Dec 12, 1989

SOME POSITIVE, AND MANY NEGATIVE TRENDS.

GENEVA, DECEMBER 11 (BY CHAKRAVARTHI RAGHAVAN)— In presenting a patchwork quilt image of some positive but many negative developments in the overall trading environment in 1989, the GATT Director-General in a report to the GATT Council has sought to use them to underscore the need for agreements in three main issues of the Uruguay Round - market access, rules of the game, and rules and policies for new areas.

The report brings out that there has been no letup in the discriminatory restraints on Third world exports, whether under the Multifibre Arrangement (MFA) or in other voluntary export restraint arrangements, and comments that there could be little doubt that such discriminatory restrictions fall "disproportionately hard" on Third World exports.

But overall, the way some of the trade-policy developments have been analysed and explained, the report leaves an impression, whether intended or not, of support to the viewpoint advanced by some that the best way to prevent unilateral actions by the U.S. or other powerful trading nations is to yield to them and write GATT rules and disciplines in the new areas of intellectual property rights, investments and services.

Nowhere perhaps is this more evident than in the report's use of the word "galvanised" to describe the international trading community's reactions over the U.S. inclusion of the so-called "Super" and "Special" 301 provisions in its Omnibus Trade and Competitiveness Act of 1989.

The report points out that the possible implications of the legislation, in terms of actions not based on GATT provisions, and the reactions of other contracting parties to it, have been and are being discussed in GATT fora.

Pointing out that many of the actual or threatened unilateral actions this past year have involved "attempts to resolve issues not covered by existing GATT rules and obligations", the report comments:

"In such instances, they serve more as stark examples of how the international commercial relations might be carried out in the absence of multilateral rules and disciplines, than as evidence of alleged inadequacies of existing dispute settlement procedures, or as signs of a 'turning away from the GATT' by the parties involved".

The Director-General's report is the first annual report called for by the decision of the GATT Contracting Parties in April 1989, in accepting the Uruguay Round mid-term accord on the Functioning of the GATT System (FOGs) and for enhancing multilateral surveillance, replacing the present practice of half-yearly special sessions of the GATT Council when developments are reviewed.

While the report presents a general overview of developments in the international trading environment, the GATT Council this week will also be undertaking, under the newly established experimental Trade Policy Review Mechanism (TPRM), review of the broad range of trade policies and developments in Australia, Morocco and the U.S.A. - based on reports of the governments and of the GATT Secretariat.

All these would be very carefully scrutinised by GATT member-governments, and outsiders too, particularly in the context of controversies that have erupted over the secretariat's attempts to expand by the backdoor its role and powers through the FOGS negotiations.

The trade policy developments are presented in the context of a modest slowing down from the unexpectedly strong growth in but a continued strong, though uneven, expansion of world output and trade in 1989 and an expected somewhat slower rate of growth in 1990.

But with the major countries in different phases of the business cycle (unlike in recent years of synchronised expansion and contraction), the world economy is expected to avoid the wide swings in economic activity.

Also, the persistence of large external imbalances among leading traders would be a continued source of attention, because of uncertainty of when and how they would be corrected and their possible repercussions on the trade policies of the countries concerned.

The uncertain outlook for primary commodity prices next year, and the increasing divergence in price behaviour evident in recent trends, are likely to contribute to important differences in the trade performance of individual Third World countries.

Many countries in Latin America and Africa "face another year of projected zero or negative growth in per capita incomes", the report notes.

The generally encouraging state of the world economy as a whole hides the serious economic situation in many countries, in particular the least developed and highly indebted countries. The shares of both these groups in world trade remain well below that of a decade ago.

While the aggregate exports of the highly-indebted in 1988 surpassed their figures of 1932, and both exports and imports are expected to grow in 1989, with imports of capital goods recovering since 1986, they are far short of the requirements to make up for foregone imports during 1982-86.

Among the positive trade policy developments, the report lists the implementation of first results of the Uruguay Round - the introduction of the TPRM and improvements in dispute settlement procedures, and early implementation of offers in tropical products.Notifications have also been received by the secretariat about the "freeze" on current support and protection levels (under the mid-term accord in agriculture) until completion of negotiations in December 1990 and the reduction in support levels in 1990.

A number of trade liberalisation and trade reform measures have also been undertaken - 15 of the 24 measures are by Third World countries.

The report also suggests some improvements in dispute settlement and acceptance and implementation "for the most part" of panel reports and rulings.

However, this is only in general GATT disputes, and not those arising out of the Tokyo Round codes. In countervailing duty cases, four out of the six reports since 1980 remain unadopted.

Anti-dumping (AD) investigations remain, after tariffs, the "most frequently invoked" trade policy instrument. The four leading users of this - Australia, Canada, the EEC and the U.S.A. - have initiated more than 1000 investigations since 1980 and leading to protective action of some sorts in more than 500 instances.

The report also notes that the scope of anti-dumping procedures have been broadened through specific legislative or regulatory measures and changes in methods used to determine whether dumping has occurred.

Of particular relevance are controversies over treatment of sales "below cost oil production" and the closely related increase in use of "constructed value" approach to determine whether there has been dumping.

In the "constructed value" approach, instead of determining the fact of "dumping" by comparison of market prices in the exporting and importing countries, the "normal" value is calculated by the investigating authority and compared with the price charged in the import market.

There have also been increased use of "rules of origin" to deal with "circumvention" of anti-dumping duties. The ongoing internationalisation of production and distribution makes "origin" of a product more open to argument.

While some of the issues are under discussion in the relevant Uruguay Round negotiating group, in taking production and marketing decisions exporters increasingly now have to take account of the effect of their actions on the competing domestic industry in the importing country.

This runs the risk of reducing the willingness of firms to engage in competition, and strengthens incentives to engage firms in implicit or explicit price-fixing agreements with firms in the importing country – "a stark contrast with the rationale behind anti-dumping, namely, to sustain competition by protecting domestic firms against predatory, as against competitive, behaviour by foreign producers".

There has been little or no reduction in overall restrictiveness of measures in textiles and clothing trade, since MFA-4, insofar as product, country coverage, growth rates and flexibility are concerned.

The number of bilateral (restraint) agreements have remained broadly constant - 114 against 115 in MFA-3. Restraints continue to be applied almost exclusively to Third World economies, 94 out of 114, with most of the remainder applied to exports from East Europe.

Austria and Finland continue to apply MFA sparingly, while Sweden has announced it will terminate MFA restrictions when MFA-4 ends in September 1991. But other industrial countries, while introducing some improvements, still have restrictive agreements (the EEC) or rise in restraint agreements with wider coverage, unchanged or lower growth rates and flexibility provisions (Canada and the USA).

In some recent agreements, restraints have been introduced in products where there have been little or no exports from the countries concerned.

The increased use of GATT dispute settlement procedures have not also ended actions taken outside GATT framework.

There are now in place some 249 discriminatory export restraint-type agreements, excluding the 114 under the MFA. Of the 249, the number restraining exports from ICs are 130, larger than the 32 against exports from the Third World.

However, when seen against the fact that exports from ICs exceed those from the Third World by a factor of three and a half, and the export restraints under the MFA are mostly against Third World exports, "there is no doubt that discriminatory export restraint-type agreements fall disproportionately hard on exports from developing countries".

The report notes that with the rising share of trade in national production and GDP of most countries, with trade flows seen as increasingly affected by policies of trading partners, mainly trade-related policies applied inside an economy, there has been increasing emphasis on GATT's capacity to deal with domestic support policies and conditions of competition.

These elements, the report notes, have been the "driving force" behind inclusion of new issues in the Uruguay Round - trade in services, trade-related intellectual property rights (TRIPs) and trade-related investment measures (TRIMs).

While "trade policy" is being broadened to cover a range of policies not previously addressed in multilateral trade negotiations, many countries have problems in reconciling this trend with their domestic policy objectives.

The report argues that the various issues raised underscore the importance of the Uruguay Round in efforts to deal with adjustment problems accompanying the integration of national economies at the global and regional levels, the entry of new players in the world markets, and process of adjustment in current account imbalances.

"Each of the three main issues in the round - increasing market access, improving existing rules as well as observance of the rules, and writing multilateral rules and disciplines for policies in new areas - has important implications for the adjustment process", the report concludes.