U.S. SEEKS "GRADUATION" OF THIRD WORLD COUNTRIES AND SECTORS.

Mar 21, 1987

U.S. SEEKS "GRADUATION" OF THIRD WORLD COUNTRIES AND SECTORS.

GENEVA MARCH 19 (IFDA/CHAKRAVARTHI RAGHAVAN) -- The United States is seeking within GATT "graduation" of so-called "advanced" third world countries, and sectors of industries in all third world countries that are "internationally competitive".

In effect the U.S. is seeking to abrogate special provisions applicable to third world countries, under the Tokyo Round subsidies code, on the use of export subsidies to promote their economic development programmes.

These U.S. moves have been unveiled, at this week's meetings of the Uruguay Round negotiating group on subsidies and countervailing measures, chaired by Michael Cartland of Hong Kong, third world sources reported.

The U.S. proposals, the sources said, met with strong opposition from a number of third world participants who warned that it would jeopardise the basic principles of the objectives and aims of the Uruguay round and upset the balance of rights and obligations in GATT.

As laid down in the Punta del Este declaration, the negotiations on subsidies and countervailing measures are to be based on review of the GATT articles VI and XVI, and the Tokyo round agreement on subsidies and countervailing measures, "with the objective of improving GATT disciplines relating to all subsidies and countervailing measures that affect international trade".

The initial phase of negotiations, to be completed in 1987, is to be devoted to submission of proposals by participants on issues to be taken up for negotiations and on negotiating techniques, provision of factual background notes by the Secretariat, and examination of proposals and documentation.

In the subsequent phase, a common negotiating basis is to be developed, and negotiations carried out on the basis of specific drafting proposals submitted by participants.

In the discussions within the negotiating group, third world participants, including a number of signatories to the subsidies code, are reported to have stressed the need for the review and revision exercise to be conducted within the larger negotiating group, thus assuring transparency, rather than within the subsidies code committee and its limited membership.

A number of third world countries, as well as some of the industrial countries, reportedly said the exercise should not only deal with the issues of subsidies, but also with the issues of "countervailing (CV) measures", in order to develop a clear interpretation of the permissible measures in this area, and disciplines in their application.

A U.S. paper before the group deals only with issues relating to "subsidies", and not with CV measures, third world sources said.

Canada is reported to have stressed the need for improving the GATT disciplines not only on subsidies but also on CV measures, and warned that any changes in the processes for initiation of CV duty investigations or imposition of CV duties would be a violation of the standstill commitment, since they have the effect of improving the negotiating position of the country concerned.

The Nordic countries, supporting the idea of disciplines in use of CV measures, reportedly underlined that CV investigations and levy of duties should not become measures for protection of domestic industries which had lost competitiveness.

Though no one mentioned the U.S., most of these countries were clearly pointing to the U.S., where there has been an intensification of such investigations, and there are proposals for initiation of such proceedings by the administration itself, rather than by the affected domestic industry.

A just published UNCTAD report (TD/B/1126) has brought out that between July 1985 and June 1986, out of a total of 58 CV investigations undertaken, 58 were by the United States.

The UNCTAD report also has brought out that where CV investigations do not result in duties, there are "voluntary export restraint" agreements or price undertakings provided by the exporters.

Other studies have brought out that the mere fact of initiation of CV proceedings act as a harassment of the exporters and discourage imports into a country.

Also, of the total of 35 CV investigations against imports from the third world during the same period, 25 were in the United States.

Article VI of GATT authorises levy, under specified conditions and procedures, of countervailing measures and duties where the exporting country provides subsidies or bounties for exports.

Article XVI deals with export subsidies.

The Tokyo round code, through so-called agreed interpretations of these articles, created new obligations and rights for its adherents.

The U.S. paper in the group has sought specific examination of some of the "concepts" relating to subsidies in articles XVI and VI, and in the provisions of the code.

In particular, the U.S. has sought review of some of the concepts like "more than an equitable share" (that countries should not gain in export trade through subsidisation of primary products), the appropriate level of discipline relating to domestic subsidies (that distort or reduce trade opportunities for other countries), and the "illustrative list" of practices (in the subsidies code) that its signatories have agreed not to use for exports of non-primary products.

The code itself is subscribed to by all the industrial countries and some third world countries. But a large majority of third world countries are not adherents of the code, and have in fact been discouraged by "collateral" demands on them by the U.S. as a condition to its agreeing to their joining.

Under the code, while the industrial country signatories are prohibited from use of export subsidies on non-primary exports, third world countries have only more limited obligations.

Third world signatories are permitted to use subsidies as "an integral part of economic development programmes", and the code makes clear that prohibition of export subsidies is not to apply to them.

But third world signatories are to endeavour to enter into a commitment to reduce or eliminate such subsidies, when their use is inconsistent with competitive and development needs, and when they do so, CV measures under the code are not to be authorized against any export subsidies on their exports.

In respect of other subsidies also, no action is to be taken unless there is a nullification or impairment of trade concessions.

The larger role of governments in third world countries in promoting economic growth and development, including interventions by governments is also expressly recognised.

In its proposals to the group, the U.S. has noted that there is no such distinction between industrial and third world countries in the prohibition of export subsidies for non-primary products in the GATT articles themselves.

Hence, it suggests, the code provisions should be reviewed in relation to "the more advanced developing countries", and also to economic sectors in which and industry in a third world country is "internationally competitive" and hence no need for use of subsidies by the country concerned to facilitate its economic development programmes.

Third world sources note that in making this point, the U.S. appears to have forgotten even the reasons for the Tokyo round code.

The major reason was the U.S. failure to change its domestic laws to make them comply with its GATT obligations in the area of subsidies and CV measures.

Under article VI of GATT, CV duties can be levied by an importing country to offset the subsidy or bounty estimated to have been granted by the government of the exporting country to the manufacturer or exporter of the product.

But no such duty can be levied without a prior determination that the effect of the dumping or subsidization, is such as to cause or threaten "material injury to an established domestic industry" or such as to "retard" the establishment of a domestic industry.

From inception, the U.S. took advantage of the provisional protocol of application of GATT, and never changed its domestic laws to comply with this GATT provision.

Under the provisional protocol, signatories undertook to apply part II of the General Agreement (all trade policy measures excepting the MFN clause and tariff schedule concessions), "to the fullest extent not inconsistent with existing legislation".

This provision, saving existing laws, has been put it in order to obviate the need to seek ratifications by legislatures, and change domestic laws before implementing GATT.

But the U.S. has taken advantage of this "grandfather clause", and in the 40 years since GATT came into being, never modified its won pre-GATT domestic law relating to subsidies and CV measures, which does not require the application of "material injury", but mere proof of provision of export subsidy.

This was a major dispute between U.S. and Europeans in Tokyo round, and ultimately the U.S. agreed, through the code, to apply the "material injury" test. The code also provided greater disciplines by countries in use of export subsidies.

But the U.S. has applied the "material injury" test, only to those who have acceded to the Tokyo round subsidies code, and even there it has required the third would countries in effect to give up their rights under the code for special treatment and right to subsidise exports under some conditions determined by themselves.

The U.S. proposal, in the subsidies negotiating group, to eliminate the special provisions in the code relating to their world countries, got a strong reaction and denunciation from all third world countries, including Israel which normally supports the U.S., according to third world sources.

Others who spoke against the U.S. move reportedly included Brazil, India, Malaysia, Mexico, Uruguay, and Yugoslavia.

Apart from this issue, the question of relationship of the work of the group and that of the group on agriculture also is reported to have cropped up.

A number of agricultural exporting countries, and particularly those like Australia belonging to the "Cairnes Group", argued that the issue of export subsidies on agricultural exports would also have to be addressed within the subsidies group.

The EEC on the other hand argued that this question of subsidies for agricultural exports had to be viewed within the context of the group on agriculture, and only after it completed its work the subsidies group could look at its work in the context of agriculture.