This renect!> a common view that horizontal arrangements diminish efficiency and economic welfare through output resu·iction:, and price increases. An exception to this rule is that Japan has been more pennissive until recently in allowing cartelization when an industry is in crisis ( "depression'' cartels) or to rationalize an industry to achieve more efficient levels of operation ( ··rationalization canels" ).74

Fourth, the rules on vertical an·angements arc usually not prohibited outright but evaluated on a situation-

72A general cavem that �hould be nmed is 1ha1 compelltton law m the level of I he EU may differ substalllially from I hal prcvailmg 111 the member �t<llC\. In dealing� on competition pohcie� between indi vidual member slates and nonmember\ of the EU. 1 he relevam rule� would be 1ho�e of the mdividual mcmber �late. unJ.:s, 'ueh t.lealing-. had an EU-wide dimension.

7\An imponam distinction in compctiuon policy rules IS between a per st• and a rule-of·rea.wm standard for dctenninmg the Illegality of a practice. Per se illegality amount!> to an outright prohihition. A rule-ol-reason standard <unoums to a case-by-case dctcrmmmion based on the effects oflhe prac1ice in the light of underlying market conditions.

7" However. as described above. the number of excmpuons from competition Ia" s for �uth cane Is ha� declined recently.

76

specific basis (according to the so called rule-of-reason test). This differential treatment of vertical arrangements in turn reflects recent developments in the theory or industrial organizationJ5 Theoretical analy'>is of vertical an·angements highlights their ambiguous welfare effects: outcomes depend crucially on the particularities of market �tructure. cost-and-demand conditions, pre�ence or risk. and uncertainty, and technological interdependence.

Although all three jurisdictions tend to use a ruleof-reason test, the treatment of important vertical arrangements differs among them in some respects. For example. territorial restraims are more likely to be deemed illegal in the EU than in the United States. while tying arrangements are more lil..ely to be prohibited in the United States than in the EU. which prohibit� it outright only when practiced by a dominant fim1. There are also inconsistencies of treatment within jurisdictions: fonnaf vertical integration is treated differently from vertical arrangements between separate firms: in the United States. vertical price restraint� are treated less leniently than nonprice re�traints. despite similaritie� in their economic effects.

Fifth. all jurisdiction� have similar policies with rec;pect to certain exemptions from competition law. such as those for export canels, price fixing for exports, and for cooperative research and development ventures. However, Japan tends 10 have a wider range of' exemption� to cover import carteb and depression and rationali .auion cartels.

Sixth, the financial penalties for anticompetitive behavior tend to be higher in the United States and the EU than in Japan ( which recently increased the magnitude of administrative and criminal penalties).

Finally. the United State� is becoming more active than other countries in the geographic application of it!> competition Jaws. Not only does it appear to show more concern about the effects in its market of the behavior of fim1s outside its boundaries. but also appears to be uniyue in extending jurisdiction where adverse effects are felt on U.S. firms in foreign markets.

7�Sec Tirolc Ct9RR). Scherer and Ro\\ ( 1990). and Watcr.on ( 1993).


Competition Policies

Table l. Salient Features of Competition Policies in the United States, European Union. and .Japan

1. Nature of enforcement

2. R1ght to 1n11Jate ca�e'

4. Treatment of vertical reMr:1int�1

a. El\clu\ive dealing

o. To.:rritorial rc\traint

c. Tying

d. Resale price maintenance

5 Treatment of horiLOntal re,traint�l

a. Price fixing

b. Output re�.�raint

c. Prcdat ion

6. Exemptions from competition law

a. E>.pon cartel'

b. Import cartel�

c. Re�ean:h and dc,·elopment ;oint venture�

d. Small and mcdium-�ized enterprbe\

United St<HC!>

J udicial/admini�trat i vc

Pub I ic enforcement agency and private partie,. Muny more private �uit� than in the EU and Japan.

Judicial

Non price ''ertical re'tmint� are u�uall) per \e legal in the absence of collu�ion between \upplicr; and dealer\.

See 4(a) above

Despite: cxc.:ption�. thi' I'• U\Ually VIC Wed a' a per \e offense.

Per \C illt:g;ll but under more narrowly defined circumstance� than in EU and Japan.2

Per 'c 1llegal

Per 'e illegal

Prohibited

E>.emptcd if the efl'ect' arc felL in foreign market\. Price lil\ing for export� ., legal.

The National Coopcrutive Research Act of 19!!4 1iftcd re�carch and development joint venture' from the \U.'-picion that they arc per �e illegal and put them under a rule of reason tC'I. and protected firm� from extreme pen a hie' in the event that their research and dcvclopmem ventul\: is found to he anticnmpetnive.

Such enterprise� Me not <,pecifically exempted from competition Jaws should they fom1 C<lrteh.

77

European Union

Prcdominuntly administrative

Publtc enforcement agency und private parties.

Judicial

F.xclu,ive de<lling. t�:rritori;JI rcMraint�. and tying arc per \C Illegal when practiced by a dommant fi1m: detem1mation of a dominant lim1 is done on a ca,e-by-ca•e ba�i�.

Japan

Predominantly admini�trauve

Publtc enforcement agency and private panic,,

Judicial

Per \c illegal if impo,ed by a dominant lim1: otherwi'>e adjudicated on a ca,c-by-ca'e ba'1'.

See 41 a) above Sec 4(a) above

See 4( a) above Sec 4( a) above

Suppliers can mmntam exclu,1ve Per '>C Illegal national distributors. but \trict enforcement of p<trallel importation renders price dtscrimmatton and resale pnce maintenance infca�iblc.

Per se illegal

Per 'e illegal

Prohibited

Exempted if the cfft:ch arc felt in foreign market,. Price lixing for exports IS legal.

Under Article R5<31 of the Treaty of Rome, a 13-ycar block exemption from competition Ia\\'\ wa' granted to c:enuin categories of re,earch and development agreement\. and to joint exploitation oft he re\uh' therefrom. The exemption applies even 1fthe panic1pants to the rc�earch and development venture together accoulll for not more than 20 percent of the market.

Per �e illegal

Pcrw illegal

Prohibited

Unlike in the United State' and EU. many c>.o.:mption� can b.: gramcd b) nonenforcement agencic' \UCh a-. the Mini�try of International Trade and lndw.�ry IMITI).

Exempted if the effect\ are fell 111 foreign mar�et�. Price fixing for exports 1� legal.

E"plicit pmvbion is made in the \tatute permitting their exempt1on lrom competuion law<,.

Re\ean:h and development joint ventures between fim1s not in a competitive or potentially competitive relmion,hip are permitted. Venture\ between compamcs who�c col lcctivc mar�et 'hare exceeds 20 percent are more likely to violate the Ant1-Monopoly /\ct.

See 6(b) above


Table 2 (concluded)

e. Rationalitation cane!\

7. Remedies

8. Merger

a. Premerger pro<:edurcs

b. Sub>tantivc \tand;trd

9. Definition of dominant po�it ion/monopol i tat ion

10. Extraterritorial application

APPENDIX I COMPETITION POLICIES

United State�

No explicit provi-,ion exbt' excmptmg rationalbwtion cancb from competition laws.

European Union Japan

See 6Cb) ahove

Administrative and �.:riminal remcdtes provtded for in all thrceJunsdtctions. Private panic, can we ror compensatory damages. but t he United States provide\ for greater deterrence by allowing recovery of punitive damage,. (Three times the amount of t:ompcnsatOI) damage>.)

Prcmerger noufication required if U.S. \ale' or U.S. a\�ets of the acquiring and acquired p:mie� exceeds $ 1 (X) million and $10 mill ton and the �tze of the transaction i\ at lea\t � 15 mill ion or 50 percent oft he voting ;;ecuritie' oft he acqutred pany.

Timing of procedure i> open ended.

Merger\ for which the post merger HI-ll is less than 1 .000 an: unlikely to be contested. Mergers producing a post merger HHL exceeding 1 .800 and an increa�e in the IIIII of at leaM 50 will usually result in an injunction. For mergers resulting in a post merger HI II between 1 .000 and 1 .800 and an increa�e in the Hill of over I (X). enforcement depend� on factor' other than concentration 1

Defined as a fim1 having at lca,t .35 percent oft he market.

Any merger would require prior notification if ( I ) annual world �ales oft he merging panics together exceed ECU 5 btllion and (2) at least two of the merging panic� have. hetween them. annual Ell sale� of at lca�t ECU 250 millton. unle-.� (.�)a �ingle member �tate account., for more than two third� of the .,ale� of ca\:h p<ll1Y to tht! agreement.

There are �trict lime limit� to be followed for merger procedures.

Tho: legality of a merger would depend on whether the merger would create or enhance a dominating position that would considerably hinder cornpelltion in the EU. While clear pall ems have no1 emerged, merger\ thm rc�ull in a combined market share of less than 25 percent would not be di'>approved.

Sec 6(c) and HCbJ above

Premergcr nottfication requir.:d of all corporate aS\et tran,fer�. Exl.cnt and nature of scrutiny h) the J FTC depend� broadly on total a�sct' of merging com panic�. their market \hares. whether merger i\ horiwnl:tl or vcnical. etc.

A numberofmarJ...ct share criteria. including when the combined market �bare of the merging panic' exceed'> 25 percent or i� the largc�t and exceed� 15 percent, arc u�cd to evaluate the legality of merge r� from a competition perspective.

A lll0110poliSIK SIIUaliOn CXISI\ when an enterprise ha<, at lea�t 50 percent market �hare or two enterprise� have an aggregate market �hare orm le;m 75 percent.

Competition law' in the United State!> and the EU have been w.ed again�t at.:tion� taJ...ing phi\:C in foreign market5. the effects of which arc fell m thc dome51ic market. This i� panicularly true when the fim1 or fimh involved in I he action abroad ha� some presence (through a �ub�idiaryJ in the domestic market. I lowever, compel ilion law!> in the United Slatcs. unliJ..e in the EU and Japan. have also been applied even where effects are in foreign markets on I he grounds that ex pons of U.S. finns have been affected.

Sourt:c&: Boner and Krueger ( 1991 ). GATT (1992). Matsu�hita (1991). OECD ( 1993). and White ( 1993). IJt i� difficult to definitively assign the legal status of all pnvate arrangements Cpanicularly vcnical one�) a� they depend on \pectfic JUdicial

dcci�ions thai may not be internally con�btcnl at any time and thai al�o evolve over time. 2The burden of proof to eslablbh illegality of resale price maintenance ha� risen over 11mc in the United Swtes. reOcctmg an apparent mtempt

to reconcile the conflicting treatment of venical price (usually illegal) and nonpncc (usually legal) restramts despite the \imilarity of their economic effect\.

'HHl refen; to the Hirschman-Hcrlindnhl index and is defined as the \Um of �quarcd market shares (expressed in percentage term�) for all suppliers in a market. The I-fi-ll lies bel ween zero ancl lO,OOO. An HI-ll of 1.000 is eqtuvalent wan industry con'>tstmg of ten equal-site firm'>. A monopoli\tic market has an HHI of 10.000.

78


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Jacquemin, A .. "European Agenda: The International Dimension of European Competition Policy:· .!oumal of Commnn Market Studies. Vol. 31. No. I ( 1993). pp. 91-102.

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--- ( 1 993b). "Survey of Transactions Between Finns in the Distribution of Automobile Parts,

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l'iews. No. 1 7 lfebruary 1993). pp. 52-72. --- ( J993c). ··survey of Tran�actions Between Firml. in

the Distribution of Paper." FTC/Japan Viell'.l, No. 17 (February 1993). pp. 73-88.

--- ( 1993dl. "Survey of Tran�actions Between Firm� in the Distribution of Passenger Cars .

.. FTC/Japan \'iews.

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---. "Efficient or Exclusionist? The Import Behavior of Japanc�e Corporate Groups," Bronking.1 Papers on Emnomic Acti1·iry (Washington: The Brooking� Institution. 1991), pp. 3 1 1-41.

---. "Japan's Different Trade Regime: An Analysi� with

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Matsushita, M .. "The Role of Competition Law and Policy in Reducing Trade Barrie rs in Japan.'' The World Economy. Vol. 14, (June 1991 ), pp. 18 1-97.

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v Trade and the Environment

An•ind Subramanian and Perer Uimonen t

C oncem about the environment has grown markedly in the recent past. At the Eanh Summit in

1992. governments collectively espoused the concept of '·sustainable development "-meeting present need� without compromising those of future generation<;thereby signaling a common concern for the environment. The global nature of environmental problems has potentially increased the scope of the interface between trade and the environment.

The trade-environment debate came into prominence in 1991 when a GAIT dispute seulement panel ruled that import restrictions taken by the United States against tuna imports from Mexico were inconsistent with GAIT rules. The restrictions had been defended by the United States on the ground that the fishing methods employed by Mexico in catching tuna resulted in more dolphin killings than specified under U.S. law. This ruling sparked a wider debate on the extent to which trade and environmental objective� were compatible and on the consequem need to change existing international rules to take greater account of environmental concerns. An example of the latter was manifested in the North American Free Trade Agreement (NAFTA). which contains provisions in some areastechnjcal standards and sanitary and phytosanitary measures-that explicitly incorporate environmental concerns. Ln addition, a side agreement to NAFTA created a Commission for Environmental Cooperation responsible for overseeing the implementation of the agreement. promoting cooperation on the environment, and ensuring that member countries enforce their environmental laws (failing which they could be liable to sanctions by trading partners).:!

The Uruguay Round also responded to certain environmental concerns. It modified some provision� of the Draft Final Act in the areas of technical standards, sanitary and phytosanitary measures, and subsidies and counrervailing measures. It incorporated the objective of sustainable development in the preamble of the WTO. At the Marrakesh meeting in April 1994 concluding the Uruguay Round. agreement was reached to set up a Commiuec on Trade and the Environment under the future World Trade Organization (WTO) to address a wide range of issues relating to trade and the

'The principal author�. lOuring the NAITA negotiations. prov1sion was also made for

instituting and funding a body for the clean up of the U.S.-Mexico harder region.

80

environment. This Committee will take over the work of an earlier body (the GATT Group on Environmental Measures and International Trade) and will examine a wide nmge of issues.� It will report to the first biennial Mini�terial Conference of the WTO after it� emry into force. The Organization for Economic Cooperation and Development (OECD) is also undertaking extensive work in this cu·ea.

This paper covers selected aspects of the tradeenvironment nexus. pm·ticularly the environmental effects of trade liberalization and the consequences of differentia] environmental standards on intemational competitiveness. While not covered in this paper, transborder environmental problems are an important issue.4 Countries have made collective eiTo11s to address some global environmental problems by negotiating international environmental agreements (fEAs). These generally provide for technical and financial assistance to induce countries to adopt first-best environmental policie�. In a number of cases, such agreements also incorporate trade restrictions as a mechanism of last resort to enforce them.5

Environmental Impact of Trade Liberalization

Environmental problems originate in production and consumption distortions and. consistent with the litera-

'These include (I) the relauon\hlp between GATT/WTO provJ· \ion<. and (a) trade me<t�ure$ for environmental purpo�e;, (b) environmemal polic1es and measures with trade effects, and (CJ environmental charge\ and taxc\, labelling. packaging. and recycling requirement�: (2) lran;parency of 1rade mea�ure\ u�ed for environmental purposes nnd of envmmmental measures and requiremems with trade effect�: (3) rclatiOn\hip between dispute \elllcmelll mcchani�lll\ in the GATT/WTO and tho�e in mtemauonal environmemal agreements (lEAs): (4 J effect of environmental measures on markc1 accc�s. especially for dcvclopmg coumncs: and (5) cxpon\ of good\ who�e u�c is domc\tic<JIIy prohibited.

�For a comprehens1ve rev1ew of the i�sues. �ee U1moncn and WhaJley ( 1994).

�see GATT ( 1992). The appropriatenC'>> of \uch restriction> and the safeguards that need 10 be mcorporated ( 1n case of theJr use) are liJ...ely to he discus<>ed in the WTO by the Commillee on Trade and Environment. In general. it has been noted that trade sanction) will rarely be used if coumnes are willmg �ignmones 10 lEAs and hence unlikely to renege from !heir international environmental commitmems (World Bank ( 1992)). Funher, the wider the panicipation in tEAs. the less will be the need for trade sa net ions agamst nonstgnawrie\. Hence. if lEAs are efficient and equitable. trade '>anctions will seldom need to be u�ed (Biackhur�l and Subramanian ( 1992)).


Environmental Impact of Trade Liberalization

Lure on optimal intervention. require con·esponding domestic policy intervention�.6 From the per!>pective of economic efficiency. trade interventions are generally viewed as �econd-best instruments for addressing such problems. A corollary is that if trade liberalization is associated with environmental problems. it should be coupled with appropriate domestic environmental policies aimed at correcting the externality that has its root in either production or consumption activity rather than 1rade.7

In practice, it is difficult to predict ex ante the environmental consequences of economy-wide policies, such as trade liberalization, because of the variety of effects-often connicting-that are induced. Grossman and Krueger (1991). however. identify three kinds of environmental effects. First. liberalization generally leads to an increase in the scale of activity. resulting in an increase in resource use (or pollution) for a given composition of output. Second. liberalization and its induced relative price changes lead to changes in the composition of output. If a country h<L'> a comparative advantage in less pollution- or resource-intensive activities. liberalization will increase the share of environment-friendly products-and. vice versa. a counlry that specializes in pollution- or resource-intensive products. Third. liberalization typically induces changes in the techniques of production. In a developing country. technique!l are likely to become friendlier to the environment with trade liberalization!! to the extent that comparative advantage generally lies in labor-intensive (i.e .. generally cleaner) production; foreign products transfer more modem environmentally efficiem technologies: income levels rise, increasing the demand and ability to pay for a cleaner environment.<�

A number or empirical studie� sugge!>t that in practice trade liberalization improves. instead of harm�. the environment. Where the environmental effects are adverse. the primary cause is not trade liberalization but the failure of market<; and governments to price environmental resources appropriately. Some evidence from studies dealing with agriculture and industry is presented below.

Agriculture

In a survey of the literature on environmental implications of agricu ltural trade policies. Runge ( 1993) concluded that many of the environmental problems associated with agriculture stem from the same policies that result in trade distortions. In industrial countries. selected agricultural commodities are granted price sup-

6Sec Bhagwati and Rama\wami ( 196:1): John,on ( llJ65). 7Sec GATT (1992). �sec Low (!992b): Grossman and Krueger< 1991 ). '1Sec World Bani.. (1992). llowcvcr. 'ome environmental prob

lem� are ob�crved to get wor�c as income� rise. but thi� ncgauve link c an be broken through appropnatc national and International policies.

81

port!> and trade protection, as well as subsidies for water. fertilizer-;. and pesticides. These policies result in reduced crop variety. chemical pollution. soil erosion and depletion. and pollution of water supplies. In developing countries, where agriculture is often taxed rather than subsidized. low prices induce poor farmers to cultivate marginal land�. The policy bias against agriculture i!l in some cases partly offset by generous subsidies for fertilizers and pesticides, resulting in soil erosion and intensive chemical use. to To the extent that liberalization is accompanied by reduced input subsidies and results in reduced marginal cultivation by the rural poor a� commercial agriculture expands. there would be environmental benefits.

Anderson (1992a) shows that protection shirts agricultural production from efficient producers in lowincome countries to inefficient producer<; in highincome countries. ln turn. this is likely 10 cause more environmental damage because of the greater use of chemical fertilizers and pesticides in the latter. Anderson abo presents evidence suggesting that variations in agricultural output in developing countries in response to price changes (induced by trade liberalization or otherwise} are primarily via changes in capital and labor use rather than via changes in quantity of land used.1 1 so I hat the loss of forests due to trade liberalization may not be a serious problem.t2 Although agricultural production expands. resources might be diverted from smokestack manufacturing or mining activities. Further. some of the rural poor and urban unemployed may be absorbed into commercial agriculture, reducing pressures on marginal lands and 1he urban environment.

Pearce and Warford (1993) noted that various agricultural crops have differing implication� for soil �lability. For example. in a country that has a comparative advantage in a less soil-erosive crop, liberalization can be beneficial. Further. numerous internationally traded crops that can be beneficial for soil stability have suffered from adverse terms of trade effects or the antiexport bias of government policies (e.g .. coffee. cocoa. and tea). On the other hand, certain commodities beneriLing from special trade arrangements can be environmentally damaging. such as cattle and other crops (maize. cassava. and groundnuts); under a preferential trade agreemem with Botswana. the European Union (EU) imports a guaranteed quantity of lean, grass-fed beef at prices above world levels-the result ha� been a doubling of rangeland in the period 1964-84. over-

lUEvidcnce of pe�tic1dc ,ubsiclic� in developing countrie� �� docu· mcntecl in Repetto (19H5).

11See below for counterexample�. 1-'AccorciJng to Anderson (1992b). studie� for Brat.il and Argen

tina 'how that the cla,ticlly of land usc with rc,pcct to change' in price<. of agricult uml product ... even in the long. run. i' \mall <tnd much �mailer than the relevant ela�ticity for labor. capital. and input u�e. For Argentina. the relevant elasticity for land wa\ 0.1:?. anti O.:?.J <tfter five and ten yean •. n:�pectively.


V TRADE AND THE ENVIRONMENT

grazing on marginal land�. and competition with indigenou� wildlife.

Some -;tudies have analyzed the adverse effects of trade liberalization. For Ghana. Lopez (1993) analyzed a model that included the quantity of biomass on village-owned fallow land as an input in an agricultural production function. A positive relationship between the amount or cultivated land and agricultural output prices was estimated. indicating a negative relationship between agricultural prices and the quantity of biomass factor services. This means there is a trade-off between the direct increase in output from extending the margin of cultivation and the decrease in agricultural productivity from the reduction in tJ1e use of the environmental (biomass) resource. Lopez also estimated that the productivity effects of a reduction in biomass more than offset the output gain from extending the margin of cultivation. He went on to estimate the effects of a decrease in agricultural export taxes and a decrease in indu-;trial tariffc; and concluded that real income declines in each case. becau-;e of a worsening of the environmental distortion associated with increased exploitation of the biomass.

In relation to forest depletion. Braga ( 1992) analyted Indonesia\ log export ban aimed at cunailing deforestation. Its effects may have been panially offset. because the resulting fall in domestic log prices provided a subsidy to the downstream wood-processing induwy ( fumiturc and production of low-grade plywood from high-grade timber). thereby increasing the demand for logs. Given tl1e low efficiency of this industry, the adverse environmental consequences of the subsidy implicit in the ban were significant. These could have been avoided had the export han been replaced by the approprime domestic policy instrument-an equivalent production tax-which would have avoided the subsidization of the local processing industry.'�

Industry

In the industrial sector. too. a po<;itive con·elation has been observed between openness and environmental quality. Birdsall and Wheeler ( 1992) examined whether free trade in Latin America was hannful to the environment by regressing changes in pollution intensity on various "gravity'' variables and an openness index. The evidence suggested a negative relation between openness and pollution-intensive growth. Lucas, Wheeler. and HeLLige ( 1992). using pooled crosssectional time series data. observed that pollution and resource intensity increased more rapidly in closed economies than in open one!>. The scope of the above -;tudies was limited. however, to an examination of changes in pollution intensity due solely to changes in

1 'Braga reported that if the loc.:<tl proce��lllg indu�tr) were operatmg under realistic pnce �•gnals instead of being subsidized by the e.� port ban. annualtimber hnrve�ts would be 10 perccntle�'·

82

the composition of output. rather than changes in its <>c<tle or production techn iques.

A number of <>tudies have assigned an important role to the effects of openness in inducing the adoption and diffusion of clean technology. For example. Wheeler and Martin (1992) studied the wood pulp industry, and Birdsall and Wheeler ( 1992) examined the experience of Chile. Wheeler and Martin (1993) demonstrated that liberalization in Indonesia in IJ1e 1980� promoted a surge in cleaner. assembly-based industries and a move away from more pollution-intensive processing sectors. In addition, industry expanded rapidly away from densely populated areas. reducing the adverse health impact of indu�trial concentration.

Feenstra (1985) '>howed that voluntary export restraints (VERs) on Japanese automobiles in the 198Ch resulted in "quality upgrading, .. shifting the composition of Japanese exports to the United States to larger. Jess fuel-efficient car<;. Thus, while protection restrained car purchases in the United States (relative to what would otherwise have been the case), the shift to imports of larger cars resulted in more carbon dioxide per car imported. The net effect of the VERs could well have been greater environmental damage.

Environment and Competitiveness

Implications of Differential Standards

Differences in domestic environmental standards have recently featured in the trade-environment debate. Some are concerned IJ1at lower environmental -.tandards, particularly related to production processe:-. and methods, in developing and transition economics confer "unfair" advantage in trade and induce shifts in investment (the "pollution-haven ·· hypothesis). Another aspect of this view is that the competitive advmuagc conferred by lower standards abroad puts pressure on all countries to lower their own standard!> in order to remain competitive. These concerns have generated political pressures in '>Ome industrial countries to offset the so-called "unfair'' advantage by raising <;tanclards world-wide (through greater ham10nization) or by trade restrictive action (countervailing duties against ..ceo-dumping··). A number of countries are concerned that strict or demanding standards may act as disguised barrier� to trade and have sought to discipline their use in the Uruguay Round agreements on Technical Barriers to Trade and Sanitary and Phytosanitary Measures (Box 1).

On the other hand. developing countries have argued that despite a shared concern for the environment, there may be internal ional variations in environmental standards, reflecting many factors-for example, different capacities to assimilate pollution. different costs and benel'its associated witl1 a given amount of pollution



Box I. GATT/WTO Rules and the Environment

Under the GAIT's national treatment rule, countries have lhe freedom to take any environmental meac;uretaxes. charges. standards. and so on-against imported products a� long as equivalent measures are in place in respect of domestically produced products. Jn such cases, restrictions against imported products can be imposed as a means of enforcing a nondiscriminatory environmental measure. Thus, governments can employ many different measure� to protect and improve the local environment. Sales taxes on products that can create pollution (those containing chlorofluorocarbons. for example), deposit refund schemes for recyclable waste (bottles, scrap cars), or favorable tax treatment of environmentally friendly products (lead-free gasoline, solar panels for home heating) and other nondiscriminatory measures would not normally be open to challenge. Similarly. export restrictions can be maintained provided there are equivalent restrictions on the domestic sale of the same goods.

The national treatmemrule does not apply, however, to processes or production methods that have no effect on the product as such; in other words. this rule cannot be invoked to impose restrictions on imports of goods whose manufacture uses processes different from those used in the manufacture of similar domestically produced goods. Similarly. under the GAIT's border adjustment rule. any tax on domestic products (e.g .. an excise tax). levied for environmental reason�. can also be levied on imports. But a domestic process tax (e.g .. a tax on fuel use) cannot be levied on imports.

In certain cases, even a measure taken for environmental protection (which would otherwise contravene GAIT's nondiscrimination rule), may be pennitted under Article XX of the GATT. The narrowly defined exceptions in Article XX penn it a Contracting Party to discriminate or to take trade restrictive actions to achjeve health. safety. or domestic-resource-conservation goals. but only

abatement and control activity, I-I and di ffcrent environmental priorities.':; As long as environmental problems are confined within national borders. differences in environmental standards may be economically efficient. in which case they should not be the basi<; for denial of the opportunity to trade.' h

1•For example. even if all counlries adopted 1he polluler-pay� principle-that i�. thai the polluter 'houlcl hear I he co� I of mcawrc' to reduce pollution-the detcm1ination of the Clht Wlluld \!ill entail \Omc valuation oft he pollution. which could vary across countne,.

1'See GATI ( 1992). While I he weight given to allaming environ· mental :md other ohj.:clivc� (�uch a� poverly reduction) could val) wuh the level of income. so too could the weight accorded to differell! environmental prohlclll\. for example. �;mnation. clean water. and air pollution.

11•See Bhagwati! 199JJ and! 1994), and World Bank (1992). ln1he conli!xl of environmental policy. an important di�tinc1ion arises hetween product \tandarcb and \landard' relating to production procc-,�es and methods. With regard to the former (which generally ad· drcs' cnvironmenwl exl\.:malitie-, in consumption). :111d C(lll'i'tt:nt wilh GATI rule�. countries can impose the \ame -,tandard� on im-

83

when certain conditions are fulfilled. fn general. these conditions ensure that a trade measure is necessary for lhe achievement of such goals-and that these goals are not used in order to reduce competition from imports.

While lhe above relates ro whether trade measures taken for environmental reasons can discriminate against import�. the future WTO will also regulate technical regulations and other regulations taken for health, safety. or environmental reasons (in the agreements on Teclmical Barriers to Trade and on Sanitary and Phytosanitary Measures) that do not apparently discriminate against imports; lhe objective in such cases is to ensure that environmentally motivated measures do not become obstacles to trade. The guiding principle is that regulations adopted in confonnity with international standard<: would be deemed to be consistent with WTO ntles. Any deviation in the fonn of higher or tighter standards are ali>o allowed provided these can be scientifically justified and are necessary to achieve legitimate objectives.

The Uruguay Round also specifies that subsidies provided for the adaptation of existing facilities to new environmental requirements cannot be countervailed by a partner country: the proviso is that such subsidies should be of a nonrecurring nature. limited to 20 percent of the cost of adaptation. not cover rcplacemenl and operating costs of investment. and be available to all finns that can adopt the new process or equipment. The Uruguay Round agreement on subsidies and cow1tervailing measures docs not sanction coumcrvailing duties again�t products from countries wtth environmental standards lower than those in importing countries. but this issue is likely to be raised in the post-Uruguay Round work program. The Uruguay Round agreement on agriculture exempts paymellls made to fanners under government environmental or conservation programs from the general requirements to reduce subsidies.

Developing countries have further argued that attempt:> to offset these differences through trade restrictions (I) lead to protect ion of dome�t ic industries and reduce market acce<.,s for them. depriving them of the benclit<; or trade; {2) risk going down a "-;lippcry

poncd produc1� as tho,c on domc,uc product\ (Box I l. l lowcvcr. 111 relation ro pro<lurunn procc��c' and method\ that arc not related 10 the produc1 :1� \U<:b (\\ hich generally ;�ddre" pmduruon externalllies), mullllmcral rule' do not pcm1it a coumry ro �11pulate wha1 production pn>ec\\c� and mclhod' \hould be followed m anmher country, nor 10 1mpo'e trade rcMriction; againSI impon� produced U\111!,! producuon pmce\'-C' nnd mer hod\ difft:rent from those used dome,llcally Whether differences acro'� coun1ric' in production procc\sc� and method' should be allowed to prevail or he hannoni/Cd IS likely to he a key i-,sue 1n 1he post-Uruguay Rounrl agenda. There arc aJ,u im:reasing pres\urc' in indu\1 rial countries to U\C trade rc'>triction' again\t proccloscs that do not creme environmental extcrnaliues m producuon. hut which arc considered ohject ionahlc on ethical or moral ground\ (lhe lUna-dolphin ca\c wa' an rJiu,tration llflhi' view).


V TRADE AND THE ENVIRONMENT

'>lope ..

on �hich any difference between countries (on labor \tandard-.. human right\) would be legitimate ground'> for takmg unilateral trade re<,trictive action: and (3) divert altention from the <,earch for more appropnate <,OIUtiOn'>. 17

Empirical E' idcncc

In addition to clarifying the conceptual and policy i!>sue� .,urrounding the competitive effects of differential environmental !>tandard�. it i� important to con�ider the likely empirical magnitudes of 'lome of these effects.1x The available empirical evidence indicates that differences in standard\ arc not -;ubstantial in their cost implications and hence do not have a significant impact in motivating trade or investment flows.

Trade l�[fects Gros�man and Krueger ( 1991) examined the effects

of NAFfA on Mexico\ e1w1romnent: they concluded that traditional dcterminanh of trade and inve<,tment patterns (um.killed labor in the case of Mexico) explained 'vte.\ican <,pecwlitation. and the alleged comparative advantage created b) lax pollution controls there played no -,ub�o,tantial role. Tobe) (1990) found that Mrict environmental regulations imposed in the 1960" and 1970'> by industrial countrie'> did not mea-;urably affect trade patterns in the most-polluting industries (defined a'> those for which direct and indirect abatement costs account lor greater 1 han 1.85 percent of total cost\). The moM-polluting industry-chemicalsfaced abatement cost� that were les� than 3 percent.

Low ( 1992c) examined co�ts for firmc, to comply with U.S. domestic environmental standard�. Available data sugge..,tcd that pollution abatement and control cost� to U.S. firm!-. arc �mall. The weighted average ratio of such cost� to output wu� only ab�ut Y2 of I percent in 1988. The highest ratio for a single industry was just over 3 percent. Based on a legislative proposal before the U.S. Senate in 1992. Low estimated the trade effect of a "pollution abatement and control equalization .. tax on impom entering the United State-.. Even under the unrealistic ac,sumption that Mexican indu\try incurred no abatement and control co.,ts at all. and that Mexican exports were therefore liable for the full equalization tax. the trade dfcch of ... uch a meac,ure were ec,timated to be �mall.

17Scc Suhr.lmaman ( 191J:! ), For C\amph:. if a 'llCICI) limh anmher \OCiCI) ·, mc1hod., ol prcpilrmg I(K>d c1h1call) ollen.,•vc. 11 ma) be more appropn:uc ICl organuc :1 pn,alc con,umcr l>oycou ollhc taller\ produch or 10 encourage 1he u'c ollahellng rcqutrernem' r.uher lhan 1mposmg lradc h;m' (13ha!.!''illl ( 19\1�11.

IXAn 1mpor1an1 ca\'Cill tn nlllc '' 1ha1 mn'l \ludic' 1ha1 make wuhm-111du,1ry. cro"·COUOII) cmnp.tmnn' of pollulion :•h:uemenl CO'>IS deal with ab,olulc ra1hcr I han comparauve advamagc: \uch cnmpamon\ \hould llu:rclnrc be ln.'<llcd wuh cauuon m c.�plaining 1n1dc llow' CBhagwall ( 199-1)).

84

Sor<.<1 ( 1994) found hulc ev1dence of a relation�hip between environmental expenditurcc., and trade in em ironmcntall) .,en.,itive goo<h-defined as the -.ector-. \\lth the h1ghc.,t pollution abatement co ... ts in the United State., in 1988 (e.g .. pulp and paper. petroleum product<;. chemicals). lndu'>trial countries have maintained competitivenes-. in these goods. according to indices of revealed comparative advantage. Though environmental expenditures in Au�tria and Finland have increa�ed. -.o have their world -.hare-. of exports of environmentally sen�itive goods. While Gem1any. Sweden. and the United State., were -.ucce�'-.ful in maintaining competitivenc!>s in thc<;c good� despite increased expenditures. Japan ha., shifted out of these industrie�. mos1 likely because of increased energy prices.

Richardson (1993) examined the effects of environmcnral costs on U.S. �o,ccloral export performance across -;tates. Export data were regressed on various factor endowment., and measure., of export disincentive<;, including '>tate pollution abatement costs. States with higher pollution abatement controls were not found to <.,ufTer lower export performance. Robison (1988> eslimatcd the effect., of a I percent increase in environmental control cost-, on the U.S. trade balance (without takmg account of the varict) of general equilibrium effect'> rc-.ulting from the relative price changes). The e�o,umated net reduction in the trade balance for 1977 wa-. I c.,., than I percent of total L' .S. trade.

flli'C\(IIICil( h'f{ttl.\

Support for the pollution-haven hypothec,b could be found if firms that locate in low-income countrie<; are "dirtier" than they would be if they located in industrial coumrie .... A>:-. discussed in Birdsall and Wheeler (1992) and Wheeler and Martin (1992) (based on evidence from Lalin America), there are reasons why finm mighl wish to c-;chew lhis '>trategy even if it appeared that difTcrential environmental regulation offered a competitive advantage. These factors include fear of liability in the event of an environmental accident. the ris� to a firm\ reputation from an environmenial scandal. the cosh of unbundling technology. the demand., ol con!>umcr., ("green consumerism··) in export market'>. anticipation of more '>Lringent local environmental '>tandar(J... in the future. and the relative!\ high co._,t., of rctroliuing agmg capital equipment ��-;tead ol'>tartmg out\\ ith .. top-of-the-line·· technolog). All the�o,e con'>idcrauons would act a-; di'>mcentive� if firm'> were tempted to differentiate production proces.,e-. and technique-. according to location.

Leonard ( 1988) examined the ··pollution-haven·· h)pothe\1., in foreign direct inve-,tment deci'>IOn� in Ireland. Spain. Mex1co. and Romania. and found that pollution control co<.,t<., were not "ub-,tantial enough to alter the investment decision� of multilateral e;terprise�. Grossman and Kru�.:ger (1991) obtained similar results for U.S. investment in Mexico.



A recent paper by Harrison and Eskcland (1994). based on detailed plant-level studies of four countries (Cote d'lvoire. Mexico. Morocco, and Venezuela) found no evidence that foreign investors invest in more polluting sectors. Further. they found that foreign in-

85

vcstors were more efficient in their energy use than their local competitor<>. Both these findings, although not arguing directly against the pollution haven hypothesis. suggest that environmental standards arc not crucial determinants of investment decisions.


Bibliography

Andcr�on. K. ( 1 992a), "Agricultural Trade Liherali;ation and the Environment: A Global Pcr�pective,

.. World

Economy, Vol. l5. No. I (January 1992). pp. 153-74. --- (1992b). ·'The Standard Welfare Economic� of Poli

cie� Affecting Trade and the Environment," in The Greening nfWorldTrade Issues. ed. by K. Anderson and R. Blackhur�t {New York: llarvcster Wheat!>hcaf. 1992), pp. 25-48.

Bhagwati, J., ··Trade and the Environment: The False Contlict'?" Bradley Lecture (Washington. 1993).

---. "Free Trade: Old and New Challenges ... The Emnomic Joumal. Vol. 104. No. 423 ( March 1994}. pp. 231-46.

---. and V.K. Ramaswami. "Dome�tic Distortion:.. Tariffs. and the Theory of Optimum Subsidy, .. }oumal of Political Economy, Vol. 71, No. I (February 1963), pp. 44-50.

Bird�all. .• and D. Wheeler. "Trade Policy and Industrial Pollution in Latin America: Where Are the Pollution Havens?'' in International Trade and the Enl'imnmem. ed. by P. Low. World Bani- Di1>cus�ion Paper� 159 (Washington: The World Bank. 1992). pp. l59-6K

Blackhurst. R .. and A. Subramanian, .. Promoting Multilateral Cooperation on the Environment .

.. in Tile Green

ing of World Trade Issues. cd. by K. Ander!>On and R. Blackhur�t ( ew York: Harve),ter Wheat),heaf, 1992). pp. 247-68.

Braga, C.A.P .. ·'Tropical Fore.\t)o and Trade Policy: 1l1e Case of Indonesia and Brazil.'' in 111/emationa/ Trade and the En''ironmem. ed. by P. Low. World Bank Discussion Papers 159 (Wa!-.hington: The World Bani-.. 1992), pp. 173-94.

Feenstra. R.C .. "Automobile Prices and Protection: The U.S.-Japan Trade Rel>traint ... .lou mal of Policy Moc/e/1-'"K· Vol. 7. No. I (19R5). pp. 49-61<.

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Grossman. G.M., and A. Krueger. "Environmental Impact:-. of a North American Free Trade Agreement.

.. ational

Bureau of Economic Rc�carch Working Paper. o. 3914 {Cambridge. Massachusell:-.: NBER. 1991).

1-larri�on. A. E .. and G.S. Eskelund, ·'Multinationals and the Pollution-Haven Hypothesis .. (unpubli�hed. Wa.,hington: The World Bani-, May 1994).

Johnson. Harry G .. ··Optimal Trade Intervention in the P resence or Domestic Di\tOrtion� • . • in Trade. Grow/It, £11{(/ the Balance of Payments. Essays in llonnr ofCottji·ied 1-/aherler. ed. by Robert E. Baldwin. and other� (Chicago: Rand McNally. 1965). pp. 3-34.

Leonard. J.. Pollution and the Slnif�glc for I he World Product (New York: Cambridge University Press. l98X}.

Lopez, R., "Economywidc Policies, Agricultural Productivity. and Environmental Factor�: The Case of Ghana .

.

(unpublished. Washington: The World Bank. 1993}.

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Low. P. ( 1992a), ed., lntemational Trade and the Em•imnmellt. World Bank Discussion Papers 159 <Washington: The World Bank. 19921.

--- (1992b), "International Trade and the Environment: An Overview," in fnlernational Trade and tlte Em·ironmellt, ed. hy P. Low, World Bank Di�cussion Paper-, 159 (Washington: The World Bank. 1992). pp. 1-14.

--- ( 1992c). "Trade Mea�ures and Environmental Quality: The Implication:. for Mexico·� Exports:· in Imemallmwl Trade and the Em•ironmenl. eel. by P. Low. World Hank Discussion Papers 159 (Washington: The World Bank. 1992). pp. 105-20.

Lucas. R.E.B .. D. Wheeler. and H. Hcuige. "Economic Development. Environmental Regulation, and the International Migration of Toxic Industrial Pollution: 1960-88." in l11temational Trade and the Em·ironment. ed. by P. Low. World Bank Discussion Paper� 159 (Washington: The World Bank, 1992). pp. 67-86.

Pearce. D. W.. and J .J. Warford. World Without E11d: Emnomic.\. Enl'ironme111. and Su.1 wi noble De1·elopment (New Yorl-.: Oxford Univerl>ity Press for the World Bank, 1993).

Repeno, R .. ··Paying the Price: Pesticide Subsidiel> in Developing Countrie\:· Re\earch Report 2 ( W:I\hington: World Rc�ources lnstilllte. 1985).

Richard ... on. J.D., Si:ing Up U.S. £.\port Disincentil·e.\ (Washington: Institute for International Economics, 1993).

Robi'>on, H.D .. " lndu\trial Pollution Abatement: The Impact on the Balance of Trade.'' Canadian Joumal of Eco-1/rllllic.\, Vol. 21 (February 19R8). pp. IR7-99.

Runge. C. F.. ''Trade Liberalization and Environmental Quality in Agricullllre, .. lntrmational Enl'irrmmental A./fairs. Vol. 5. No. 2 ( 1993). pp. 95-l2�t

Sorsa, P .. "Competitivent:s� and Environmental Standards: Some Exploratory Result-;.'' Policy Re�earch Working Paper 1249 (Washington: The World Bank. February 1994).

Subramanian. A.. ''Trade Mea,ures for the Environment: A Nearly Empty Box,

.. World Economy, Vol. 15. 1 o. I

( !992). pp. 135-52. Tobey. J., "The Effects of Dome�tic Environmemal Policies

on Patterns or World Trade: An Empirical Test. ..

Kyklos, Vol . 43, No. 2 ( 1990), pp. 19 1-209. Uimoncn. P .. and J. Whalley. ·'Trade and the Environment:

Selling the Rules" (unpublished. WashingtOn: International Monetary Fund, 1994).

Wheeler, D .. and P. Ma11in, "Prices, Policies. and the International Dirfusion of Clean Technology: The Ca-;e of Wood Pulp Production." in lmemational Trade and the Eni'II'OIImenl. ed. by P. Low, World Bank Discu�sion Papers 159 (Wa�hington: The World Bank. 1992). pp. 197-224.


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---. .. National Economic Policy and Industrial Pollution: The Case for Indonesia. 1975-R9"' (unpubl i�hcd. Washington: The World Bank, l993).

87

World Bank, \Vor/d Del'elopment Report. /992 (Washington: The World Bani-... 1992).


VI Regional Trading A rrangements

Rirhard 1-larmsen and Michuel Leidy'

R egional trading arrangements:! have become increasingly important in the relation� among Fund

member'i. This paper reviews recent developments in regional trading arrangemcms, factors comributing to their proliferat ion. and the effects of increased regionalism including its compatibility with mull ilaleral libcralization. Thi:-. i:-. supported by a comprehensive catalog of exi'iting arrangements (in Appendix I) . Two of the most prominent regional initiatives. the European Union (EU)3 and the North American Free Trade Agreement (NAFTA), are reviewed in some detail. Selected agreements are examined briefly in Appendices II-IX (the EU's trading relation:. with transition and MediteiTanean economic!>, the Southern Cone Common Market ( MFRCOSUR), the Central African Cuo;toms and Economic Union (UDEAC). the Cro'\sBorder Initiative (CBI). the ASEAN Free Trade Area (AFTA ). the Asia-Pacific Economic Cooperation Forum (APEC). the Gulf Cooperation Council (GCC), and the Economic Cooperation Organization (ECO)). Appendix X provide!> information in intra- and extraregional trade flows.

The key conclusions or the paper arc as follows: • Since the second half of the 1980s, some impor

tant new regional trading arrangements emerged. and many others were reactivated, in particular in Europe and the Western Hemisphere. The trend toward increased regional integration was due partly to fru<>tration with slow progress in the Uruguay Round. but factors beyond the Round appear to have played an important role. While the completion of the Round may lessen some of the impetus toward regionalism, indications are that interest will remain strong in the future.

• As regionalism emerges as an integral part of the trading environment. it should not be allowed to divert allention from the fact that the first-best pol icy i� mostfavored-nation (MF ) liberalization. and the ultimate goal is global free trade. Hence. it ic;; important that regional initiatives be implement-ed in a manner that would harness them securely to the long-run goal of

1The pnncipal au1hon. of th1s paper. Climon Sh1clb prepared the �ec1ion on NAFTA; Rosa Alonso i fenne. Ali lbmhim. tlll<.l Manmohan Agarwal prepared most of t he appcndiceo,.

2As u�ed 111 1his paper. 1he 1enn "regional trading arrangement.., ..

need no1 imply geographic proximity ofmember coumric,. 'The European Union (EU), which came into cffccl in 1993. b

U$ed in this paper to also refer w t h e European Cornmunuy.

88

multilateral liberalization and that regional trading arrangement:. develop a:. "building bloch" to such liberalit.ation. The Fund\ policy advice should actively -.upporl c;uch an objective.

• Regional trading arrangement!> are most likely to contribute to global trade liberalization and minimi;.:e trade diversion if they satisfy a number of conditions. These include coverage of all sector<; (without exception). transparent rule!> of origin. liberal rules of accesc;ion. and strengthened disciplines on the u<>e of antidumping action against third parties. Most important, MFN liberalization should precede or accompany new arrangements. e!>pecially when protection against nonmembers is high. Deeper fonns of integration (including. e.g .. services trade) can enhance potential gains from efficient re!>ource allocation within the regional grouping.

• Many of the major regional initiatives in the recent past have been associated with outward orientation, as evidenced. for example. by MFN liberalization that preceded or accompanied regional liberalization.

• Measured by the scope of integration and the number or countries involved. the EU is the most advanced regional trading arrangement; some of the forces behind its integration are unique and not easily replicated. In the rmmufacturcd goods sector, there has been substantial net trade creation in the aggregate as a result of European integration. Earlier concerns by u·ading partncr!) or "Fortrcs� Europe" as a result or the Internal Market Program have not materialized. onetheles�. pockets of discrimination continue within the manufacturing sector. where trade diver'>ion ha!> affected <,pecific sectors and countries and the level of industrial o;ubsidics is high. ln the agricultural sector. trade diversion effects were clearly predominant as a result of the Common Agriculture Policy, with significant negative impl ications for welfare in the EU and third countries. Given the major impact of the EU on the world economy. and prospects for it� further expansion. the Fund need:. to continue to press for liberalization in areas �till subject to significant protection.

• NAFTA is unique in that it attempts integration among economies at very different income level!>. While the potential for trade diver�ion in the aggregate as a result of N AFTA appears to be limited, there may be significant effects in c;clcctcd sector<> or individual countries.


Overview of Recent Developments and Issues


Regional trading arrangements come in a variety of packages. with varying degrees of internal liberalization and alternative external commitment<; (Box I) . Thi" section <;ummariLes the recc111 interest in pursuing regional trading arrangements. discusses the political and economic factors that motivated these initiative�. reviews the theoretical considerations that help to evaluate their economic effects, and identifies a number of specific guidelines for the fonnation of economically preferred regional trading arrangements.

Recent Developments in Regional Trading Arrangements

During the first half of the 1990s, some important new regional trading arrangements emerged, and many existing ones were reactivated (Appendix 1). In E11mpe. developments were many and rapid. Progressive implementation of the Internal Market Program aimed to stimulate expansion of trade and growth within Europe. The European Economic Area (EEA) was fonned between the EU and Austria, Finland. Iceland. Liechtenstein, Norway, and Sweden:� Of these, Au:-.tria. Finland. Norway. and Sweden completed negotiations for their accession to the EU and are expected to accede in 1995 if their governments pass referendums. The EU entered into association agreements with several Central and East European countries, cooperation and partner-;hip agreements with c;everal countries of the former Soviet Union. free trade agreement'> with the Bultic countries. and a customs union with Turkey; it is in the process of negotiating agreements with <>ome Mediterranean countries (Appendix II). Central and East European countries are negotiating similar agreements with the European Free Trade Association ( EFTA): the Czech and Slovak Republics fom1ed a customs union and concluded a free trade agreement with Hungary and Poland: Hungary and Poland have applied for EU membership. The Baltic countries concluded a free trade agreement among themselves. The Commonwealth of Independent States (CIS) agreed to fonn an economic union.�

In the Western Hemisphere, too. the trend toward regional trading arrangements accelerated. Jn addition to

AFTA. a substantial number of new arrangements were fonned. most notably MERCOSUR (Appendix fli).

•1Partic� to the agreemelll will lwve virtually complete accc�� to each other's market• for manufactured good�. �ervice\. capital. and labor. Also, non·EU panic' accept all the exi�ting EU rule� and legislation (except those pertaining to the Common Agricultural Policy and the Common Fi�heries Policy) and make certain financial contribution•.

�Prior to ih derni�e 111 1991. twdc relation' among Central and East European countrie' and the fom1er Soviet Union were conducted under the au,pices of the Council for Mutual Economic A\sistance !CMEAJ: other member� of the Iauer included Cuha. Mon· golia. and Viet Nam.

89

and cxi'>ting regional integration '>chemes. 'iuch a" the Andean Pact and the Central American Common Market (CACM). were revived. Many of the new arrangements tended to be bilateral. in most cases taking the fonn of free trade agreemems. and were typically fonned by countrie:-. already in one or more regional trading an·angcmcnt.6 A number of countries (Colombia and Venezuela. for ino;tance) recently formed trade partner<,hip� with ... everal other countries. Additional agreement� arc under negotiation (e.g., those of the Group of Three-Colombia. Mexico, and Venezuela: the Caribbean Community (CARICOM) and Colombia: and the C\Rtcovt and Venezuela). A number of countries in Latin America have expressed interest in acceding to the NAFTA. Within the set of existing arrangernems recently revitalized, the Andean Pact and the CACM agreed on a common external tariff. and the CARICOM became more active.

While there wa� not much change in the statu� of the many long-standing regional trading arrangements in A{rica. there were -;orne new developments toward greater integration. With the recent devaluation of the CFA franc. the Central African Customs and Economic Union (UDEAC-scc Appendix IV) moved forward on a number of front-;, including implementation of a common external tariff, replacement of quantitative restrictions CQRs) with tariffs. and phased elimination of intra-UDEAC dutie�. In eastern and southern Africa. there i� a new Cros�-Border initiative tCBI) (Appendix V). spon�ored by the World Bank, the European Commission, the African Development Bank, and the Fund. The CBI i<. intended a� a pragmatic step toward economic integration in the o;ubregion. including cros<;border trade, investment. payments and exchange sy-;tems. and institutional development.

Economic integration in East Asia principaiJy rcllected private market forces; institutional arrangements tended to play more of a �upporting than a leading role. Recent development� include the establishment of the ASEAN Free Trade Agreement ( AFTA > (Appendix VI). and increased activity within the A'>iaPacific Economic Cooperation (APEC) forum (Appendix VII). Elsewhere in A<iia, a decision wa� reached in 1992 to drai'L a preferential trading arrangement for the South Asian Association for Regional Cooperation (SAARC) with the recommendation that all formalities for pulling this arrangement into operation, including the finalization of schedules of concessions, be completed before 1995.7

1'New ammgcmcnt� mclude the free trade agreement� of Mexico and Chtle (1991). Chtlc and Venc;ucla (199J). Chile and Colombia { 1993 ). Colomhia and Venc.wcla ( 1992). El Salvador and Guatemala (1991). Mt.-Rc-ostr� (1991). Mexico and Central America (199::!). Nueva Ocotepcquc { 1()9:! ). Mexico and Co�ta Rica ! 1994 ). Thc�e arc listed in Appendix I.

7Thc contracting \tate� tncluch: Banglade�h. Bhul!ln. India. Maldtve'. Nepal. Pakt�tan. and Sri Lanka.


VI REGIONAL TRADING ARRANGEMENTS

Box 1. Types of Regional Trading A rrangements

Free Trade Area

In principle, a free trade area (FT'A) entails the full elimination of tariff and nontariff trade barriers between the partner countries, while each partner's trade barriers with third countries are left intact. Rules of origin establish conditions under which an item qualifies for preferential access within the area. Some FTAs have recently included provisions to liberalize investment rules. services trade. government procurement, and other steps to achieve greater economic integration. Typically. provisions for factor mobility are not included. except perhaps in the context of facilitating services trade. The GATT's Article XXIV (see Box 3) defines an FTA as an arrangement that eliminates duties and other restrictions on "substantially all the trade" between members. Ln practice, however, arrangements that are referred to as FTAs typically include a number of sectoral exceptions in which intraregional trade barriers remain in place (e.g., in sensitive sectors such as agriculture and textiles and clothing). Further, FTAs typically include provisions for contingent protection through, for example. one or more safeguards clauses and the maintenance of antidumping provisions.

Customs Union

A customs union is an fTA that also adopts a common external tariff against third countric!.. GATT's Article

Interest also increased in regional initiatives in the Middle East. TheGulfCooperation Council (GCC) liberalized movements of capital and labor. worked toward establishing a common external tariff. and held discussions with the EU concerning the possibility of an economic cooperation agreement (Appendix Ylll) . Ambitious plans for integration within the Arab Common Market (ACM) and the Arab Maghreb Union (AMU). both established in the 1960s, remained largely unimplemented. The Economic Cooperation Organization (ECO) made efforts to improve cooperation, and recently added as members a number of stales of the former Soviet Union (Appendix IX).

The Impetus for Regionalism

Regional trading arrangements are pursued for a variety of reasons that may differ across arrangements and across participating countrie::. with in a given arrangement. While it is not always possible to identify a single overriding motivation underlying an arrangement. several factors seem to have played key roles in the regional initiatives of the 1990s. This subsection reviews the principal factors contributing to the increase in arrangements.

90

XXIV defines a customs union essentially as a free trade area that applies ''substantially tbe same duties and other regulations of commerce" t to trade with countries not included in the union. It also requires that duties and other regulations of commerce applicable to nonmembers "shall not on the whole be higher or more restrictive than the general incidence of these prior to the formation of the union."2

Common Market

A common market is a customs union with provisions to liberalize regional factor movements.

Economic Union

An economic union is a common market with provisions for the hannonization of cenain economic policies,

particularly macroeconomic and regulatory policies. It is sometimes argued that the practical distinction between a common market and an economic union will disappear over time since factor mobility within a common market will create pressures for a high degree of policy harmonization. 3

I See GATI (1986). Article xxrv. Section S:a. 2See GAIT (1986), Article XXTV, Section S:a. 3See OECO (1993), p.23.

The Economic Effect!i of Regionalism

The prospect of enhanced economic growth (stemming from the opportunity to exploit scale economies, regional specialization and learning-by-doing, as well as atrracting investment by expanding the regional market) is a motivation that is present in virtual ly every reoional trading arrangement, between both industrial and developing countrie�. The realization of scale effects was a major consideration underlying the Internal Market Program in the EU. ln Al'rica. possibly the most important reason for regional integration is the belief that individual economies need to overcome the drawbacks of small size and limited physical and human capital, which constrain economic growth. Foroutan ( 1992), for example. identifies this consideration as the key factor underlying regional integration in subSaharan Africa.R lt is also an explicit goal or AFI'A and MERCOSUR to exploit scale economies. deepen the division or labor across the region. and attract roreign direct investment (FDI) by presenting the region as a stable and prosperous single market." The dynamic

�R.:fcrencc� 10 \Uh-Saharan Africa in 1Im papa du not include South Afnca.

''USJTC (1993h). and C:irdena' (1992).



growth effect� expected by Mexico, especially the anticipated surge in FDL were abo a key motivation for Mexican interest in NAFfA . 10

Noneconomic Objectives

Regional initiatives may be viewed as a mean-; to promote a broad range of noneconomic objective�. from enhancing regional political cohesion to variou1> foreign policy consideration�. �uch a:-. managing immigration flows and promoting regional security. The formation of the EU had strong political roots, as did the fom1ation of the Association of South East Asian Nations (ASEAN ). The desire or a number of EFfA counu·ies to join the EU was also motivated, in part. by noneconomic objectives. MERCOSUR is perceived as a mean<. of fostering cooperation between its member state!>.1 1 In Africa and the Middle East, regional trading arrangements have been motivated by -;imilar cooperative impul<;es.1:! The promotion of political and economic stabilization and control of immigration flow'> were also important elements underlying both AFfA and the association agreements of the EU with East European countries. u

Reasons Related to Uruguay Round

The Uruguay Round played an imponant role in fo'itering interest in regional trading arrangements. Regionalism was sometimes perceived as an allemative to multilateral trade liberalization under the Uruguay Round in view of its <;)ow progress. In other cases. it rellected a desire to strengthen negotiating positiom in the Round and in the imernational trading c;ystem a\ a whole. One or both of these elements were present in the fom1ation of regional arrangements in onh America. South Ea-;t Asia. and most of those in Latin America. 14

Regional "Safe Havens"

Regional mitiative\ at tin1es have been viewed as an instrument to pre-empt future restrictions on market

1t1Ramircl de Ia 0 ( 1993). and Hulbaucr and Scholl 1 19931. 1 1Cardcnas ( 1 992) view' 1he noneconomic goal of s1reng1hcning

polilicat r.:lation� among I he member' of MER<"O�l R a'> ver:r impor· Iaili in ih motivation.

I!See. for m'iance, Forouran ·, descnpuon of !he 1mponance ot cuhural lie� and in�titulion' dating bad. to colonial lime'> in influencing !he 'hape ot reg1onali�m 111 sub-Saharan Afnca. the poliucal con'>ideruuons in N1gena lcadmg 10 lhc EconomiC Communlly of Wc\t African Stare' ! ECOWAS ), or I he nonecQnomic go:1l of Soulh· ern African Development Coordmation Conference <SADCCJ members of les-;ening dependence on Soulh Afnca (Foroulan ( 1992)). Regarding 1he Middle Ea,t. see Fischer r 1992).

1 'Hulbaucr and Scholl ( 1993) cmpha,ize 1hc U.S. foreign policy c.limension of NAFrA. according 10 which 11 'crvc-, !he key U.S. policy objcc1ivc of enhancing 1hc pro'>pcrily and \lability of i1� neighbor to !he -.out h.

"For the impac1 of 1hc lack ot progress on I he Urugua)· Round in La11n American n:gional Lrading arrangcmenl'>. �cc Lu\lig and Braga ( 1994 ); on Sou1h East A�w. �ce de h• Torre and Kelly ( 1\192).

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acce�s-access that appeared not to be sufficiently guaranteed by emerging developments in the Roundand to help create a more stable and predictable trading environment. Smaller nations may seek such safehaven trade arrangement<. with larger countries when future market access appears uncertain. 15 Thi-; seems to have been a key element in CUSFrA, NAFfA and MF.Rcost m. It may have abo contributed to the interest of some EFfA countrie� in joining the EEA.16 1n North America, Mexico wa� partially motivated by fear of changes in U.S. trade policy toward a more "managed'' or ··c;trategic .. trade orientation . J 7 Canada\ pursuit of the CUSFfA was signiricamly motivated by a desire to discipline the use of antidumping and countervailing measures in the United States; IX this issue arose again in the context or NAFfA.

Locking in Domestic Policy Reform.�

Regional trading arrangements have been pen;eived as enhancing the prospects for sustaining domestic policy reforms. including unilateral trade liberalization, as well as fostering an environment conducive to the maintenance of macroeconomic stabilization, in particular in developing countrie.., and economic� in tran-;ition.19 This view suggests that a regional arrangement may complement and solidify domestic policy shift'> toward privatization and market-oriented reforrn. :w East European countries view their association agreement� with the EU ill> very important in enhancing and cementing their economic reforms. "Locking in" domestic reforms wa� abo a motivation of considerable importance in many Latin American initiatives. MERCOSL•R is viewed by Argentina as complementing domestic deregulation, and in Paraguay it has -;upported m<u·ket-ba-;ed policy reform and trade liberalization. Recent efforts to revive the Andean Pact and CACM are seen by member countries as an attempt to capture and lock in the outward orientation of the economic reforms initiated by individual countries during the past decade.:! 1 NAFTA was particularly attractive to the United States as a means of accelerating and encouraging domestic policy reforms in Mexico�

•�sec Sriniva�an. Whalley. and Woolen (1993). '"Sec l lindlcy and Mc,,crhn ( 19\11). nsce Nogue' and Quinwnilla 1 1991). 1HScc Wonnacoll ( 19Rh Scholl ( 19RRl. and Han 1 19R9J. •'�Up 10 I he late t9!Ws. developing coumric' tended 10 be le�' .. uc

ccs�ful 111 impl.:mcnling agrc�d regional trading ammgcmen1s compared wi1h mdu.,lri<�l o.:ounrries. For a detailed dbcus,ion of the rea'on�. 'ce de Ia Torre and Kelly r 1992 ). In bncf. de Ia Torre and Kelly 'ugge ... l lhal lhc poor implemcntalion record of developing counlric' w"' a renec1ion ol 1hc fundumcmal incllmpaubJiity bc1wccn 1he1r inward-onemcd development polic1e' and the objec1ive of reg.1onal mtcgrat1on. One mighl cxpccl an improvement in lhe implcmcnHttion recnrd of rcgionul 1rading arrangement'> ••mong developing countries in the 199Ch. a' many of Lhem have more vigorou•ty pur•ued markc1-ha�cd refomh and macroeconomic ,labiti:Lallon.

!OSee Braga 1 1994). !1Sec Nogucs and QUintanilla ( 1\191).



The Domino Effect

As new regional trading arrangements form. or existing ones expand or deepen. the opporLUnity cost of remaining mnside an runmgement rises. Nonmember exporter<; could experience costly reductions in market shares if trade is diverted to members. This may be �ufficient in some nonmember states to tip the political balance in favor of accession. as exporting interests begin to dominate import-competing interests. In turn, a� new member� join the arrangement, trade diversion from other outsiders may lead to a second round of accessions. The "domino effect. "::!2 or the anticipation o f such, appears t o have been prominent. for example. in the initiative of EFTA countries to apply for accession to the EU. East European countries were similarly interested in improving access to West European markets and in not being left out of the emerging Internal Market.

The negotiation:. between Mexico and the United States to form a free trade area (F'TA) may have started a comparable process in the Western Hemisphere. Canada ·s interest in NAFTA was strongly influenced by the potential erosion of the benefits expected from the CUSFfA were it not to join the newly emerging NAFTA.23 In a similar vein. the large number of bilateral trade arrangements between Mexico and <,eventl Latin American countrie� is viewed by Mexico\ partners as a fina step toward joining NAFTA.�4

Access to NAFTA has become an important objective of many Latin American countries as a way to correct the expected trade and investment divcr�ion toward Mexico. Finally, Paraguay and Uruguay\ interest in MERCOSUR was significantly motivated by their desire to prevent diver!>ion of trade to Argentina and Brazil.2�

Infant Industry Regionalism

Sometimes <;upport for regionalism i'> based on a regional infant industry argument. Regional trading arrangement s have often b'een pursued as a strategy to broaden and deepen domestic regional markets as a precursor to cxpo�ing regional industries to the full rigors of extraregional competition. Liberali;ration at the regional level combined with a protectionic;t commercial policy toward third countries could. in thio;; view. prepare regional industrie� eventually to compete beyond the region. This conception was behind mo�t Latin American and ::.ub-Saharan African arrangements during the 1960s and 1970s and was a regional manifestation of import-substitution industrialinttion <.trate-

��sc.: Baldwin < llJ93). 2�For a detailed analy�is of the different nmional nbtcctives lor

1AFfA. see l-lufhuucrand Schott ( 1992). NSee Lm.tig and Braga ( 1994). 2�Sec Nogucs and Quintamlla r 1992>.

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gics pursued at the national lcvel.2" It is noteworthy that those arrangements that in the past were most influenced by this perspective were also the least �ucces�ful in expanding trade and fo�tering economic growth.27 That an infant industry rationale might underly the relative failure of <;uch initiatives may rcllcct the connection between initial objectives and the precise design of an agreement. The hesitancy to embrace competition on a global level implicit in the infant industry rationale appears to have manifested itself in relatively weak commitmcnh to liberaliLe trade intemally. The regionali'>m of the 1990� is far le�s influenced by regional infant industry argument'>, although remnants of thio; view remain.

Effects of Increased Regionalism

Unlike the srrong case for unilateral and multilateral trade liberalization. economic theory offers neither unqualified support nor unqualified opposition to regional trading arrangements. whether they be free trade areas. customs unions, or deeper forms or economic: integration.�x The fact that many of the arrangements identified above fail in '>ignificant ways to satisfy textbook definitions of FTAs or custom� union-. add c., to the diiTiculty in reaching definitive conclusions. Theory docs. however, offer several general !!uidelines for assessing the welfare implicatio;s of su�h an-angements.. Their economic effects and theircompatibi lily with the multilateral trading sy�tcm arc examined below.

Static Effects

Jacob Viner\ di�tineuon between trade diversion and trade creation delineated the static tracle-offs implied by preferential moves toward free trade.�9 The tendency or regional trading arrangements to induce a shift from less efficient to more efficicm producer� within the region (trade creation), together with opporlllnities to exploit economic� of scale. imply a regional expansion in real national income. other things equal. However, the tendency of regional trading arrangements abo to induce some substitution of inefficient regional supplier-; for efficient suppliers in nonmember countries (trade diversion) tends to reduce regional national income, other things being equal ( Box� 2). 111

The real income of the regional grouping. therefore.

1"f"or the link hel\vcen 1mpon suh�tllution development \lrmegies and early Latin American regional tradmg arrang.:mcnts. \Ce Cardena� ( 1\192) and Nogu�s and Quintanilla \ 19\12).

�.,N01abl}. the Andean Pact and mo�t rcg1onal tradtng arrange· mcnt� in �ub-Saharan Arrica.

2M For dellmtion� or variou-. type� nf n::g10nal arrangement'. -.tc Box I .

�·'Sec Viner ( 1950) 10Th.: \tatic and dynarntc en·ech of regional tradtng arrangement�

ore discussed at greater length tn de Ia Torre and Kelly ( 19lJ1).


Overv1ew of Recent Developments and Issues

Box 2. Static Trade Diversion and Trade Creation: Simple Numerical Examples

The diMinction between trade diversion and trade creation in the fonnation of a customs union or other preferential trading arrangements can be illustrated with the help of sever-ell numerical examples in the Ricardian tradition. '

Opportunity Cost (at existing exchange rates) of a Single Commodity (X) in Three Regions

Coumry A B World

Opponunity cost 35 26 20

Case 1 (High MFN Tariffs). Suppose countries A and B both have an MFN tariff of 50 percent. Before the formation of the customs union. country A would be importing from the world market-the least-cost source-while country B would use domestic sources. With the formation of the customs union, country A·s imports of X would be shifted from the world market to producers in country B. Production would cxpartd in B but contract in the rest of the world. Country A had been using the world market sources at an opportunity cost of10 and following the formation of the union it uses sources from country B at 26 per unit. This is a case of trade diversion and national income is reduced both within the union and in the rest of the world. The problem of trade diversion illustrated here is due to the relatively high MFN tariff.2

Case 2 (Low MFN Tariffs). A sufficiently low MFN tariff would have eliminated this effect. Suppose, for ex-

1Thb discussion llraws on Lipsey ( 1960). 2lf a country's MFN tariff '>tructurc is prohibitively high, so

that the country is in vinual autarky. preferential liberalization would, of cour�c. improve resource allocation without divening any tntde. simply because there is no trad.: to diven. But thi� extreme case is of no pracucal imercst since it is difficult to identify any :.ingle country. let alone several, that are �ufficiently close to autarl.y to make this theoretical pos:.ibility relevant.

tench to rise when trade creation dominates trade diver� ion.� I

The incentive� for trade diversion are minimi;red when a regional trading <m-angement \ external barrier'> are low. Alternatively. high MFN tariff"> generally o;ct up greater pressure for trade diverc;ion. Regional groupings between coumrie<; that are alread) major trading partners (and have relatively open trade regimes) suggest Jess pressure for trade diver� ion, and a greater op-

"'fhe income-reoucing effect of trade diver� ion need n<ll occur when change-. in relative price'> JnJ the re-.uhing �uh!>tilution cffecb in consumpuon enter the analysi .. <Lip�ey <1960)). Bas1cally. be cau.,c the pre-union MFN tariff llistom both proJuclion nnd cun>umption, hy focu-.ing on the produc1ion effect> alone, Viner neglected the po�sib1lity 1hat eliminating the price d1Mortion w1ihn1 the union m1ght 1mprove welfare through adju�tmcnt� in con�umptiun panem>.

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ample, the MFN r.ariff h. 10 percent in both coumries A and B. Both countries would import commodity X from the world market before and after integration. Thull the MFN tariff in this case would be sufliciently low to avotd the trade diversion of Case 2.

Case 3 (Low and High MFN Tariffs). Consider the case in which MFN tariffs are quite different between the parties to a preferential trading agreement. Suppose that the pre-integration MFN tariffs are 10 percent and 40 percent in A and B. respectively. In thh. case, before integration, country A imports commodity X from the world market, but country B sources commodity X domc!>tically. If a customs union is formed. and the lower tariff is adopted by the union. trade is created between country B and the rest of the world. In this case, of course. it is the MFN liberalization in country B that produces the positive outcome. This example points to the simple observation tha.t customs unions that adopt the tariff structure of the most liberal member create additional pre:>sures for trade creation. other things equal. due to the implied MFN liberalization.

This one-commodity, constant-cost example yields certam elementary propositions about the tradediversionary effects of customs unions that apply more generally. First. countries with high trade barriers that are nevertheless integrated tnto the world economy (Case I J stand to divert more tmde than otherwise due to the extreme nature of the post-union preferences. Second, (Case 2) countries will1 low MFN tariffs stand to divert lcs� trade tl1an otherwise due to the relatively minor nature of postunion preferences. To the extent that these countries arc abo natural trading partners and were thu!> trading o;ubstantially with each other before the union. ll1c preferential trading arrangement would also create more trade than otherwise. Third, a customs union that adopts the lea.�t restrictive tariff structure of the member countnes (Case 3) is likely to create trade with the rest of the world because of the associated MFN trade liberalization.

port unity for trade creation. This is because. before regional preferences are introduced. trade flow� arc generally consi:.tent with least-co�t �ourcing. If prospective union partner" arc trading heavily with each other. it i!-. becau!>e each otTer<> lhc other the least-co'it source for a large o;et of good�. Thus the likelihood i'> reduced that a large number or items will be diverted from leastcost supplier!> outside the union to higher-cost suppliers within the union. In the ca)>e of the Canada-U.S. Free Trade Agreement. for example, MFN tariffs were already quite low in both countries. <>uggesting that pressure for trade diver-;ion was minimal. Further. each had long-established close trading tics and were naiUral trading partners. also indicating less pressure for trade diversion, while opportunities for trade creationalthough limited by the already low lariffs-were also greater than otherwise.



As a regional grouping moves from minimal trade preferences toward regional free trade. there is a tendency for the incremental regional gains from trade creation to decline while the likel ihood of trade diversion increases.n This appears to call into question the economic rationale for GAIT Article XXIV. which requires regional trading arrangements to liberalize ·'substantially all"' trade (Box 3 ); however, the GATT requirement i� compatible with the long-term goal of full multilateral liberalization and help� to preclude the kinds of partial preferential trading scheme!-> that prevailed throughout the 1930s.

An important proposition helped to clarify the potential welfare effects of customs unions. Kemp and Wan ( 1976) showed that it is alway� pos�ible 10 select a common external tariff so that the formation of a cu�toms union will have no adverse effect on nonmembers while improving the welfare of members. While Kemp and Wan o;upplied the theoretical proof that these Pareto superior-'-' customs unions could be devised. there i!-. no reason to believe that actual customs unions are devised so as to satisfy the Kemp-Wan criteria. Ncvcrthcles�. the insight of Kemp and Wan might be used to a��ess welfare effects of actual regional trading arrangements by looking at indicators or the volume of exlraregional trade. �4 In a static sense. if the volume of imports into a region is at least as great as the volume imported prior to the regional grouping, it would suggest that the Kemp-Wan criteria have been mel and that the grouping is welfare improving. JS

Other Effects

Trade liberalization may also give rise to effects that produce a sustained increase in economic growth through information transfers, increased competition. accelerated technological change. and the perception of improved investment opportunitic� . .l�> These spillover effects are occasionally cited among the reasons for puro;uing regional trading arrangements. To the extent that an arrangement stimulates regional growth. it may offset static trade diversion effects and produce an expansion of trade both inside and outside the arrange-

nsee Meade (1955). "A Pareto �uperior polic) change i� one that leave� at lea�t (utc

party bcuer off without m:tl-.ing anyone wor�c off. ��see McMillan (1993). "Thi• approach wa, \ugge�ted in McMillan ( 1993). However. 11

latl' to capture what cxtraregwnul trade mtght havt� been 111 the ab· \Cnce of regional imcgration. It mu\t thu' be regarded a' a mugh rule of thumb.

11•Recentl), a number of theorist,_ for example. l lelpman and Krugman ( 1985 ). have integrated clcmcnh of rnonopoti,tic com pet ition under increa�ing retums into tmdc theory. In tim "new" trade theory the po'ittve effect\ of trade liberalization are even more pronounced a' l'ree trade lead' to greater variety of pmduct�. incrca�ctl competition. and lower co�t�. in �ddition to the gain\ from \peciali�:ation. The welfare implicallon' of imperfect competlllon and incrca�ing rcturns for regional arrangemenh arc not clear cut. Thi' remain' an area of ongoing rc�carch.

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ment. There i�. however, the add it ion a! risk for outsider� that improved inve�tment opponunitie�. combined with restrictive or nontransparent rule'> of origin, or both. may divert direct investment flows from nonmember'>. n This effect is likely to be less <;ignificant from a worldwide per<;pective when a regional grouping maintains relatively low MFN tariffs or the grouping is economically small. Further, the stronger the convict ion that multi lateral trade I i beral ization wi II proceed apace, the les� the incentive to alter longerterm investment plans in response to current regional trading arrangements.

Regional Arrangement\' and the Multilateral Trading System

Apm1 from the above conceptual issues. an as:.cs�mcnt or the welfare errech or regional arrangement� must also consider possible policy linkage� to the process of multilateral trade liberalization. Are regional trading arrangements likely to be "building blocks" or "stumbling blocks

., to the multilateral trading 'iys

tem?1?< During the protracted Uruguay Round negotiations. there was concern in some official and academic circles that preoccupation with regional initiatives might divert attention from the multilateral trade negotiations. There was ai!.O concern that if the Uruguay Round discussion<; did not succeed, regionalism might prove to be inward looking and thus antithetical to the multilateral trading system.

H properly conceived and implemented. regional trading arrangement� can be supportive or the goal of multilateral liberalit.ation. Blackhurst and Henderson ( 1993) argue that regional arrangements are neither inherently inimical. nor inherently favorable. to <;uch a goal. They point oul that regional arrangements involve a liberalizing process. and unless they are combined with protectionist elements or clearly disregard multilateral rules set out under GAlT Article XXIV. they contribute to the long-run goal of global free trade.

17Ruh:' or nrigin e,tabli'h the condition, untler which a product w1ll be dig1hle for prden:nt�<tl acce'� w1thin a FTA. An item mu,t establi'h origtn wnhm thr rcgron m order to <tualify lor prelercnttal treatment. In th�.: ca�e of an FI'A. in which member\ maintam 'cparate external tari rt\ and nun tariff barriers. rule' of origin are u�ed to prevent the deflection of trade through the pomt ol lea't re�r\tance. tlwt h. the leil\t-protected market. llighl) libeml. nr unre�tnctive. rule' of nngin tend w tran�mrt some of rhe benefit\ of internal libcralrLatron to nonmember'> b) et'h:ctively granung them acces' to each countr) in the union und.:r the term'> cxi�ting in the lca'>t protective memhcr cmmtr). Strict, or nontran�parcnt. rule' of origin may confer protection on �orne regional producers of mtermcdiutc'> b) mal..ing it more difl'icult or costly fur proce"ed gooch within the union tn c�tahli,h local origm. When rule' of ongin arc applied 'o a' to mcrea'e the local demand for \Omc input\. th" ma) end up taxmg cert�Lin dnwn,trcam indu,trics h) diverting demand to les' efficient reg1onal supplier,.

1XBhugwati 11991. p. 77l liN ,uggested thi' language. See also Lawrence ( 1991) and Bhagwati ( 1993) for a detailed di'>CU\\ion of the po,sible linkage� between regionali'm and multilaterali�m.



Box 3. Regional Arrangements Under the GATT and the WTO

Article l (General Most-Favored-Nation Treatment) of the General Agreement on Tariffs and Trade (GATT) requires Contracting Parties not 10 treat the trade of any country more favorably than that of any other Contracting Party. In other words. improved conditions of market access granted to one must also be made available unconditionally to all. A principal exception to nondiscrimination is embodied in GATT Article XXIV (Customs Unions and Free Trade Areas), which explicitly sanctions the formation of F1'As and customs unions. Preferences in the context of customs unions or PrAs. or ''interim arrangement� .. leading to these, may be granted as long as barriers are eliminated on ·'substantially all" trade in goods between members, and provided extraregional trade barriers are not raised.

In practice, the disciplines intended to limit regional trading arrangements to bona fide FTAs and customs unions have not materialized.' At times, this has been due to the granting of waivers,2 but more often it has occurred because regional arrangements arc notified to the GATI as interim agreements with a signilicant transition period before the formation of a free trade area or customs union. GATT Article XXfV was imprecise in the language governing interim agreements, saying only that they must

1See, for example, 1he discussion in Jackson (1969. Ch. 24), and Bhagwati (1991, pp. 66-69).

2 See Jackson (1969).

Blackhurst and Henderson recall that concern.., over the rise of regionalism are not new and figured prominently also in �everal earlier rounds or multilateral trade negotiations. w

Bhagwati (1992) and (1993) generally agrees but warns that certain measures are needed in order to secure a complementary relationship between regional initiatives and the multilateral trading �ystcm. Bhagwati expresses concern that countries may attempt to present regionalism as an alternative to multilateralism in order to attempt to strengthen future negotiating positions. Also, the current rise of regionalism may gain further strength becau!)e the United States. prev iously a strong countervailing voice against regionalism, i� now a major advocate. Together. these factorc; risk reinforcing the mistaken belief that multi lateral ism and regionalism are always antithetical. even those regional trade anangements sanctioned under Article XXIV. which could lead to inward-looking policies. In thi� view, ··confidence-building•· measures are called for-for example, pronouncements by the major players <Uld institutions that regionalism and GATT/WTO can be

'?Also �cc Prccg ( 1970).

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lead to Lhe formation of an FTA or customs union "within a reasonable length of time."

The Uruguay Round Understanding on the lnterpretation of Article XXIV (GATI (1994)) provides for clarification. First, the "reasonable length of time" for the completion of transitional arrangements is not to exceed ten years, except under exceptional circumstances. Second. any notilicmion of a new or enlarged regional arrangement shall be examined by a working party. and the working party will submit a report to the Council for Trade in Goods, which will make subsequent recommendations to Lhe World Trade Organization (WTO). In the case of interim arrangements, the working party may make recommendation� concerning the time frame and measures required to complete the transition to a customs union or a free trade area. This reaffirms. and appears to strengthen, the previous notification and review commitments Lmder GATI. Third, the Understanding includes explicit reference to the applicability of the WTO dispute-seulement procedures to any matters arising from the application of A1ticle XXIV. Finally, the Understanding also clarifies the technical procedures appropriate to an assessment of the stance of a customs union's external trade barriers.

The Uruguay Round Understanding on Article XXIV does not significantly alter the multilateral rules governing the formation of regional trading arrangements. Nevertheless. it may lead to greater attention to the intent of Article XXIV-which is to limit regional tntding arrangements to bona lide FTAs and customs unions-through enhanced oversight and tighter enforcement.

fully compatible-and institutional reform-; are de�irable to firmly harness new regional initiatives to the goals of multilmeralbrn.oo�o

Another concern that has been rai<;ed i<; that enhanced competition within regional trading ammgements may induce increased resort to antidumping actions toward firms outside the arrang.cment.4 1 Thi-. endogenous use of antidumping actions might lead to considerably more trade diversion than otherwise. Hindley ru1d Mes�erlin ( 1993). using the example of the

EU. offer ca!>ual empirical support for this propo!)ition and call for a strengthening of multilateral rule� in this area.

Krugman (!993) has pointed out that a� a trading bloc increases in economic si7e. there may be an incen-

•1"Bhag\\ ati ( 1991, pp.77 79) ha\ recommended I hat t\rticlc XXIV of the GAIT be modtlted 'o that c I 1 an� coumne' �cclo.lll!! to ronn an Fl'A (or jilin an establi,hetl one) 'hould he required to ,iniultancou\1) r..:ducc thctr MFN tariff�. or. in the ca>c of cu\lnnh union\. the lowest MFN tanlf prevnJling among n1cmber' on each nem 'hould he adnplcu a' the c:ommon e;.tcm:ll tariff or the: union: and 11) il huild' in a cummllment that �uc;h :trrangcmcnh he open 10 the acccpt<mcc of new member>.

'1 See Bhagwati ( 19931.



tive to increao;e external tariff.<> in order to exploit expanding maTket power. thereby improving its terms of trade. If thi� were so. the formation of regional mtding blocs would appear to threaten the goab of multi lateralism.4� But thi� observation may not renect how trade policies are actually formed-as Krugman acknowledges. It ignores the existence of multilateral rulesincluding GAlT tariff bindings and GAlT Artic.:le XXIV rcquirement�-that constrain such choice�. Moreover. succe��ful efforts toward multi lateral cooperation have repeatedly taken place over pa�t decade:-.. and governments rarely act according to unidimen-.ional motives (such as achieving optimal tariff�). Krugman'<; observation does. however. reinforce the significance of •ariel adherence to the multi lateral rules governing the formation of regional trading arrangement� if they arc to complement multilatcrali�m.

Principles for Assessing Regional Trading Arrangements

Two fundamental points are c;uggested by the above discuc;sion. First. the best regional arrangements arc those that divert the least trade and create the most. Minimizing trade diversion is beneficial for both member� and nonmembers. It abo avoids introducing friction into the multilateral trading system. This suggest:-. that. particularly in those cases where the problem of trade diverc;ion would be more pronounced (e.g .. among countries with relatively high MFN tariffs). MFN tariffs �hould be reduced as preferential tariffs proceed toward zero.*' Second. adhering to u strict interpretation of GAlT Article XXIV should be regarded a� essential if regional atTangcment� are to be complementary to tl1e multilateral trading system. Indeed. surpassing the conditions or GATT Article XXIV would more securely harness the impetus toward regionalism to the goal of multilateral trade liberalization.

These principles �uggest the following normative guideline� for preferred arrangements;44 these go be-

·11Krugman t llJ91) and ( 19lJ3) �uggeM� thai the hc�t outcome in tenns of world welfare occur� when there are either very few or very many trading bloc�. I k point� out that the imuition i'> thai with very fe" tmding bloc\ <panicularly one) one move' toward free trade: with many such bloc�. there i� 1111 inc.:enuvc to set low external tariffs (becau'e each ha' limited market power).

HThc fact that trade taxc' arc currently a prominent �uurcc of revenue 111 man) developang countries need nol conllacf wJth tha� pre,cription. Regional arr:mgemcnt\ ;are typic:all) negotiated over an extended periud of time and lhcir irnplementation tjpically proceed' over more than five years. Thi� provides an ample window of opportunit) during whach off�etting nondi�crimmatory revenue mea,ure' could be developed and implemented-preferably a broad-ba,ed value-added tax-thus assuring revenue neutraliry. Nonetheless. thcrt: '' a ri\k that temporary fi,cal problem� may induce tariff in· crea�c' that may fall on nonrnembt!r\. given that tariff' on regional partners cannot be increased.

'1Thc�c guide I ine' d!l not imply encouragement of dascnminatory exchange arrangement' that arc incnn,i\tcnl with tht! Fund\ Article' ol Agreement

96

yond the obligations set out in GAIT Article XXIV:4'i • Regional trading anangements -;hould cover all

sectors without cxceptionY• • The tran�itional phu�e should not be overly long

(preferabl) less than the maximum period of ten yean, set out in the Urugua) Round agreement) and should include well-derined liberalization schedule-. at the c.;cctoral levcl.

• MFN liberalization -.hould precede or accompan)' every new free trade agreement. Thi'> is particularly important when MFN tariffs are initially high.

• Customs unions, in <;elling their common external tariff, should strive to adopt either the tariff code of the least restrictive member in it., entirety (us is contemplated. for example. in the Cro�s-Border Initiative among :-.everal African countries). or-a more demanding standard-the lowe:-.t prevailing MFN tariff among member-. for each product.47

• Regional trading arrangements should include liheral rules or accession so that regional liberalization can spread to new members:·'!(

• Rules of origin should have a high degree of tran'>parency and minimal <;cope for influence by protectionist interests within the union.49

• Deeper forms of integration,'O other thing� equal. arc preferred since the potential gains from efficient rec.;ource allocation within the bloc are maximi;.ed: deeper forn1s of integration would include liberalization also of services trade, investment, '>orne regulatOI")' coordination and harmonization (without rejecting the legitimacy of regional diversity in, for example, areas �uch as labor <;tandardc;, environmental protection. and tax policy). and liberalization or faclor flows including labor. "i 1

• The use of antidumping laws should no longer apply among memher:-. of regional trading anangemcnts (as occurred. for example. in the Au�tralia-New Zealand Closer Economic Relations Trade Agreement (ANZCERTA ) and the EU, and has been sought by Canada in the Canada-U.S. Free Trade Area and NAFTA). and disciplines :-.hould be strengthened on use of antidumping against countrie!. outside the arrangement. 52

4'Thcse pumls draw on Bhag'-'atl ll9YI J and C 1993!. Bl;1ckhurst and llcndcr�on ( 1993). <uld Br:1ga ( 1994).

lf•tr a government run crcdihl) prccommit 10 pur\Utng a regiunal trading arrangement wathoul sectoral exceptions. 11 can avoad both the CO\h of rent secl..ang nnd the patchwork of sp1:cial t:�ception' that woulu otherwi�e accompany a final agreement.

PSee Bhagwmi ( 1991). "'Sec Bhagwat 1 ( 1991 ). Tim conditton may al'n help ltl lc\\en

po�sible trade friction hy givmg oul\idCT', including especially those hun hy trade divcn.aon, the option to accede.

1''Sec Krueger ( 1993 ). '"Thi� due� not anclude monetary union�. ''It i'> nmcwonhy that cleeper forms of imegra11on arc subJCCI to

I he �:m1c caveat\ as preferential wnff cut\ mnrc gcncrall> that J\, deeper integration b both trade creating and trade divening.

'�Sec Bhagwati ( 1993) and I lindley and Mes\erlin ( 1993).


European Union

Infra- aud Hxlrart•gioua/ Trade Flow.\

Whether or not a gi\'cn regional arrangement leave') panictpanl\ bcllerofl while lca\ing other' no \.\Orse off i' c�.,entially an cmptrical matter that could be in\'e�tigmed on a case-by-ca'e ha.,i .... Although there are many empirical '>ludic., ol the co�t., and hcncfih of variou., regional arrangernenl\ lor member\. fC\\ allcmpt the more difficult "'""' ol a"'>C:.'>ing the effect� on countrie:. excluded from the arrangemcnt or on Lhe world trading .,y.,tem a ... a whole. An indication of the overall economic effects of the trend IO\\ard re!!ional arranoements can he dra� n from development., in intra- a0nd cxtrarcgional trade .,hare'>. Such indices arc an imperfect measure of the ciTect� of regional arrangement�. becau�e intra- and extraregional tradc flow� evolve al:.o in re'>pot,.,e to other factor.,, :-.uch a'> change!> in comparative advantage. technology, multilateral liberalization. rei at ive price'>, regional economic .,iLe and diversity. and variou., noneconomic event� unrelated to reoional tradtng arrangement�. Ncverthclc�s. thc..,c dcsct�ptive :.tati.,ttc., offer a broad indication of whether the arrangemcnh arc a-..,ociated -with greater regional concentration in trade flcm .... E\traregional trade as a ')hare of GDP for .,elected regional arrangement� and trend-. in intrarcg1onal and cxtraregional trade-to-GOP ratio.., for geographtc reg10m. are given in Appendix X. Bo\ 4 dtscu..,.,e., the.,e rcgional trade de\elopment\. The general conclu-.ton i, that the increa..,ed cmpha.,i� o; regional trading arrangement., ha., not apparent!) occurred at the e\pen\e of ongoing integration between region.,. Thi' implte., that thm. far the trend toward regionali.,m appear., to have been broadly compatible wirh the goal of deeper global economtc integration.

European Union

With the adoption of the Treaty of Rome in 1957 the '>i x original member state-; of the EU laid the ba�is of a �rocc:_:.,., of contimtou-. political and economic integratton 111 We.,tern Europe that ha' resulted in one of the large�l internal mar(..et., in goods and <.erviccs in the world econom). �' Three different '>I age!> of integration can be di.,tingui ... hed. The fiN. tran'>itional period (from 195H to 1969) v.a-. mar(..ed by the pha ... ed eliminatiOn of internal tanfh. the di ... mantling of quantitative restnction., on unporh from other member <>tate:-. and the introduction of a common external tariff. The tran'>ition penod al.,o '"\' the C'>labli<;hmcm of the Common Agricultural PoltC) <CAP) atmed at the introduction of free trade in agricultural good., within the Communll). The ..,econd period of integration. covering the 1970-. and the year-. up to the mid-198()... was marked by the introduction of a number of important in<>titutional change., (such a-. an enhanced political role for

''1 he''" llrl!!lnal m�::mhcr' arc Hclglllm. fr;mcc. Gcnnan). hal\. Luxcmhuurg. and 1hc Netherland\.

•

97

the European Council> and bv t\\O enlargement'> of the Communlly. ltN '' 11h the a�ce,..,ton of �Denmark. Ireland. and the L n11ed Kmgdom in 1973. followed h\ Greece. Ponugal. and Spa111 in the 198<>.... The third period (from 19X6 oil\\ ard\l \\ "" dominated b) the adoption and ... ub ... equent tmplcmcntation of the Internal Vlar"-et Program and the Treat) on the European Lnion. "'hich brought further important in-.titutional change-. and a road map lor the e ... tablt.,hment of an Economte: and Monetar)' Unum. Thi., period wa.., abo marked b) clo..,er cooperation with "urround1ng countnes (notahl) the member \tate.., of EFrA and countric!> in Eastern Europe <tnd tho�e of the former Soviet Union) and accev .. ion talks with Auo;tna, Finland. Norway, and Sweden.�·'

This 'cct ton review" the prc .... ent statu� of EU intcgnttion with re�pcct to trade and trade-related issue�. A de.,cription ot the Internal Market Program and it� '>Ialli� of implcmcntat ion i., followed b) a rcvic\.\ of empirical work. on the trade and aggregate real mcome effect\ of European llltcgration ... ince the e-.tabli..,hment of the Communit). Conclu\lon., about the tmplicatton'> of European tntegration lrom the pomt of ' ie\\ of multilateral trade libcralttallon arc aho pre.,ented.

Completion of the Internal Market Program

The progrc._.,,,e tmplcmentation of the Internal Mar(..ct Program can he .,ecn a' the mo\t imponant European iniuauve dtrected toward -.timulation of trade and grov. th '>tnce the e\tahli.,hment of the Community. The formal deadltne of the program wa., December 31. 1992. Although the impo-.ition of a deadline wa' of

great -.igniricance lmthe negotiation process wiLhm the EU, the implementation of the Internal Market Pro!!ram i., in effect a continuou� proce ... s that "tuned soon �1fter the adopt ion of" the White Paper on the program in 1985 and i., not yet tully completed. The creation of the Internal Mar(..et brought. inlet alia. the following change'> in the area of trade tn good-. and .,en ice..,:

• Removal of phy,ical control., on cro�s-border .,h,pmcnt'> of good..,. Tim reqUired a change in the admini.,tratton of indtrect taxc-.. '"hich wa ... strong!) dependent on CU\t<llm declaration'>. Thi'i change and the rcmo\ al of controb hecame ellecttvc on Januan 1 . 1993. ,.\l.,o, difference-. between levcb o f indirect t;xa

tion \\ithtn the FL '"ere redul:cd ... ince the .,tart of the program.

• Eliminatton of n.·matning natiOnal re..,trictiom on impons of indu,trial product., from third countrie .... and their replacement 111 .,ome ca.,e-. \\ ith EL -�ide re-.Lriction.,. Vlemher \tate., \ttll maintamed a large number of QR.., and voluntary e\pon rc.,traints eVER') on car.,

'·'f-or .tn ovcr\IC\\ ol lh�: hl\lnr) of l·uropc;m mtcgmlion and Communi!} 111\lllllllllll\, \Cc Swann ( 199:!).



Box 4. Intra- and Extraregiooal Trade Developments

Jn western Europe intraregional trade as a percentage of GDP has grown steadily, increasing from 14.8 percent in 1948 to 33.0 percent in 1990 (Appendix X, Table 7). Extraregional trade as a percentage of GOP fell between 1948 and 1963 but has been roughly constant since then at about 13 percent. In the EU in particular. extraregional imports as a share of GDP have stayed at around 9 percent since 1970 (Appendix X. Table 6). Thus, notwithstanding increasing integration, EU imports from third countries have generally kept pace with the growth in GOP. Eastern Europe and the former Soviet Union's intraregional trade ac; a share of GDP expanded quickly between 1948 and 1968 (owing partly to the creation of the former Cow1ci1 for Mutual Economic Assistance (CMEA)), but it has been falling since then. Extraregional trade as a share of GDP had fallen to 9.7 percenr by 1958 (Appendi x X. Table 8), but has been on an upward trend since then.

ln the NAFTA region, intra- and extraregional trade have increased. Extraregional imports as a share of the region's GDP have grown from 2.9 percent in 1970 to 7 percent in 1992 (Appendix X. Table 6). Both North American intra- and extraregional trade as a share of GOP were considerably greater in 1990 than they had been in 1948 (Appendb< X. Tables 7 and 8). Tn contrast, Latin American regional trade shares fluctuated, but there was a trend toward decline in intraregional trade shares. while extraregional trade shares were roughly constant.

In the ASEAN countries, extraregional imports as a :.hare of GDP have been growing rapidly (in 1990

from third countries with implications for intraCommunity trade. In some cases, national restrictions were replaced by Community-wide restrictions, notably the YER on Japanese cars. the tariff quotas on bananas. and QRs on imports of toys. ceramics. and footwear from China.

• The definition of es:-.ential minimum requirements with respect to technical regulation� on product standards (mainly in the interests or heailh, safety. and the environment). the promotion of harmoni.t.cd industry standards and the mutual recognition of testing and certification.

• Elimination of barriers to cro'is-bonler services. notably transportation and financial services. The Internal Market Program provided for minimum hannonization of prudenrial supervision and technical rules, where appropriate. and the elimination of discriminatory restriction� on trade in service� between member states.

• Introduction or the principle or home country control related to prudenrial supervision in the finnncial sector and mutual recognition of licenses.

• The opening of public procurement markets. Public procurement of goods and service� has been made subject to rule� providing for transparency and free market access.

98

they reached 26.9 percent. compared with only 9 percent in 1970) (Appendix X, Table 6). Much of Asia experienced rapidly expanding intra- and cxtraregional trade (as a share of GDP) due to the region ·s dynamism and growing openness. Japan's intraregional and especially extraregional trade as a share of GDP increased between 1948 and 1958 reflecting the country's export-led growth. Both shares remained roughly constant since the 1960s. In ANCZERTA a mild increase in extraregional imports as a share ofGOPcan be traced between 1970 and 1992.

Africa's intraregional trade as a share of GDP followed a downward trend from 1948 through 1979, and it increased slightly during the 1980s, while cxtraregional trade as a share of GOP fell from 1948 unlil 1968, and has been on a mildly upward trend loince then. Ln the Middle East, intraregional trade decreased sharply between 1948 and 1968 and roughly stabilized thereafter. Extraregional u·ade varied widely from 1948 through 1979, then stabilized at about 50 percent ofGDP.

Trade-weighted averages for the world show that intraregional trade as a share of GOP has more than doubled since 1948 (it grew from 7.3 percent in 1948 to 17.4 percent in 1990). While the path of extraregional trade as a share of world GDP has been less clear, it moved to its highest post-world war levels in the last decade. Thus, intraregional integration has been important throughout the postwar era. but it does not appear to have precluded interregional trade expansion.

• The approximation of rules in the area of intellectual and industrial property rights.

• The full liberalization of capital movement�. All restriction� on capital movement� between member states arc eliminated.

A'::> noted above. the implementation of the Internal Market Program i� still going on. There were some delay" in the legislative work al the Community level and in the implementation of EU legislation by member states. For example, legislation liberalizing road haulage was adopted only after the formal deadline of the program. Also. some liberalization measures provide for relatively long implementation periods. such a., in the case of road and air transportat ion. Some area� were not covered by the program. notably lea:-.ing service<;. -;erviccs which arc subject to private regulation ( legal services. accountancy), energy, and some areas of telecommunications and postal services. Mo-.t of these sectors are currently subject to a more active application of the principles of competition policies. including new legislative initiatives.

Also. private enterprises continue to face trade barriers from time to time related to the practical implementation of the rule�. This seems to be particularly relevant in cases where the introduction of EU legislation on a national level ha� been combined with �pecific


European Union

national regulations, notably in the area of technical product standard�. The effectiveness of the enforcement of Internal Market rule� i� also receiving increased attention. For instance, in the field of public procurement there are problem� with the monitoring of the vast range of public conu·acts. The European Commission has drawn up a "strategic program·· of priorities that aims to improve the functioning of the Internal Market, providing. imer alia. for beller enforcement of rules and calling for faster transposition of EU rules into national legislation.

Trade and Real Income Effects of European Integration

This subsection gives a brief overview of empirical work on the trade diversion and trade creation effects of European integration and the third country effects of the Internal Market. The conclusion can be drawn that in the manufactured goods sector. trade creation exceeded trade diversion by a wide margin, and that the Internal Market Program likely has net positive effects on third countries. A clear exception is the agricultural sector. where trade diversion dominated as a result of the CAP.

Trade Creation and Trade Diversion

The trade creation and diversion effects of European integration have been subject to a large number of studie!:>. covering different period� between the establishment of the Community and the beginning of the 1990s. Mayes (1978) reviews estimates from studies of the trade effects of integration during the 1960s and the 1970s. The various estimates in the survey are not strictly comparable due to differences in coverage and methodology. and in any case quantitative estimates in thi� area have a number of drawbacks. 55 Nevertheles�. the broad conclusion can be drawn that trade creation in the manufactured goods sector in this period was significam ( 10 percent to 30 percent of total EU imports of manufactured goods), and that it exceeded trade diversion by a wide margin (estimated at 2 percent to 15 percent). This development likely can be explained by at lca�t two factors. namely. the process of multilateral trade liberalization during the same period, and the different structure of intJ·a- and extra-Community trade in manufactured products. The impact of the elimination of internal tariffs on the size of the resulting trade diversion was mitigated by the more or Jess simultaneous reduction of external tariffs in the context of various GAn' rounds. Average external tariff rates declined from 13 percent in 1958 to 6.6 percent after the implementation of the Kennedy Round agreement. As concerns the structure of intra-EU trade. computations of Balassa ( 1975) and Buigues, I lzk.ovitz. and Lebrun

��see Et-Agraa ( 1985).

99

( 1990) show that the share of intraindustry trade in total EU trade steadily increased since the establishment of the Community. renecting continued product diiTerentiation and scale cffccts.56 Trade with third countrie!:>, however. is more based on interindustry '>pecializauon related to differem factor endowment!>.

The above-mentioned studies on trade creation and diversion, in general. did not cover trade in services and agricultural products. Balassa ( 1975) made a firM attempt tO measure trade creation and diversion including trade in agricultural products. He came tO the conclusion that the Common Agricultural Policy had resulted in significam trade diversion. although the overall effect-combining manufactured and agricultural products-remained positive. A computation by Jacquemin and Sapir (1988) for the period 1975-82 also showed that total trade crearion effects outweighed trade diversion effects in the four large�! member <;tales of the Community. A study by Sapir (1992) covering nine member states confinns this picture for the period 1980-91 (Table 1) . The calculations are based on a decomposition of expenditure into three shares: dome�tic production. intra-EU imports. and extra-EU import!:>. Table I �how� that the share of domestic supplies of all processed goods (including proces�ed agricultural products) steadily decreased since 1980. whereas the shares of intra- and extra-EU imports increased. Thi'i points to trade creation both within the EU and in relation to third countries. However. the trade figures on food. drink. and tobacco indicate that in the agricultural sector trade diversion effects occurred since 1985.

Implications of the Internal Market Program for the Multilateral Trading Environment

The [ntemal Market Program was primarily directed toward the creation of the conditions for free trade in goods and services within the European Union. However. the Internal Market also had implications for third parties. In this connection. two observations should be made.

First. the po�itive demand effects of the Internal Market Program are a likely contributor to the growth of world trade in goods and services. The European Commission is still working on an evaluation of the economic effects of the program. The Commission initially estimated the eventual permanent effect of the program on the level of real income at 4.25 percent to 6.5 percent of GDP for the Community as a whole.�7 The trade diversion effects at the expense of foreign suppliers were estimated at 2.5 percent of imports. Assuming an average income easticity of EU demand for imports from the rest of the world of 2. and a GDP

�(•The 'tronge>.t increa'e wa� recorded in Gennany, where immindustry trade 10 manufacwrcd product� grew from -17 percent (1958) l<l 76 percent ( t987) of trade 1n manufactured product� with EU partnel"'>.

�7Scc Commi�sion of the European Commun11ies 1 198Xl.



Table l . Sources of Apparent Consumption: Elf-91 !In peram)

All Processed Products Food, Dnnk. and TC:>bacco lmra- Exira- lmra Exira

Dornl;!�lic EU EU Dome-.lic FU Ell Year procluclion impon' impon� Tol:ll producrion impon-. i rncom, 1o1al

19RO 66.7 19.1 14.2 I 00.0 ll2.1 I 1 . 1 6.7 I()().() 191!1 65.3 19.6 15. 1 I 00.0 1! 1 .4 1 1 .6 7.0 I 00.0 19Xl 64.3 10.5 15.2 100.0 R l . l 12.0 n.9 100.0 Jt)fi:\ 63.R 20.7 15.5 I 00.0 1!1.4 1 1 .7 6.9 I 00.0 ltJX-1 61.6 21.5 16.9 1 00.0 l!O.o 12. 1 7.3 100.0 19R5 60.6 22.6 1 6.t) 100.0 79.lJ 13 . 1 7.0 100.0 1986 ol.2 22.6 1 6.2 I 00.0 Xl . l 12.lJ 6.1 I 00.0 IYX7 60.5 23.2 1 6.-1 100.0 i!Ul 13. J 5.9 JOO.O 198R 5!U< 23.5 17.7 I 00.0 xo.o 13.X 6.2 100.0 198() 57.1 24.6 I!U I()().() 79.lJ 14.0 6.1 I 00.0 1990 57.4 2-1.5 ltU 100.0 Xll.5 1 3.7 5ll 100.0 1991 56.1 25.0 I R.9 ICXl.O XO.I 1-1.2 5.7 100.0

Source: Sapir ( 1991). 1Thc nine members of rhe EU covered in rhb wblc arc Bo.:lgium. DenmarJ... France. Gennan}. lraly.

lrehmd. Luxembourg. Nclhcrland�. and lhc Unilccl Kingdom.

growth rate of 5 percent, the net positive impact of the program on extra-EU imports would reach 7.5 percent. The Commission also estima1ed that this increase would be compensated by lower extra-EU import� owing to improved competitiveness of European industries as a resuli of the program. In a separate study. Haaland and Norman (1992) also came to the conclusion that the third country effects of the program would be small. More updated infom1ation on trade and income provide only partial support to their concluo;ions. Preliminary estimates suggest that the permanem real effect of the program was 2.4 percent to 3.4 percent of GOP. somewhat le�s than initially expected, although still considerable.sx At the same time. the progressive implementation of the program was associated wilh a strong increase in both intra- and extra-EU imporls (Table 1 ) .

Second, the elimination of remaining national quantitative restrictions and technical barriers to trade and liberalization in the financial sector (services and capital movements) have implications for suppliers oULside the EU. The elimination of trade ban·ien, resulting from the hannonization of technical product standards does no1 only promote trade between member stales, bu1 also witJ1 third countries. The same holds. mutatis mutandis. for liberalization of financial services and capital movements. The Second Banking Directive grants to foreign bank sub�idiarie� established in a member stale the same benefits as EU banks. New foreign establishments are c;ubject to the principle of reciprocity in na-

5KSee Buigues :111d Sheehy ( 1993) and Harrison. Rulherford. and Tarr ( 1994). These eslimate\ do nol rake imo account thai the program b nor yel fully implemenlctl and 1har ou1pur effecl> arc likely 10 be realized over a significan1 penod.

100

tio1�al treatment. As U.S. legi�lation is considered by the EU LO <;atisfy this principle. the implementation of the Second Banking Directive has in practice created full market acces'i for U.S. subsidiaries. Further, the elimination of restrictions on capital movements also covers capital transaclions between the EU and third countrie�. All re�trictions are prohibited. with the exceplion of any restriclions on direct inveslment. lhc right of establishment, lhc provision of financial <>ervices or the admission of o;ecurities thai existed on December 31, 1993. In this area. new measures lllal constitute a step back as regards the liberaliLation of capital movements to or from third countries require a unanimow, Council decision. Thu-; the new regime on capital movements implies a o;tandstill on restrictions on direct investmelll and the right of establishmenl from third counlrics.

At the same time, lhe elimination of national quantitative trade restrictions under the Internal Market was in some cases replaced by EU-wide restrictions. l n one well-documented ca�e-the replacement or national quotas on import� of bananas (mainly affecting Latin American coumrie!>) with a EU-wide tariff quotathere is a risk that efficient producers may lo!>e market share in the EU. especially in previously unrestricted markets. Another example i� the replaccmenl or national quotas and VERs on Japanese cars with a EUwide VER. Also. provisions in public procuremen1 directives leave the possibility for national authorities to maintain a 50 percent EU contelll requirement and a 3 percenl price preference for EU suppliers. This could potentially reduce market access for third countries, although lhe liberalization of public procuremenl markets in the EU may still have a net positive impact on foreign suppliers.


North American Free Trade Agreement

European l'nion: A Model for Integration'!

A question often rai..,cd i"' \\hethcr the EU provides a model for integration that other countries could emulate. Some ol the forces behind European integration are umque and not eao,ily replicated in other regions.

Fir...t. and mo'>t 1mportant. European integration, although predom1nar11ly economic in nature. -,hould al"'o be ... een in the light of the geopolitical considerations of it\ founding rather'>. The European Economic Community and il'> si-.ter organitation. the European Coal and Steel Community, were c-.tabli-.hed to create a multilateral framework for cooperation between industrial countries thai were previou<tly engaged in two world wars. and faced with the pressures of the cast-west conflict after the war. The establishment of the European Communi tic:. wa� u unique a11empt to create an area of political stability in Europe, and thi), objective ha� not lost it'> value since then. The clo-,er cooperation with countries of Eastern Europe und of the former Soviet Union and recent application'> for EU membcr-.hip by Hungary and Poland \hould ai'>O be -.een in thi-. light.

A <;ccond relatively Important di<>tinction i'> the structure of trade in manufactured goods. A'> noted earlier. a large and growmg -.hare of trade within the EU con-.ist'> of intra-industry trade. rellecting increasing product differentiation and narrov. ing difference'> in the economic development of EU member '>late\. Product '>pecialiLation within a certam indu'>tr) typically require)> less \tructural change than intcrindustr) '>pecialization that may be as'>ocmted with the clo..,ure of whole enterprrsc� and substantial new investments. As a result of the '>pecific circum'>tance� in Europe. the overall adjustment co-.h of economic integration have remained relatively small.

Third, European integration goes beyond the creation of an internal market in goods and services. EU member states have agreed to establish an economic and monetary union including a <;inglc currency. in accordance with the provisions of the Maastricht Treaty. The EU abo aims at the enhancement of economic cohe�ion. requiring substantial financial transfer� by the wealthier member -.tates to the economically weaker region... in the EU-total resources committed for the period 1995 99 arc '>Ct at Ecu 176 billion.

Fourth. the proce-.-. of mtcgra11on and liberalization took place over a prolonged period, which unnecessarily delayed ih net bcnelih. The transuion period (195&-69) wa., unduly long. and before 1985 progress in the field or trade in service\, libcralitation of capital nows. and the enforcement of competition policies (including tho'>e directed toward the reduction of distortive \tate aid'>) wa., limited. due to w1de differences of policies and practlCC'> between member '>late)>. The Internal Marken Program gave an important impetu<; to further liberalianion, but even today. after the nearly full implementation or the program, some important area:- of economic activity (such as the production

101

and di-.trihution or encrg) l arc not yet completely liberal11cd.

otwith\tanding thc'>e qualifiuli!On'>. mo)>t computation'> ol the trade crcauon and diver'>ion effect'> of European antegrat1on md1cate that the aggregate real 111-

come effect\ ha\1.� clearly been po-.iti\e. notabl) in the manufactured good.., '>ettor. Gi"en the limited gros.., trade diver'>IOn cllech mea.,ured in this '>CCtor. and the pusit1ve 1mpact of hrghcr ancorne in the EI..J on import'>. indu.,tri:�l producer., in third courmie'> are in general likely to have henelitcd from European integration. especially becau-.c nlternal integration wa<., associated with cxternal lihcralinHion in the context of the GATT. The hannoni.wtion and liberalinllion under the Internal Market Program probably have added to these po<;itive effccl'i. Al-;o, European competition policies may have contributed to �omc reduction in �tate aids during the 19l{0'>. and pm • ..,ibly have prevented harmful )>Ub�idy war-. between European countrie .... However. the pre�ent level of -.ub..,iditation i'> -.till vcr) high. and reaching agreement on fa'>ter refornl\ ha'> proved difficult.

�A clear C\CCpllon to the po'>llive real income effect'> i-. the CAP. \1. hich ha., ellcctively clo'>ed EU market-. fur temperate tone product\ and '>eriou-.1) di.,torted world markeh 1n agricultural commoditic'>. The co� I'> for consumer.., \1. ithin the EU and for more efficient foreign producer.., ( including man) developing countrie'>) are high. and the rntroductaon of nece.,.,Uf) reform' ha'> pr�ved difficult. Although computation'> of trade diver'>ion and creation indrcate that the negative trade effects in the agricultural -.ector were smaller than the po�iti\'e effect'> in the manufactured good-. sector. the intere�t\ of tho'>e countrie.., that arc heavily dependent on exports of tempermc tone produch arc -.criou�ly damaged by the-;e policie'>.


The North American Free Trade Agreement liberaliLes bamcr., to trade and inve ... trncnt hetween Canada, Mexico. and the United Stute'i. while leaving barrier'> to countrie� out'>idc the NAFTA unchanged. It<> provision'> include improved market acccs<; as well ao; change'> in trade rule-. and new ic;..,ue ... : the�e are bnefly summaritcd hclow. Sub\equent to the ... igning of the NAFTA. two -.upplementary agreement'> were negotiated in the ar\!a\ of environmental and labor -.tandards.

The '\AFTA i-. expected to '>timulate trade and rai<,e Ji, ing -.tandard' \�.<ithin North America. Exl'>ting '>ludic-. mdicate that the \IAFTA will not have <>ub<;tantial adver-.e effect'> on nonmember<> in the aggregatetrade divcr.,ion i'> C\tirnated in mo..,t studies at les� than I percent of norH AFTA partner country export:-. to North America. It i'> 1mportant to note, however, that the\e -.tudic:-. provide, at best, rough order., of magnitude of the full economic effect'> and they typically do not capture the distribution of adverse effect<> at the level of incl iv idua I nonmember countrie�.



,\1ain PrO\ is ions

The NAFrA was signed by the Governments of Canada, Mexico. and the United States on December 17. 1992. and entered into force on January 1. 1994.59 The agreement provides for improved market access in many o.,cctors. including agricullure, the automotive '>ector. energy. financial services, telecommunications te\tile., and apparel. and tran<;portation. Additionally: there arc provisions governing the niles for internallonal trade v. ithin 1 onh America. including dispute seLtlcme�t. governmem procurement. intellectual property. and 1nve•.tment.

. Improvements in market access arc provided in the form of phased tariff reduction�. libcrali..:ation of nontariff barriers (NTBs). relaxed investment restrictions. a

!1d h�11111onization of standard-;. The principal provi

SIOn\ 1n the NAFfA on market acces\ and trade rules arc brieny summarized below for a \election of key \eCtOr,.

The AFrA has separate bilateral agreements concerning agricultural product:; for U.S.-\llexico trade and Canada-Mexico trade. The Canada-U.S. Free Trade Agreement still cover\ U.S.-Canada trade. On U.S.-Mexico trade. tariffs will be reduced over a 15-year peri�d (over half of bilateral trade became duty free a� of January 1, 1994), and both countries eliminated all NTBs by converting them into tariffs or tariffnne quota'>. to be phased out over 10 to 15 years. Canada and Mexico eliminated all tariff and nontariff barrier'> on their agricullural trade. with the exception of those in the dail'). poultry. egg. and sugar \ector'>.

l\.1ex ico v. i l l phase out all tariff.., and most NTBs on cars 0\ er five to ten years. Car imports imo the United St<�tes fr?m Mexico became duty free upon implementation of the AFrA: the light truck tariff fel l from 25 perc7111 to 10 per�ent, to be phased out over five year�. �extca� domestic content and trade balancing proviSIOtl:- will be phased out over ten years. The rule of origin specifies that finished automobiles must contain at least 62.5 percent North American content, as compared with 50 percent in the CUSFrA.

. In the enerxy sector. the NAFrA contains provisions 111 the area" of investment. tariff\ and NTB .... and procurement. Mexico will open mo'>t petrochemical and electric generation sectors to U.S. investment: however. re\trictions will remain on foreign investment in the ba\ic energy sector. including invc�tment in oil and ga!. exploration. production, and refining. where Pr.M�>- (the Mexican state-owned oil company) will conttnue to hold a monopoly. PEMt,.>- and CFE (the State Electricity Commis�ion) contracts will be opened up to foreign competition.

. Mexico a¥reed to eliminate it\ restrictions on foreign �11\ est":'ent 1n th� banking. mswwtn•. and brokerage mdll' .. trte\ but wuh long pha .... eout period\. There are

�''DI!taih nlthe '-AFTA'., pr0\1\1011\ <llld an a"e"rnen1 are found 111 llulbauer and Schou < 19lJ3l and US! rC ( IW3a).

102

limih on the market share\ of foreign firms in the transition period. The NAFrA partner., are only required to allow subsidiaries of North American fim1s in thctr countries rather than branches. Each subsidiary is subject to the minimum capital and reserve requirements of the host country.

The AFrA provides for rapid progress for Tonh American finns in gaining acce..,.., to Mexico\ tdecom""�'�'catiom market. Mexico eliminated the majonty ol tan ft... and NTBs to it\ telecommunication'> equipment market upon implementation of the AFrA and v.ill accelerate cross-border investment in telecommunicatiom.. goods and enhanced services .

�.S. i�pon quotas were eliminated upon implementatiOn ol the NAFfA on Mexican tt'\files and apparel trade. provided the strict rule., of origin requirement-; arc met. For Mexican good., that do not meet the'ie rules. quotas will be eliminated over ten years.60 All tariff., will be eliminated within ten year ... : tariffs covering the majorit) of U.S.-Mexico textile trade will be elimmated within six year\.

Under the NAFrA. tmc�ing companie.., may Carl') cargo aero.,., the border. and foreign investment in bu� and trucking services is pem1i11ed. Prior to the AFrA, U.S. truckers were prevented from carrying cargo <�eros� the border. and Mexican truckers were allowed limited access to the United States.

In the area of' dispwe .lettlemenr. the NAFrA parallel� and augments the dispute seulement provisions in Chapter' 1 8 and 1 9 of the CUSFrA. The AFrA establi-.hes the Free Trade Commiso.,ion. compri.,ing cabinetlevel representatives of the three member countries. to supervi.,e implementation of the agreement and re'iolve dl!-.putc..,. The NAFrA al'>o extend., the CUSITA di\putc re..,oluuon procedure., regarding antidumping and countervailing duty actions to Mexico. NAFrA �em�cr:-.. agree to rep Ia�� judicial review or final antidumptng and countervatlmg duty determinations with binational panel review: such binational panel decisions are h

.inding. In addition. the NAFrA includes new provi

'iton.., to ensure that a country complies with panel procedure., and rulings. and strengthens cxbting extraordinary challenge procedures of the CUSFrA.c.t

In the area of r:m·emmelll pmcuremelll. Mexico \\ill open up competition to all North American companie'> over a 10-year period. For Pf'\llt x. CFE. and con'itruction contract<,. procurement will be opened to Canadian and U.S. bidders progressively over ten year". Liberalit.�llion in pharmaceutical� will proceed more rapidly. w11h patented drugs opened immediately and nonpatcnted drug'> opened within eight years. Subnational

•��"lcxute, and ••ppa�et mu .. t be rn<Jdc from ) am ,pun in 'onh i\mcnc<� 111 trom fabnc wo,cn from IIller' nngmaling 111 'orlh i\mcm:a

010ncc a pand decision ha' bccn m<Jde. cuher counli) ma) re-4\le\l a lhrcc-p.: r,on C\IJaordmaf) challenge commlllee. If am ul the gruund' nf 1he eMraordmal) challenge ;m: mel. the panel Jeci\JOn w1ll bc overiUmcd and a nc\1 panel 'CI up



govemments are encouraged but not required to enter into the obligations of the NAFfA.

ln the illlelleccual property area, the NAFTA commits Canada to eliminate its compulsory pharmaceutical licensing requirements and Mexico to follow the GATT intellectual property agreement. The NAFfA also enhances Mexican protection of patents, copyrights. trademarks. and trade secrets, largely along the lines set out in the Uruguay Round Agreement. Canada will maintain its cultural exemption, and biotechnology inventions are excluded from patentability.

Under the NAFTA. member countries agree to provide national treatment to im:eswrs of another NAFfA member; the agreement also accords most-favorednation treatment to investors of NAFfA members. Mexico agreed to phase out its export performance, local content, and foreign exchange balancing requirements. In addition. investors of NAFTA members may seek binding investor-state arbitration before an impartial tribunal. ln anticipation of the NAFfA, the United States and Mexico concluded a bilateral tax treaty in September 1992 that reduced the high statutory cax rates on interest, dividends, and royalties flowing in both directions. There are some significant sectors exempted from these provisions, including Canada's cultural industry. Mexico's energy and railroad industries, and U.S. airline and radio communication industries.

Supplementary Agreements

Subsequent to negotiation and signalllre of the NAFTA. the three coumries embarked upon a series of parallel negotiations, culminating in supplementary agreements on labor, the environment. and import surges. These supplememary agreements were implemented along with the main NAFfA with effect from January 1, 1994. The agreement on import surges reaffirms the right to emergency protection provided in the safeguards clause (Chapter 8) of the NAFTA and includes provisions to facilitate its effective use. lt establishes both an ··early warning system·· for responding to import surges. and a Working Group on Emergency Action. The Working Group will assess the performance of NAFfA's safeguards provisions and make recommendations for revisions. as appropriate.

The North American Agreement on Environmental Cooperation creates a new Commission for Environmental Cooperation. commits the NAFTA partners to work toward improving their environmental protection laws and to enforce existing laws, and establishes a dispute-settlement procedure to address complaints of a persistent failure to enforce domestic laws (monetary fines as high as $20 million may be assessed).

The North American Agreement on Labor Cooperation sets forth shared objectives and obligations in the area of labor standards and sets up a dispute resolution mechanism similar to that established in the environmental side agreement. including establishment of a tri-

103

national Commission for Labor Cooperation. The Commission provides a forum for consultations and, in addition, has the authority to form dispute resolution panels. If a country ::.how� a persistent pattern of failure to comply with enforcement of mutually recognized, trade-related labor law. the panel may assess monetary fines (up to $20 million). If the fines are not paid within an established time frame. NAFTA benefits may be removed temporarily in the case of the United States and Mexico: in the case of Canada, enforcement shall be handled by Canadian courts.

E ffects on Member Countries

Implementation of the NAFTA is expected to result in a broad-based expansion of trade within North America. especially between Mexico and the United States. and in increased real incomes in all three member countries. Substantial rationalization and gains from trade are expected in the areas of agriculture. automobiles and auto parts. machinery, chemicals, textiles and apparel. and services (banking and insurance. pharmaceuticals. and telecommunications). There has been considerable debate concerning the effects of NAFTA on aggregate employment and real wages for low-skilled workers in Canada and the United States. Available evidence is mixed-some studies <>how increases and others decreases-but in most cases the effects arc small (real wages change by less than 2 percent). Effects of the NAFfA on member countries have been extensively analyzed in the literature, using a variety of modeling methods.62 [t is important to note. however. that these studies were conducted without full information as to the exact nature of the agreement, and therefore may be subject to a larger margin of error than otherwise.

Aggregate Effects for Member Countries

The distribution of the aggregate gains from trade liberalization under NAFfA depend on the relative magnitudes of trade between the partner countries. as well as the relative sizes of the economies. The Canadian economy is about one tenth the size of the U.S. economy, whereas the Mexican economy is less than half the size of the Canadian one (measured in terms of GDP). The CUSFTA has already liberalized trade between the two partners. hence the NAFfA is unlikely to have important effects on U.S.-Canada bilateral trade (or investment) flows. Canada-Mexico bilateral trade flows are currently very small. It is unlikely that the NAFfA would lead to a substantial increase in trade between them. Mexico is a significant trading partner for the United States. but because the U.S. economy is large, Mexico only accounts for about 7 percent of U.S.

"2Scc Brown < t992), Francoi\ and Shiell� (1994). and USITC ( 1993aJ for surveys.



exports and 7 percent of U.S. imports. rn contrast, trade with the United States i-; very important for Mexico; around 70 percent of its trade occurs with its northern neighbor. It is therefore to be expected that Mexico will reap most of the gains, and bear much of the adju�tment burden, from the NAFfA.

Thi::. is confirn1ed by existing studies. Although the studie� indicate that the NAFfA is likely to lead to an increase in aggregate real income for all partner countries, estimated increases in aggregate real income for Canada range from 0.03 percent to 0.07 perc em and, for the United States. they range from 0.07 percem to 0.3 percent.63 Real income gains for Mexico are more substantial; they range from 0.1 percent to 5.0 percent, with the range depending upon whether the studies incorporate gains due to rationalization of production in the presence of scale economies, and whether the NAFTA induce� substantial capital flows into Mexico.64

Notwithstanding the insignificant nature of estimated aggregate effects for the United States. there has been considerable auention given to the possibility that low-skilled U.S. workers may suffer reduced earnings or Jose their jobs as a result of the NAFTA. While some studies do distinguish low-skilled workers from other workers, their findings are inconclusive; regardless of the direction of the estimated change in earnings. however, "the preponderance of evidence indicates an almost indiscernible effect on U.S. wage rate� for both low-skilled and high-skilled groups. ''65

Effects on Selected Sectors

The NAFTA liberalizes imports of fresh fruits and vegetables into the United States and imports of grains (principally com) into Mexico. This is expected to reduce U.S. production especially in certain horticultural product�>. such as asparagus, avocados. fre�h and canned tomatoes. oranges and orange juice. and sugar. fl6 Liberalization of corn trade is expected to lead to substantial displacement of Mexican production and,

1•1See US lTC ( 1993b). The swtic computable general equilibrium models used to generate these numbers descnbe the one-tune rmpact on real nmional income achieved upon full implementation of the agreement. The CGE methodology first solve� for the level of na· tional income (and other endogenous variables like prices. employment. and production by sector) under the initial condition� of the trade regime (the status quo including existing tariff levels, quotas and other TB�J. Next, the model rs recalculated under the condition-; characterizing the postagreement preferential trade regime (e.g .. regional tariffs are �et at zero). Endogenous variables. such as national income. in the preagreemcnt Mate are then compared with those under full implementation of the agreement to obtain the kind<. of estimates cited above.

MSee usrrc (1993a). pp. 2-7. 65Sce US lTC ( 1993a). pp. 2-3. MThe latter two are subject to agreement� that effectively limit

surges in rmpons of orange juice and sugar.

104

in turn, to migration or displaced farmer<; into urban areasf'7

The effects of liberalization of orth American trade in cars will depend crucially on decisions by the large multinational producers. Cunently. five auto producer� operate in the Mexican market, all of which are wholly foreign owned: Chrysler, Ford. General Motor!>, Nissan, and Volkswagen. On the demand side. the income elasticity for autos is very high in Mexico. hence strong economic growth there (due to the NAFTA) would lead to a substantial increase in car sales.6K On the supply side, existing domestic content and trade balancing provisions under the Auto Decrees have led to uneconomical investment in parts production, and to production al too small a scale for efficient operation. The NAFfA would be expected to lead to substantial rationalization in the Mexican auto industry, but to only slight production and employment changes in Canada and the United States.69

The NAFfA liberalizes tariffs and quotas on North American trade in textiles and apparel. Safadi and Yeats ( 199)) show that Mexico has consistently underutilized its Multifiber Arrangement quotas with the United States over the 1980s, Mexico's market share in the United States is low, and that the NAFfA incorporates a strict rule of origin based on ''triple transformation." This make� it unlikely that Mexico would experience a major expansion in its textiles and apparel industry as a result of the NAFTA. especially as quotas under the MFA are phased out as a result of the Uruguay Round.70

Effects on Nonmembers

Given the preferential trade liberalization, there '" the potential for trade diversion, as AFTA member countries shift their purchases to other countries within North America and away from countries excluded from the NAFTA. Additionally. there b potential for investment diversion: firms may relocate operations to North America to serve the integrated North American market. Rules of origin in the NAFTA are particularly strict in the auto, computer, and textiles and apparel sectors, and this may exacerbate the exclusionary tendencies of the agreement. Available studies. however. though tentative. suggest that the adverse economic effect� of the NAFTA on excluded countries in aggregate are likely to be quite small. Caution is wan-anted. however. in interpreting -;uch results, as disruption at the level of indi-

�>7See Levy and van Wijnbergen ( 1994! and Robinson and other; ( 1 993).

6�See Berry and Lopet-de-Salina' (forthcoming). 1•'1See Lopez-de-Salinas. Mar�usen. and Rutherford ( 1994). 7CJScc. however. Trela and Whalley ( 1994). who do find thai Mexi-

can expon� to the United States will expand �ignificantl). although they as�umc that quota� on Mexican expons to the United States arc binding.



vidual countries. or specific 'lectors within countries. may be significant. Because <.,uch studies typically model the rest of the world as a single entity. significant effects for individual nonmember trading partners are not captured. Potentially significant trade diversion may take place within a limited range of items-for example, in certain agricultural sectors and laborintensive manufactures such as textiles and apparel where MFN protection is high-for selected countries whose trade is concentrated in these items. The conclusion to draw from these studies is that trade diversion due to NAFTA is not likely to appreciably disrupt the pattern of aggregate world trade. but that individual trading panners might still experience an adverse trade shock.

Aggregate Effects

Using partial equilibrium methods. Laird ( 1 990) finds that removing tariffs completely within North America would reduce exports of other countries in the Western Hemisphere to the United States by less than 0.8 percent: for all industrial countries, the NAFT'A would reduce their exports to the United States by 0.5 percent. Erzan and Yeats (1992) abo use partial equilibrium methods to show that trade diversion from preferential tariff elimination within orth America would be limited. 94 percent of total trade diversion would affect countries outside the Western Hemisphere. and total trade diversion would amount to about 0.5 percent of U.S. imports from nonmembers.

While a large number of computable general equi librium (CGE) models constructed to analyze the economic effects of the NAFTA concentrate mainly on the NAFTA members themselves, a few do provide some results for the rest of the world. These indicate generally that nonmembers suffer losses in u·ade shar�s and in welfare a� a result of the NAFfA. albeit their maonitude is very small.7 1 Estimated trnde diversion eff�cts of the NAFTA based on these CGE models depend importantly on the manner in which foreign investment flows are incorporated. if at all. and on the way in which the model's structure inlluences terms of trade changes in response to preferential trade liberalization within North America.72

7' Brown, Deardorff. and Stern ( 1992). for instance. lind that the NAFTA would improve the tenn� of tmde of it� member\ with the rc�t of the world. thereby leading 10 trade dtvcrsion and a reduction in real income (albeit less than 0.1 percent) for countrie' out\idc Nonh America. Co>. and Harris ( 1992) rind that U.S. import volume� from countries outstdc North America dcclinc (but by less than I percent). while Canadian impom from outside the NAFTA increa\C (again by less than I percent).

72Sobarzo ( 1992J. for example. eMimatcs that change� 111 Mcxicu's trade balance with nonmember, would range from lCro to l7.1 percent. depending on the :.ct of assumptions made regarding international capital mobility. exchange rate determinatton. and factor price ncxibility.

1 05

Effects 011 Selected Regions

East Asian countrie� generally face the highe:,t tariffs and hard-core NTBs on export� to the United States (their largest North American market) in laborintensive manufactures. such as textiles and apparel and footwear; China, Korea, Malaysia, and Singapore also face significam trade barriers on exports of iron and steel a::, well as electronic equipment7' Diver&ion or East Asian exports induced by the NAFT'A i� estimated to range between $380 million and $700 million based on partial equilibrium and gravity equation methods as employed by Braga and others ( 1992): thio; amounts to less than I percent of East Asian exports to the United States in 19R9. Partial equilibrium estimates constructed by Kreinin and Plummer ( 1992). however, suggest somewhat greater trade diversion. For ASEAN. this is estimated at $434 million, or 4 percent of exports to North America; this amounts to less than I percent of ASEAN global exports in 198�. For Korea, trade diversion is estirnated at $1,015 million, or 5 percent of Korean exports to North America (or just over 2 percent of Korea\ global exports in 1987).74 Noland ( 1994) obtains estimates of trade diversion for Korea ranging from I percent to 3 percent of Korea's global exports in 1991, using a variety of partial equilibrium models. There is only anecdotal evidence on the likelihood of investment diversion from East Asia to Mexico as a result of the NAFT'A. in particular regarding the rules of origin: thi� remains an open and potentially important question. Countries in East Asia are also concerned about the potential trade-diverting effects of possible future accessions by Latin American countrie� toNAFfA.

Countries in South Asia mainly compe1e wirh Mexico for sales of textile� and clothing in the U.S. market and ure subject to tariffs in the range of 15 percent to 30 percent and to bilateral quotas under the Multifiber Arrangement ( MFA): India has by fur the largest share or South Asian exports to the United States. While Mexico's access to the U.S. market for textiles and apparel will increase under the NAFfA. Mexico currently underfills its existing quota� by about 25 percent and many of the items Mexico exports to the United State!> do not overlap with exports from other countries.75 In view of this. trade diversion due to the NAFTA in textiles and apparel is unlikely to be significant. Diversion of exports from South Asian countries due to the NAFTA is expected to be minor (about l percent of South A�ian exports to the United States) based on partial equilibrium :,.imulations of preferential removal of tariffs and NTBs on textiles and apparel within North America.76 It is noteworthy that diversion of South

71Sec Braga and others ( 1992). 7•'Pomfret ( 199.3) Mg.uc� that the c�timatc\ of trade dtvcl"\inn 111

Kremin and Plummer ( 1991) arc upper boumb. 7'Set:: S<tfadi and Yeats ( 19931. 7h$ce Safadi and Yeah ( 1993).



Asian exports due to the NAFTA is estimated at about ! percent oflhe expected gains from the Uruguay Round.

Latin American and Caribbean countries compete with Mexico in certain agricultural products (frozen orange juice concentrate from Brazil and sugar from Caribbean Basin countries, for instance) and in laborintensive manufactures. such as textiles and apparel and footwear.77 Regarding orange juice, there is potential for trade diversion from Brazil (on the order of 5 percent of Brazilian citrus production) if the NAFTA stimulates significant new investments in Mexican

77 Beneficiary countries of the U.S.-Caribbean Ba�in lnitimive e"pressed concern that their benefits might be eroded by the NAFTA. particularly due to possible investment diversion to Mexico in the area of textiles and apparel. In response, the U.S. administration recently prepared an Interim Trade Program for the Caribbean Basin (ITPCB). The program outlines mutually beneficial measures to allay these concern�. The United States is offering new NAFTA-Iike preferences in textiles and apparel for beneficiaries of the Caribbean Basin Initiative in return for commitments on trade-related intellectual property right�. trade-related inve�tment measure�. environmental protection. labor standards. and adherence to GATT/WTO trade rules. The !TPCB proposal requires Congressional approval before entry into force.

106

citrus.78 Clearly, the Caribbean is also vulnerable to changes in U.S. sugar quotas. Trade diversion is likely to be minor (I percent) for Latin America and the Caribbean as a whole, although some exceptions may occur in certain product groups vis-a-vis particular countries. 79

Estimates of trade diversion for each region may overstate the actual trade diversion in view of the aforementioned capacity constraints in the Mexican economy (as evidenced by the small Mexican share of the U.S. market), substantial underfilling of MFA quotas. and tight rules of origin that may reduce the value of preferential liberalization in the NAFTA. Phaseout of the MFA (and other improvements in market access) contained in the Uruguay Round agreement will erode the margin of preference in textiles and clothing, thereby lessening trade diversion in this area. Nevertheless, it will be important to monitor implications for individual countries as NAFTA implementation proceeds.

7�Sec Spreen and othe r� (1992). 79See Braga and others ( 1994), and USTTC ( t992).


Appendix I

Regional Trading A rrangements

T his appendix presents the membership, objectives, and recent progress toward integration of regional

trading arrangements. It includes only regional trading

Regional Trading Arrangements

Name

Africa

AEC (African Economic Community) ( 1991)

CBJ (Cros�-Border lnniative) ( 1993)

CEAO (Communaut� Economique de !'Afrique de I'Ouest) ( 1974) Abolished in 199�

CEPGL (Communaute Economtque des Pays des Grands Lacs) ( 1976)

Membership

Fifty-one African member states.

Burundi, Comoros, Kenya. Madagascar. Malawi, Mauritiu�. Namibia, Rwanda. Seychelle!>. Swaziland, Tanzania. Uganda, Zambia, Zimbabwe. Members of CoMESA. SADC. or IOC can panictpate.

Benin, Burkina Faso. Cote d'Jvoire. Mali, Mauritania. Niger. Senegal.

Burundi. Rwanda. Za'ire.

arrangements of a reciprocal nature. Unilateral preferential agreements, for example, arrangements under the Generalized System of Preferences, are not included.

Objectives

£tonomit union. Six Mages progressing through a strengthening of existing regional arrangements, the formauon of a pan-Afncan FTA. cu�toms union. and eventually a common market and monetary union. The community is to be established over a transitional period not to exceed 34 year�.

Economic union. Supporung integration objectives of CoMES A, SADC, and lOC. Promoting cross-border trade, investment and paymenL,, Facilitating factor mobility. Removing intraregional trade barriers, as well as lowering external tariff�. Liberalizing administratton and other controls relating to investment.

Cusroms Union. Ultimate objective is to establbh an economic union (now within the framework ofWAEMU; see below).

Free 1rade area. Free factor mobility and sectoral regional cooperation.

Progress to Date

Ratification and entry into force on May 12. 1994.

A frame wort- on core policie� wa� agreed upon. It call� for immediate abolition of NTB� and removal of tariff� on trade m good� and �ervice� among reciprocating countries by the end of 1996 and for moving toward a common external tariff by lowering external tariffs at least to the level of the member with the lowe�t tariff\.

Only 42!:1 products rece1vc regional preference�. Some �ucce�� in achieving labor mobtlity and regtonal cooperation.

Application ofpreferential tanffs has not been fully unplemented.

107


APPENDIX I REGIONAL TRADING ARRANGEMENTS

Regional Trading Arrangements (continued) Name

Co\H�'-A (Common Market for E:t�tem and SoUl hem Africa) < 1993 J. l'om1erly PTA (Preferential Trade Area for EaMcm and Southern African Swtes) ( l9l:!2J

ECCAS (Economic Community of Central African State�) ( 1992)

ECOWAS <Economic Communny ofWc�t African State�) ( 1975)

IOC ( Indian Ocean Commission) ( 19R4J

La go� Plan of Act ton ( 1980)

MRU ( Manu River Union) ( 1<>73)

SACU <Southern Afncan Customs Union) \ 1910)

Membership

Angola. Burundi. Comoros. Djibouti, Ethiopia. Kenya, Lesotho. Madagascar, Malawi. Mauritius, Mozambique. Namibia, Rwanda. Somalia. Sudan, Swaziland, Tanzania, Uganda, Zambia, Zimbabwe.

Burundt. Cameroon, Ccmral African Republic. Chad. Congo. Equatorial Guinea. Gabon, Rwanda. Sao Tome and Principe, Za'ire.

Benm, Burkina Faso. Cape Verde. Cote d'lvoirc. Gambia. Ghana, Guinea. Guinea-Bis�au. Liberia. Mali, Mauritania. Niger. Nigeria. Senegal. Sierra Leone. Togo.

Comoro�. Madaga�car. Mauntius. Seychelles.

All countries in �uh-Saharan Africa.

Guinea. Liberia. Sierra Leone.

Botswana. Le�otho. Namibia. South Africa. Sw<tl.tland.

Objective�

Common marker. A common market is to bc c�tablished by 2000. Ulumately. an cconomtc union. Seeton� I cooperation in indu,trial. agricultural. and interstate transpon and communication� development. environment. natural resource�. energy and the development of economically depressed area�. Cooperation in monetary and financtal matter�.

Com11wn nwrf...1'1. Coordinating and expanding effon� at regional cooperation in Central Africa.

Common morket. Fiscal amJ monetary hamll)nization. Jotnt development project�. Ne'' target to eliminate NTBs by 1995.

Economic coopt!ratwn. Promote cooperation in economic, commercial. and indu�triaJ development.

Ecmumm 1111ion. Providtng a unifying framework for existing arrangements.

Ecrmonuc tuuon.

Common nwrker. Free movement of good� and right of tran\it among memhc rs.

108

Progres� to Date

PTA tariff reform calls for an inittal set oftariffcut� ranging from I 0 percent to 70 percent. foil owed by a I 0 percent tariff reduction every two year\ bet ween 1 988 und 1 996. The remaining 50 percent would be eliminated in two \teps: 20 percent in 1 998 and 30 percent in 2000. NTB' arc to be eliminated during that period 3\ well. Thb schedule is being implemented by most PTA member!.. To facilitate intrarcgional tran�action�. checks denominated Ill UAPTA (P'TA Units of Account) were introduced in 1988. To e;be tntercoumry now of merchandise trade. the Road Customs Tran,it Declaration (RCTD) was Introduced: it has replaced diver�e documents previou�ly required b) member states. in 1987.the PTA Motor Vehicle Insurance scheme wa� introduced to obviate tho.: need to take out separate insurance in every country.

A framework agreement is heinl,l di�cussed.

Ltmttcd trade liberalit.ation: common extcmal tariffremains to be designed; the Fund for Compensation and Development i� not yet functional. A protocol on labor mobility wa� �igned in 1979. but it has not been implemented.

Some �ucce�� in sectoral cooperation in fishmg.tran,pon. communication, and in format ton.

The ECCAS was created under the au,piccs of the Lagos Plan of Action in order to coordinate economic integrauon m Central Africa.

lntra-MRL trade JS tariff free and a common extemal tariiTis m place. However. progrc\s toward intcj,lration and intmregionul trade has been �lowed by pervasive NTB,.

Goods and labor market� arc relatively wcll mtcgrated. A commun extemal tariff i'> in effect. With the exception of Botswana. all SACU countric� are abo member, of the Common Monetary Area or Rand Moncwry Area.



Regional Trading Arrangements ( contiflued)

Name

SADC (Soulhern African Dcvclopmcm Communily) ( 1 992), forn1er SA DCC (Soulhem African Devclopmcnl Coordma1ion Conference) 1 1980)

UDEAC (Union DouaniC!rc de' Elm\ de I ' Afrique Cemrale) 1 1 966}

WAEMU (We\1 African Economic and Monetary Union) ( 1994)

Asia

AFTA (ASEAN Free Trade Arrangemem) ( 1992)

ANZCERTA !Australia-New Zealand Closer Economic Relations Trade Agreement) (1983)

A PEC (Forum for Asia-Pacific Economic Cooperalion) l 1989>

Membership

Angoh1, B01sw;ma. Les01ho. Malawi. Mozambique. Namibia. South Africa. Swaziland. Tanzania. Zambia. Zimbabwe.

Cameroon, Ccmral African Republic. Chad, the Congo. Equalorial Gumea. Gabon.

Benin. Burl ... ina Faso. Cote d'lvoire. Mali. Niger. Senegal. Togo.

Brunei Daru�salam. Indonesia. Malaysia. Philippines. Singapore. Thailand.

Aus1ralia. New Zealand.

Aus1ralia, Brund Darussalam. Canada. China. Hong Kong. Indonesia. Japan. Malaysia, Mexico, New Zealand, Papua New Guinea, Philippines. Republic of Korea. Singapore. Taiwan Provmce of China. Thailand. United Slale\.

ObjCCiives

Economic cooprralion. Fosler economic coopera1ion among rncmher\, inilially with a view 10 reducing economic dependence on South Africa; promote balanced reg10nal development; and �ecure and coordin:ue �upport from foreign donor�. SADC member� have now exprc:.�ed I heir willingnc\\ to welcome South Africa into the organiza1ion. Since I 9!1!1. the SA DCC included trade us an addiuonaJ area for cooperation.

Common market: pofir·_v /i(lmwm:mion. Member� of the UDEAC are also members of I he Franc Zone, with a common central bani... BEAC.

Emnomic uniun. Adding a common market to 1he existing monetary union through the BCEAO. HarmoniLing tax system> and coordinating scc10ral policies.

Free trade area. Regional indumial cooperation. The FTA IS to be ach1eved in 2008, I 5 year' after the 'tart oft he phasing down of tariffs in 1994. The goal is 10 reach u zero to 5 percent preferential tariff on manufactured goods b) 2008. QR� arc to be eliminated upon enjoyment of mi1ial concessions. and other NTBs are LObe phased ou1 over five years from I he date of initial conce�sions on an item. Raw agricullural products and services are no1 included. '

Free trade area. I Jarmomzauon of business Jaw and cooperation in I he area of standard� and customs procedures. Elimination of antidumpmg within the FTA.

Economic coopercmon. Promo1ing the multilateral trading system and intcn�ifying regional consultation and cooperation. Repre�eming membcrcountnes' views in mullila1eral ncgot iating forum,.

109

Progress 10 Date

Some succcs:. in undertaking joint development prOJeCIS in 1ran�port and communic;.uion, food and agriculture. and mdu,trial rehabiliwuon.

QR-, among mcmhercountnc' arc being eliminated. A common external 1anff wi1h four rates (5 percent. 10 percent, 20 percent, and 30 percenl) i-. being implememed. A preferenlial tariff equal to 20 percent of the common ex1ernal tariff i� to he applied to member �tate�. UDEAC countncs signed a 1reaty establi\hing the Economic and MoneHlf) Communily of Central Africa CCEMAC) ( 1 994).

A!;rccment �igncd in January I 994. Main goals 111 1hc agreement: coordination of mucroeconomic policy. fi\cal convergence, harmoniLation of budget procedures, publ1c finance sta1istic�. indirecl 1axa1ion. and bu�iness Jaw.

The staning datc for implementalion was moved forward from January 1993 to January I 994. An average of25 percent of member country 1arifl' lines arc covered in the program of tariff rcduclion with effect from I 994. According 10 I he present schedule, roughly 88 percent of 1hese tanff lines will reach 1he targel level of zero to 5 percenl tariff by 2003.

Since I 990. ••II mtra-area trade 111 goods and services i'> free of lariffs, QRs. antidumping measures. and production subsidies.

ExploraiOIJ work i� under way on reviewing memher countries' cus10m� procedure� and inves1ment regime� :mel prospects for mutual recogm11on of standards. A dmfl free trade agreement fonhc Asia-Pacific region is 10 be di,cussed at the APEC �ummit on November I 5. 1994.



Regional Trading Arrangements (continued)

Name

.\SEAN (AJ>ia-Pacific Economic Cooperation Forum) ( 19671

Bangkok Agreement

EAEC CEast Asian Economic Caucus) ( 1 990)

SA ARC (South Asi;m A�sociation for Regional Cooperation>

Europe

Bailie FfA ( J 9931

Belams-Russia Economic Union ( 1 994)

BENELUX ( 1948> (BelgiumNetherlands-Luxembourg Economic Union)

B ilatcral f rce trade agreements between individual Baltic countries and Finland. Norway. Sweden. and Switzerland ( 1992) ( 1993)

Membership

Brunei Darussalam, Indonesia . Malaysia, Philippines. Smgapore. Thailand.

Banglade�h. India. Republic of Korea, Lao People's Democratic Republic. Papua New Guinea. Sri Lanka.2

Brunei. China. Hong Kong. Indonesia, Japan. Republic of Korea, Malaysia. Philippine�. Singapore. Taiwan Province of China, Thailand.

Bangladesh, Bhutan. India. Maldive�. Nepal. Pakistan. Sri Lant..a.

Estoma. Latvia, Lithuania.

Belarus, Rus�ia.

Belg1um. Netherlands, Luxembourg.

Estoma. Finland, Latvia. Lithuania. Norway. Sweden, Switl.erland.

Objectives

Economic coopercuion. Initial!) concerned with regional peace and security iswcs. Since 1977, when theASEAN Preferential Trading Arrangement was �igned, the goaJs became more economic in nawre. Mainly enhancing regional trade. maintaining the area's competitive position. and exploiting economies of scale.

Intended to promote regional economic development through trade explmsion.

Economic cooperation. Regional grouping to represent members· view� in multilate ral negotiating forum� and to expand regional cooperation.

SAARC countries arc comrniued to �tep-by-Mep liberalization of trade in 'uch a manner that all l:Ountnes in the region share the benefits of trade expansion equitably.

Free trade area. The agreement does not apply to agricultural goods, for which a �pecial protocol will be signed at a later date. Cu\loms duties and QR� abolished upon entry into force of the agreement. No new tariffs or NTBs are to be introduced among the three countries in future. During a transitional period expon restrictions on some specific goods will be mamwined by each republic.

Economi<' union. A full economic union b to be achieved in stages between the two count ric�. The first �tage involve\ a customs union. The final stage features the complete elimination of barriers to trade between Belarus and Russia.

Economic 11111011.

Free trade area. Agnculture 1� not included and restrictions apply to textiles. A separate agreeme111 between Sweden and Latvia grant\ Latvia lower impon duties on agricultural ex pons to Sweden.

1 1 0

Progres� ttl Date

Under the auspices of ASEAN'� PTA, preferences for a limited range of products were implemented; no agreement on reducing NTBs: liberalization process hindered by �lrlct rule� of origin: some joint ventures. Regional trade liberalization plan now formally codified in AFTA ( 1992).

Tariff preferences established for about 300 producb.

The EAEC proposal was put on the agenda for the ASEAN summit meeting in January 1992. A SEAN leaders agreed to �uspend tt and launchedthe AFTA proposal instead.

In July 1 992. a decision was reached to draft an agreement for a SAARC Preferential Trading Arrangement (SAPTA). The draft agreement wa$ submilled to the SAARC Standing Committee in December 1992 and signed April I I . 1993. As of January 1994. negotiations were continuing to finali1.e �chcdules of concessions.

The agreement went 11110 effect on April l. 1994.

The first stage of the economic union b being implemented.

Closely integrated common market. Tax policy coordination.

Most agreement!. have come mto force throughout 1992 and 1993.




Name

CEFTA (Central European Free Trade Agreement). or Visegrad Agreement ( 1992)

CIS (Commonwealth of Independent States) Economtc Union ( 1993)

Customs Union between Czech and Slovak Republics

CustOms Union between KazakhJ>tan. the Kyrgyz Republic. and Uzbekistan.

EEA (European Economic Area) ( 1 994)

EFTA (European Free Trade Association) ( 1960)

EFTA-Turkey FTA ( 1991)

Membershtp

Czech Republic. Hungary, Poland. Slovak Republic.

Am1enia. Azerbaijan. Belarus. Georgta, Kazakhstan. the Kyrgyz Republic, Moldova. Russia. Tajikistan, Turkmenistan, Ukraine. Uzbekistan.

Ctech Republic and Slovak Republic.

Kazakhstan, the Kyrgyz Republic, and UzbekiMan.

European Umon, Austria. Finland, Iceland, Liechtenstein. Norway. Sweden.·'

Austria. Finland. Iceland. Liechtenstein. Norway. Sweden. Switzerland.

EFTA. Turkey.

Objectives

Free rrude area. Liberalization of trade in "nonnal'· goods over a period of three to four years and 111 "sensitive'' products (textiles. �teel, agriculture) over eight years. Exceptions remain, for example. QRs in agnculture will remain indefinitely.

Economic- union. Gradual deepening of tntegrauon through the establishment of a free trade zone, a customs union. a common market. and monetary coordination. Cu,tom� procedure to be harmonized and legal provisions and policte� for inter�tate contract�. investment. and joint ventures to be coordinated. The treaty envisages the coexistence of countries belonging to a renewed ruble area with countries with national currencie\. Regarding national currencies. the treatv calls for limiting exchange r�te Ouctuations between currencie�. The treaty also provides for the harmonization of national fiscal policies. to be �pccified in a future agreement.

Cu.lfoms rmion. Part of an effort to preserve previous commercial relattonships between themselves <md with third partie!>.

Cuswm,,· wuon. Estahli\h a common market by the year 2000.

Free rrade area plu.v j(u·ror mobi/iry. It excludes agricultural product�.

Free rrade area. Agricultural products are excluded.

Free rrade area. Most agricultural products are excluded.

1 1 1

Progress to Date

Implemented as of March 1993.

No deadlines have been specified regarding implementation. Several supplementary agreements are being negotiated. As of May 1994. all CIS republic� except Tajikistan had introduced interim or permanent national currencte<, to be u<,ed alongside ruble�.

Entered into force January I ()93. No transition period �ince no tariff or nornariff barriers previously ex is ted between the member.>.

KU!.akh�tan and Uzbekistan agreed in January 1994to allow free movement of goods anc.l facto� of production with the goal of e�tablishing a common market by the year 2000. The Kyrgyz Republic acceded to the plan in February 1994.

Entered intO force in 1994.

All tariffs on manufactures eliminated by 1907. QRs eliminated by the late 1970s.

By 1994. EFTA coumrics had abolished all custom� duttes on most impons from Turkey. For textiles and apparel they will be completely phased out by end ot I 995. Turkey had by 1993 reduced the tariff rate on EFTA imports by 70-80 percent.




Name

EU ( Europe<tn Union) C 1993) EC ( 1 957)

Europe Agreement�: EU Associauon Agreements (bilateral) wtth:

EU-Baltie countries FTA ( 19\14 )(bilateral l

EU-FSU Cooperation and Partnership Agreementl> ( I 994) !bilateral)

EU-Turkcy Association Agreement ( 1963)

Membership

Belgium. Denmark. France. Germany. Greece. Ireland, Italy, Luxembourg, Netherland�. Portugal. Spain, United Kingdom.4

Bulgariu ( Interim Ag reement 1993>: Ctech Republic ( lmenm Agreement 1992): Hungary (Interim Agreement 1992): Poland ( JniCrim Agreement 1991 ): Romania (Interim Agreement 1993): Slovak Republic C Interim Agreement 1 992).

EU. Estonia. Lmvia. Lithuania.

EU. former Soviet Union (Belarus. Katakh,tan, the KyrgyL Republic. Moldova. Rus�ia. Ukraine).

EU. Turkey.

Objcc.:tives

Economic union. Economic and Monetary Union to be achieved by 1997 or 1999 at the late\t. Coordination of fiscal and socioeconomic polictcs.

I' n•e trade area. Liberalization of trade m manufactun:d goods. Ultimately, the gn;ll is accc��ton m the European Union. The agreements include provisions on political dialogue and traderelated issue,, 'uch as competition law. Commitment to negotiate the libcralizatron of trade in \ervice\. Approximation of legislation of East European countries to European Unron law.

Free 1rade area.

Fref' rrade fm•a. In the medium run. the "cooperation and ranner>hip agreement�

.. of the EU with the countries of the former Sovret Umon provide for M FN treatment of merchandi�e trade and certain 'ervices. The al!rccment� also schedule a revision in 1998 with the possibility of creating a free tmde area.

Clmom.1 union. To be achieved by 1995.

1 1 2

Progres� to Date

By the end of 1993, the lntcm;ll Market Program had almost been completed. Some harrie r\ remam in area� such a� energ), tclccommunicauons, and tran�ponat ion. Free capital mobility ha� been achieved. Labor movemcnl t� almost completely liberaliled. Exchange rate coordimnion through the European Exchange Rate Mcchani�m.�

Mm.t tariff� and QRs on industrial good� were eliminated after the coming tnto effect oft he agreements. Sub�tantive rcstnctions remain 111 steel. text ilcs and clothing, and coal, but arc due 10 be phased out over a four- to five-year period after the entry mto force of the agreement�. Conces�ion\ were made by Ea�t European countries. although more limited. with longer phase-in periods for implementation (with a maxrmum of ten years!.

Negotiation' have been concluded. Under these agreement�. the EU will libcr.tlizc impom of industrial good' and sen· icc!> from the Baltic countries. The same scm.nivc area.' which rccerve special treatment in the Europe Agreements will be protected in the EU agreements w1th the Baltic: countries. E-.tonia will eliminate all QRs upon entry into force of the treaty. L<Jtvra and Lithuania will be granted a fiveto-six year period to do ,o.

Negotiations w11h Russta, the Kyrgy7 Republic. Moldova, Ka£akh\tan. and the Ukraine were concluded in 1994. and they arc still m procc>� with Belarus. The EU had already signed a treaty on commercial and economic cooperation with the U.S.S.R. in 1989. Undcrthc auspices of that treat). -.pecilic EU QR� were removed m 1989 and 1990.

lndu�trial produch ofTurki'h origin have been exempt from customs duties and QRs m the EC since I 971. By 1993, Turkey had brought the cumulative rate oft<triff reductions on EU irnpon' to 70-80 percent. Vcr) significant tariff reduct ion' are al;o being implemented in Turkey with regard to non-EU countries in anticipation of the implementation of the common externul tanffin 1995.



Regional Trading Arrangements (cofltinued)

Name

Intra-CIS Bilateral Trade Arrangemenb ( 1992) ( 1993)

Middle East

ACM !Arab Common Markell ( 1 964)

AMU !Arab Maghreb Union) ( 19R9) (fom1er Maghreb Cul>tom� Union)

BSEC (Black Sea Econornac Cooperation Project) ( 1992)

ECO (Economac Coopcrauon Organization) ( 1985) (fonncr Regional Cooperation Development)

Member;hap

CTS member �tate�.

Egypt. Iraq. Jordan. Libya. Mauritania. Syria. Yemen.

Algeria, Libya. Maurnanaa, Morocco, Tunisia.

Albania. Annenia. Azerbaijan. Bulgaria, Georgia. Greece. Moldova. Romania. Rus�ian Federation, Turkey. Ukraine.

Islamic Republic of Iran. Pakiqan. Turkey.

Since 1992: Islamic Stme of Afghani�tan. Azerbaijan, Kazal-h�tan, the Kyrghyz Republic. Tajikastan. Turkmenistan. Uzbekbtan.

Objectives

Ea�ing '>Upply. payment'>. and tenn� of trade problem�. The agreements typacally included three �ection�: one on "obligatory trade·· m •·strategic goods.·· �uch as energy and key inpuh for which price� were fixed and governments were obliged to ensure delivery; a !-econd �ection with "indicative lasts" of cmerprise-to-enterprise trade in which the government wa� only obliged 10 is�ue the neces�ary licenses: third, m all other good'>. trade wa' left free to enterprise�.

Cuswms tl/11011.

Econmntcumon. In its 1991 meeting. the AMU agreed to a four-�tage economac integration process. The announced deadline\ were the end of 1 992 for an FTA. the end of 1995 for a custom� union and the end of 2000 for a common marl.. ct. There was no set deadline for the �tage of monetary union. which �hould be e�tablbhed "some time thereafter."

/::('(1110111/C cooperutton. Enhanced movement of goods. \ervice'>. and labor and capital. Regional economic cooperation.

£co11onuc t·oopc•rattoll. Bilateral trade and investment promotion and sectoral economic cooperation.

113

Progrc,., to Date

The agreement'> were implemented throughout 1992. They were rcncgouated for 1993 and 1994. The new agreements reduce the volume of govemment·to·govemment trading to a fe" ",trmegic" products. provtde lor quota., and tariff quotas forenterpri�e·toenterprise trade and. in general. give preferenllal trcatmcm to the signatory countrie�. Transactitm\ under the agreemcm� have fallen �hon of the target,.

Tariff\ on manufactured goods had. with a few exceptions. been removed by 1992. Considcmble QRs remain. No progres� on common exh:rnal tariff.

Some multilateral trade liberali7ation agreements have been �igned but remain large!) un11nplemented. An agreement wa.' signed by the five central bank:-. of the AM U in 1991 to help facilitate interbank payment'>, and it htL\ been implemented since April 19\12. Some joint projec�'> in the energy and industrial sector� have been reached and arc being carried out under the acgi\ uf thc Unmn.

Working group� have been e\labli�hed covering areas �uch a� organi7at ion a I matters. exchange of stat asucal data and economic mfom1:uion. banktng and finance. trade and industrial cooperation. mmspon and communication\, agriculture and agro-indu�trics. and free travel for businessmen of the panicipating �tall!\.

In llJ92. a very limned �ystem of tariff preference� among membcrcountrie� wa�o established granting a 1 0 percent reduction on specific tariff line�. The agreement wa� initially for four years, but would be automatically extended for fun her periods of two years each. Several commlllees 10 coordinate �ectoral cooperation have been fonned. !nlliatives under consideration include the establishment of a regional trade and devclopmem bank and fonnation of an ECO '>hipping company.




Name

GCC (Cooperation Council for the Arab States of the Gulf, or. alternatively. the Gulf Cooperation Counci I) ( 198 I )

Western Hemisphere

A• COM or Andean Pact (Andean Common Market) ( 1969) Revived 1990

Argentina-B razi I ( 1 990)

CACM (Central American Common Market). ( 1961) Revived 1990

CARICOM (Caribbean Community) ( 1973)

CARICOM-Colombia ( 1991)

CARICOM-Venezuela ( 1991)

Chile-Colombia FTA ( 1 993)

Chile-Venezuela FTA ( 1 993)

Membe rship

Bahrain, Kuwait, Oman, Qatar, Saudi Arabia. United Arab Emirates.

Bolivia. Colombia, Ecuador. Peru. Venezuela.

Argentina. Brazil.

Costa Rica. El Salvador. Guatemala, Honduras. Nicaragua.

Antigua and Barbuda, Baham�, Barbados. Belize. San Cristobal, Dominica. Grenada, Guyana. Jama1ca. Montserrat, St. Kius and Nevi�. St. Lucia, St. Vincent and the Grenadines. Trinidad and Tobago.

CARrcoM member countries. Colombia.

CARrcoM member countries. Venezuela.

Chile. Colombia.

Chile, Venezuela.

Objectives

Common marker. Achievi11g "deep integration·· among the member countries by eMabli�hing free movement of goods. serv1ces. and factors or production.

Common marke1. Harmonization of �ocial and economic policies. jomt programs.

Conm1011 marke1. EMablishing a bilateral common market by 1994.

Clmoms union. Agricultural goods are excluded from trade liberalization; a common price band for some key agricultu ral products is in place.

Common marker. Phasing down oft he common extemal taciffto reach a 5 percem to 20 percent range by 1998.

Free rrade area. During a transition period, it would work a� a system of unilateral preferences for access of CARICOM products into Colombia. Eventually, CAKrCOM countries would reciprocate.

Free lrade area. During a period of five years. all dutie� on Venezuelan imports from CARr coM should be phased out. After five year:,, negotiations should stan on how to chmmate trade barriers on Venezuelan imports into CARr coM countries.

Free 1rade c1rea.

Free 1rade t1rea. The final deadline for complete trade liberalization between the two countries is 1999. Eventually a customs union.

1 1 4

Progress to Date

Vinual elimination of CUl>lOml> 1ariffs by 1982 and liberalization of trade in services by 1983. Free movement of factors of production has been achieved.

By 1993, tariff barriers between membercoumrie� had been elimmated in almost all product categories except capital goods. A four-tier common external tariff-5. 10. 15. and 20 percent-has been agreed upon and �hould stan to be Implemented i n January 1995, with some exceptions. Strict rules on foreign ownership relaxed significantly i n 1987.

Effons at liberalization arc being concentrated in the MERCOsuR framework.

Many restrictions to mtrarcgional trade were lifted in the 1960s and 1970s. NTBl. were reintroduced in the 1980s. Common external tariff between 5 percent and 20 percent by the end of 1992.

Most imraregional trade has been liberalized. The fir�! pha:.e of the common external tariff, which will bring tariff rates down to a range of zero to 35 percent, has been implemented starting 111 January 1993.

Negotiations onder way.

Negotiations under way.

The free trade area is operational as of January 1 994.

lntraregional tariffs are 10 reach zero in 1999.




Name

Colombia-Central America FT'A ( 1993)

Colombia-Ecuador-Venezuela FT'A ( l 992)

Colombia-Venezuela ( 1992)

EAI (Enterprise forthe Americas Initiative) ( 1 990)

El Salvador-Guatemala FT'A ( 1 9 9 1 )

GROUPofJ: ColombiaVeneluela-Mexico FT'A ( 1993)

LA IA (Latin American Integration Association) ( 1980). formerly LAFT'A (Latin American Free Trade Association) ( 1960)

Mt:KCOSUR (Southern Cone Common Market) ( 1 9 9 1 )

Membership Costa Rica. El Salvador. Guatemala, Honduras. Nicaragua, Panama, Venezuela.

Colombia, Ecuador. Venezuela.

Colombia. Venezuela.

Bolivia, CARICOM (the 1 3 Caribbean member�). Chile. Colombia. Costa Rica, Dominican Republic. Ecuador. El Salvador. Guatemala. Honduras. Mexico. Nicaragua. Panama, Peru. Southern Cone countrie� (Argentina. Brazil, Paraguay. and Uruguay). United States. Venezuela.

El Salvador. Guatemala.

Colombia, Mexico. Venezuela.

Argentina, Bolivia, Brazil, Chile. Colombia. Ecuador. Mexico. Paraguay. Peru. Uruguay. Venezuela.

Argentina, Brazil. Paraguay. Uruguay.

Objectives

Free trade area. During a tran�itional period. Colombia i� to grant unilateral tariff cul!i to Centrul American countrie�. Eventually these cuts �hould be reciprocated and result in a free trade area.

Customs union. Elimination of tariffs and NTlh to bilateral trade and estabhshment of a simplified common external tariff.

Free trade urea.

Free trade area. Aim� to achieve a free trade t.one for the entire Western Hemrspherc. Reinforcing market-oriented refonn:, in Latin America by expanding trade. mcreasing investment. casing the debt burden, and strengthening environmental policie�.

Free trade area.

Free trade area. Creating a free tr.tde zone over a ten-year period staninginJanuary 1995. Agricultural goods are excluded. Liberalization of the car �ector will be phased in over o I 3-year period.

Common market. Area of economic preferences conMituted by regional tariff preferences . .. regional scope agreements." and "partial scope agreement�·· (among only �orne of the member states) on �ectoral issues of economic coopcrat ion ortrade liberalization.

Common market. Coordinating fiscal and exchange rate pol icy. Accclerat ing economic development.

1 1 5

Progress to Date

Negotiation' under way.

An automobile trade agreement w� �igned in 1993 and became effecuve in January 1994: it includes a unified automobile indu�trial policy through a common external tariff and common rules of ongm. Negotiation� on the harmonization of agricultural policy to stabilize pnces and align them within the customs union are under way.

Intra-area tariff� were elimrnatt:d in 1 992 and a common external tariff was agreed.

The United States has srgned framework agreements with 3 1 countries.c' Framework agreements e�tablish the agenda for bilateral negotiation!.. a.\ well as institutional mechanism�.

It entered into force rn I �91.

Treaty signed in June 1994. Agreement prov1de� for an rmrncdiate zero tanff for some items and a ten-year tran�ition for other�. Tariff cut� will proceed more quickly lor Colombian and Venezuelan export� to Mexico than vice ve rsa. Venezuela has been granted two extra years to dismantle tariffs on textile;.

Numerous bilateral trade agreements. In 1990. member countrie� doubled the level oft he Regional Tariff Preference to an average of20 percent. The non· extension of preferences granted by Mexico to Canada and the United States under NAFT'A will require an amendment of the treaty.

lntraregional trade is being gradually liberalized, with 1995 as rhe final deadline for the elimination of tariff� as well a� NTBs. A common external tariff ranging from zero to 20 percent has been agreed for 85 percent of product�. There i� no common external tariff on capital goods and high technology product�.



Regional Trading Arrangements (concluded)

Name

Mexico-Chile FTA ( 1991)

Mexico-Costa Rica FTA ( 1994)

Mcxtco-Costu Rica-EI Salvador· Guat�mala-Honduras-Nicaragua FTA ( l 992)

NAFTA (Nonh American Free Trade Agreement) ( 1994)

Nueva Ocotepeque Agreement ( 1992)

OECS (Organi.�ation of East Canbbean States) ( 1991)

United State,-Canada FrA ( 1989)

United State�-J,raeli FTA ( 1985)

Vcnet.ucla-Central America FTA ( I 992)

Membershi p ObJeCtive�

Chile. Mexico. Free trade area. Promoting inward investment. Phased elimination of tarim. and NTB� by 1998. Oil products and cenain agricultural good� are excluded. Harmonit.ation of taxation and invc,tment rule;,.

Mexico. Costa Rica. Free 1rade area.

Mcxtco. Costa Rica, El Salvador. Frl•e trade lll"l'll. Guatemala. Hondura..,, Ntcaragua.

Canada. Mexico. United State�. rra mule urea Including g<>o<h and �ervice\. government procurement and intellectual propeny right\. Canadian agricultural and Mexic;m petroleum products are panially \!'-eluded. Liberaliauion of investment nows itnd professional service,,

El Salvador. Guatemala. Honduras.

Antigua and Bermuda, Domintca. Grenada, Mont.-.crrat. St. Kith and Nevi\. St. Lucia, St. Vincent and the GrenadJJlcs.

Canada. United State\.

hracl. United State,,

Co�ta Rica. El Salvador. Guatemala. Honclura\. Nicaragua. Panama. Venezuela.

C11.11mm union. Fom1mg a free trade area by 1993. and eventually evolving into a custom::. union.

Cu.\lnlll.l llnion. Its main goal wa' to implement CARIC0'-1 \ common external tariff ahead of schedule.

Free lrade area. Tariff libcntlizattOn for trade 111 good� 111 .'i-1 0 year�. some harn1oninuion oftechnic:tl standard�. \tandM i 115 agreed in \Crvtcc� and inve�tment. \omc liberalization of government procurement.

Frer mule area. Eliminaung. hy 1 '195 tariff-, on all product� traded between Israel and the United States.

Free 1rade area. During a transitional penod. unilateral tariff cuts will be made by Venezuela. Eventually. Central American countnc> will rec i procme.

Progress to Date

Since 1992. NTBs have been climmated and the maxtmum mutual tariff i� I 0 percent. Thi' rate ts bcmg cut by 2.5 pcrcem a year unt i I it reaches t.ero 1n 1990 lor goods '" the fast track. For good� 1n the �low track (key among them oil and teMile\) duties on bilateral trade will be reduced over 'even year\.

An agreement wa.-.signed 1n 1994 and i� scheduled to go into effect in January 1995.

Deadlme for achteving the FTA has been \et for 1996. Negotiations arc m process.

Staged climtnallon of tanff, and NTB\ over a maximum of 1 5 year\. Efl'ectiveJanuary l , 1'19�.

Member countnes have stgncd Economtc Complementation agreements. Little progress toward establtshtng a free trade area.

A few countries (e.g .. Dominica and St. Vincent and the Grenadine\) have implemented the common external tariff.

Implementation ahead of schedule: three rounds of accelerated tanff cuts completed. Pans of the agreement will be �uperscded by NAFTA. The Auto Pact rem am, and membef\hip is frozen.

Liberalizallon on �chcuulc.

Ncgollation' arc underway.

1 Motor vehicles and mineral fueb arc also excluded from the libcrali£ation �chcmc. Member 'tates may temporarily exclude �cn�ilivc item,. The c"clusion li�t� will be reviewed in the eighth year with a view to bringing the covered item� back into the hberalil.atton process and achu:ving the zero to 5 percent tariff by 2008.

2The Islamic State of Afghanistan i� negotiating accc\�ion. 3As of 1995, Austria. Finland, Norway. and Sweden will accede to the European Umon. if 'o agreed under nat1onal referendums. 'Austna. Finland. Norway. and Sweden completed their ncgollations for acccs,ion to the EU i n 1994. Cypru'>, Hungary. Malta. Morocco,

Poland. and Turkey have applied for membe rship. �The Greek drachma, the Italian lira and the United Kingdom's pound are nol part of the ERM at the moment. 6The exceptions arc Cuba. HaJtJ, and Suriname.

1 1 6


Appendix II

The European Union: Trade Relations with Transition and Mediterranean Econon1ies

T he past several years brought important changes to trade arrangements between the European Union

and countries in Eastern Europe and the fo1mer Soviet Union. In 1989. the EU concluded an agreement on trade, commercial. and economic cooperation with the U.S.S.R., which gave the latter most-favored-nation Matus and established a timetable for the removal of general quantitative restrictions on export!> to the EU. Specific EU quantitative restrictions were removed in 1989 and 1990. Also, in January 1993. the EU gave Rus�ia and other countries of the former Soviet Union access to the Generalized System of Preferences (GSP). ln October 1991. the Council gave a mandate to the European Commission to negotiate separate .. cooperation and partnership agreements'' with Ru<;sia and other countries or the former Soviet Union. Negotiations with Russia. Moldova, Kazakhstan, the Kyrgyz Republic. and the Ukraine were concluded in 1994. The agreements provide MFN treatment for merchandise trade and certain cross-border !-.ervices and contain rule� on investment protection and the free transit of goods. They also provide for a review in subsequent years to examine the possibility of the creation of a free trade area. The European Union ha� a separate agreement with Russia on textiles, steel, and uranium. Trade relations with other countries of the former Soviet Union arc still governed by the agreement with the U.S.S.R.

The EU has negotiated free trade agreements with Estonia, Latvia, and Lithuania, which provide preferential treatment on imports from these countrie�. comparable with the trade sections of the EU's Association Agreements with East European countries. Under these proposed agreements, Latvia and Lithuania will have a five- to six-year transition period.

The EU concluded Association Agreements ('·Europe Agreements") with Bulgaria, the Czech Republic, Hungary. Poland. Romania, and the Slovak Republic. Trade and some trade-related aspects covered by interim agreements became effective on March I, 1992 for the Czech and Slovak Federal Republic. Hungary, and Poland, on May I , 1993 for Romania. and on December 3 1 . 1993 for Bulgaria. The final agreements with Hungary and Poland entered into force on February I . 1994. The E U also maimains special agreements on trade in wine and meal with most East European countries.

1 1 7

The Association Agreements with Eastern Europe contain provisions on, inter alia, political dialogue. trade in goods and services. and trade-related issues. �uch as competition law. They provide for immediate or phased elimination of trade re�trictions on industrial products. The EU abolished QRs and tariffs on a large number of industrial products upon entry into force of the agreements: remaining tariffs (including tariff quotas and ceilings) will be eliminated after a threeyear period.R0 However. �pecial. more restrictive arrangements apply to so-called sensitive goods: agricultural product�. clothing and textiles. coal. and steel. Market opening in agricultural trade is rather limited. The level of protection in agriculture will remain high after the full implementation of rhe agreements, and cereals arc excluded from liberalization. The provisions on the other sensitive product categories are more favorable: baiTiers to re-exports of textile� and clothing in connection with proces�ing activities were lifted upon entry into force of the interim agreements, and elimination of remaining duties and QRs will be phased over a rive-year period. Quantitative restrictions on steel were eliminated upon entry into force of the interim agreements: and those on coal will be removed a year later (with the exception of coal imports into Germany and Spain). Tariffs on steel will be aboli&hed in three to four years. Comparable liberalization will be undertaken by the associated countries, although in some areas it is more limited, and implementation periods arc longer (up to ten years).

Notwithstanding the maintenance of restrictions on sensitive products. the reduction of trade baniers in recent years has facilitated the :.trong growth of trade in the region. Total trade between the EU and East European countries grew on average by about 21 percent a year between 1989 and 1992. Progress remains limited, however, on the application of other important provisions of the Association Agreement�. in particular the approximation or law� by the associated countric::. to EU law (such as competition law and lcgil>lation in the field of technical standards and intellectual property). Progress in this area is essential for further integration and liberalization. for instance, in trade in services. Another point of concern is the latitude provided in the

K0The European Council of June 1993 decided to reduce thi' pc· riod rrorn I he initial live years 10 three year\.


APPENDIX II EUROPEAN UNION: TRADE RELATIONS

Association Agreements for protective measures, such as safeguards and antidumping actions, and for the reintroduction of trade taxes. For example. on several occasions the EU imposed restrictions on imports of steel from Eastern Europe. Poland also introduced safeguard measures against imports of sugar and some agricultural products from the EU; and both Poland and the Slovak Republic introduced import surcharges.

The EU has had longstanding nonreciprocal preferential trade agreements with Mediterranean countries, such as the Maghreb countries (Morocco, Tunisia. Algeria) and Turkey. Morocco has had a Trade and Cooperation Agreement with the EU since 1976. Morocco's industrial exports enter the EU duty free and virtually unrestricted. with the exception of a VER on clothing and a QR on petroleum products. Morocco's agricultural exports face greater restrictions. Some agricultural products are admitted duty free up to a certain quota and are accorded preferential treatment thereafter. The restrictions on fruit and vegetable imports are the most onerous for Morocco. The EU and Morocco are currently negotiating a new pannership agreement

1 1 8

that includes new provisions on agricultural exports. Tunisia has a Cooperation Agreement with the EU that provides for duty-free and unrestricted access for industrial products (with the exception of textile!> and clothing that are subject to a voluntary export restraint). There is also preferential treatment of some important agricultural products (olive oil, wine, citrus fruits) up to certain limits. Tunisia is also negotiating a new agreement with the EU. Algeria has a Cooperation Agreement with the EU similar to (but more limited in scope than) Morocco's and Tunisia's.

Turkey's Association Agreement with the EU provides. as a general rule, for duty-free and unrestricted access to EU mcu·kets for industrial products, with the exception of textiles and clothing (which are subject to a VER) and petroleum products (subject to a tariff quota). Agricultural products are restricted. Turkey has embarked on a trade liberalization program that provides for the elimination of tariffs and other restrictions on imports of industrial products from the EU by the end of 1994. A customs union with the EU is currently planned for January I , 1995.


Appendix III

Southern Cone Common Market

T he Southern Cone Common Market ( MERCOSUR) wa� founded by the Treaty of Asuncion signed by

Argentina. Bnllil, Paraguay, and Uruguay in 1991. 1 t aims to establish a common market among the member countries by 1995. The instruments set forth by the treaty include the free movement of goods, services. and factors of production through the elimination of tariffs and nontariff barriers, e�tablishment of a common external tariff, coordination of macroeconomic policy, and hannoni7ation or the respective internal legislation as needed.

In contrast to the emphasi� on regional import substitution that characteri7ed Latin American integration in earlier decade-.. regional cooperation in the 1990s was part of a more general Mrategy to deregulate and liberalize the economy. and to promote multilateral trade liberalization b) reducing external trade barriers. McRcosL R i'i a good example of this new trend.

The Treat> of A\unci6n mandates signatory counLries to apply a progre�sivc and automatic schedule of intra regional tariff reduction in eight equal steps beginning in 1991 and to be completed by the end of 1994. Nontariff barriers arc to be eliminated by the same date.ll1 Member countries arc to agree on a common external rariff by 1995. Paraguay and Uruguay. as relatively less advanced countries within the area, are given one extra year in the phase-in period for free trade. Factor mobility should be free by 1995.

According to the Asunci6n Treaty. assembled products must have a minimum of 40 percent of domestic value added in order for them to qualify for regional preference!>. Rule<> of origin will no longer be in force after the implementation of the common external tariff. The treaty provide!> a few rules concerning the settlement of dispute'> that may arise among member countries during the tramition period. In December 1991. a Protocol was signed that mandated that disputes should be settled through arbitration. Abo, until 1995. member countries were allowed to reintroduce tariffs and quotas ac; a safeguard in ca<;e of balance of payments crises or

�1 Member \l:llC\ 'ubmmcd li\h of product� thai were to be exempted from the gcneral tanff-rcducuon \chcdulc. They included the followmg number of item\: 394 for Argentina. 324 for Brazil, 439 for Uruguay, and 960 for Paraguay. These hMs have been progressively reduced and they �hould reach tero by the end of 1994 for Argentina and Br:11il, and b) the end of 1995 for Paraguay and Uruguay.

1 1 9

in the case of a threat of injury to domestic industry. The A-;unci6n Treaty allows production-sharing arrangements to be signed within MERCOSUR.

Implementation has been on schedule. As planned, by the end of 1993, member countries had reduced their intra-area tariffs by 82 percent and the elimination of NTBs wa� quite advanced. After 1994, export incentives will no longer be po<;siblc within MERCOSUR. and the agreed common legislation on antidumping and countervailing dutie� will enter into force. Agreement has been reached for a common external tariff for about 85 percent of tariff line�. and will range from zero to 20 percent. But there i� no common external tariff for capi· tal and high-technology goods, which Brazil produce:.. A second key area in which an accord has not yet been reached is the list of products that will definitely be excluded from Mr RC'O'it R.112 Production-sharing arrangements allocating different stages of the production proces'> among M�RCOSL R firms have been signed in almost all indU' .. tric'>. These 'iectoral arrangements are included under Article 5 of the Treaty of Asuncion as one of the key irl'>truments in the constitution of the common market; they arc assigned the objective of making the best usc of the factors of production in the region and contributing to exploiting efficient economics of scale. llowcvcr. they risk hampering the potential gains from trade creation, especially in Argentina and Brazil. In April 1992, for instance, a production-sharing arrangement was signed for the steel industry for the period up to the end of 1994.

At the present time, the potential net gains from MERCOSL1R seem large. Trade within the area during 1993 rose by one third to reach $8 billion. Brazil is now Argentina's largest export market. and Argentina is Brazil"s second biggest market. For Paraguay and Uruguay, the importance of MERCOSL R is even greater, '>ince the regional market accounts for 40 percent and 35 percent of their exports. respectively. Dynamic gainc., from trade creation may arise from the new opportunity of member countries· firms to exploit economic'> of scale, as well a., from the eventual increase in intra-industr) trade if macroeconomic stabilization proceeds in the region and economic growth continues. Further gain'> arc already being reaped from foreign invesLment, a ... the region is increasingly viewed by inves-

M2Thcsc wrll likely include \OillC agricultural product�. a� well a� selected �ecto r-. of heavy 111du�1ry.


APPENDIX I l l SOUTHERN CONE COMMON MARKET

tors as a single market. Other less tangible, but nevertheless important, gains will come from enhanced bargaining power of the region as a whole and from strengthening political relations among its members. The single largest benefit probably resides in the role of MERCOSUR in locking in the unilateral trade liberalitation currently being implemented in the region.

There is some potential for trade diversion. Much de-

120

pend'> on the level or the common external tariff. The introduction of the common external tariff for most goods. which ranges from zero to 20 percent, will cause trade diversion for some M�;;RcosuR countries who have lower tariffs on some lines than those established by the common external tariff (especially Paraguay. whose maximum tariff at present is 16 percent). Brazil will apply a higher tariff on high-technology good-;.


Appendix IV

Central African Customs and Economic Union

T he Central African Customs and Economic Union (UDEAC) was founded by a u·eaty signed in

Brazzaville in 1964 and became effective at the beginning of 1966. h comprises six Central African countries!�:\ which are also members of the Fnmc Zone, with a common currency (the CFA Franc) and a common central bank (the Btmque Centrale de:, Etats de !'Afrique CenLiale. BEAC). With the ultimate objective of establishing an economic union, the Treaty envisaged the creation of a customs union with a common external tariff. the elimination of all barriers to intra-union trade. and the establislunent of a ''Taxe Unique·· or single-tax systemll4 to foster the creation of a regionally balanced industrial structure. The Treaty also provides for L11e establishment of a common customs administration. the creation of a UDEAC investment code, the progressive harmonization of domestic fiscal systems, coordination of transport sector issues, and the free intra-union movement of labor. service�. and capital.

The perfonnance of the UDEAC over the last thirty years has been mixed. While it has had some success in areas such as training and research. its goal of an integrated regional market has remained elusive. This relatively poor record can be traced to two major factors.

First. buoyed by the commodity price boom of the 1970s, oil exporting members of the UDEAC (Cameroon. Congo. and Gabon) embarked on an importsubstitution strategy, mainly through ambitious programs of public investment and public enterprises. In order to accommodate the objectives of these countries, the UDEAC treaty was revised in 1974. and the scope of free intraregional trade was restricted to raw materials and unprocessed agricultural products; trade in other products originating from the UDEAC was limited unless they had access to the single-tax regime, which became an instrument of restricting preferential treatment on intra-UDEAC trade to only a selected number of products.

Second, the sharp decline in commodity prices and the overvaluation of the CFA franc. combined with inappropriate macroeconomic policies, resulted in a severe economic crisis in all UDEAC countries in the second

8JCamcroon. Central African Republic. Chad. the Congo. and Gabon were original signatorie>. Chad left the Union in 1968 and rejoined in !984. Equatorial Gumea gained admissiOn in 1984.

84Thc "Taxe Unique" i� a complex incentive regime thai favor� eligible regional fim1� in the application of mdirecl taxes on their imponcd input�. and their sales wuhin the Union.

121

half or the 1980s. To cope with the difficult economic situation, individual counLiies imroduced several measures to circumvem the provisions of the Treaty and further their own objectives, thereby exacerbating the distorted incentive structure created by the single tax. As a result, tariffs became very high and dispersed across and within countries. and nontariff barriers to intra-union u·ade. and trade in general. increa1.ed.

Against this backdrop. in late 1991. UDEAC members� who had already embarked on structural adjustment programs. started discussions on a Regional Reform Program to reinforce their domestic adjustment efforts. At the core of the program is a simplification of the trade regime. increasing its transparency, and lowering average tariffs and tariff dispersion. The main clements-to be implemented by all UDEAC members between January I. 1994 and January I , 1995-are as follows.

On tariff reform. a common external tariff with four rates will replace all previous customs duties and related taxes and levies. The new tariff structure comprises rates of 5 percent for essential products. 1 5 percent for inputs and capital goods, 35 percent for consumption goods. and a temporary 50 percent for a limited number of products needing special protection. Duties on intra-UDEAC imports are set at 20 percent of the corresponding common extemal tariffs before being progressively eliminated over the next five years. starting in 1994. The single-tax regime will be abolished, and individual member� will regain full control of their jurisdiction on domestic taxation. Quantitative restrictions on imports arc to be eliminated over a threeyear period and replaced, if neces<.;ary, by an import surcharge not greater than 30 percent: this surcharge should be phased out over the following three years.

The new UDEAC trade regime represents a substantial trade liberalization effort. yet still provides significant protection to certain domestic industries. Over the medium tem1. a� the competitiveness of these industries improves (owing to the recent devaluation of the CFA franc). as the domestic tax base is broadened. and as tax administration is strengthened. members would benefit considerably from further tariff reduction. In this regard, the decision of members to accelerate the tariff-reduction process and implement a tariff structure with lower rates (5. 10. 20. and 30 percent) than suggested by the common external tariff, is a notable step in the right direction.


Appendix V

The Cross-Border Initiative

T he Cross-Border Initiative (CBI) is a regional integration initiative among 1 3 Eao;tern and Southern

African countries.ss It is cosponsored by the African Development Bank. the Commission of the European Communities. the World Bank, and the Fund. lL has been developed in collaboration with the Common Market for Eastern and Southern Africa (COMESA), the Southern African Development Community (SADC}, and the Indian Ocean Commission (IOC) to provide support for the integration agenda of these arrangements. An agreement on core policy measures to be implemented was reached in August 1993. The broad objective of the CBI is to help reduce impediments to cross-border activity with a view to bolstering economic growth in the region. The CBI is not an "institution" for regional integration, but rather a set of commonly designed and agreed policies to promote trade, investment, payments, and institut ional development among participating countries.

Trade Patterns Within the CBI Region

lntra-CBl trade is relatively low and usuaJJy involves one or two partners, renecting the general lack of complementarity among participating countries, but also a poor regional infrastructure. For example, in 1992, the share of individual countries' exports to the entire CBI region varied from below 3 percent for Malawi. Mauritius, Rwanda, and Uganda to about 9-15 percent for Kenya, Tanzania, and Zimbabwe (Table 2). Kenya and Zimbabwe (which have the most diversified export base among CBI countries), represent the dominant intra-area trading partners and run '>Ubstantial <;urpluses with the rest of the region.

lntra-CBI trade is also hampered by the relatively high level of tariffs and nontariff barriers that still prevail in the region despite recent liberalization efforts by some participants. Many countries, including Burundi, Kenya, Mauritius, Tanzania, and Zimbabwe have average tariffs exceeding 30 percent, and in o;ome cases (e.g., Kenya and Mauritius) tariff dispersion is quite wide (Table 3). Quantitative restrictions on imports vary from open general licensing in Burundi and Tanzania. to more or less restrictive licensing in Comoros.

11�Burund1, Comoros. Kenya, Madaga,car, Malaw1. Mauntiu<>, "Jamib1a. Rwanda. Seychclle�. Tan:zan.a. Uganda, Zambia. and Zimbabwe.

122

and import bans on different items in Madagascar and Mauritius.

The low level of trade among CBI participants and the differences in the degree of liberalization of their economies make it very importam for the initiative to have mechanisms to minimize the risk of trade diversion. and help those coumries with the most restrictive trade regime to achieve their liberalitation objective.

Main Elements of the CHI

The CBI rests mainly on three p1llars: a trade liberalitation program, an investment promotion component, and measures to liberalize members· exchange and payments systems.

The trade liberalization program emphasizes the elimination of tariffs and nomariff barriers among participating countries in the context of an overall trade libcrali.mtion effort. Participants in the CBl agreed to eliminate tariffs on intraregional trade by 1996, while at the <,arne time lowering tariffs for third countries to the level of the member with the lowe<,t tariffs. Quantitative restrictions affecting both intraregional trade and trade with non-CBI members arc to be removed. The elimination of quantitative restrictions applies also to trade in services. The CBI allows for technical and some financial assistance. as well as some flexibility in the pace of reduction of trade barriers for countries that arc likely to be severely affected by the implementation of these measures.

The investment promotion component of the CBI consists of measures aimed at reforming the regulatory environment for investment and progressively harmoniting investment incentive<;. Participating countries arc to take concrete steps to liberalite. streamline, expedite. and publicize procedures for the approval of both domestic and foreign investment. Participants in the CBI should also enhance the incentives for crossborder investment by, inter alia, taking steps to ( I ) join investment-guaranteeing agencic., such as the Multilateral Investment Guarantee Agency; (2) conclude necessary agreements to avoid the double taxation of investment profits: and (3) facilitate labor mobility.

The CBT also seeks to improve significantly the functioning of the intraregional payments system and liberalize members· exchange <;ystems. In this regard, participants are to take the necessary measures to ( I ) <>trengthen the domestic payments and settlements sys-


Cross-Border Initiative

Table 2. Trade Between Major Participants in the Cruc;s-Border l nitiati\'e. 19921 ( /11 f'l'I"C<'IIf oj <'IICh C<JIIIIf/T.,\ Iolii/ (' \{JOrl.\ 01 1//I{JOI'/.\ I

Burundi Kenya Madagascar Malawi Mauritiu� Rwanda Tanzania Uganda Zambia Zimbabwe Total

Burundi 3.2 0.5 3.7 3.3 0.1 8.9 2.Y 0.9 16.1

Kenya 0.5 0.1 0.2 1.2 1.8 2.3 7.8 0.4 0.6 15.0 0.2 0.1 0.5 0.1 0.3 0.8 2.0

Madagascar 0.2 2.2 0.5 3.6 1.0 1 .0 2.0

Malawi 0.2 1.6 1.0 2.R 0.2 0.1 1.4 9.2 10.9

Mauritius 0.1 0.9 0.6 2 . 1 1.4 0.9 0.1 2.4

Rwanda 0.2 0.2 1.3 9.7 8.0 0.2 19.2

Tanzania 4.1 1.6 0.1 4.8 0.3 0.6 1 1 . 5 3.0 0.1 0.1 0.5 3.7

Uganda 1 . 1 0.4 0.1 0.2 1.8 21!.1 0.2 29.0

Zambia 0.5 0.7 0.4 0.3 1 . 2 3.1 0.5 7.8 0.5 0.3 5.6 15.1

Zimbabwe 0.1 1.0 3.4 0.1 0.4 3.7 8.9 0.5 0.2 0.4 0.2 0.7 2.0

Source: IMF. Direction ojTrade Statistics ( 1993). 1The table should be read horizontally; for each country. figures in the fi rst row indicate exports to pannercountrie�. and figure5 in the second

row indicate imports from partner countries.

Table 3. Trade Regimes of' Selected Participants in the Cross-Border lnitiative1

Burundi

Comoros

Kenya

Madagascar

Malawi

Mauritius

Tanzania

Uganda

Zambia

Zimbabwe

Tariffs

Average tariff is 40.4 percent.

Average tariff is I() percent. Consumption taxes averaging 25 percent applied to impom.

Average tariff rate is 34 percent. Maximum rare of 62 percent is applied on certain goods such as TVs. fini�hed textiles. and some beers.

Tariff range i� 5-40 percent. Most rates fall into 5-10 percent range. Fiscal duty of I 0-50 percent on import� with a surtax of 30 percent on luxury goods.

Average tariff rate of about 20 percent. Max•mum rate is 40 percent.

Average tariff is 52 percent. The tariff range ts 5-220 percent. Fiscal duty (5-100 percent) and import levy of 17 percent are also applied to imports.

Average tariff is about 30 percent.

Tariff rates ranging from zero to 30 percent for most goods. Higher rates of 90-17 5 percent for some petroleum products.

Tariff rates range frorn 15 percent to 40 percent for most goods. Luxury good� are at higher rates.

Average tariff rate is about 20 percent plus a surcharge of20 percent.

Sources: GATT; IMF: and World Bank.

Quantitative Restrictions

Open general licensing for import!>. A few import restrictions for security reasons.

Import bans on some goods. Imports outside the Franc zone require licensing. Import� of some clothing and food item� are restricted. Government monopoly on rice and petroleum imports.

S hort negative li�t for imports for envimnmental reasons.

OGL for impom except for import ban� of 61 uem� mainly for health and security reason!.

MoM 1m ports are under OGL. Specific import license!> are required for certain items in some cases for health and security reasons.

Import pern1its mamtained for stausucal and tax purposes. J mport bans exist for certain items.

OGL for imports with a small negative list for health and �ccurity reasons. and for eight luxury items.

Import bans on beer and soft drinks.

Negative list uJcludes those related to secunty reasons. gold. �ilver, platinum, alcoholic beverages. tobacco. electronics. and passenger vehicles.

Retention of exports earnings up 10 60 percent.

1 Most oft he information refers to early 1994 and is based on mformation available as of June 1994.

123


APPENDIX V THE CROSS-BORDER INITIATIVE

terns; (2) converge to a position that wil l allow the complete. nondiscriminatory elimination of all restrictions on payments and transfers for current international transactions, and the attainment of current account convertibility; and (3) establish a unified, interbank foreign exchange market by 1996.

As one of the sponsors of the initiative, rhe Fund has

124

primary responsibility for guiding reforms and providing technical assistance in the area of macroeconomic. monetary and exchange rate policies. Participants are to hold discussions with Fund staff with a view to designing a l'ramework of macroeconomic and structural policies that facilitates the attainment of the objectives of the CBI.


Appendix VI

A S EAN Free Trade Agreement

B eginning in the late 1970s. the Association of Southeast Asian ations (ASEAN) shifted its at

tention from a largely political orientation to an economic focus.R6 This was viewed as part of an effort to maintain its competitive position in the world economy by increasing opportunities to exploit scale economies and deepen the division of labor across the region. On February 24. 1977, member states signed the ASEAN Preferential Trading Arrangement. This arrangement included provisions relating to Jong-tenn quantity contract�. preferential interest rates for purchase finance. preferences in government procurement, selective tariff preferences, and the preferential liberalization of nontariff barriers. The scope of regional liberalization under this arrangement was strictly limited by the request-offer approach to liberalization, extensive exclusions. relatively stringent rules of origin, and the small number of tariff lines covered by intra-ASEAN trade. As a result. the share of intra-ASEAN trade in total ASEAN trade, the direction of imra-ASEAN trade. and the product composition of intra-ASEAN trade have remained virtually unchanged.

The third ASEAN summit held in 1987 essentially paved the way for the ASEAN Free Trade Area (AFTA). Member countries recognized the ineffectivenes� of the ASEAN Preferential Trading Arrangement and agreed in 1987 to seek new ways to increase intraASEAN trade. On January 28. 1992, ASEAN member countries agreed to implement the Common Effective Preferential Tariff Scheme (CEPT), with the aim of improving the preferential trading area and with a view to moving toward an ASEAN Free Trade Area.

The stated objective of the AFTA was to increase manufacturing competitiveness in ASEAN member countries by attracting greater foreign direct investment and thereby improving the ASEAN production base from which to reach world markets.

A detailed CEPT Jist was submitted by ASEAN members and announced on October 31. 1993. h includes the products to be liberalized-both fast track and nom1al track-those excluded from liberalilation (both temporary exclusions and general exceptions),IH

N(•ASEAN was established by lndone�ia. Malaysi<l. the Philippine�. Singapore. and Thai I and in 196 7. Brunet Darussale m JOined in 19H

�7The general exclusion list includes �uch product� as motor vehicles. mineral fuels. etc. Member �tate� may exclude products from the CEPT 'cheme for reasons or national security. publit· morals.

125

and a specific timetable of tariff reductions submiued by each ASEAN member to be implemented over a ISyear period from January I, 1993. The Agreement covers manufactured products and processed agricultural products. Unprocessed agricultural products and services are not covered. 1l1e goal is to reach a target preferential tariff on manufactured goods of from zero to 5 percent by January I . 2008. Nontariff bmTiers, including quantitative restrictions, on CEPT goods are also to be eliminated; quantitative restrictions arc to be eliminated upon enjoyment or initial concessions, and other NTBs are to be phased out over live years from the elate of initial concessions on a CEPT product.

Concessions apply only to goods originating in an ASEA country and the rule of origin is set at 40 percent of local content. either within a single member country or on a cumulative ASEAN basis.

The starting date for the implementation of the AFTA was moved forward by consensus from January 1993 to January 1994. An average of roughly 25 percent of member coumries· tariff lines are to be covered in the program or tariff reductions with effect from 1994. The currem schedule indicates that about 8H percent of the tariff lines included in the liberalization schedule will reach the target level of from zero to 5 percent tariff by the year 2003.

The phasing of CEPT tariffs i� divided into "fasttrack" and "normal-track'' timetables. Tariff-redu<.:tion timetables are subdivided into those items with tariffs initially above 20 percent and those at or below 20 percent. Fast-track items with tariffs above 20 percent will be reduced to 0-5 percent by January I. 2003. Those with initial tariffs at or below 20 percent are to be reduced to 0-5 percent by January I , 2000. Under the norn1al-track timetable, items with tariffs above 20 percent are to reach a 20 percent tariff not later than .January 1. 2001 . Subsequently, these items are to reach tariffs of 0-5 percent by January I . 2008. Nonnal trach. items with initial tariffs below 20 percent are to reach the 0-5 percent range by January I , 2003.

protection of human. animal, or plant life and health. and the protection of anicles of ani�llc. htstoric. or archeological value. Member �tates ma) temporarily exclude certain �cn;,itivc items from the CEPT scheme and the exclusion list will be reviewed in the etghth year with a view w bringing these items 11110 the scheme and achieving the 0-5 percent tariff within the rl'maining seven year\.


Appendix VII

Asia-Pacific Economic Cooperation Forum

E stablished in 1989 at a ministerial conference in Canberra-under the initiative of Australian

Prime Minister Bob Hawke-rhe Asia-Pacific Economic Cooperation Forum (APEC) is a vehicle for promoting greater regional economic cooperation. The original membership included the members of ASEAN (Jndonesia, Malaysia, the Philippines, Singapore, Thailand, and Brunei), as well as Australia, Canada, Japan, Republic of Korea, New Zealand, and the United States. The group expanded in 1991 when China, Hong Kong, and Taiwan Province of China joined the 12 original members. APEC members together account for 38 percent of world trade (in 1992). and intra-APEC trade represents 60 percent of their total trade. From the outset the attention of the organization was devoted to trade facilitation and technical cooperation efforts carried out within ten working groups (Telecommunications, Trade Promotion, Human Resources Development, Regional Energy Cooperation, Marine Resource Conservation, Fisheries. Transportation. Trade and Investment Data Review, Investment and Technology Transfer, and Tourism). More recently, exploratory work has been under way in the areas of customs cooperation, reviewing APEC-member investment regimes (with a view to increasing transparency), and exploring the prospects for mutual recognition of standards.

APEC typically has not been viewed as a precursor to an eventual free-trade arrangement. Instead, cooperation efforts and trade facilitation initiatives are pursued under the banner of "open regionalism." This means that any successful efforts to facilitate trade and

126

investment nows within APEC will be carried out multilaterally, on a most-favored-nation basis. In 1992, a permanent secretariat was established in Singapore to support Asia-Pacific cooperation in trade. Support for the multilateral trading system was reaffirmed with the November 1993 declaration of APEC ministers calling for urgem action to conclude the Uruguay Round successfully.

TI1e November 1993 meeting established a Pacific Business Forum. an APEC Education Program, and an APEC Business Volunteers Program. In addition, several new initiatives were agreed upon including ( 1 ) steps to improve the competitiveness of small and medium-sized businesses; (2) an action program to assist in the integration of policies on economic growth, energy security, and environmental protection within APEC; and (3) the development of a set of nonbinding investment principles. With regard to the Iauer area, APEC countries will undertake a work program to identify barriers to trade and investment flows in the region with a view to pursuing future efforts to eliminate these. Ministers also agreed at the meeting to expand APEC membership to include Mexico and Papua New Guinea.

A vision for the future direction of APEC was recently presented in the Report of the Eminent Persons Group. Ministers endorsed the report's call for initiatives to achieve freer trade and investment flows in the region, and called for further study in some areas. including the group's recommendation that APEC pursue an aclive program of regional trade liberalization consistent with the GATT.


Appendix VIII

Gulf Cooperation Council

T he Gulf Cooperation Council (GCC) was established in 1981 by Bahrain. Kuwait, Oman. Qatar,

Saudi Arabia. and the United Arab Emirates to integrate their economies by establishing free movement of goods, services. and factors of production. Trade in goods between the GCC members is free of tariffs, provided that at least 40 percent of the value added is produced in the GCC region and that at least 5 1 percent of the capital of the producing firm is owned by citizens of the GCC member countries. Oman, however, was permitted to levy tariffs on some products, reduced to 4 product groups in 1989, originating in the member coumries. The GCC countries are to levy a common external tariff ranging between 4 percent and 20 percent. Tariff exemptions are allowed, and the higher range of tariffs is to be levied for protection or other special reasons.

Currently, the trade regime� of the GCC members are practically free of QRs. the tariff structure is relatively uniform, and the average tariff is low. Qatar and the United Arab Emirates levy generally uniform tariffs at 4 percent and 1 percent, respectively. Oman has a basic import duty of 5 percent on non-GCC imports, though on some goods rates of 15 percem to 25 percent are levied. In Saudi Arabia. tariffs on most imports average 12 percent, within an overall tariff structure ranging from zero to 20 percent. Tariffs in Bahrain range from zero to 20 percent with an effective tariff of about 5 percent. In Kuwait, tariffs also range between zero

and 20 percent. The recent agreement to apply a common external tariff on commodities on which there i� accord should help accelerate the formation of the common market.

Trade among GCC members in 1992 was about 6 percent of their overall trade (about 5 percent for exports and about 7 percent for imports), and imports were significantly lower than exports. While the share of intra-GCC exports in overall trade is small. intraGCC exports are important in total non-oil exports, varying from about 5 percent to about 30 percent, depending on the country.

Exports are very concentrated. with Saudi Arabia accounting for about 60 percent of intra-GCC exports-a significant portion of which are petroleum exports to Bahrain-while the UAE accounts for another quarter (Table 4 ). The main importers are Bahrain with about a third of intra-GCC imports, and Oman and the United Arab Emirates with about one fourth each. The main exports from Saudi Arabia are light manufactures, such as gannents and paper products, and agricultural goods. such as dairy products. Other import<mt export items include fish from Bahrain and metal products from Bahrain. Qatar. and the United Arab Emirates. For some GCC members, re-exports constitute a significant part of exports.

The GCC ha..<; been negotiating an economic cooperation agreement with the EU to foster trade between the two regions and for the EU to assist members of the

Table -'· Gulf Cooperation Council: lntra-GCC Export Trade, 1992 tIn milliom oj L, . .S <lollnr.l 1

Destination

United Total to Saudi Ar<1b

Origin Bahrain Oman Qatar Arabia Emirate� GCC1 World

Bahrain 25.4 23.2 t04.2 43.7 196.5 3.007 .6 Oman 41.4 5.2 26.8 8.3 8 1 .7 7.799.9 Qatar 3.7 8.5 56.2 129.0 1 97.4 3.4R8.1 Saudi Arabia 1 .598.0 68.0 83.0 909.0 2.658.0 5 1 .771.0 United Arab

Emirate� 32.0 957.0 7.0 2 1 5.0 1.241 .0 24.742.0 Total 1 .675. 1 t.05R.9 14R.4 402.2 1,090.0 4.374.6 90,R08.6

Source: fMF. Direc1ion ofTrade Slali.\tics ( 1993). 1 Data on Kuwait were not available and were not included in other countries· exports to the GCC area.

Exports include re-exports. For some countries re-exports could be a significant proportion of exports to member countries.

127


APPENDIX VIII GULF COOPERATION COUNCIL

GCC in their economic development. ln May 1994. the EU and the GCC agreed to intensify cooperation in a number of areas, such as standards, environment. energy, and industry. The ultimate objective is for an EUGCC free trade agreement. This will be discussed after completion of the common market among GCC members through the establishment of a common external tariff.

Factors of production move freely within the region, and the capital markets of GCC members arc integrated. Citizens of GCC member countries are allowed to move within the area for employment. as well as to purchase and own shares of industrial companies in all

128

GCC member countries. Citizens can also borrow from the specialized tinancial institutions of any member country providing loans for industrial development on common terms relating to maturity and chargel>. To open the way for regional enterprises. Meps have been taken to harmonize certain prices throughout the region, for example. telephone rates have been unified and there is movement toward unifying water rates and prices of petroleum products. GCC companies arc accorded a 10 percent preferential margin in government contracts. The Gulf Investment Corporation aims to set up private joinL ventures in the region, and ha)> been operating since 1986.


Appendix IX

Economic Cooperation Organization

T he Economic Cooperation Organization (ECO) aims at promoting economic. technical, and cul

tural cooperation among its member states. Its origins are to be found in its forerunner. the Regional Cooperation for Development ( RCD). which was founded in 1964 with identical goals and working procedure as the ECO. The founding members of the RCD were the Islamic Republic of Iran. Pakistan. and Turkey. U became the ECO in 1985. In 1992, ECO found new strength as the newly independent Central Asian countries of Azerbaijan. Kazakhstan. the Kyrgyz Republic, Tajikistan, Turkmenistan. and Uzbekistan, as well as The Islamic State of Afghanistan, joined the organization. At the 1993 ECO summit. member states expressed their intention at a future date to take up the Russian Federation's proposal to become a member.

The activities of ECO are organized through eight working groups or technical commitLees in the fields of economic and commercial cooperation. transport and communications. agriculture. energy. infra�tructure and public works. narcotics. and educational. scientific. and cultural mailers.

At the 1992 ECO summit, a very limited system of tariff preferences among member countries was agreed, establishing a 10 percent reduction on specific tariff lines. The agreement was initially for a period of four years, but would be autOmatically extended for further periods of two years each. The ECO summit of 1993 adopted a decision to establish the ECO Development Bank as well as a joint insurance company for shipping and airlines. Further areas discussed included the �etring up of free trade and industrial zones. border trade, joint ventures in the transportation sector. and coopera-

Table 5. Intra-ECO Trade of Selected Members, 1992 tin nu//w/1.\ of L.S dol/an I

tion in the area of telecommunications. pipelines, and railroads. A proposed project, supported by the World Bank, to build a railway linking Baluchistan and Turkmenistan has not made progress owing to the military conflict in the Islamic State of Afghanistan.

ECO's progress in achieving regional integration has thus far been limited. The extent of regional trade liberalization is extremely limited, and the projects decided upon at ECO summits are not being implemented. Participation by the lslamic State of Afghanistan is constrained by its imernal security situation. The Central Asian countries have only recently joined, and lheir most pressing needs arc internal stabilization and restructuring. They are naturally also desirou)o of maintaining their economic links to other countrie5 of the fom1er Soviet Union. especially the Russian Federation. Even among the original ECO members. intraregional trade accounts for very small percentages of total trade (Table 5). The trade regimes of ECO member countries vary considerably. Turkey has few QRs and an average tariff of less than 10 percent. The Islamic Republic of Iran retains QR!> on some commodities, an average tariff of 30 percent, high import registration fees. and a commercial benefits tax; under it). trade liberalization program, the Islamic Republic of Iran intends to cut its tariffs by half by the end of 1994 and incorporate the benefits tax into the tariff structure. Pakistan has the most restrictive trade regime among the three but is currently undertaking significant libcral i..:ation.

In the long run, the region could benefit from increased trade as infrastrucLUre is improved. economic reforms take hold. and military conflicts are resolved.

bhmm; Stale of blamic /\J'ghanlstan Republic of Iran Paki�tan Turkey

Counlric� lmpom Ex pons lmpon� Ex pons 1m pons Expon� 1m pons Ex pons

Afghaniswn. l�lam1c S1a1e of 6.6 16.0 0. 1 0.:'\ Iran. blamic Republic of IR4.7 89.9 269.X 502.0 Pakislan 17.6 6.0 99.0 t6!!.0 46.9 4 1 .7 Turkey 0.5 0. 1 552.0 245.0 49.!! 3.0 - -- -- --

lmra-ECO low I tR. I 6.1 651.0 413.0 241.1 148.9 316.8 544.::!

Percent of total Imports and Expon� l. t 0.6 2.!\ 2.6 2.6 2.0 u J.7

Source; IMF. DtreNion o(Trade Stmistws ( 1993 ).

129


Appendix X

Intra- and Extraregional Trade Flows

T able 6 presents extraregional trade as a share of Table 7 (concluded) GOP for selected regional arrangements, and Ta-

Region 1948 1958 1968 1979 1990 bles 7 and 8 provide trends in intraregional and extra-regional trade-to-GOP ratios for geographic regions. Australasia�·� 6.6 7.7 7.7 14.3 15.0

Developing coumries Asia2 I 1 .0 13.3 J 1.0 17.8 26.2

Table 6. Regional Arrangements: Extraregional T01al A�ia 9.6 10.8 7.8 1 1 .2 14.0

l m ports as a Share of GOP Africa 4.2 3.7 3.5 2.7 3.1 1/11 pern•m) MiddleEaM 10.2 7.0 3.0 3.6 3.3

Regional Trading T01al World 7.3 8.8 10.3 15.9 17.4 Arrangement (Year

Source: Anderson and Blackhurst ( 1993). founded/enuy imo force) 1970 1980 1990 1991 1992

EU- 12' 9.0 12.5 9.7 9.7 9.1 'Tntrarcgional merchandise expom plus import� a� a percemagc

ofGDP.

EFTA ( 1 960) 17.2 22.3 20.0 18.8 1 9.0 2Jntrareg10nal trade shares refer 10 trade with other economies in Asia.

CACM ( 1958/60) 17.2 23.5 25.0 23.0 1Australaloia is composed of Au�tra1ia and New Zealand.

LAIA ( 1980: LAFfA. 1960/6 1 )2 6.8 10.6 6.8 8.0

ANDEAN PACT ( I969) 1 1 .2 14.3 12.6 14.6

CUFSTA ( 1988/89) 3.0 7.6 7.7 7.4 7.7 Table 8. Extraregional Trade as a Share of GDPt NAFfA ( 1 992/94) 2.9 7.0 7.0 6.7 7.0 1/11 pcrcenl)

MERCOSUR ( 1991) 5.7 10.6 4.0 4.8 5.3 Region 1948 1958 1968 1979 1990

ASEAN ( 1 967) 9.0 19.7 26.9 Western Europe 20.6 15.8 1 2.5 16.1 12.8

ANCZCERTA ( 1983) 1 1.7 1 3.0 13.4 12.9 1 4.3 Ea�tem Europe and

Source: Braga ( 1994). countrie� of the 1The 12 members of EU-12 are Belgium. DenmarJ,.. France. Ger- formerSovtet Union 13.4 9.7 14.6 18.4 22.7

many. Greece, Ireland, Italy, Luxembourg. Netherlands, Portugal. Total Europe 16.5 12.4 10.2 12.& I 1 . 1 Spain, and the United Kingdom.

2LAFTA was superceded by LAIA in 1980. North America 7.8 6.3 6.0 13.6 1 3.2

Latin America 24.0 24.8 1 7.4 21.3 23.7

Table 7. Intraregional Trade as a Share of GDP1 Total America 6.0 5.2 5.2 1 1 .2 1 1 .2

lin pcr('('nl) Japan 2.8 1 1 .8 1 1 .5 1 3.8 1 1 .6

Region 1948 1958 1968 1979 1990 Aumalasia 44.7 29.0 23.2 27.2 28.0

Western Europe 14.8 17.7 2 1 . 3 3 1 . 5 33.0 Developing countnes

Ea�tern Europe and Asia 15.8 1 8.9 20.4 28. 1 31.2

countries oft he Total Asia 1 5 . 1 15.5 13.5 16.1 15.2 former Soviet Union 1 1 .6 15.3 25.4 21 .6 18.8

Total Europe 17.2 19. 1 24.5 33.4 34.3 Africa 45.8 42.2 34.8 45.5 45.6

North America 2.9 2.9 3.5 5.8 6.0 Middle East 40.0 51 .0 34.2 52.5 50.0

Latin America 6.0 5.0 4.0 5..1 3.8 Total World 14.9 12.9 1 1 .6 18.8 16.1

Total America 7.9 6.6 5.7 9.7 9.2 Source: Anderson and Blackhurst ( 1993). 1Extraregional merchandise expom plus impom a\ a percentage

Japan2 5.2 6.7 5.0 6.1 6.2 ofGDP.

130


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.S. Sem1tc on lnvC!>tig;llion o . . 132-3:!6 l'ndcr )ct tion 332 of the Trade Act of 1930. USITC Puhllc<ttlllll 2621 ( Wa�hington: USITC. May 19C).h

Viner. J .. The Ctwom.' Urttnn i.I.\IIC (New York: C 'arncg1c l:n· dowment for Internal ional Peace. 11)50 ).

Winter-.. L. Alan . .. The European Communi I ) : ,\ CN· ol Succc:-.sful Integration'!" paper pre,cnted at the World Bank ;md CEPR Conference on Nev. IJimcn,iotl\ 111 Rc gional Integration. Paper o. I I ( Wa�h ington: The World Rank and CEPR. April 2 3. IIJI)�J.

Wonnacoll. Paul. Tlw United State.\ ortd Cunwfa ·r lrt• {jrrt·lt jiw Fn•e 7i·(l(/e ( Wa:-.hington: hhtitute lor lntt-rnall\lll,d Economic:-. 19X7 ).


World Economic and Financial Surveys This series (ISSN 025� 7440) contains biannual, annual, and periodic studies covering monetary and financial issues of importance to the global economy. The core elements of the series are the World Economic Ol�tlook report, usually published an May and October, and the annual report on lmemmional Capital Markets. Other studies assess international trade policy, private market and official financmg for developing countries, exchange and payments systems, export credit policies, and issues raised in the World Economic OtUlook.

World Economic Outlook : A Survey by the Staff

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The World Economic Owlook, published twice a year in English, French, Spanish, and Arabic, presents !MF staff economists' analyses of global economic developments during the near and medium term. Chapters give an overview of rhe world economy; consider tssues affecting industrial countries, developing countries, and economies in transition ro the market; and address topics of pressing current interest. ISSN 0256-6877. $34.00 (ac:ademic rare: $23.00: paper).

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These studies, supporting analyses and scenarios of rhe World Economic Outlook, provide a derailed examination of theory and evidence on major issues currently affecting the global economy. $20.00 (academic rate: $12.00; paper). 1993 ISBN 1-55775-337-7 Slock IIWE0-393.

Developments in International Exchange and Payments Systems by a Swff Team from the IMF's Exchange and Trcu.le Relations Deparcmenc

The global trend toward liberalization in countries' international payments and transfer systems has been most dram<1tic in central and Eastern Europe. But developmg countries in general have

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Official Financing for Developing Countries by a SwffTeam from the IMF's Policy Development and Review Department led by Michael Kuhn

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