9:50 AM May 18, 1993


Geneva 18 May (Chakravarthi Raghavan) -- The contradictions between the European Community's advocacy of 'free trade' and 'trade liberalization' and the actuality of its web of managed and preferential trade arrangements came out in the review of the EC's trade policy at the GATT's TPRM exercise this week.

This is the second time, since the Trade Policy Review Mechanism was set in place in the GATT in December 1989 as a result of the mid-term agreement of the Uruguay Round that the EC's policies have come for review, based on a report by the GATT secretariat and another by the European Commission.

In contrast to the first occasion, several of the GATT participants noted, the report of the secretariat this time was subdued and low-key and one had to look carefully before one could get a clear picture.

While GATT officials, and delegates to the GATT, almost unanimously point to the TPRM exercise as a major success of the GATT and the Uruguay Round and for the "transparency" it brings to bear on national trade policies, any independent outside assessment and cost/benefit analysis would begin to question whether the costs (three million dollars a year on the secretariat alone) justify the benefits and to whom transparency is provided.

Like other GATT activities, the TPRM exercise is normally preceded by making available to the media the secretariat report and the report of the country or trading entity being reviewed and, at the end of the discussion, the text of a Chairman's summing up, a highly sanitised version of the discussions. After a few months, the reports and the GATT record of the discussions and summing up are published (for those who can afford to buy it, mainly TNCs and trade associations, and perhaps provides them information on individual country policies.

The opening remarks of one of the two discussants, Amb. Celso Amorim of Brazil (who as all discusstants spoke in his personal capacity) perhaps brought into question not only the reality of EC's policies but that of the GATT and the multilateral system too.

Starting with the story of the scene in the classic film "Casablanca" where Humphrey Bogart (as the character Rick in the story) tells the police chief that he had come to Casablanca "for the waters" and when asked "what waters, we are in the desert", replies "I was misinformed", Amorim went on to add: "If Adam Smith or one of his followers would come to one of our TPR exercises, and those which concern the major partners, we might be faced with a similar situation.

"I can see the ghost of the founder of modern economic science coming to the GATT and, when asked why he came here, replying that he came for 'free trade'," Amorim continued. "In such a case, one of us..would have to disabuse him by saying, without irony this time, that he is misinformed."

Amorim then went on to list some of the contradictions between the 'liberalisation' and 'free trade' as preached or professed and as practised: quantitative restrictions, massive subsidization (not merely of agriculture), reference prices, variable levies, price undertakings, Voluntary Restraint Agreements or VRAs (formal or informal), counter-vailing charges, absurdly heavy and highly selective excise taxes, "multilaterally or bilaterally" agreed restrictions on textiles and the large array of discriminatory measures implicit in the different preferential agreements.

All these, the discussant added, "builds into a scenery -- not of a desert maybe, but of an intricate and impenetrable forest where the canons of free trade are hardly to be seen...Although highly educational it is not very edifying reading".

And while the EC Commission has jurisdiction in trade policy, it is difficult to grasp all the measures that affect trade, given the levels of decision-making in the EC, Amorim noted pointing to the case of R & D expenditure where the constituent States of Germany in 1989 spent four times more money than was available in programmes funded through the EEC institutions.

The secretariat's press communique (which is probably all that most media reporters would ever get around to reading and reporting) starts with the 'news': "Available information sugests that the implementation of the internal Market programme has improved, access, transparency and legal security in many sectors," It goes on to record the secretariat view that EC has removed many long-standing residual national trade restrictions, protecting individual member States' markets, especially of Asian or central and eastern European origin, has taken steps to harmonize the regulatory framework among States in a number of industries, eased entry bariers and injected competition into hitherto strictly controled areas.

The summary then goes on to speak of actions taken (by harmonizing) in the steel, pharmaceutical, telecommunications, coal... It also speaks of EC-wide arrangements in other sensitive areas, replacing a maze of national restrictions, making it easier for the exporters.

In reviewing developments since the last review, the secretariat report, and even more the EC Commission's own, have dwelt greatly on the harmonization for the Single Market and, as Amorim pointed out, equating harmonization with liberalization. Apart from the banana regime, where it has become more restrictive for some exporters, whether in practice harmonization is equal liberalization is yet to be tested in experience.

That neverthless, the discussant and several of the delegations who intervened, found the EC policy praiseworthy, more so on unilateralism (despite its New Commercial Policy Instrument of 1984 equivalent to the S.301 of US trade law) and EC's desire to strengthen and support the GATT, was essentially in terms of the contrast to the United States which, more so under the Clinton administration now, is openly talking of and trying to use all the unilateral trade policy instruments to gain markets and force trading partners to yield.

As Amorim put it, "If the ambiguity of GATT provisions on matters such as emergency measures and antidumping, of which the EC is a frequent user, leaves room for some of unilateralism in application of restrictions, this cannot be equated with the aggressive pursuit of market opening through threats and sanctions."

In the web of EC trade relationships, there are only five suppliers (US, Japan, Canada, Australia and New Zealand) selling into the EC market on the basis of the GATT most-favoured-nation (MFN) principle. These include the other major trading entities (US, Canada and Japan) and account for 27 percent. The bulk of the rest is under preferential arrangements.

Thirty percent of the EC's imports come from developing countries other than the Lome countries, but only six percent of this 30 qualified for GSP treatment.

All other trading partners are governed by one or other preferential arrangements -- free trade areas, the closest, with the other Europeans in the European Free Trade Agreement, the new emerging Europe agreements (with former east and central European communists now turned market-economists), the number of association agreements in concentric circles with those closest to Europe having more privileges than those farthest away.

While all the preferential agreements are 'contractual', except for the GSP where the preferences are 'autonomous' privileges conferred by the EC and thus easily whittled away when faced with competition, even the contractual arrangements have a one-sidedness in decision-making and don't really provide security as has now been experienced by the east Europeans whose steel exports have been hit with anti-dumping measures.

The special arrangements foreseen in Europe, including proposals to wind-down the MFA textile restrictions on the exports of these countries in half the time frame envisaged for the other developing country exporters hit by the MFA regime would also mean that the latter would be at a competitive disadvantage, and even more if the Uruguay Round tariff cutting where the EC wants the high and peak tariffs to be reduced. When this happens, the unrestrained trade (whether of the US and other exporters now, or the east europeans who would have their exports liberalized ahead of the developing countries) would quickly grow and occupy the 'niche'.

The GATT report deals with this issue of preferential arrangements, in its pluses and minuses, but sidesteps the question of the questionable legality of several of them including extension by the EC as other industrialized countries of GSP privileges to the former Socialists which on the face of its is not covered by the blanket authorization in the 1979 Enabling Clause nor by any GATT waivers.

The secretariat report notes though that some of the recent agreements may be weakening GATT and says that provisions of the recent Europe agreements have set a new tone. While the 'old' free trade agreements with EFTA members explicitly refer to and reaffirm obligations from other international agreements, there is no comparable reference in the "new" Europe Agreements, except in the areas of dumping and subsidization. "In imposing bilateral restrictions on steel imorts from the Czech and Slovak Federal Republic in 1992, the EC used the safeguard provisions under the Agreement in a way that seems to suggest that not only bilateral preferences but also GATT obligations have been suspended".

Noting that trade policies are defined and administered amidst competing economic interests, the secretariat not4s that the current macroeconomic problems and uncertainties in the EC, compounded by adjustment pressures stemming from the Internal Market programme, the 'Europe Agreements' and need to integrate east German economy fully with the EC, may strengthen inward looking interests.

And while in these circumstances, more leeway in decision-making, possibly at expense of contractual obligations, may seem as an advantage, enabling policymakers to respond swiftly and 'pragmatically' to challenges, "without a stable and effective framework of multilateral rules and disciplines, however, such decision-making may be vulnerable to short-term pressures and vested interests."

Amorim pointed out that, without going into the conformity of these agreements with the GATT, it was hard to believe that "such an intircte web of different norms and statuses does not entangle the working of the multilateral trading system...it is as if the historical heritage of some EEC member-states weighs on the Community, which somehow reproduces the pattern of the imperial systems of the past...in its drive toorganize most of its trade through preferential arrangements, political motivations seem to have played atleast as important a part as economic considerations.

"This might lead to further distortions in the world trading system...pushing countries or regions which may have the EC as their main trading partners but not included in the existing preferential schemes into other regional arrangements, further contributing to the fragmentation of the world economy"

Amorim however noted that among the industrialized countries, the EC has displayed the greatest sensitivity to the problems of developing countries and during the Uruguay Round had been more responsive than others to the concerns of developing countries on such issues as Art XVIII:B (bop restrictions), Trips or cross-retaliation and "to its credit was able to exercise a mediating role". In ordinary GATT activities too, the EC had been able to display a "relatively flexible position" towards developing countries and their aspirations.

The Community continues to place strong reliance on ad valorem duties (and specific duties on some agriculture-based products), low tariff averages on industrial products and a very high proportion of them bound in GATT, and significant tariff escalation in sectors like fish, tobacco, leather, rubber, textiles and metals.

In the area of tropical beverages, and more than 30 years after the Heberler Committee report, the EC member-states have some of the highest excise taxes on coffee, cocoa and tea -- ranging from a 'low' of 25 percent to over one hundred percent. The EC single-market and harmonization will not touch these at all.

The EC is one of the most frequent users of antidumping measures as a trade policy, the instrument often used as a selective safeguard or protectic measure against individual sources of supply. The report brings out that recently there is a shift in using the antidumping measures from eastern and central European producers to Asian suppliers. In mid-1992, there were 144 antidumping measures in force.

Apart from agricultural subsidies, the EC and its member-states resort most to subsidies to promote production. In 1988-1990 (according to figures quoted by Amorim from the EC's own reports) the sum of the aids providedc by the 12 member-states, and excluding funds from the EC budget and sub-national entities, averaged ECU 89.5 billion a year or two percent of the EC's GDP.