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In September 1986, the member nations of the General Agreement on Tariffs and Trade (GATT) inaugurated a new round of negotiations aimed at further opening the world trading system. The Congress must provide U.S. representatives at these negotiations with negotiating authority and policy direction, and will be asked to ratify the final results when talks end, several years from now. These negotiations come at a time when trade imbalances have become a source of tension in the world economy and when governments are playing a growing and important role in determining the flow of commerce. This report, requested by the Subcommittee on International Trade of the Senate Finance Committee, provides an overview of this round of trade talks and examines how they might affect four sectors of the U.S. economy--high-technology goods, agriculture, mature industries, and services. In keeping with the mandate of the Congressional Budget Office to provide objective analysis, no recommendations are made.
This report was prepared in CBO's Natural Resources and Commerce Division,
under the direction of Everett M. Ehrlich and Elliot Schwartz. Stephen
Parker made valuable contributions to the content and structure of the
report throughout its development. The overview and historical material
was written by Stephen Parker and Elliot Schwartz. Chapters on specific
sectors were written by Daniel P. Kaplan, Stephen Parker, Elliot Schwartz,
and Philip C. Webre. Roger Hitchner, David Trechter, and James G. Vertrees
contributed to the chapter on agriculture; Gwyn Adams and Jerrold Abrahams
to the chapter on services. Kristen Galles, Peter Glick, Julie Goldman,
and Pam Pritchard provided research assistance. Valuable comments were
received from Victoria Farrell, Neil Fisher, George Iden, Andrew Horowitz,
James Kiefer, and Eileen Manfredi of CBO, and from Robert Baldwin, Thomas
Dorsey, Harry Freeman, Robert Hudec, Gary Saxonhouse, Nancy Schwartz, and
Lee Tuthill. Helpful suggestions were also made by the Office of the U.S.
Special Trade Representative. The report was edited by Francis Pierce,
assisted by Nancy H. Brooks, and prepared for publication by Kathryn Quattrone,
assisted by Pat Joy.
Edward M. Gramlich
Acting Director
June 1987
SUMMARY AND CONCLUSIONS
I - INTRODUCTION
II - GATT NEGOTIATIONS IN PERSPECTIVE
III - HIGH-TECHNOLOGY TRADE
IV - AGRICULTURE
V - MATURE INDUSTRIES: AUTOMOBILES, STEEL, TEXTILES AND APPAREL
VI - TRADE IN SERVICES
| TABLES | |
| 1. | U.S. Tariff Rates, 1789 Through 1984 |
| 2. | Duty Reductions Since 1934 Under the U.S. Trade Agreements Program |
| 3. | Tokyo-Round Tariff Cuts by Stage of Processing for the United States, the European Community, Japan, and Canada |
| 4. | Tokyo-Round Tariff Cuts by Industry for the United States, the European Community, and Japan |
| 5. | High-Technology Balance of Trade for Selected Years |
| 6. | World Market Shares for Wheat and Coarse Grains in Trade Year 1985/1986 |
| 7. | U.S. Exports and Imports of Agricultural Commodities, 1971-1986 |
| 8. | U.S. Agricultural Exports by Region, Fiscal Years 1981 and 1986 |
| 9. | U.S. and EC Outlays for Price and Income Supports |
| 10. | Ranking of Producer Subsidy Equivalents by Commodity and Country, 1982-1984 |
| 11. | Weighted Averages of Producer Subsidy Equivalents by Country, with Major Sources of Assistance, 1982-1984 |
| 12. | Trade Balances by Products and Countries |
| 13. | Net Balance of Trade in Services |
| 14. | U.S. Exports and Imports, Selected Years |
| FIGURES | |
| 1. | World Agricultural Exports |
| 2. | Apparel Industry: Trade Balance of the United States and the European Community with Developing Countries |
| 3. | European Community: Steel Production, Consumption, and Capacity |
| BOXES | |
| 1. | Reciprocity in GATT Negotiations |
| 2. | The U.S. Trade and Budget Deficits |
| 3. | The General Agreement in Brief |
The General Agreement on Tariffs and Trade (GATT) is both a multilateral agreement and an organization that administers the agreement among the 93 signatories. Seven rounds of GATT-sponsored multilateral trade negotiations have progressively lowered postwar tariff barrriers, and an eighth round--the "Uruguay Round"--is now taking place.
The Uruguay Round is occurring at a critical juncture in international
trade relations. The GATT rules and procedures that have successfully guided
four decades of trade liberalization show signs of breaking down. Unless
confidence in GATT is renewed, present difficulties could lead to a costly
global trade war.
IMPORTANCE OF THE URUGUAY ROUND
Governments are increasingly resorting to policies that are not regulated by GATT, and that conflict with its principles of open and nondiscriminating trade. Such government actions are often felt to be essential to maintaining the competitiveness of national industries. As tensions rise, this tendency may escalate into retaliatory measures and countermeasures. The importance of the Uruguay Round lies not so much in how any one of the items on its agenda is resolved as in the recognition by governments of the need to modernize the GATT framework so as to reflect the increasing importance of international markets, and to accept the resulting changes in their own policies.
Many hope that new GATT agreements will work to reduce the huge U.S. trade deficit. Such a hope is probably misplaced. Most of the aggregate trade deficit can be attributed to divergent macroeconomic policies among the major industrialized countries. In particular, high U.S. government budget deficits have been a major cause of the recent surge in the U.S. trade deficit.
The Uruguay Round requires attention from the Congress for several reasons. Most immediately, the Congress must provide new authority for these negotiations, along with policy direction. In addition, it must consider the possible effects of the Uruguay Round on federal programs that are sensitive to international trade--most obviously in agriculture. Through their effects on such programs, new trade agreements could ultimately have an impact on the federal budget.
Trade negotiations take time. This round of talks--preliminary negotiations have already begun--is not scheduled to end until 1991, although some interim agreements may be reached before then. After Congressional approval, more time will be required to phase in the new policies. Whatever the outcome of the trade talks, then, most of the direct effects on U.S. policy and economic activity will not occur until well into the 1990s.
The Uruguay Round could nevertheless have an immediate impact on the way governments deal with their trade problems. If the talks were to deadlock, governments might resort to actions outside the realm of GATT to serve their national interests. On the other hand, indications that the talks were moving toward a successful resolution of key problems would lessen pressure for immediate and possibly harmful government actions. In this sense, the talks will succeed in the short run if they foster an atmosphere of cooperation that reduces current tensions among countries.
The main focus of these negotiations, however, will be on the long term. The benefits of open trade are well known: trade expands the range of goods available for consumption and increases productivity by allowing producers to specialize according to their resources and technology. But opening up trade creates problems, such as how to address the unequal distribution of benefits and losses among different groups in a country, and how to react when another country attempts to promote some of its own industries at the expense of its trading partners.
One way of analyzing the Uruguay Round is to examine its possible consequences
for particular sectors of the U.S. economy. This report looks at four broad
sectors--high-technology goods, agriculture, mature industrial products,
and services--to see how they might be affected by trade liberalization.
THE URUGUAY ROUND IN PERSPECTIVE
The Uruguay Round will be judged largely on how well it addresses issues related to nontariff barriers. Examples of nontariff barriers (NTBs) range from direct quantitative controls on imports to the less visible effects of national economic policies on trade flows. GATT has been unable to regulate the use of NTBs for a number of reasons: they are inherently less "transparent" in their effects than tariffs, which makes them difficult to evaluate; and they are often linked directly to national policies that are based on domestic rather than international priorities.
The General Agreement on Tariffs and Trade
The GATT was created following the Second World War as one of three international organizations intended to oversee postwar economic relations, the other two being the International Monetary Fund and the World Bank. GATT's members today account for over 80 percent of world trade.
Four key principles underlie the General Agreement:
These principles are not inviolate; exceptions to them have always been tolerated. In fact, many of GATT's current problems stem from both old and new evasions of these principles. Examples of current exceptions include:
This list of exceptions to GATT's general principles will comprise much
of the agenda for the Uruguay round of multilateral trade negotiations.
In essence, the agenda aims to strengthen GATT discipline and expand it
to cover all trade in goods and services. If successful, most nontariff
policies would come within its purview, which would extend to all major
trading countries of the world. The primary concern, however, is not so
much strengthening the role of GATT as resolving fundamental disagreements
among countries over the role of government in economic activities.
IMPLICATIONS OF THE URUGUAY ROUND FOR U.S. GOVERNMENT PROGRAMS
A distinguishing feature of the Uruguay Round is its emphasis on liberalizing trade barriers--especially NTBs--that are integrally linked to national economic policies. Foreign trade can no longer be dealt with apart from other domestic economic policy concerns. Governments often employ trade policies less for commercial ends than to achieve other goals--economic, political, and social. Significant trade liberalization thus means changing these national programs, and for this reason domestic policies will increasingly be the focus of trade negotiations.
The following is an illustrative, but not comprehensive, list of U.S. government policies that are effectively on the Uruguay Round bargaining table:
The length of this list illustrates the deep ramifications of foreign trade in the U.S. economy. Similarly lengthy lists could be made for most other countries. Although the Uruguay Round is not likely to require substantial changes in all of these programs, those included in the list will increasingly become the focus of future trade policy negotiations. The United States and other countries have already started reforming several of these policies on a unilateral basis in response to internal economic and political pressures.
The following discussion shows the bearing of the trade negotiations on domestic policies in four sectors.1
High-Technology Products
Trade in high-technology products is already covered by the GATT, but numerous disputes have arisen because many governments subsidize production of these goods in an attempt to gain a competitive advantage. An underlying issue is the extent to which governments can, and should, enhance the competitiveness of domestic producers; and how the spillover effects of such policies can be controlled.
Discussions of intellectual property rights will bear directly on high-technology goods. If an agreement can be reached that tightens the penalties against unauthorized use of patents, copyrights, and trademarks, U.S. firms holding those rights--most generally in high-technology industries--should gain.
Trade liberalization should in general benefit most U.S. producers of high-technology products--in aerospace, computers, electronics, pharmaceuticals, and scientific instruments.
Agriculture
Most barriers to trade in agricultural products have been erected to accommodate domestic farm policy programs. In this country, for example, such restraints often serve to protect domestic farm price supports. Many other developed countries use import barriers and export subsidies in much the same way: to stabilize and nurture the domestic farm sector, not to achieve export or import goals. Such trade barriers cannot be significantly reformed without changing the domestic farm policies they serve. The negotiations will focus on the agricultural policies of developed countries, most importantly those in the United States, the European Community, Japan, Canada, and Australia. Although major policy reforms are likely to benefit the economies of all countries, some farmers may be made worse off by reductions in farm support programs, especially over a transition period. Efforts to compensate farmers for losses may be necessary. For each country, however, the adjustment costs may be lessened if all countries concurrently open their agricultural markets, which should expand world trade and bolster prices, and if agreements are phased in over a long period of time.
Mature Industries
These industries, such as steel, textiles, apparel, and--increasingly--automobiles, have declined in the advanced industrial countries, even as they have grown in some developing countries. They are technically covered by the GATT, but many countries have sought to develop special protective arrangements for them through formal and informal agreements. Abolishing such practices would force governments to confront the consequences of economic change, such as unemployment, and to revise policies that often impede, rather than promote, adjustment. GATT negotiations over subsidies, escape-clause procedures, and the GATT dispute settlement process will be of particular importance for mature industries. Negotiations in these sectors often take on a North-South polarization, since developing countries are rapidly becoming major suppliers of such goods to developed countries.
Agreements that liberalize trade and reduce trade barriers will have a direct impact on those mature industries that are now accorded special protection. The negative effects would be lessened if the liberalization was truly multilateral. The U.S. automobile industry, for example, might benefit from a reduction of European barriers to Japanese autos, since those barriers have diverted Japanese auto exports from Europe to the United States.
Services
An agreement on services trade would bring a new set of national policies
under international scrutiny. All countries regulate service activities
to some degree--with the added complication that much of this occurs at
the state or provincial level. Many of the regulations embody long-standing
social values, such as consumer and producer rights, that are generally
considered well within the bounds of national sovereignty. But the spillover
effects can be stifling to international trade. The United States, in particular,
has untapped export growth potential in many kinds of services, particularly
those employing large amounts of high-skilled labor (such as construction,
telecommunications, financial services, and skilled professional business
services). On the other hand, the United States stands to lose from greater
imports of lower-skilled, labor-intensive services (in construction, shipping,
and personal services).
KEY ISSUES UNDERLYING THE NEGOTIATIONS
The Uruguay Round agenda covers most of the current issues in international trade. But underlying these issues are a number of more subtle questions. How can trade policy be made more transparent? When does a national economic policy become an internationally unacceptable nontariff barrier to foreign trade? To what extent are governments willing to relinquish their sovereignty and shift their national priorities to accommodate international agreements? Should discriminating trade practices of any kind be allowed? If nontariff barriers are to be liberalized, how can this best be done? Would bilateral or multilateral agreements be preferable? When does a developing country graduate to become a full-fledged member of the international trading community?
Need for Policy Transparency
It is difficult to measure the relative benefits and costs of trade reform unless the effects of national policies can be compared for different countries and industrial sectors. This can be done easily for ad valorem tariffs, which apply a tariff rate in percentage terms to the value of a traded good. For nontariff barriers, however, there is no such "transparent" measure of protection. To negotiate the liberalization of nontariff barriers, ad valorem equivalents of their protective impact must be measured in a way that can be consistently compared between countries, types of policies, and economic sectors. Producer subsidy equivalents, which are being employed for this purpose in the agricultural sector, are one such measure. Another way to achieve transparency is to convert nontariff barriers to equivalent ad valorem tariffs. Not only are ad valorem tariffs more transparent than nontariff barriers such as import quotas, but they also have a less distorting effect on economic decision making.
Introducing transparency requirements should favor U.S. interests by providing U.S. negotiators and firms with a much clearer picture of how foreign governments influence trade flows. Trade policy procedures in the United States are relatively open compared with those in other countries. The United States does employ several nontariff barriers to trade, and converting these to tariff equivalents would show the extent to which import quotas often represent high levels of protection. It would lessen the negative impacts of protection on the economy, and if the tariff-equivalent amounts could be collected by the government (either directly or by auctioning quota rights to the highest bidders), the Treasury would gain the quota rents that otherwise accrue to foreign exporters.
Rules, Enforcement, and Trade Liberalization: the Role of GATT
Considerable effort will be exerted during the Uruguay Round to devise rules to control better the use of various nontariff barriers to trade. New rules, however, require general acceptance of underlying principles. Disagreement among GATT members as to what those fundamental principles should be is a major stumbling block to improving GATT rules.
GATT's previous success in reducing tariffs was accomplished by developing a set of rules that discouraged increases in tariff rates, and then gradually reducing existing tariffs--on a most-favored-nation basis--through reciprocal bargaining during multilateral negotiations. The rules reinforced, but did not lead, the liberalization process.
A first step in liberalizing nontariff barriers will be to develop rules that clearly identify NTBs and demarcate those NTBs that are improper. Then the rules must be implemented. The Tokyo Round codes of conduct--a set of rules applying to several NTBs--relied primarily upon the good-faith compliance of signatories of the code. GATT enforcement procedures for the codes were cumbersome and ineffective. Although these codes may have restrained some governmental actions, there is little evidence that they have led to significant changes. The experience with tariffs suggests that reciprocal bargaining, involving coordinated concessions among trading partners at either the policy or the industry level, may be a more effective medium for liberalizing NTBs.
GATT dispute procedures play an important role in the trade liberalization process by encouraging countries to resolve their conflicts in an orderly manner without confrontations. Streamlining and enhancing the GATT dispute settlement process will be a major priority for the Uruguay Round. Establishing a nonpartisan standing panel of experts and applying stringent procedural deadlines can prove beneficial. But efforts to strengthen GATT's power to enforce its rules will encounter the reluctance of most governments to yield sovereignty over control of their national policies. It is unlikely that GATT will ever be the primary enforcer of its rules. Rather, in liberalizing NTBs, it will most likely rely on the adherence to mutually accepted standards of behavior by governments; its role will be to facilitate dispute settlements and other negotiations.
The Uruguay Round and Developing Countries
More vigorous participation by developing countries in the trade talks will require concessions by the United States and other developed countries in several ways. For example, developing countries want long-term guarantees of access to developed-country markets for their exports. Better access would involve loosening such barriers as the Multi-Fiber Agreement, along with promises by developed countries to refrain from erecting similar barriers in the future. This would force the developed countries to cede some of their existing markets to developing countries, and to adjust their domestic economies accordingly--involving difficult economic and political decisions.
Developing countries now have almost one-quarter of total world exports, and about one-eighth of world manufactured goods exports. Economic growth in developed countries is increasingly linked with the economic future of the developing countries. Yet most trade policy actions by developing countries are not regulated by GATT. Just as developing countries argue that it is not fair for developed countries to erect trade barriers that penalize them for their industrial success, so the developed countries complain of the self-serving trade policies employed by many of the most successful developing countries. Clearly, the advanced developing countries must be more fully integrated into the GATT system. The question is not so much whether this will happen as when and how it will be accomplished. Underlying the negotiations on many of the key issues in the Uruguay Round will be compromises over this graduation process.
Product and Country Trade Policy Discrimination
Countries increasingly resort to bilateral agreements, involving quotas and other nontariff arrangements, to solve trade disputes. Such agreements introduce two forms of trade policy discrimination: the application of policies unevenly across countries, and their application unevenly across industries. Although most forms of trade policy discrimination are discouraged by GATT, exceptions have always existed, and some observers question whether the principle of nondiscrimination will remain the basis for future trade agreements.
Most-Favored-Nation Treatment. Unconditional most-favored-nation (MFN) treatment~the application of a trade policy equally across all countries--is a cornerstone of GATT. Trade policies that discriminate by country not only complicate international trade relations and negotiations, but also may divert trade from low-cost producers to higher-cost producers. Such policies invariably induce countries not covered by an agreement to alter their behavior, often offsetting the original intent of the agreements and leading to further discord.
Violation of the MFN principle usually occurs for three reasons: a small group of countries may be able to work out an agreement more easily than a broader group (as in free trade agreements); a country aims specifically to penalize another country for what are perceived to be unfair trade practices (by retaliating against dumping, or applying countervailing duties in response to export subsidies); and a country places restrictions on imports causing injury to specific domestic interests. In certain of these situations, discriminatory practices may prove beneficial: free trade areas can create trade among the members; retaliation can force trading partners to halt unfair trading practices; and the selective application of trade remedies for the relief of threatened industries can limit the negative effects of suppressing competition. The danger, though, is that discriminatory practices may become the norm rather than the exception.
Specific Product Agreements. GATT does not explicitly require that protection be applied evenly across industries within an economy. But its general thrust is to limit the use of quantitative trade barriers--which are commonly used to provide higher levels of protection to some industries than to others~and to encourage reductions in trade barriers across all industries. Uneven protection that favors some industries relative to others can limit economic growth if low-productivity sectors are favored over higher-productivity sectors.
The case for special treatment of specific products is made on several grounds, namely: that temporary restraints provide an effective way of handling temporary market disruptions (as in autos); that specific exemptions are necessary to save the general rule of free trade, since without the ability to make exceptions the whole structure would fall; that different products have different characteristics, requiring somewhat different trading rules (as in textiles and various services); and, in the extreme, that some products (as in the steel, agriculture, and high-technology industries) are so vital to national interests that administrative solutions are preferable to market results.
Alternatively, it can be argued that most restraints to trade are detrimental to world economic growth, and often to the countries enforcing the restraints. It can also be argued that the proliferation of sectoral protection and managed-market agreements breeds more protection, as it becomes difficult to justify protection for some sectors and not for all.
The Uruguay Round will specifically address the most serious case of
sectoral discrimination--that in the agricultural sector. It will also
take up other specific sectoral actions, including barriers to trade in
services, the Multifiber Agreement and other voluntary export restraints
in various industries, and the "safeguard" procedures that are used to
implement many of these policies. The United States has been an active
user of discriminatory trade policies, and the results of these trade talks
may limit the flexibility of U.S. trade policy in the future.
IS GATT WORTH SAVING?
The strongest defense of GATT is based more on what it has prevented rather than on its explicit accomplishments. Since the creation of GATT, world economic growth has not been fettered by nationalistic policies. Instead, it has been stimulated by expanding international trade.
GATT was created primarily to reduce the possibility of another debilitating trade war similar to that which followed the Smoot-Hawley Tariffs at the beginning of the depression. It was also intended to undo much of the damage caused by those actions. By this test, GATT can be judged quite successful. Although trade relations have suffered numerous crises over the last 40 years, these have not set back world economic growth. And GATT-sponsored multilateral negotiations have helped to reduce the Smoot-Hawley-era tariffs by over 90 percent: the average tariff rate for most developed countries is now less than 5 percent.
The value of GATT lies not only in its rules, but in the fact that it also provides a forum where countries can resolve disputes over national policies. GATT is one of the few policy forums where long-run goals guide the resolution of short-term crises. No comparable framework exists for settling other key international problems--such as how to coordinate macroeconomic policies or to lighten the burden of debt.
GATT needs to be modernized, however, and this means rethinking the principles that should guide trade policy for the rest of the century. GATT has little independent power; it merely reflects the will of its members. To revitalize it, the members will need to reexamine many long-standing domestic policies and reassess their national priorities, given increasingly important economic linkages among countries. The problem is not the inadequacy of GATT, but rather how governments are going to mesh their policies with the requirements of the world economy. Opening up the potential of international trade represents one of the great challenges facing governments today.
This document is available in its entirety in PDF.
1. No attempt is made here to summarize fully the sectoral analyses contained in Chapters III-VI. A short precis appears at the beginning of each of those sectoral chapters.