4:12 PM Jul 25, 1995

EU FACES SOME SHARP QUESTIONS

Geneva 25 July (Chakravarthi Raghavan) -- The European Union faced some sharp questions Monday, under the WTO's TPRM exercise, on a range of its trade and economic policies, and in particular its common agricultural policy and measures to comply with Uruguay Round obligations and the growing web of bilateral preferential trade accords and compatibility with the WTO system, trade diplomats said,

The EU also came under some sharp criticism for its approach in terms of the accessions and integrations: where it has taken in more countries (Sweden, Finland and Austria) or promoted free trade agreements, without first negotiating under Art. XXIV compensatory arrangements for those affected.

In fact, for the three accessions, except with the US where the EU entered into interim accords, the other countries have had little progress to report on their Art XXIV negotiations.

This is the first review of the EU under the WTO and, in accord with the practice, the WTO's General Council, acting as the Trade Policy Review Body (TPRB), had a report from the EU Commission and another from the WTO secretariat, dealing with all aspects of trade covered by the WTO - Goods, TRIPs and Services.

Two earlier reviews under the old GATT (covering the trade in goods) was conducted in 1991 and 1993.

The secretariat's report was essentially a descriptive document, rather than one with analytical comments of its own or any prescriptive views. Some trade diplomats privately said outside (though no one appears to have raised it in the TPRB), it was weak in terms of criticism or expression of opinion under the TPRM exercise -- weaker than earlier ones on the EU, much weaker of some sharp criticism in the past of the United States, and even sharper views of the developing world.

Unlike in the earlier reviews, and particularly the 1993 one, when the EU was known to have found fault with and objected in private to the secretariat's assessments, the EU Commission this time found little to quarrel with the secretariat report. Roderick Abbot, a top commission official told the media in a briefing, that there was "very little gap" between the views of the EU and the WTO secretariat, and in a couple of areas where they differed, it was a question of opinion.

The WTO secretariat in its report called the EU "as among the pace-setters" in the multilateral trading system and saw the recent accessions to the EU and the new preferential arrangements as having further increased the EU's influence on the system.

The review is posited against the background of the EU's recovery from the 1993 recession and the EU Commission's projection of a period of rapid recovery ahead (but subject to some uncertainties -- due to uncertainties of upward pressures on long-term interest rates, effects on EU exports of the dollar's weakness against EU currencies) and its likely continuance.

The EU's Single Market process (from mid-1980s to 1994) is estimated to have provided a cumulative gain of 1.5 percent GDP, according to the OECD, while the EU's own calculation of results won't be available in 1996. But according to the WTO secretariat's econometric calculations, on average the contribution of Single Market integration contributed to an economic growth of 0.4% percent annum over the period 1986-1992.

This has to be contrasted with the EC's own Paolo Cechhini report of 1988 which projected an overall GDP increase through the integration process of 2.5% to 6.5%, with a midpoint estimate of 4.5%. No one wants to be reminded of those projections, and even the WTO secretariat which, with the IMF and the World Bank, has been over-engaged in econometric projections of trade liberalization benefits, made no references to it.

The trade policies pursued by the EU over the past two years, the secretariat says, show increasing internal policy integration, a rapidly expanding and increasingly complex network of free-trade area and preferential relations and active participation in multilateral trade liberalization.

The secretariat document adds: "A strong, constantly active WTO framework is necessary to guide the Union's future trade policies and counter-balance the discriminatory impact of expanding preferential trade."

The report also draws attention to the tariff peaks in the EU's trade regime, and particularly in terms of the agricultural tariffs (the effect of the socalled 'dirty tariffication' that was done by all the majors, and in their wake by others, under the Uruguay Round, and generally accepted without challenge) and the tariff quotas that assure existing access to traditional suppliers but make new access for new suppliers much more difficult.

The EU has introduced in some cases ad valorem duties, and in others specific duties which could result in increased future protection.

But while the report details in a chart the 'average' tariffs on agricultural products in the 24 HS chapters, not much detail or comments are available within and across individual product lines.

But the chart shows tariff peaks of 50% for products in HS chapter 02 (meat and edible meat offal), 04 (Dairy produce etc) and over 60% for chapters 10 and 11 (cereals, products of milling industry etc). The average is 25%. The report says that meat and meat products, dairy products, sugar and derivatives, and tobacco products have peaks, while tariffs are low or zero for oilseeds, fruit and vegetables and plants.

The report also refers to the EU's customs tariff with its "traditionally displayed significant escalation", affording higher effective protection than suggested by nominal rates in respect of sectors such as fish, tobacco, leather, rubber, textiles and metals. And while the Uruguay Round cuts have addressed some of these, with a formula based tariff cut approach, "significant escalations remain in textiles and clothing - with a tariff average of about 10% on fully processed items in year 2000 compared to less than one percent on raw materials.

The EU is one of the "most frequent users" of anti-dumping instruments, and recent amendments to the Community legislation, enabling actions on the basis of simple majority rather than the earlier qualified majorities, makes its use easier as a protective instrument.

As of end 1994, there were 156 anti-dumping measures (provisional and definitive duties and price undertakings) in force. In 1993 and 1994,, respectively 21 and 43 new investigations were initiated -- figures comparable to the past. But relatively few were initiated in second half of 1994. New investigations covered tapered roller bearings from Japan, polyester yarn from India, Indonesia and Thailand, polyester fibres from Belarus, advertising matches from Japan and 3.5 inch microdiscs from Malaysia, Mexico and the US.

In the use of subsidies and countervailing measures, the secretariat says the EU has closely followed the WTO agreements and used countervailing legislation sparingly.

The EU has also put in place New Trade Barriers Regulation to defend its rights in international trade. Industries could complain about obstacles to trade having an effect on the EU market and causing material injury, enterprises could complain about obstacles having an effect on third-country markets with adverse trade effects. These cover goods, services and intellectual property. Final measures of a commercial policy nature over these complaints are to be taken by the EC Council of Ministers by qualified majority.

But unlike the US S.301, the actions in areas covered by the WTO cannot be taken without a WTO dispute settlement decision in favour of the EU and measures are authorized by the WTO's DSB.

The EU claims to have the most open trade regime, and uses some indicators to buttress it: the ratio of MGE (external imports of goods to total imports of goods, MGST (total imports of goods and services) to GDP and MGE to GDP - the last two expressed both in current and 1985 prices.

But the secretariat sounds a note of caution in using such indicators and notes that indicators, such as share of trade in GDP or as in the EU's case share of external to total trade (this includes the trade among EU members), "are fraught with problems" and even the share of EU's total imports to external imports were fraught with conflicting interpretations: the EU is more inward-oriented and self-centred vs the view that removal of standards, procurement- and other policy related barriers, has a stronger impact on EU-based than external suppliers.

The report treads somewhat lightly on the web of preferential and free trade agreements that the EU is forging between itself and countries within Europe, Mediterranean, and in Asia, Latin America, as well as the ACP, but cites an EU Commission paper outlining the policy in forging such agreements: "The EU should be selective in its approach, applying different instruments to countries at different development stages and choosing priority sectors for cooperation which reflect EU comparative advantage - i.e. banking, energy, environmental technology, transport equipment and telecommunications (emphasis added).

A careful study of various agreements, instruments and preferences - whether it be to the ACP countries, or GSP schemes to the other developing countries or the socalled third and fourth generation cooperation agreements, with some leading to possible future adhesion to the EU (in respect of the east European economies) -- all suggest a pattern of building up a powerful web of dependency relationships.

This comes out starkly in the new GSP regime where four factors are set and a mixture of them used and applied to graduate countries as a whole out of the benefits or particular sectors and products.

Though these are specifically and clearly mentioned, the process itself is non-transparent, as the questions addressed to the EU in the exercise showed.

The four factors used are:

* relative income -- the beneficiary country's per capita income as a percentage of the EU's average per capita,

* relative manufactured exports -- value of all manufactured exports from the beneficiary as a proportion of total EU manufactured exports,

* sectoral share in EU imports -- share of EU imports from beneficiary in a given product category in all EU imports in that category (with some 21 separate product categories specified including one each for textiles, clothing, footwear, steel products, consumer electronics and motor vehicles), and

* the overall share in EU imports -- total value of EU imports from beneficiary country as a proportion of global EU imports.

The relative income and relative manufactured exports are used to define the socalled "development index". Under this Hong Kong, South Korea and Singapore are 'most developed' with an index of -0.6 to -1; Brazil, Malaysia, Mexico and Thailand fall in a second group with an index between -1 and -1.23; a third category of Argentina, China, India, Indonesia and Venezuela with an index between -1.23 and -1.7; a fourth of those with an index between -1.7 and -2 including Chile, Colombia, Pakistan, the Philippines and Uruguay; and a last category of those with an index of less than -2 including Ecuador, Bolivia, Sri Lanka, CIS Republics, and most Central American countries including Costa Rica.

In the specialization index, the higher a country concentrates its exports in a single sector, the higher its ranking in the specialization index.

The combination of the two indexes are used to determine whether a good from a particular source benefits from GSP sources.

The secretariat cites some examples of the country-product combinations resulting in graduation (end of GSP privileges): Argentina - raw hides and skins; China - leather and footwear articles; Hong Kong - clothing; India - raw hides and skins, leather and textiles articles; Indonesia - wood and articles of wood and footwear; Malaysia - wood and wood articles; Singapore - all electronic goods; South Korea - leather and footwear articles; Thailand - footwear; and Pakistan - raw hides and skins, articles of leather and textiles.

The secretariat comments that the new GSP scheme favours countries with low per capita incomes and low manufactured exports relative to EU. The bias is quite strong as the development index falls increasingly exponentially -- faster with lower income or manufactured exports.

But implicity, the report adds, the system disadvantages larger countries, as everything else (including ratio of manufactured to other exports) being equal, the higher the absolute export level, the greater the development index.

The EU system also discourages countries concentrating exports to the EU in a narrow range of products and also penalize beneficiaries diversifying away from exports to the EU -- for a fall in the beneficiary's share in global EU imports leads to a larger specialization index.

When the EU, with US encouragement, originally formulated its common agricultural policy, few saw its ultimate shape and its non-transparent administration which played havoc with competitive exporters and their market opportunities -- to the point that during the Brussels meeting, agricultural exporters called it the 'most diabolical scheme' to keep out exports.

The EU's preferential trade policies and web of agreements may not have reached that point -- the EU is still torn between the inward looking single market integration approach and web of concentric circles of associate states, and a more open trade regime.

But in terms of promoting a dependency relationship -- as the secretariat itself says in arrangements where sectors of cooperation reflect the EU's "comparative advantage" -- they may need to be watched out, and a more critical look from the WTO and its secretariat.