September 10, 1986

September 10, 1986 | Backgrounder on Trade, Economic Freedom

A U.S. Strategy at the GATT Trade Talks

(Archived document, may contain errors)

533 I September 10, 1986 A US. STRATEGY AT THE GATT TRADE 'TALKS INTRODUCTION Pressures for increased trade protectionism have been greater in the United States this year than at any time since World War 11. Only Ronald Reagan's veto stopped a bill that would have cut back textile and apparel imports drastically. And Congress still is threatening to pass an omnibus trade bill that would make it easier for industries to gain protection against their f oreign competitors.

To counter protectionist pressures, Administration officials have negotiated various bilateral agreements to open foreign markets further to U.S. exports. In addition, Reagan Administration efforts have led to a new round of the multina tional General Agreement on Tariffs and Trade (GATT) talks. On September 15th, the 92 members of the GATT will meet in Punta del Este, Uruguay, to set the agenda for this, the sixth round of talks since the creation of the GATT in 1947.

The U.S. negotiating team in Punta del Este should make sure the following items are included in this agenda o Reducing tariffs and eliminating quotas as a form of trade protection.

Strengthening the GATT mechanism for settling trade disputes o o Treating government subsidies to industries and exports as unfair trade practice and establishing procedures to counter such practice. o Bringing trade in services under the framework of the GATT principles o Liberalizing trade in high technology items o Including agricultural subsidies and trade restrictions in the GATT and reducing immediately.such.-practices o Phasing out the Multi-Fiber Arrangement, which restricts the textile and apparel trade, and including these goods under the GATT o Strengthening intellectual property rights by completing work on the GATT anti-counterfeiting code 0 Initiating liberalization of international investment policies o Blocking Soviet membership in the GATT.

The new round offers the U.S. a chance to turn the protectionist tide and to create a new order for international trade that will benefit all trading nat'ions opportunity to eliminate trade barriers and liberalize world trade.

Meanwhile, Congress should avoid all protectionist legislation, which would make it more di,fficult for U.S. negotiators to win concessions The Administration should take this DEVELOPMENT OF THE GATT Spiraling trade protectionism had been a major cause of the Great Depression of th e 1930s. After World War 11, therefore, the Western democracies understood that reconstruction and prosperity require trade liberalization. The 1947 General Agreement on Tariffs and Trade, accordingly, initiated a process for removing trade restrictions an d created a mechanism for future liberalization. The central principle of the GATT remains the concept of Most Favored Nation (MFN) status, which grants to every participating nation the same trade treatment given to !

the most favored" nation. In essence therefore, each GATT signator agrees to allow access to its market and to apply its own trade laws, equally and without discrimination, to all other GATT members. Thus, if a country levies a 5 percent tariff on imported steel, it must apply this tariff eq ually to all other countries.

The five previous GATT rounds have led to greatly expanded world trade ever. Total world trade is estimated at between $1.5 and $2 trillion per year and contributes nearly 16 percent of total world output which is twice the fi gure for the early 1950s. In 1960, U.S. exports The world'is more interdependent economically today than 2plus imports equalled 10i4 percent of U.S. GNP figure was 20.5 percent.

By last year, the The new GATT round will be characterized by a number of conflicting interests among the developed countries themselves and between the developed countries and the less developed Third World.

But the array of cross-cutting interests offers U.S. negotiators the opportunity to form coalitions among the GATT members and to play these coalitions off against one another, so'as to maximize trade liberalization measures. For example, Argentina, as a Third World country, has opposed liberalization of trade in services. But as an exporter of agricultural commodities, it.ha s an interest in j.oining other countries with efficient farm sectors, such as the U.S Canada and Australia, against unfair European agricultural subsidies.

Naturally, this gives the U.S. the opportunity to win Argentina,Is support for liberalization of tr ade in seryices. Traditionally, the U.S. plays the role of educator in such international forums as the GATT, trying to win through rational demonstration of its points.

While the U.S. should not abandon this role, it also should take advantage more forcefully of specific chances to promote freer trade through a greater emphasis on political coalition building.

TARIFFS AND QUOTAS High.'tariffs were once the major form of trade protection. But thanks to the five previous GATT rounds, GATT countries have re duced their average tariff rates substantially. Average U.S. tariff rates for example, have dropped from over 50 percent in the 1930s to a current average of just over 6.percent. Many countries, however inpose higher tariffs than does the U.S while others maintain high rates on specific items. Japan's tariffs average approximately 3.5 percent, for example, but its effective tariff on U.S. manufactured tobacco products is nearer 40 percent.

More common today than tariffs are quantitative restrictions or quo tas. While, technically illegal under the GATT, many countries employ them regularly particularly guilty of this. The U.S. is also an offender. Using so-called voluntary restraint agreements and orderly marketing arrangements, Washington has restricted tr a de in such products as automobiles and .steel restrictions makes it essential to win international agreement for a The European Economic Community is The growing worldwide use of quota 1. The production process itself is becoming more internationalized. F o r example, the IBM personal computer, with billions of dollars in sales for the U.S. giant computer firm, uses 60 percent foreign-made parts 3plan of action to eliminate them U.S. negotiators at this monthl.s GATT meeting should seek to include Continuing the process of tariff reductions While working toward an agenda, the o o Phasing out the use of quotas o When quotas cannot be eldminated. gULlyi'converting them.to a tariffs, which are already controlled under the GATT.

THE GATT DISPUTE SETTLEMENT MECHAN ISM It is relatively easy to monitor compliance with tariff agreements. But today's more subtle and varied forms of trade restrictions make it more difficult to determine if a country is violating its treaty obligations. To strengthen compliance, the U.S a t the GATT meeting should seek to include the following goals during the new round o Strengthening the GATT dispute settlement mechanism, by clarifying situationsaunder which cases can be brought and by allowing greater penalties for violators o Pledging U .S. cooperation in such GATT decisions TRADE IN SERVICES Banking, insurance, telecommunications, and other service industries are of increasing importance to world trade generally and U.S. trade particularly. In the early postwar years, over half of U.S. G NP was generated by the service sector. Today the figure is about three-quarters. The foreign revenues of the American service sector are estimated at approximately 60 billion annually, or nearly 30 percent of export earnings. Trade in services, however, is not protected by the GATT.

Bringing service trade under GATT will be difficult For one thing, the very diversity of services, as well as the restrictions placed upon them, preclude using uniform measures to reduce restrictions. Banking laws, for instanc e, are quite different from procedures for assigning airline landing rights. For another thing 2. For a good review of this problem, see Jonathan David Aronson and Peter F. Cowhey Trade in Services A Case for ODen Marketa (Washington, D.C.: American Enter prise Institute, 1984).

B 4many services have been provided traditionally by governments themselves and are considered part of the public sector telephone companies, for example, are often owned or tightly controlled by governments Banks and Because of government involvement and the diversity of the service sector, liberalization of trade in services will have to proceed on a case-by-case basiss .Nonetheless U;S. negotiators at Punta del Este should raise such issues as o Gaining agreement that certain services are to be covered by the GATT Most Favored Nation provision Since not all the GATT countries are likely to agree to this, it might be necessary first to reach agreement with a limited group of GATT countries.

In the case of government procurement of services, applying the A greement on Government Procurement, a GATT provision currently governing the purchase by state agencies of goods o In the case of government regulation of services within a country, assuring the Vransparency" of the decision-making process for such regula tions. Often foreign suppliers of services are notified of changes in regulations after the fact.

This gives them little or no time to adjust to the new situation. On the other hand, domestic suppliers of services are usually brought into the decision-maki ng process, and thus not only have prior warning of regulatory changes, but are often able to influence such changes o HIGH TECHNOLOGY TRADE Trade in high technology items suffers from obstacles similar to those facing trade in services definition. Most p e ople would recognize conputer chips and complete computer units as high-tech products everyday products actually employ computer chips and other high-tech components. As such, there are disagreements over whether a product is high-tech. Further, many high - tech products are closely related to the services they perform, and thus suffer trade problems similar to those of the services equipment, for instance, might find government-owned telephone companies unwilling to purchase their products products, it is i n the U.S. interest to secure maximum access to international markets for these goods. Here new GATT principles governing high-tech trade might not be necessary, as the problem probably could be solved with existing remedies. U.S. trade negotiators thus sh o uld seek the following goals First there is the problem of But a growing number of I Foreign suppliers of telecommunications Since the U.S. is highly competitive in nearly all high-tech 5o Ensuring, in cases where high-tech products are treated as manufac tured goods under normal GATT provisions, that such goods actually are treated as provided for under the GATT, and allowing for unfair trade practice sanctions against those who fail to treat high-tech goods accordingly.

Treating bothsthe service-:and the .hi-gh-tech problem together where restrictions on high-tech goods result from restrictions against the services they perform.

Developing means within the GATT to.dea1 with such problems, in cases where certification and safety standards are used merely t o restrict high-tech trade o o SUBSIDIES Bitter trade disputes have arisen because governments subsidize industries. Such subsidies take many forms. Sometimes private or state-owned companies receive direct government support to cover losses or to allow f i rms to reduce export prices. In other cases, the government sells domestic industries various government-owned or controlled resources, such as o,il, at low prices not available to foreign industries. Such practices place companies trying to compete again st a subsidized industry at a disadvantage at home and overseas.

The U.S. should initiate action against subsidies during the new GATT round by o Working to prohibit all export subsidies o Declaring preferential prices to domestic producers for government- owned or controlled resources a subsidy such practices are not recognized as trade distorting under GATT rules. Therefore, damaged parties have little internationally recognized recourse against offenders unfair trade practice would allow steps to be take n under GATT rules Currently Declaring them to be an AGRICULTURAL TRADE Agricultural products have been one of the most important sources of U.S. export earnings. In 1981, a record $43.3 billion in farm products were sold overseas, nearly 20 percent of tot a l U.S. exports for that year. The U.S. is the world's largest exporter of these commodities 6Yet in recent years this vital sector has suffered from a variety of problems, as a result of flawed U.S. farm policies and of the actions of foreign governments. The fall in commodity prices, coupled with the higher value of the dollar, was a blow for agricultural exports. But U.S. price supports for farmers also have made it difficult for American farmers to sell overseas, because the government price floor is fa r above the world price.

The solution to this would be for the U.S. government to phase out all farm price supports. But even if this politically difficult step were taken, American farmers would continue to suffer the effects of other countriesls subsidie s to their farmers. The European Communityls Common Agricultural Policy (CAP), for instance, provides massive price supports and export subsidies to EEC farmers.

Agricultural trade generally is not covered by the GATT caused U.S. farm exports to suffer. The new round provides an opportunity to include them under the GATT principles of free trade.

It offers the U.S. the opportunity to eliminate its own agricultural subsidies in exchange for elimination of similar subsidies by other countries. The following steps would help deal with the agricultural trade situation and should be placed on the agenda This has o Treating export subsidies and production subsidies as unfair trade practices o8 Developing a schedule of phased reductions for agricultural subsidie s o Eliminating import quotas on agricultural commodities, or, at the very least, converting them into tariffs encouraging the use of these forms as a way to relieve pressure for continued market restrictions o Recognizing GATT legal forms of adjustment as s istance and THE MULTI-FIBER ARRANGEMENT Trade in textiles and apparel is excluded from the provisions of At the GATT and covered instead by the.Multi-Fiber Arrangement(MFA the insistence of the U.S the MFA allows for substantial restrictions on textile tr a de, such as discriminatory tariffs and quotas, which normally would not be tolerated under the GATT. The original goal of the multilateral textile agreement was to provide lltemporaryll protection to allow the textile industry in the U.S. and other develo p ed countries to adjust to imports from Third World competitors tended to restrict trade even more than its predecessor. And rather In fact, each successive agreement in the MFA series has 7than enabling the textile industries in developed countries to adj ust protectionism has simply relieved any pressure to adjust.

During the new GATT round, Third World developing countries will be asked by the advanced nations to accept freer trade in services and high-tech products. Understandably, these less developed c ountries will see such calls as self-serving as long as the MFA continues to restrict trade in textile products,-.inIwhdch these countries4have a comparative advantage. Concerning the MFA, U.S. GATT negotiators should see that the agenda includes 0. Phasi n g out the MFA. Trade in textiles and apparel should be treated under the provisions of the GATT, in.exchange for also including services and high-tech trade under the GATT o Converting quotas to tariffs and then developing a schedule of reductions in thos e tariffs. The textile and apparel trade laws of the GATT countries should be applied without discrimination in accordance with the Most Favored Nation principle.

INTELLECTUAL PROPERTY RIGHTS While there are many codes and conventions for the protection of intellectual property .rights, enforcement of these rights has been inadequate. For example, counterfeiting in the less developed countries of drugs and other products patented by'U.S. pharmaceutical companies has been a serious problem. The U.S. governm e nt has worked on a bilateral basis with the countries involved to deal with this situation. Taiwan and Singapore, for example, have recently agreed to step up enforcement. But a more universal and enforceable code within the GATT framework is sorely neede d . Specifically, U.S. negotiators should seek the following'objectives for the new GATT agenda o Seeking to complete the GATT's work on an anti-counterfeiting code. Some developing countries have been reluctant to endorse a strong code, but the U.S. should not compromise. Strong pressure should be brought to bear on those who are holding up completion of the code. o Ensuring that an adequate enforcement mechanism for this code is available within the GATT 3. It is important to eliminate the MFA as soon as p o ssible. The prospect of the admission of the People's Republic of China into the GATT has raised new fears of textile competition among other developing country textile exporters. In order to retain market shares without the need to become more competitiv e , these countr.ies might decide to support the continuation of the MFA 8INVESTMENTS While the GATT has never dealt with investment policies, these are nevertheless a crucial aspect of international commerce and can affect the. flow of trade Admittedly inv e stment -issues..are- complex and at best only marginal success can be expected from attempts within the GATT framework to liberalize investment practices. Still, the U.S. should attempt to o Raise the issue of investments for discussion by the GATT member s, pointing out that the flow of goods, services, and money usually go hand in hand o Explore ways to use the GATT mechanism to begin the process of liberalizing investment policies, especially among Third World countries.

SOVIET GATT MEMBERSHIP In an Augu st 15th letter to the GATT Secretariat in Geneva Soviet.Union requested the right to participate in the new GATT round. The U.S. rejected this request. The reasons for denying Soviets the right to participate are clear the the First, the Soviet economic s y stem is based on rejection of the free market principles that guide the GATT. Second, the Soviets have not said that they wish to abide by GATT principles--they wish only to participate in the proceedings. In all probability, this means that their goal is to embarrass the U.S. and its allies. The U.S. has a difficult task ahead in the new GATT round and cannot afford to waste political resources fighting off Soviet sabotage in the GATT forum.

Consequently, U.S. negotiators need to be firm in their strategy of blocking Soviet membership in GATT CONCLUSION The new GATT round will be the most difficult yet, by reason of numerous new trade barriers that must be addressed. Negotiations and implementation within the round will take several years.

Yet the results of the groundwork'laid at the beginning of this new round could well set the conditions for U.S. and world prosperity for decades. The Reagan Administration has achieved the opportunity to negotiate important trade liberalization by winnin g agreement for 9this sixth round of talks. U.S. Trade Representative Clayton Yeutter can be expected to proceed aggressively. Meanwhile, it is up to the U.S. Congress to support these efforts by refraining from any protectionist measures that could jeopar dize the free trade opportunities offered by the latest GATT round.

Edward L. Hudgins, Ph.D Walker &Fellow .in...Econornics 10 -

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