Apr 25, 1987


GENEVA APRIL (IFDA/CHAKRAVARTHI RAGHAVAN) -- The international trading system is in disarray, and actions have to be taken from within and outside the strengthen and improve the trading system, according to the UN Conference on Trade and Development.

In a report (TD/324(ADD/4) for the Seventh Session of the Conference, the Secretariat says that concerted international action needs to be taken in this regard.

Such actions must correct the tendency eroding the system from within, adapt it to new realities, and expand it beyond its present limitations. There is also need for supportive actions from other areas of the international economic systems, including money and finance.

Analyzing the limitations of the GATT system, UNCTAD point out that this was partly because only the commercial polity chapter of the Havana Charter was put into operation.

This proved to be one of the main limitations in that the agreements in other areas - on commodity price stabilization, economic development measures, RBPS and macro-economic policies - were excluded from the area of mutual rights and obligations in the trading system.

Another limitation arose from aspects of its rules and principles that impeded the full participation of certain countries and groups of countries, especially the third world countries, and their ability to derive equitable benefits.

Subsequently attempts were made to adjust GATT to meet the needs of these countries - through amendment of article XVIII (governmental assistance to economic development), application of GSP schemes negotiated in UNCTAD, incorporation of part IV, and application of differential measures for special and more favourable treatment through the "enabling clause" incorporating the Tokyo Round agreements into GATT.

However, these measures have been either non-contractual or heavily qualified, while the departures permitted to third world countries were "generally subject to strict surveillance".

The differential treatment to third world countries in the Tokyo round codes had not been implemented in practice, while GSP benefits have been made increasingly conditional upon some reciprocal actions by beneficiary countries.

The debate on the GSP and "integration" of third world countries into GATT, UNCTAD comments, "rest upon arguments wanting in both economic substance and historical and political perspective".

Attributing the declining respect for the unconditional MFN clause to the GSP "ignores the fact the major breach in the MFN principle, the long term agreement on cotton textiles, came into effect a decade before GSP and that the MFA entered into force the GSP schemes of U.S. and Canada", UNCTAD comments.

There have also been erosion from within the GATT system, due to the neglect of the unconditional MFN clause and in particular application of discriminatory provisions against third world and socialists countries, introduction of concepts like "market disruption" and "conditional MFN" to justify such discrimination, and the decline of the relevance of tariffs as an instrument of trade policy.

Third world countries have been particularly penalized and face an increasing array of trade restrictions through a variety of "emergency" or "temporary" protective devices, while the advantages they enjoy are being withdrawn under the principle of "graduation".

The concept of "unfair trade practices", applied in domestic trade laws has been extended far beyond the traditional areas of "dumping" and "subsidization".

Measures arising from implementation of policies on investment, intellectual property, technological development, material resource conservation, stimulation of services production and others are being defined as "unfair", "unreasonable", "unjustified", etc., and met by threats of protective or retaliatory trade actions even when no international commitments have been breached, UNCTAD points out.

"This tendency has had a destabilizing effect on the trading system as a whole, as actions considered as legitimate and essential components of development strategies are determined to be "unfair" by trading partners and even subject to threats of retaliation".

The basic assumptions of the system are also no longer valid, and some like the rapid emergence and accelerating diffusion of new technologies and the dominant position of TNCS in world trade and production, were not foreseen.

A new wave of technologies, producing completely new products and processes, and the increasing "service" content of goods has become a determining factor in competitiveness.

The application of new technologies, within an overall strategy of continually adapting production to the exigencies of the world market and of human capital to the new production requirements, permit countries to accelerate their development process.

But this dictates decisions to produce a product to be taken years in advance of its entry on the market and within long-term strategies to "create" comparative advantage - placing a clear responsibility for this on all governments.

For third world countries their sole advantages of labour costs and plentiful natural resources have been significantly reduced, and natural resource/commodity producers face a secular decline in world demand and a worsening of terms of trade.

Behind protective barriers, new technological applications are taking place in industrial countries to enable them to establish competitivity in sector where third world countries have traditionally been major suppliers.

While reducing unemployment has ceased to be the main goal of macro-economic policy, it has become increasingly an important factor in trade policy, and the main driving force behind protectionist initiatives in OECD countries.

In contrast to the initial assumptions of the Bretton Woods System, monetary flows have now come to determine trade flows, and a country can find itself with a currency whose value in no way reflects its competitivity in international trade.

The Havana Charter foresaw inter-governmental commodity agreements to deal with difficulties in primary commodities such as "the tendency towards persistent disequilibrium between production and consumption, accumulation of burdensome stocks and pronounced fluctuations in prices".

A trading system based on access to markets, UNCTAD points out, is of less relevance to countries whose ability to import is influenced by the prices obtained for their commodity exports rather than trade barriers of their trading partners, UNCTAD points out.

In the area of RBPS, though there is a multilaterally agreed set of equitable principles and rules, the set is non-binding and not linked to other international trade obligations which continue to be circumvented by RBPS.

Another strain for the world trading system is due to the emergence of TNCS as major actors in world trade.

Home governments increasingly see them as "national champions" they see TNC interests coincide with national goals, and have become more supportive of TNC investment and production abroad it helps their competitiveness.

But the increased participation of TNCS, UNCTAD comments, has implications for international trade, including the growing oligopolistic nature of world trade, transfer pricing, and great impact of FBPS in the international trading system.