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804 January 18,1991 INTRODUCTION The multilateral trade negotiations of the General Agreement onTariffs and Trade GATT called the Uruguay Round since they were launched in Punta del Este, Uruguay in 1986, are in disarray. No agreement was reached by the scheduled December 7 deadline. The Bush Administration has indicated that it will extend the talks at least through the end of March, which is when special negotiating authority granted to the Adm i nistration by Congress runs out, if the European Community offers concessions in its position on agriculture trade. During this extra time a last-minute compromise might be reached. A new GATT agreement could reduce barriers to American exports of goods a n d services, better protect American patents and other intellectual property, remove restrictions on foreign investments and eliminate protection and subsidies for farm products According to U.S. Trade Representative Carla Hills, a successful GAIT round ag reement could expand economic output by as much as $4 trillion by the year 20 00. Failure to reach an agreement, by contrast, could trigger a spasm of trade protectionism. With the U.S. economy already weak and fighting the damage imposed by increased taxe s, a trade war would push The Farm Barrier. Agriculture is the major issue preventing a GATT agreement. The European Community (EC which spent an estimated $29 billion in agricultural subsidies in 1989l, refuses to meet demands by other GAlT members for s i gnificant farm sector reform. U.S. Secretary of Agricul ture Clayton Yeutter commented last month in Brussels that there was zero sup ort for the European position from non-EC nations attending the meet ing. The EC claims that the U.S. proposal for a 75 p ercent to 90 percent reduction in tariffs will endanger the livelihoods of the 10 million farmers within the Community. Many less developed countries counter that EC agricultural policies keep Third World farmers poor and destitute. EC export subsidies, it is correctly argued, drive down the world price of agricultural goods, making it un profitable for less developed countries to export their products. Without an agreement on agriculture, less developed countries might pull out of the America into a deep e conomic recession or even a depression s l GAITtalks High Stakes. Trade liberalization would benefit the international trading system in general and America in particular. According to Gary Hufbauer, an economist at the Washington-based Institute for Inte r national Economics even a moderately successful conclusion of the talks will expand annual world trade by 100 billion. U.S.Trade Representative Hills says that over the next decade America could enjoy a 2oI) billion rise in exports to less developed count ries alone if the GAm round succeeds. A deadlock in the negotiations however, could trigger a worldwide spasm of damaging trade protectionism. In the 193Os, trade barriers helped cause and sustain the Great Depression. A successful GATT agreement thus is vital to American interests. The Bush Administration should agree to an extension of GATI negotia tions and aggressively work to resolve its differences with other member M tions during that period. Further, the U.S. should not let EC recalcitrance over ag ricultural trade stand in the way of a GATT agreement. While such an agreement would not include all of the privisions that the U.S. seeks, it still would liberalize trade in services, open markets further to foreign invest ments, better protect intellect ual property rights, and lower tariff rates. All of these reforms would help U.S. businesses.The U.S. would be better off with a more limited GATT agreement than with no agreement at all 1 From the European Codons report, A cuItumI Sifuatitm on the Gmmuniry 1989, Table T 63. 43. This figure includes only direct government internal supports and export subsidies. Other figures that include additional supports, such as government funded research and administrative costs, raise the total in 1989 to $53 billion 2 Reported in the WdI Stmet Journal, December 4,1990, p. A4 2 The U.S meanwhile,can continue to pursue trade liberalization through other means. Washington, for instance, should initiate negotiations for free trade areas with countries wishing completely opened markets.The U.S. cur rently is phasing in such arrangements with Canada and with Israel, and is beginning negotiations with Mexico. Other interested countries include Australia, Chile, Guatemala, Panama, Singapore, the Republic of China on Taiwan a n d Thailand. Free trade areas .also should be offered to Eastern European nations who establish democracies and free markets In addition, the U.S. should begin unilaterally to remove its own trade bar riers to such products as machine tools, steel, sugar a nd textiles.This protec tion costs the American consumer billions of dollars a year. With the U.S. sliding into recession, free trade is vital for sustaining economic growth. The stakes are global and an agreement is necessary to prevent a collapse of the world trading system THE ORIGINS AND OB JEcnvES OF GAIT The shrinking world trade that was created by protectionism starting in 1930 was one of the principal causes of the Great DepressionTo avoid a repeat of this, after World War 11 the Western democraci e s committed them selves to trade liberalization. In 1947, the 24 countries meeting in Bretton Woods, New Hampshire, signed the General Agreement onTariffs and Trade (GAlT), liberalizing some trade immediately and establishing a mechanism for future negoti ations to remove other trade barriers. Embodied in the original GATI agreement is the concept of Most Favored Nation status This term is extraordinarily misleading, for it implies that some nations are granted special favors. It is just the opposite. It me ans that every participating nation gets the same trade treatment as that given to the most favored nation Thus if barriers are lowered for one nation, all other par ticipating nations automatically have barriers lowered for them. Through the most favored nation concept each member of GATT agreeg to give equal ac cess to its markets, without discrimination, to all members. Today, some 168 nations receive most favored nation status from America. Building on the original commitment to freer trade, there have been seven completed rounds of GATI negotiations since 1947.These are The Geneva Round of 19 47. There were some 45,000 agreements in this round, reducing tariffs on manufactured goods and some agricultural products 3 Kenneth W. Dam, The GAm: Law and the International Economic Ogonizution, Chicago, Un;VerS;ty of Chicago Press, 1970 3 The Annecy, France, Round of 1949, and the Torquay, bce, Round of 1951.These mainly admitted new member countries to GA'IT. The original members also negotiated an additiona l 13,000 tariff conces sions The Geneva Round of 19 56. This round also mainly adnjtted new mem bers; most of the discussion concerned admitting Japan The Dillon (named after US. Secretary of Treasury Douglas C. Dillon Round of 1960 to 19 62. This resulted in a 10 percent reduction in tariffs that had been imposed on U.S. exports and other total world tariff reductions equalling 40 billion The Kennedy Round of 1963 to 19 67. Cited as one of the most success ful GAlIT rounds, it cut tariffs of non-agricultural products by about 35 percent, affecting approximately 80 percent of the dutiable products of the industrialized world? In addition, reductions of up to 20 percent were made on agricultural products TheTokyo Round of 1973 to 19 79. Though its achievements were mini mal, there was some reduction of duties and tariffs. The main result was 600 a framework for the current GAIT negotia tions The Uruguay Round launched in 19 86. The Uruguay Round is in tended to achieve two broad goals. The first is to prevent increased protectionist pressures from undermining the multilateral trading sys tem. Of particular ur gency is to halt in creases in protec tionism by less developed countries partly triggered by Total World Exports 1950-1989 Bllliw ~w r nnl) U.8.8 aooo 1600 oooF Source: International Financial Statistics 4 Severd.countries opposed Japan's admission into GA'IT because of fears of the effects low Japanese wages would have on other countries. Under Article XXXV of the GAIT charter, these co u ntries were allowed to withhold trading privileges to Japan indefinitely. It was not until the late 1%Os that most of these countries fully accepted Japan. 5 Gilbert R. Winham, Internalid Trade and the T- Round, Princeton University Press, New Jersey, 198 6, p. 61 4 I their mounting international debt and political unrest. The second goal is to bring the GA'IT up to date by extending its rules to cover areas of disputes that had eluded past rounds. Among these are growing trade protection of farm products. Government sub sidie for a cultural products last year cost would consumers $245 bil lion. In textiles and apparel trade, protectionism costs American con sumers between $15 billion and $30 billion annually from 1986 through 19 89. New rules also are needed for international investment, the inter national sale of services, and patent protection for intellectual property. The positions taken by the various countries in the current round reveal the benefits to be gained from and the barriers to a successful agree ment ig AGRICULTURE An agreement on agriculture, which accounts for 13 percent of world trade is the litmus test of a successful Uruguay Round? Past rounds have, for the most part, avoided this crucial topic. Because most participants in the Urugua y Round have invested considerable time and effort trying to reach a consensus in agricultural products, the failure to reach agreement here so far has unraveled the rest of the negotiations. Reforms in the Uruguay Round seek to phase out government suppor ted trade protection and subsidies for agricultural products. There are two diverging factions on this issue at GA These are 1) The U.S. and the Cairns Group! These nations want to replace J government protection of farm products with free trade. This woul d require an agreement ending import restraints, quotas and subsidies. These for a short time would be replaced by tariffs 2) The European Community, Austria, Japan, the Nordic Group, and Switzerland.'O This group strongly resists the objective of the U.S and Cairns group. Instead of free trade, this group's counter-offer includes merely trimming protection somewhat. Its idea is to con solidate all forms of protection, with an agreement to reduce the 6 AgriculturcZr Policies, Mdts, and Tmdc: Monitoring and Outlook 1990, OrganiZation for Economic Cooperation and Development, Paris, France, 1990 7 Dale Hathaway,&cultun? and the G4m: Rewriringthe Rules. Policy Analyses in International Economics No 20, Institute for International Economics, Washington, D.C Sep t ember 1987 8 The Cairns Group, so called because of the meeting that took place in Cairns, Australia, in 1986, includes 14 countries that export agricultural products. The members are: Argentina, Australia, Brazil, Canada, Chile, Columbia Fiji, Hungary, I ndonesia, Malaysia, New Zealand, the Philipphes, Thailand, and Uruguay 9 10 The Nordic Group consists of Finland, Norway, and Sweden. See "Meanwhile in Geneva The Economist, September 22,1990, p. 29 5 AGRICULTURAL SUPPORTS 1989 Producer Subsidy Equivalent New Zeabnd 4 0.2 5 Austrrrlb 13 1.3 10 United States L 1 19.3 32.2 27 Canada 14.9 5.2 35 European Community 139.5 53.0 38 Sweden 4.7 2.2 47 Japan 6 33. 6 72 Finland 6.1 4.4 72 Switzerland 5.6 4.2 75 NOmy 3.5 2.6 74 Source: Organization for Economic Cooper a tion and Development The producer subsidy equivalent includes the internal supports and export subsidies mentioned in the European Community table at the cmnclusion of this study, but also additional supports like government funded research and administra tive costs levels over time.This would allow a country to choose which kind of support to reduce, leaving many of the most disputed practices untouched. There are three main agriculture issues under consideration in the current round: internal supports and export competition, market access, and health standards Internal Supports and Export Competition.Governments subsidize agricul tural production in almost every major producing country (seetable).This in cludes direct subsidies, export credits, and low in terest 10ans.This support dis torts world trade and is the heart of many international trade disputes. Government subsidies and supports also have been costly to consumers A central goal of reformers in the current negotiations has been to end sub sidies i n agriculture, especially those provided by the European Community EC) and America, allowing competitive market forces to set world and domestic prices based on supply and demand. Most of the negotiations center 6 on how these reductions will be achieved, monitored, and enforced.The group led by the EC has agreed in principle to reduce subsidies, but it wants to avo# specific limits. The U.S on the other hand, wants specified reduc tiOnS Market Access. Most major agricultural producers protect their domest i c sectors. America, for example, protects cotton, dairy products, peanuts, and sugar; Japan protects rice; Canada protects dairy products and poultry; and the EC protects beef.These policies restrict market.access and maintain higher-than-world market pri c es in the home country.The goal of the vast majority of GAlT members is to ban these practices, replacing them with tariffs which would be reduced by a specific amount every year until they are completely eliminated The EC and Japan are resisting these re f orms. A suc cessful agreement on agriculture will require the EC and Japan to accept the American and Cairns plan Health Standards. Uruguay Round reformers hope to create a consensus on health standard practices that in some cases interfere with the free t rade of agricultural goods.Typica1 of this problem is the dispute between America and the EC over American beef produced with growth hormones. In 1987 the EC imposed restrictions on American hormone-fed beef, claiming that this product presented a health r isk. This claim is widely disputed. Since almost the entire American beef in dustry used growth hor mones, the EC's health restrictions prevented the U.S. from selling beef in the EC. In retaliation, the Reagan Administration im posed a 100 percent tariff on EC beef, fruit juices, in stant coffee, pet food, and tomatoes. Most of these restrictions remain in force Average Tariff on Manufactured Imports for Advanced Industrial Democracies Year 1940 1950 BBO 1970 le80 le90 0 10 20 so 40 60 sourc Tlw &-ht Hmrl t ar DatmChmrl Avoraga Tarifto (percent 11 Reported by Neal Blewett Agricultural Talks: Round and Round World Link Mogcaine, September 10,1990 p. 20 7 TARIFF AND SUBSIDIES Tariff rates have been reduced in each GA'IT round since 1947.This has helped increBe world trade from 100 billion annually in the 1950s to $3 tril lion in 19 89. Subsidies for manufactured goods and seMces also now are coming under increasing criticism as many countries realize their damaging effects The U.S. and GATT Plans. Urugua Round negotiators essentially have agreed to reduce tariffs by 33 percent! But, the U.S. is pushing for deeper cuts, offering to reduce its own tariffs by 43 percent if other countries do so as well. The U.S. plan also eventually would eliminate most tariffs. C a lled the zero to zero" option, the plan would require all participants to reduce their tariffs to zero on specific products.14 The "zero to zero" plan offered by U.S negotiators was first put forward by a group formedlpf 100 leading American businesses wh o would benefit from reduced tariffs. This group pointed out that the U.S. still imposes tariffs on some 8,753 different products, and that al though the U.S. average tariff rate is about 5 percent, there are many imports exposed to extremely high levies. Examples: tobacco products are levied a 458.3 percent tariff; certain wrist watches are levied a 151.2 percent tariff; cer tain textile and apparel products are levied tariffs ranging from 15 percent to 70 percent. Countervailing Duties. While there has be en modest progress in recent years in reducing government subsidies to exporters, the Uruguay Round is stalemated on further progress. Indeed, the negotiations are no longer focused on ways to reduce further the use of subsidies, but rather on the use of countervailing duties (CVDs For the U.S a CVD is a levy placed on an import that allegedly is sold in an unfair manner. Such a penalty might be placed on a good that has received a government subsidy either for its produc tion or sale. Or a CVD might be placed on an imported product that is .being "dumped in America, that is, sold at a cheaper price than the original cost of produc tion. In such a case, Washington often imposes a duty to raise the price closer to the true cost of produc tion. One problem in gaining support for the elimination of CVDs is that the U.S. is the principal backer and user of CVDs. Between 1980 and 1986, for ex ample, the U.S. initiated 90 percent of CVD cases worldwide.16 Critics of 12 "International Financial Statistics International Monetary Fund 1990 Yearbook, Washington, D.C. 13 Jeffrey J. Schott The Global Trade Negotiations:What Can Be Achieved Policy Analysis in International Economics No. B, Institute for International Economics, September 1990, p. 17 1 4 "U.S. Offers to Cut Tarif& by 43%: Financial Tunes, October 25,1990, p. 3 15 "Radical Surgery Required for Tariffs Wcrshington Tunes, October 22,1990, p. G4 16 Schott, op. cit p. 94 8 Washington's CVD strategy point out that "dumping" is a very subjectiv e term and is often used as a cover for American protectionism. They point out for example, that the U.S. view on dumping routinely does not take into ac count that goods justifiably may be sold at prices below cost when there are surplus supplies, at leas t for a limited time. In addition, critics of CVDs used against alleged dumping claim that it is practically impossible to compare the price of products in two countries because there are subtle legitimate cost dif ferences in what might appear to be ident i cal products. Example: special credit arrangemely and warranties often are overlooked when calculating production costs. Finally, the U.S. often defines dumping in a way calcu lated to make imports appear to be priced unfairly, even when this is not the c a se TEXTILES AND APPAREL Despite the reduction in tariffs since 1947, there has been a steady increase in non-tariff barriers and quotas. Automobiles, steel, sugar, and textiles, are examples of products facing quotas or so-called "voluntary" restraint agr e e ments in the U.S. Such practices impose massive economic costs on the citizens of the countries erecting the barriers. Example: U.S. quotas on steel imports cost the American consumer an estimated $3.5 billion annually be tween 1985 and 1989.18 Example: U.S. quotas on textiles and apparel led to price increases of at least $15 billion and as much as $30 billion annually for the American consumer from 1986 through 1989.19 Restrictions on textile and apparel trade are one of the most damaging and growing f o rms of non tariff barrier The Multi-Fiber Arrangement (MFA In 1974, in a reversal of the general pattern of freer trade achieved by the GA'IT, 55 major textile and apparel producing countries signed the Multi-Fiber Arrangement to restrict trade in textile and apparel products. This industry had been protected since 1957 when the U.S. negotiated a voluntary export restraint pact with Japan. MFA sharply increased protection. It allowed signatory countries to set up bilateral quota agreements. As a result, Am e rica has some 40 agreements with less developed countries and with Japana Reformers in GA'IT are seeking to end these practices.The various plans to deal with textiles are 17 See 'Anti-Dumpings Dirty Secrets Wall Sfmet Jozcmal, October 15, 1900, p. A16 18 Studies show the cost of protedon in steel to the US. consumer to be about $25 billion to $35 billion annually. For more information see A General Equilibrium Analysis of the Welfare and Employment Eff- of US. Quotas inTextiles, Autos, and Steel by David G.Tarr, the Federal Trade Commission, February 1989 19 &id for the $15 billion estimate. Members of President Reagan's Comd of Economic AdvisorS estimated the cost to be $30 billion at various times in the late 1980s 20 Thomas Gremes The Collision Course o nTextile Quotas," Cat0 Institute, Policy AnuEysis No. 140, Cat0 Institute, September 12,1990 9 1) The U.S. Plan. Washington proposes that the quota system in tex tiles be phased out in the next ten years. In the interim, some form of protectionism, either tariffs or a global quota system, would be established 2) The Japanese Plan. Tokyo's proposal caUs for the final termination of the MFA on July 31,1991, the date on which the agreement ex pires. Japanese negotiators propose a transition period, from the e xpiration date in 1991 through 1999, during which quotas gradual ly would be increased until there would be no restriction on trade. A key and controversial feature of the Japanese proposal is the means by which quota expansion would be determined.The prop osal would establish a multilateral review board to oversee the transition and ensure that no participant is adversely affected by the increase in quotas.The danger is that such a review board might brake the reform process 3) The European Community Plan. The EC proposal sets no date for terminating quotas in textiles and apparel. In essence, the EC proposal simply gives each importing country discretion to convert quotas to tariffs or other forms of protection and to determine its own methods and timetabl e for eliminating its protectionist policies 4) The International Textiles and Clothing Bureau Plan. This group consists of the majorThird World countries producing textiles and apparel. Its proposal calls for the final termination of MF'A on its scheduled 1991 expiration, followed by raising the quotas over six years until they are gone. Quotas would be allowed to grow 6 per cent in the first year, 8 percent in the second, 11 percent in the third, 15 percent in the fourth, 20 percent in the fifth, and 25 p er cent in the sixth year Policy Implications of the Proposals sition period. Further, the cost to American consumers of the global quota system option is estimated at $26.1 billion in 1992, rising to $36.6 billion by 2000. The EC and Japanese proposals, too, have drawbacks. The EC proposal for example, does not set a specific target date for elimination of protection. Without agreement on a termination date there is no guarantee that protec tion will end. The Japanese proposal for a multilateral review bo ard meanwhile, is very vague and could prove ineffective. The board also could be used by protectionist countries to slow reform. Perhaps the best proposal is made by the coalition of less developed countries. Its short transition period, however, may mak e the proposal unacceptable to countries with large, politically powerful, yet inefficient textile sectors The U.S. proposal arguably is the least reform oriented, due to its long tran 10 NEW AGENDA ITEMS IN THE URUGUAY ROUND In addition to wrestling with t hese basic issues, the GATT negotiators are considering reforms in a number of other areas.These include Trade in Services Services include such industries as banking, civil aviation, communications engineering, finance, and shipping. It is stimated that w orld trading of ser vices is now worth $600 billion annually? Current restrictions make the trad ing of services across most borders difficult and sometimes impossible.There are two major proposals under discussion in the Uruguay Round to deal with this. T he U.S. plan would set rules and guidelines in a number of areas. It would secure rights of service sector businesses to esiablish overseas opera tions and to trade in services. It would require countries to treat foreign ser vices providers in the same m a nner as domestic companies and would prohi it discrimination by governments against foreign providers of ser vices. In 1990, however, the U.S. began to step back from its own reform proposals for several key industrial sectors. This was due to pressure fr o m U.S. civil aviation, shipping, and telecommunications inter ts, which argued that increased competition would destroy their businesses? The EC plan would liberalize service trade in some areas, but would exclude audio-visual industry, including movies, f ilms, and television, from reforms Intellectual Property Protection The creation of new ideas with commercial value generates "assets" called intellectual property. In most cases these ideas receive patent protection so other companies cannot market the n ew idea or resulting inventions without permission. Patents usually are given for a period long enough to allow the in novating companies to recover their investment. When the patent .expires competitors can market the product. Many less developed countrie s fail to protect intellemal property within their borders.The result: many firms from developed countries refuse to in vest in the less developed countries for fear they will have technical ideas stolen. Less developed countries thus deprive themselves o f important in dustries and so harm their own economies.24 Moreover, the U.S. Internation 21 "A Disservice to the GA'XT Financial Ties, October 24,1990, p. 14 22 "U.S. Unveils Plan to Lt'beralizeTrade in Services Financial 7i~, October 24,1990, p. 8 23 "US . Is Changing itsTune on Liberalization of Trade New Yonk Ties, October 29,1990, p. D4 24 See Mark A. Fraq "NewThreats to Intellectual Property Rights Heritage Foundation Backg?vzu~der No. 761 March 29,1990 11 a1 Trade Commission estimates that the failure of other countries to pro ct intellectual property rights Costs American businesses $24 billion a year. For example, the production and sale of goods by foreign companies using stolen American patents cut into the sales of these products by the owners of the patent The U.S. argues that the current GAlT dispute settlement mechanism for property rights cases is inadequate.The U.S. proposes establishment of stric ter international standards to protect patents, trademarks, and copyrights and increased law enf orcement to prosecute counterfeiters and violators of the patent laws. Many less developed countries oppose the U.S. plan.They argue that intel lectual property protection actually is a barrier to international trade. They are holding out for special exemp tions from any GAlT agreement on proper ty rights.The developed countries counter that Third World leaders favor such exemptions so that they can steal Western patents developed countries are tying intellectual property protection to liberaliza tion of te x tile and agricultural trade ii The Uruguay Round negotiations in this area are moving slowly. Many less International Foreign Investment Foreign investment provides business opportunities in other markets and spurs economic growth in recipient countries. Y et many countries impose restrictions on international foreign investment. These countries treat foreign investment as a privilege granted to the investor. In exchange for "allowing" a foreign business to invest capital in their economy, governments often im pose certain requirements. Local content requirements are one such practice. These require that a specified share of a product's components be purchased from local suppliers. In a country with a 40 percent local content require ment, for instance, the investor must purchase components worth 40 percent of the final product from local suppliers. This may be in the form of labor raw materials, or manufactured parts. This practice often is a strong disincen tive for foreign investment. Many companies have little inclination to open factories in less developed countries if they must buy local parts that are in ferior to other sources of supply or are more costly. A special GAlT negotiating committee is considering the elimination of what are called "trade re lated investment measures which restrict foreign in vestment.The U.S. seeks to eliminate most restrictions, such as local content requirements, limits on equity participation in local companies, export perfor mance requirements and restrictions on taking p rofits out of a country. The 25 "Foreign Protdon of Intellectual Property and Its meet on US. Industry and Trade International Trade CommisSion, Washington, D.C. 1988 12 EC and the Japanese, however, would still permit countries to limit pur chases by for e ign businesses'of stock in local companies. The EC in addition would allow countries to continue to force foreign investors to transfer tech nology to local businesses in the host country AFTER THE URUGUAY ROUND As the Uruguay Round comes to a conclusion s uccessful or otheNvise American policy makers must maintain the momentum for opening the world trading system. Retaliation against other countries for alleged unfair trade practices rarely leads to the removal of trade barriers. Usually such a policy give s protectionists in the countries affected an excuse to retain trade barriers against the U.S. In the worst case, in the 193Os, such policies helped create and sustain the Great Depression. A protectionist response to a failed GATT round would harm both Am erican consumers and industries and would as sure a deep and lingering recession for the future. The Bush Administration should seek an extension of the GATT round through at least the end of March 1991, which is when special negotiating authority granted to the Administration by Congress expires. During this period the Administration should seek the best GAIT agreement possible even if it falls short of America's expectations and even if the EC will not agree to the complete elimination of barriers to agr i cultural trade. Even an imperfect GATT agreement could liberalize trade in services, foreign invest ment policies, and lower tariff barriers.This would be better for the U.S. than no agreement at all Seeking Regional Agreements. With or without an agreeme n t, America should seek trade liberalization through other means. Washington, for ex ample, more energetically should seek regional trade agreements with any in terested trading partners. In particular, a FreeTrade Area FTA such as the one being phased in b etween the U.S. and Canada, should be extended to cover the entire Western Hemisphere An FTA requires all countries in volved to remove all tariff barriers and most non-tariff barriers to each other's trade. The Bush Administration already has extended an invitation to any country that wishes to negotiate such an agreement. Negotiations are scheduled to begin with Mexico. Chile, and Panama also have requested negotiations. Other Central American and Caribbean countries have ex pressed interest in such an a r rangement The U.S. also should invite other countries to enter FTA agreements. The Pacific Rim countries of Australia, the Republic of China onTaiwan, Sin gapore, and Thailand have asked for such agreements. The U.S. too should ex tend invitations for FI' As to Eastern European countries that successfully es tablish democracies and free market economies. The FTA approach will pressure those countries that have blocked major GAIT reforms. The EC, for example, sees Eastern Europe as a region in 13 which it wi ll be the dominant investor and trader. Yet the EC is unwilling to open its markets to Eastern European agricultural and other products. If the U.S. establishes FIAs with Eastern European countries, the EC will find it more difficult to compete in markets with which they historically had strong economic ties Incentives for Membership. Some fear that bilateral or area-wide FIA agreements could create a world trading system separated into powerful trad ing blocs with free trade internally but protectionism e x ternally.This is unlike ly, however, since FTAS do not require each member to have the Same trade policies towards non-members. Agreements such as the U.S.-Canada FIA in fact offer incentives for other countries to join the group. The lure of mem bership also would provide a powerful stimulus for less developed countries to reform their economies, a necessary requirement to join a free trade arran gement. The U.S. also should take unilateral steps to liberalize its own market. It is not a concession to foreigners when the U.S. allows its businesses and con sumers to purchase foreign products. America should start by dismantling its quota systems governing a utomobiles, textiles, and sugar. Opening the American market in these areas would provide more consumer choices and lower prices for Americans, and stimulate the healthy international competi tion needed to make American industries more efficient CONCLUSI O N A host of important world trade issues are being considered in the current GAm round. Failure to complete the round risks a world-wide binge of protectionism. There are many stumbling blocks, from the ECs intransigence on agriculture to unwise American p ositions on textiles and services.The Bush Administration should continue to work for a successful agreement. But even if no agreement is possible, the U.S. and the world need not repeat the mistakes of the 193Os, sentencing millions to poverty and lower living stand ards as a result of destructive trade wars. Free trade is vital for a strong U.S economy. Currently, export sales are almost the only thing preventing a reces sion. Increased exports in 1991 will be needed to sustain the American economy. The U.S. should pursue free trade, whether through GATI or through FTAS with individual countries, while eliminating its own trade restrictions. To do otherwise would risk a damaging slowdown in international trade. B~yanT. Johnson Policv Analvst 14 EXPORT S UBSIDIES In U.S. S millions Beef and veal 908 1,331 Cereals 5,229 4,553 Dairy 3,644 2.691 Eggs and pou by 230 243 Fruits and vegetables 76 95 Oil seed 29 26 Olive oil 76 137 Pig meats 203 95 Sugar 1,851 1,619 Tobacco 51 54 Wines 51 Estimated INTERNAL SUPP O RTS In U.S. S millions Beef and veal 2,018 1,520 Dai ry 3, m 2,710 Fnrb and vegetables 761 1,249 CmlS 3,645 3,055 011 teed 3,484 3,216 OliW Oll i 1,041 1,806 Sheep and goat products 1,529 1,601 Sugar 609 695 Tobacco 1,091 1,020 Wines 1,776 1,565 SourceAgn ' culnurrl Sintotion on the Community Table T.863.43, European commrssl '011 Antigua and Barbuda Argentina Australia Bangladesh Barbados Belgium Belize Benin Bolivia Botswana Brazil Burkina Faso Burundi Cameroon Canada Central African Republic GATPs 99 Memb e rs on August l,l990 Chad Chile Cdumbia Congo Costa Rlca c&te d'ivoire Cuba CYP Czecho slovakia Denmark Dominican Republic EWPt Finland France Gabon Gambia Germany Ghana GreeCe Guyana Haiti Hong Kong Hungary Iceland indonesia Ireland Israel Jamaica Japan K o rea, Rep KMit Lesotho Fed. Rep Kenya Lwembourg Madagascar Malawi Malaysia Maldives Malta Mauritania Mauritius Mexico MOmCXO Myanmer Burma) Netherlands Newzealand Nicaragua Niger Nigeria Notway Pakistan Peru Philippines Pdand Portugal Romania Rwanda Senega l Sierra Leone S~ngapore South Africa Spain Sri Lank Suriname Sweden Switzerland Tanzania Thailand Toso Trinidad and Tunisia Turkey Uganda United Kingdom United States UWMY Yugoslavia zaire Zambia Zimbabwe source Business America Tobago
804 January 18,1991 INTRODUCTION The multilateral trade negotiations of the General Agreement onTariffs and Trade GATT called the Uruguay Round since they were launched in Punta del Este, Uruguay in 1986, are in disarray. No agreement was reached by the scheduled December 7 deadline. The Bush Administration has indicated that it will extend the talks at least through the end of March, which is when special negotiating authority granted to the Adm i nistration by Congress runs out, if the European Community offers concessions in its position on agriculture trade. During this extra time a last-minute compromise might be reached. A new GATT agreement could reduce barriers to American exports of goods a n d services, better protect American patents and other intellectual property, remove restrictions on foreign investments and eliminate protection and subsidies for farm products According to U.S. Trade Representative Carla Hills, a successful GAIT round ag reement could expand economic output by as much as $4 trillion by the year 20 00. Failure to reach an agreement, by contrast, could trigger a spasm of trade protectionism. With the U.S. economy already weak and fighting the damage imposed by increased taxe s, a trade war would push The Farm Barrier. Agriculture is the major issue preventing a GATT agreement. The European Community (EC which spent an estimated $29 billion in agricultural subsidies in 1989l, refuses to meet demands by other GAlT members for s i gnificant farm sector reform. U.S. Secretary of Agricul ture Clayton Yeutter commented last month in Brussels that there was zero sup ort for the European position from non-EC nations attending the meet ing. The EC claims that the U.S. proposal for a 75 p ercent to 90 percent reduction in tariffs will endanger the livelihoods of the 10 million farmers within the Community. Many less developed countries counter that EC agricultural policies keep Third World farmers poor and destitute. EC export subsidies, it is correctly argued, drive down the world price of agricultural goods, making it un profitable for less developed countries to export their products. Without an agreement on agriculture, less developed countries might pull out of the America into a deep e conomic recession or even a depression s l GAITtalks High Stakes. Trade liberalization would benefit the international trading system in general and America in particular. According to Gary Hufbauer, an economist at the Washington-based Institute for Inte r national Economics even a moderately successful conclusion of the talks will expand annual world trade by 100 billion. U.S.Trade Representative Hills says that over the next decade America could enjoy a 2oI) billion rise in exports to less developed count ries alone if the GAm round succeeds. A deadlock in the negotiations however, could trigger a worldwide spasm of damaging trade protectionism. In the 193Os, trade barriers helped cause and sustain the Great Depression. A successful GATT agreement thus is vital to American interests. The Bush Administration should agree to an extension of GATI negotia tions and aggressively work to resolve its differences with other member M tions during that period. Further, the U.S. should not let EC recalcitrance over ag ricultural trade stand in the way of a GATT agreement. While such an agreement would not include all of the privisions that the U.S. seeks, it still would liberalize trade in services, open markets further to foreign invest ments, better protect intellect ual property rights, and lower tariff rates. All of these reforms would help U.S. businesses.The U.S. would be better off with a more limited GATT agreement than with no agreement at all 1 From the European Codons report, A cuItumI Sifuatitm on the Gmmuniry 1989, Table T 63. 43. This figure includes only direct government internal supports and export subsidies. Other figures that include additional supports, such as government funded research and administrative costs, raise the total in 1989 to $53 billion 2 Reported in the WdI Stmet Journal, December 4,1990, p. A4 2 The U.S meanwhile,can continue to pursue trade liberalization through other means. Washington, for instance, should initiate negotiations for free trade areas with countries wishing completely opened markets.The U.S. cur rently is phasing in such arrangements with Canada and with Israel, and is beginning negotiations with Mexico. Other interested countries include Australia, Chile, Guatemala, Panama, Singapore, the Republic of China on Taiwan a n d Thailand. Free trade areas .also should be offered to Eastern European nations who establish democracies and free markets In addition, the U.S. should begin unilaterally to remove its own trade bar riers to such products as machine tools, steel, sugar a nd textiles.This protec tion costs the American consumer billions of dollars a year. With the U.S. sliding into recession, free trade is vital for sustaining economic growth. The stakes are global and an agreement is necessary to prevent a collapse of the world trading system THE ORIGINS AND OB JEcnvES OF GAIT The shrinking world trade that was created by protectionism starting in 1930 was one of the principal causes of the Great DepressionTo avoid a repeat of this, after World War 11 the Western democraci e s committed them selves to trade liberalization. In 1947, the 24 countries meeting in Bretton Woods, New Hampshire, signed the General Agreement onTariffs and Trade (GAlT), liberalizing some trade immediately and establishing a mechanism for future negoti ations to remove other trade barriers. Embodied in the original GATI agreement is the concept of Most Favored Nation status This term is extraordinarily misleading, for it implies that some nations are granted special favors. It is just the opposite. It me ans that every participating nation gets the same trade treatment as that given to the most favored nation Thus if barriers are lowered for one nation, all other par ticipating nations automatically have barriers lowered for them. Through the most favored nation concept each member of GATT agreeg to give equal ac cess to its markets, without discrimination, to all members. Today, some 168 nations receive most favored nation status from America. Building on the original commitment to freer trade, there have been seven completed rounds of GATI negotiations since 1947.These are The Geneva Round of 19 47. There were some 45,000 agreements in this round, reducing tariffs on manufactured goods and some agricultural products 3 Kenneth W. Dam, The GAm: Law and the International Economic Ogonizution, Chicago, Un;VerS;ty of Chicago Press, 1970 3 The Annecy, France, Round of 1949, and the Torquay, bce, Round of 1951.These mainly admitted new member countries to GA'IT. The original members also negotiated an additiona l 13,000 tariff conces sions The Geneva Round of 19 56. This round also mainly adnjtted new mem bers; most of the discussion concerned admitting Japan The Dillon (named after US. Secretary of Treasury Douglas C. Dillon Round of 1960 to 19 62. This resulted in a 10 percent reduction in tariffs that had been imposed on U.S. exports and other total world tariff reductions equalling 40 billion The Kennedy Round of 1963 to 19 67. Cited as one of the most success ful GAlIT rounds, it cut tariffs of non-agricultural products by about 35 percent, affecting approximately 80 percent of the dutiable products of the industrialized world? In addition, reductions of up to 20 percent were made on agricultural products TheTokyo Round of 1973 to 19 79. Though its achievements were mini mal, there was some reduction of duties and tariffs. The main result was 600 a framework for the current GAIT negotia tions The Uruguay Round launched in 19 86. The Uruguay Round is in tended to achieve two broad goals. The first is to prevent increased protectionist pressures from undermining the multilateral trading sys tem. Of particular ur gency is to halt in creases in protec tionism by less developed countries partly triggered by Total World Exports 1950-1989 Bllliw ~w r nnl) U.8.8 aooo 1600 oooF Source: International Financial Statistics 4 Severd.countries opposed Japan's admission into GA'IT because of fears of the effects low Japanese wages would have on other countries. Under Article XXXV of the GAIT charter, these co u ntries were allowed to withhold trading privileges to Japan indefinitely. It was not until the late 1%Os that most of these countries fully accepted Japan. 5 Gilbert R. Winham, Internalid Trade and the T- Round, Princeton University Press, New Jersey, 198 6, p. 61 4 I their mounting international debt and political unrest. The second goal is to bring the GA'IT up to date by extending its rules to cover areas of disputes that had eluded past rounds. Among these are growing trade protection of farm products. Government sub sidie for a cultural products last year cost would consumers $245 bil lion. In textiles and apparel trade, protectionism costs American con sumers between $15 billion and $30 billion annually from 1986 through 19 89. New rules also are needed for international investment, the inter national sale of services, and patent protection for intellectual property. The positions taken by the various countries in the current round reveal the benefits to be gained from and the barriers to a successful agree ment ig AGRICULTURE An agreement on agriculture, which accounts for 13 percent of world trade is the litmus test of a successful Uruguay Round? Past rounds have, for the most part, avoided this crucial topic. Because most participants in the Urugua y Round have invested considerable time and effort trying to reach a consensus in agricultural products, the failure to reach agreement here so far has unraveled the rest of the negotiations. Reforms in the Uruguay Round seek to phase out government suppor ted trade protection and subsidies for agricultural products. There are two diverging factions on this issue at GA These are 1) The U.S. and the Cairns Group! These nations want to replace J government protection of farm products with free trade. This woul d require an agreement ending import restraints, quotas and subsidies. These for a short time would be replaced by tariffs 2) The European Community, Austria, Japan, the Nordic Group, and Switzerland.'O This group strongly resists the objective of the U.S and Cairns group. Instead of free trade, this group's counter-offer includes merely trimming protection somewhat. Its idea is to con solidate all forms of protection, with an agreement to reduce the 6 AgriculturcZr Policies, Mdts, and Tmdc: Monitoring and Outlook 1990, OrganiZation for Economic Cooperation and Development, Paris, France, 1990 7 Dale Hathaway,&cultun? and the G4m: Rewriringthe Rules. Policy Analyses in International Economics No 20, Institute for International Economics, Washington, D.C Sep t ember 1987 8 The Cairns Group, so called because of the meeting that took place in Cairns, Australia, in 1986, includes 14 countries that export agricultural products. The members are: Argentina, Australia, Brazil, Canada, Chile, Columbia Fiji, Hungary, I ndonesia, Malaysia, New Zealand, the Philipphes, Thailand, and Uruguay 9 10 The Nordic Group consists of Finland, Norway, and Sweden. See "Meanwhile in Geneva The Economist, September 22,1990, p. 29 5 AGRICULTURAL SUPPORTS 1989 Producer Subsidy Equivalent New Zeabnd 4 0.2 5 Austrrrlb 13 1.3 10 United States L 1 19.3 32.2 27 Canada 14.9 5.2 35 European Community 139.5 53.0 38 Sweden 4.7 2.2 47 Japan 6 33. 6 72 Finland 6.1 4.4 72 Switzerland 5.6 4.2 75 NOmy 3.5 2.6 74 Source: Organization for Economic Cooper a tion and Development The producer subsidy equivalent includes the internal supports and export subsidies mentioned in the European Community table at the cmnclusion of this study, but also additional supports like government funded research and administra tive costs levels over time.This would allow a country to choose which kind of support to reduce, leaving many of the most disputed practices untouched. There are three main agriculture issues under consideration in the current round: internal supports and export competition, market access, and health standards Internal Supports and Export Competition.Governments subsidize agricul tural production in almost every major producing country (seetable).This in cludes direct subsidies, export credits, and low in terest 10ans.This support dis torts world trade and is the heart of many international trade disputes. Government subsidies and supports also have been costly to consumers A central goal of reformers in the current negotiations has been to end sub sidies i n agriculture, especially those provided by the European Community EC) and America, allowing competitive market forces to set world and domestic prices based on supply and demand. Most of the negotiations center 6 on how these reductions will be achieved, monitored, and enforced.The group led by the EC has agreed in principle to reduce subsidies, but it wants to avo# specific limits. The U.S on the other hand, wants specified reduc tiOnS Market Access. Most major agricultural producers protect their domest i c sectors. America, for example, protects cotton, dairy products, peanuts, and sugar; Japan protects rice; Canada protects dairy products and poultry; and the EC protects beef.These policies restrict market.access and maintain higher-than-world market pri c es in the home country.The goal of the vast majority of GAlT members is to ban these practices, replacing them with tariffs which would be reduced by a specific amount every year until they are completely eliminated The EC and Japan are resisting these re f orms. A suc cessful agreement on agriculture will require the EC and Japan to accept the American and Cairns plan Health Standards. Uruguay Round reformers hope to create a consensus on health standard practices that in some cases interfere with the free t rade of agricultural goods.Typica1 of this problem is the dispute between America and the EC over American beef produced with growth hormones. In 1987 the EC imposed restrictions on American hormone-fed beef, claiming that this product presented a health r isk. This claim is widely disputed. Since almost the entire American beef in dustry used growth hor mones, the EC's health restrictions prevented the U.S. from selling beef in the EC. In retaliation, the Reagan Administration im posed a 100 percent tariff on EC beef, fruit juices, in stant coffee, pet food, and tomatoes. Most of these restrictions remain in force Average Tariff on Manufactured Imports for Advanced Industrial Democracies Year 1940 1950 BBO 1970 le80 le90 0 10 20 so 40 60 sourc Tlw &-ht Hmrl t ar DatmChmrl Avoraga Tarifto (percent 11 Reported by Neal Blewett Agricultural Talks: Round and Round World Link Mogcaine, September 10,1990 p. 20 7 TARIFF AND SUBSIDIES Tariff rates have been reduced in each GA'IT round since 1947.This has helped increBe world trade from 100 billion annually in the 1950s to $3 tril lion in 19 89. Subsidies for manufactured goods and seMces also now are coming under increasing criticism as many countries realize their damaging effects The U.S. and GATT Plans. Urugua Round negotiators essentially have agreed to reduce tariffs by 33 percent! But, the U.S. is pushing for deeper cuts, offering to reduce its own tariffs by 43 percent if other countries do so as well. The U.S. plan also eventually would eliminate most tariffs. C a lled the zero to zero" option, the plan would require all participants to reduce their tariffs to zero on specific products.14 The "zero to zero" plan offered by U.S negotiators was first put forward by a group formedlpf 100 leading American businesses wh o would benefit from reduced tariffs. This group pointed out that the U.S. still imposes tariffs on some 8,753 different products, and that al though the U.S. average tariff rate is about 5 percent, there are many imports exposed to extremely high levies. Examples: tobacco products are levied a 458.3 percent tariff; certain wrist watches are levied a 151.2 percent tariff; cer tain textile and apparel products are levied tariffs ranging from 15 percent to 70 percent. Countervailing Duties. While there has be en modest progress in recent years in reducing government subsidies to exporters, the Uruguay Round is stalemated on further progress. Indeed, the negotiations are no longer focused on ways to reduce further the use of subsidies, but rather on the use of countervailing duties (CVDs For the U.S a CVD is a levy placed on an import that allegedly is sold in an unfair manner. Such a penalty might be placed on a good that has received a government subsidy either for its produc tion or sale. Or a CVD might be placed on an imported product that is .being "dumped in America, that is, sold at a cheaper price than the original cost of produc tion. In such a case, Washington often imposes a duty to raise the price closer to the true cost of produc tion. One problem in gaining support for the elimination of CVDs is that the U.S. is the principal backer and user of CVDs. Between 1980 and 1986, for ex ample, the U.S. initiated 90 percent of CVD cases worldwide.16 Critics of 12 "International Financial Statistics International Monetary Fund 1990 Yearbook, Washington, D.C. 13 Jeffrey J. Schott The Global Trade Negotiations:What Can Be Achieved Policy Analysis in International Economics No. B, Institute for International Economics, September 1990, p. 17 1 4 "U.S. Offers to Cut Tarif& by 43%: Financial Tunes, October 25,1990, p. 3 15 "Radical Surgery Required for Tariffs Wcrshington Tunes, October 22,1990, p. G4 16 Schott, op. cit p. 94 8 Washington's CVD strategy point out that "dumping" is a very subjectiv e term and is often used as a cover for American protectionism. They point out for example, that the U.S. view on dumping routinely does not take into ac count that goods justifiably may be sold at prices below cost when there are surplus supplies, at leas t for a limited time. In addition, critics of CVDs used against alleged dumping claim that it is practically impossible to compare the price of products in two countries because there are subtle legitimate cost dif ferences in what might appear to be ident i cal products. Example: special credit arrangemely and warranties often are overlooked when calculating production costs. Finally, the U.S. often defines dumping in a way calcu lated to make imports appear to be priced unfairly, even when this is not the c a se TEXTILES AND APPAREL Despite the reduction in tariffs since 1947, there has been a steady increase in non-tariff barriers and quotas. Automobiles, steel, sugar, and textiles, are examples of products facing quotas or so-called "voluntary" restraint agr e e ments in the U.S. Such practices impose massive economic costs on the citizens of the countries erecting the barriers. Example: U.S. quotas on steel imports cost the American consumer an estimated $3.5 billion annually be tween 1985 and 1989.18 Example: U.S. quotas on textiles and apparel led to price increases of at least $15 billion and as much as $30 billion annually for the American consumer from 1986 through 1989.19 Restrictions on textile and apparel trade are one of the most damaging and growing f o rms of non tariff barrier The Multi-Fiber Arrangement (MFA In 1974, in a reversal of the general pattern of freer trade achieved by the GA'IT, 55 major textile and apparel producing countries signed the Multi-Fiber Arrangement to restrict trade in textile and apparel products. This industry had been protected since 1957 when the U.S. negotiated a voluntary export restraint pact with Japan. MFA sharply increased protection. It allowed signatory countries to set up bilateral quota agreements. As a result, Am e rica has some 40 agreements with less developed countries and with Japana Reformers in GA'IT are seeking to end these practices.The various plans to deal with textiles are 17 See 'Anti-Dumpings Dirty Secrets Wall Sfmet Jozcmal, October 15, 1900, p. A16 18 Studies show the cost of protedon in steel to the US. consumer to be about $25 billion to $35 billion annually. For more information see A General Equilibrium Analysis of the Welfare and Employment Eff- of US. Quotas inTextiles, Autos, and Steel by David G.Tarr, the Federal Trade Commission, February 1989 19 &id for the $15 billion estimate. Members of President Reagan's Comd of Economic AdvisorS estimated the cost to be $30 billion at various times in the late 1980s 20 Thomas Gremes The Collision Course o nTextile Quotas," Cat0 Institute, Policy AnuEysis No. 140, Cat0 Institute, September 12,1990 9 1) The U.S. Plan. Washington proposes that the quota system in tex tiles be phased out in the next ten years. In the interim, some form of protectionism, either tariffs or a global quota system, would be established 2) The Japanese Plan. Tokyo's proposal caUs for the final termination of the MFA on July 31,1991, the date on which the agreement ex pires. Japanese negotiators propose a transition period, from the e xpiration date in 1991 through 1999, during which quotas gradual ly would be increased until there would be no restriction on trade. A key and controversial feature of the Japanese proposal is the means by which quota expansion would be determined.The prop osal would establish a multilateral review board to oversee the transition and ensure that no participant is adversely affected by the increase in quotas.The danger is that such a review board might brake the reform process 3) The European Community Plan. The EC proposal sets no date for terminating quotas in textiles and apparel. In essence, the EC proposal simply gives each importing country discretion to convert quotas to tariffs or other forms of protection and to determine its own methods and timetabl e for eliminating its protectionist policies 4) The International Textiles and Clothing Bureau Plan. This group consists of the majorThird World countries producing textiles and apparel. Its proposal calls for the final termination of MF'A on its scheduled 1991 expiration, followed by raising the quotas over six years until they are gone. Quotas would be allowed to grow 6 per cent in the first year, 8 percent in the second, 11 percent in the third, 15 percent in the fourth, 20 percent in the fifth, and 25 p er cent in the sixth year Policy Implications of the Proposals sition period. Further, the cost to American consumers of the global quota system option is estimated at $26.1 billion in 1992, rising to $36.6 billion by 2000. The EC and Japanese proposals, too, have drawbacks. The EC proposal for example, does not set a specific target date for elimination of protection. Without agreement on a termination date there is no guarantee that protec tion will end. The Japanese proposal for a multilateral review bo ard meanwhile, is very vague and could prove ineffective. The board also could be used by protectionist countries to slow reform. Perhaps the best proposal is made by the coalition of less developed countries. Its short transition period, however, may mak e the proposal unacceptable to countries with large, politically powerful, yet inefficient textile sectors The U.S. proposal arguably is the least reform oriented, due to its long tran 10 NEW AGENDA ITEMS IN THE URUGUAY ROUND In addition to wrestling with t hese basic issues, the GATT negotiators are considering reforms in a number of other areas.These include Trade in Services Services include such industries as banking, civil aviation, communications engineering, finance, and shipping. It is stimated that w orld trading of ser vices is now worth $600 billion annually? Current restrictions make the trad ing of services across most borders difficult and sometimes impossible.There are two major proposals under discussion in the Uruguay Round to deal with this. T he U.S. plan would set rules and guidelines in a number of areas. It would secure rights of service sector businesses to esiablish overseas opera tions and to trade in services. It would require countries to treat foreign ser vices providers in the same m a nner as domestic companies and would prohi it discrimination by governments against foreign providers of ser vices. In 1990, however, the U.S. began to step back from its own reform proposals for several key industrial sectors. This was due to pressure fr o m U.S. civil aviation, shipping, and telecommunications inter ts, which argued that increased competition would destroy their businesses? The EC plan would liberalize service trade in some areas, but would exclude audio-visual industry, including movies, f ilms, and television, from reforms Intellectual Property Protection The creation of new ideas with commercial value generates "assets" called intellectual property. In most cases these ideas receive patent protection so other companies cannot market the n ew idea or resulting inventions without permission. Patents usually are given for a period long enough to allow the in novating companies to recover their investment. When the patent .expires competitors can market the product. Many less developed countrie s fail to protect intellemal property within their borders.The result: many firms from developed countries refuse to in vest in the less developed countries for fear they will have technical ideas stolen. Less developed countries thus deprive themselves o f important in dustries and so harm their own economies.24 Moreover, the U.S. Internation 21 "A Disservice to the GA'XT Financial Ties, October 24,1990, p. 14 22 "U.S. Unveils Plan to Lt'beralizeTrade in Services Financial 7i~, October 24,1990, p. 8 23 "US . Is Changing itsTune on Liberalization of Trade New Yonk Ties, October 29,1990, p. D4 24 See Mark A. Fraq "NewThreats to Intellectual Property Rights Heritage Foundation Backg?vzu~der No. 761 March 29,1990 11 a1 Trade Commission estimates that the failure of other countries to pro ct intellectual property rights Costs American businesses $24 billion a year. For example, the production and sale of goods by foreign companies using stolen American patents cut into the sales of these products by the owners of the patent The U.S. argues that the current GAlT dispute settlement mechanism for property rights cases is inadequate.The U.S. proposes establishment of stric ter international standards to protect patents, trademarks, and copyrights and increased law enf orcement to prosecute counterfeiters and violators of the patent laws. Many less developed countries oppose the U.S. plan.They argue that intel lectual property protection actually is a barrier to international trade. They are holding out for special exemp tions from any GAlT agreement on proper ty rights.The developed countries counter that Third World leaders favor such exemptions so that they can steal Western patents developed countries are tying intellectual property protection to liberaliza tion of te x tile and agricultural trade ii The Uruguay Round negotiations in this area are moving slowly. Many less International Foreign Investment Foreign investment provides business opportunities in other markets and spurs economic growth in recipient countries. Y et many countries impose restrictions on international foreign investment. These countries treat foreign investment as a privilege granted to the investor. In exchange for "allowing" a foreign business to invest capital in their economy, governments often im pose certain requirements. Local content requirements are one such practice. These require that a specified share of a product's components be purchased from local suppliers. In a country with a 40 percent local content require ment, for instance, the investor must purchase components worth 40 percent of the final product from local suppliers. This may be in the form of labor raw materials, or manufactured parts. This practice often is a strong disincen tive for foreign investment. Many companies have little inclination to open factories in less developed countries if they must buy local parts that are in ferior to other sources of supply or are more costly. A special GAlT negotiating committee is considering the elimination of what are called "trade re lated investment measures which restrict foreign in vestment.The U.S. seeks to eliminate most restrictions, such as local content requirements, limits on equity participation in local companies, export perfor mance requirements and restrictions on taking p rofits out of a country. The 25 "Foreign Protdon of Intellectual Property and Its meet on US. Industry and Trade International Trade CommisSion, Washington, D.C. 1988 12 EC and the Japanese, however, would still permit countries to limit pur chases by for e ign businesses'of stock in local companies. The EC in addition would allow countries to continue to force foreign investors to transfer tech nology to local businesses in the host country AFTER THE URUGUAY ROUND As the Uruguay Round comes to a conclusion s uccessful or otheNvise American policy makers must maintain the momentum for opening the world trading system. Retaliation against other countries for alleged unfair trade practices rarely leads to the removal of trade barriers. Usually such a policy give s protectionists in the countries affected an excuse to retain trade barriers against the U.S. In the worst case, in the 193Os, such policies helped create and sustain the Great Depression. A protectionist response to a failed GATT round would harm both Am erican consumers and industries and would as sure a deep and lingering recession for the future. The Bush Administration should seek an extension of the GATT round through at least the end of March 1991, which is when special negotiating authority granted to the Administration by Congress expires. During this period the Administration should seek the best GAIT agreement possible even if it falls short of America's expectations and even if the EC will not agree to the complete elimination of barriers to agr i cultural trade. Even an imperfect GATT agreement could liberalize trade in services, foreign invest ment policies, and lower tariff barriers.This would be better for the U.S. than no agreement at all Seeking Regional Agreements. With or without an agreeme n t, America should seek trade liberalization through other means. Washington, for ex ample, more energetically should seek regional trade agreements with any in terested trading partners. In particular, a FreeTrade Area FTA such as the one being phased in b etween the U.S. and Canada, should be extended to cover the entire Western Hemisphere An FTA requires all countries in volved to remove all tariff barriers and most non-tariff barriers to each other's trade. The Bush Administration already has extended an invitation to any country that wishes to negotiate such an agreement. Negotiations are scheduled to begin with Mexico. Chile, and Panama also have requested negotiations. Other Central American and Caribbean countries have ex pressed interest in such an a r rangement The U.S. also should invite other countries to enter FTA agreements. The Pacific Rim countries of Australia, the Republic of China onTaiwan, Sin gapore, and Thailand have asked for such agreements. The U.S. too should ex tend invitations for FI' As to Eastern European countries that successfully es tablish democracies and free market economies. The FTA approach will pressure those countries that have blocked major GAIT reforms. The EC, for example, sees Eastern Europe as a region in 13 which it wi ll be the dominant investor and trader. Yet the EC is unwilling to open its markets to Eastern European agricultural and other products. If the U.S. establishes FIAs with Eastern European countries, the EC will find it more difficult to compete in markets with which they historically had strong economic ties Incentives for Membership. Some fear that bilateral or area-wide FIA agreements could create a world trading system separated into powerful trad ing blocs with free trade internally but protectionism e x ternally.This is unlike ly, however, since FTAS do not require each member to have the Same trade policies towards non-members. Agreements such as the U.S.-Canada FIA in fact offer incentives for other countries to join the group. The lure of mem bership also would provide a powerful stimulus for less developed countries to reform their economies, a necessary requirement to join a free trade arran gement. The U.S. also should take unilateral steps to liberalize its own market. It is not a concession to foreigners when the U.S. allows its businesses and con sumers to purchase foreign products. America should start by dismantling its quota systems governing a utomobiles, textiles, and sugar. Opening the American market in these areas would provide more consumer choices and lower prices for Americans, and stimulate the healthy international competi tion needed to make American industries more efficient CONCLUSI O N A host of important world trade issues are being considered in the current GAm round. Failure to complete the round risks a world-wide binge of protectionism. There are many stumbling blocks, from the ECs intransigence on agriculture to unwise American p ositions on textiles and services.The Bush Administration should continue to work for a successful agreement. But even if no agreement is possible, the U.S. and the world need not repeat the mistakes of the 193Os, sentencing millions to poverty and lower living stand ards as a result of destructive trade wars. Free trade is vital for a strong U.S economy. Currently, export sales are almost the only thing preventing a reces sion. Increased exports in 1991 will be needed to sustain the American economy. The U.S. should pursue free trade, whether through GATI or through FTAS with individual countries, while eliminating its own trade restrictions. To do otherwise would risk a damaging slowdown in international trade. B~yanT. Johnson Policv Analvst 14 EXPORT S UBSIDIES In U.S. S millions Beef and veal 908 1,331 Cereals 5,229 4,553 Dairy 3,644 2.691 Eggs and pou by 230 243 Fruits and vegetables 76 95 Oil seed 29 26 Olive oil 76 137 Pig meats 203 95 Sugar 1,851 1,619 Tobacco 51 54 Wines 51 Estimated INTERNAL SUPP O RTS In U.S. S millions Beef and veal 2,018 1,520 Dai ry 3, m 2,710 Fnrb and vegetables 761 1,249 CmlS 3,645 3,055 011 teed 3,484 3,216 OliW Oll i 1,041 1,806 Sheep and goat products 1,529 1,601 Sugar 609 695 Tobacco 1,091 1,020 Wines 1,776 1,565 SourceAgn ' culnurrl Sintotion on the Community Table T.863.43, European commrssl '011 Antigua and Barbuda Argentina Australia Bangladesh Barbados Belgium Belize Benin Bolivia Botswana Brazil Burkina Faso Burundi Cameroon Canada Central African Republic GATPs 99 Memb e rs on August l,l990 Chad Chile Cdumbia Congo Costa Rlca c&te d'ivoire Cuba CYP Czecho slovakia Denmark Dominican Republic EWPt Finland France Gabon Gambia Germany Ghana GreeCe Guyana Haiti Hong Kong Hungary Iceland indonesia Ireland Israel Jamaica Japan K o rea, Rep KMit Lesotho Fed. Rep Kenya Lwembourg Madagascar Malawi Malaysia Maldives Malta Mauritania Mauritius Mexico MOmCXO Myanmer Burma) Netherlands Newzealand Nicaragua Niger Nigeria Notway Pakistan Peru Philippines Pdand Portugal Romania Rwanda Senega l Sierra Leone S~ngapore South Africa Spain Sri Lank Suriname Sweden Switzerland Tanzania Thailand Toso Trinidad and Tunisia Turkey Uganda United Kingdom United States UWMY Yugoslavia zaire Zambia Zimbabwe source Business America Tobago
