Apr 7, 1984
COUNTER-TRADE AS SUCH NOT CONTRARY TO GATT.
GENEVA, APRIL (IFDA/CHAKRAVARTHI RAGHAVAN) -- Counter-trade as such is not contrary to the General Agreement on Tariffs and Trade or any of its codes, but some government measures requiring counter-trade or reacting to it, may be inconsistent with GATT obligations.-In putting forth this view, the GATT secretariat says that rules of GATT and its codes on import restrictions and export subsidies, are sufficiently broad to cover such cases where protection or export subsidisation results from a requirement or inducement to engage in counter-trade.- Counter-trade, GATT says, has grown considerably in recent years.- Beginning in late-1960’s in east-west trade, and involving counter-purchases, it grew rapidly until 1982, and has had little expansion since then.- In the trade of developing countries, where it is a recent phenomenon, a few countries have imposed counter-purchase requirements in a systematic way, while others have been doing it selectively and unofficially.- There has also been increasing reliance on classic barter trade in the last few years, particularly by the indebted oil-producing countries and others with "surplus" primary products.- Estimates of counter-trade have ranged from a one percent of world trade of the IMF to a 40 percent by private sources.- GATT suggests that the latter, very high estimation, encompasses trade flows under bilateral payments arrangements binding all trade within the Socialist countries and a proportion of that with some the developing countries.- However, it notes that total intra-socialist trade accounts only for five percent of world trade, bilateral clearing arrangements IMF members for only 0.5 percent, and that between developing countries and Socialists at most for another one percent.- This, with GATT’s estimates of a maximum of eight percent of what it calls counter-trade, would account (if payments arrangements are taken into account) for only 14.5 percent of world trade.- Apart from problems of definition, estimations of counter-trade, GATT notes, is also difficult in the absence of reliable data, since transactions are not distinguished separately in foreign trade statistics.- Available estimates are thus based on selective national surveys, discussions with those involved in counter-trade or generalisations from some first hand knowledge of the business.- In GATT’s view, taking counter-purchase and buy-back transactions involving the Socialists and developing countries together, it could at best be a maximum of three percent of world trade.- The classical barter, the predominant form of counter-trade involving the developing countries, could account for no more than 4.5 percent of world trade.- The value of sales of large commercial aircraft to government-owned airlines itself amounts only to 0.5 percent of world trade, and hence offset arrangements in this area "is of little consequence".- As regards offset arrangements involving military sales, unofficial estimates put value of trade in arms at about two percent of world trade in 1981, and the counter-trade elements involved in this is probably below 0.5 percent of world trade.- Counter-trade is often explained as due to severe foreign exchange shortages in countries, but GATT does not see this as providing sufficient rationale.- The study puts forward various other reasoning to knock them down on the ground of inefficiency of resource allocation and interference with market mechanisms.- Countries with a liquidity problem have enforced strict exchange controls. In such a situation, the counter-trade enables local firms continue trading when foreign exchange is not forthcoming. It also enables appropriate de facto devaluation of the currency on a transaction-by-transaction basis.- It is also resorted to for disguising the real prices in a transaction involving "surplus" commodities.- While a temporary phenomenon in competitive markets, many primary commodities are not sold in competitive markets, domestically or internationally.- "For a whole range of commodities, international competition is restricted by cartel-type agreements", GATT concedes.- Counter-trade is also justified as a "marketing device", more likely to be advantageous where foreign firms are large and diversified or have marketing expertise.- Frequently, the foreign suppliers are unable to market the counter-trade arrangements and sell to specialised trading firms, whose services could presumably be made available directly to the country concerned at a lower cost, GATT argues.- Counter-trade is also used as an instrument of industrial policy to favour particular industries or the export sector generally.- But the extra cost imposed on the foreign supplier would be normally reflected in higher prices for that supplier's goods, and thus an indirect subsidy to the industry benefiting from the government-mandated counter-trade.- In economic terms, GATT argues, bilateral trading involved in counter-trade has costs involved in restriction of choice and transaction costs associated with it, that could rise with the degree of rigidity in the bilateral trade.- In the GATT views when voluntarily entered into by private firms it imposes no additional costs at all.- This appears to miss the main complaints of such "voluntary agreements" involving TNCs, which may involve no cost or even a profit to the TNC, but yet real economic or development opportunity costs for the developing countries.- GATT suggests that the costs of counter-trade also escalate when there is a high "coverage ratio" (value of import commitment as a proportion of value of initial export transaction), large penalties for non-compliance, restrictions on resale or use of traders, regional limitations on marketing, short transaction periods, and unpredictability of final requirements themselves.- Where all these factors are present, the costs of the counter-trade could become so high as to virtually bring a country's trade to a standstill, GATT suggests.- Third World sources note that while this GATT argument is applied solely to government-induced counter-trade, all these factors with others are also present in the intra-firm transactions of TNCs.- And often Third World governments are forced to have recourse to counter-trade as a counter-vailing force against the TNC system of managed international trade, and the voluntary export restraints and orderly marketing arrangements that powerful industrialised countries impose on their weaker trading partners.- GATT says that where access to the multilateral trade and payments system is inhibited by rigid exchange controls and overvalued exchange rates, certain counter-trade practices may naturally emerge as a second-best solution, "allowing some additional trade to take place and improving economic welfare".- It views this however as having force only when private firms enter into it "as a means of dealing with exchange market distortions".- But in government mandated counter-trade, "additional costs" will be incurred, with the possibility that a country would suffer net losses in trade and welfare.- Thus, in the GATT secretariat view, counter-trade cannot in itself provide a solution to balance-of-payments problems that require action at a broader policy level.- Third World sources note however that countries resort to counter-trade not as an ideal way of dealing with their problems, in the face of rigidity with which the ills of the present international economic system, including the monetary system and finance for development, are sought to be preserved by the U.S. and others with vested interest.- In this view, the problems of counter-trade cannot be dealt with in isolation as a trade problem, or a trade/finance linked problem of the Bretton woods system, but only a wider development problem involving trade in goods, finance, technology and other services, and other development issues, that can be addressed only in a more universal and wider forum like UNCTAD.-