9:37 AM Aug 2, 1996

IMF WANTS A SAY IN WTO DISPUTE SETTLEMENT

Geneva 2 Aug (Chakravarthi Raghavan) -- The International Monetary Fund (IMF) is seeking to have a voice in trade disputes at the World Trade Organization (WTO) and be enabled to provide its views on matters where exchange measures of a country may be involved.

A draft of the agreements of WTO with the IMF and the World Bank, which has been negotiated between the WTO secretariat and the staff of the Fund and the Bank, now pending before the WTO General Council, has a provision on the IMF role before dispute settlement panels.

The drafts have been approved by the Executive Boards of the IMF and the World Bank, but is pending before the WTO General Council where it has run into opposition from many developing countries, among others over the IMF being injected into the dispute settlement process.

The Director-General of the WTO, Mr. Renato Ruggiero, appears to be feeling that his own prestige is involved, since the Executive Boards of the two Bretton Woods institutions have approved it.

But developing country delegations say that the two Bretton Woods institutions will be extending their own influence, while the WTO will have no influence the other way round. In any event, the two Bretton Woods Institutions have no influence on policies and measures of the developed countries, but want to use a relationship with the WTO to more effectively force their conditionalities of adjustment on the developing world.

It is this asymmetry that forced the developing countries, as long ago as the Montreal Mid-term programme to reject the then GATT Director-General, Arthur Dunkel's attempts to strengthen the IMF/Bank/GATT coordination. This issue was never resolved, and hence nothing more than the vague declarations about strengthening coherence could be adopted at Marrakesh.

In the final stages of the negotiations on the WTO, the IMF in fact sought to have a special status, but with resistance, and it ultimately ended as a Ministerial Decision to the effect that the IMF/WTO relations on issues under the multilateral trade agreements would be based on provisions that had governed relationships of CPs of the GATT 1947 and the IMF.

At that time, several of the key negotiators said this did not increase any IMF role.

But the new proposed agreement could do so, and be one more handle against the South countries.

While the draft agreement between the WTO and the IMF provides for cooperation and exchange of information between the two secretariats, and for some participation in meetings of each body by representatives of the other, Paragraph 8 of the draft provides "The Fund shall inform in writing the relevant WTO body (including dispute settlement panels) considering exchange measures within the Fund's jurisdiction whether such measures are consistent with the Articles of Agreement of the Fund.

A WTO secretariat note says that this sentence was included in the proposed agreement "at the request of the IMF, for whom it was a minimally acceptable provision compared to the more expansive panel access that seemed to be one of the IMF's major (perhaps the major) negotiating objective."

The secretariat note suggests that the IMF's "request" could be accommodated without any amendment to the WTO's Dispute Settlement Understanding (which stipulates who besides the parties could participate before panel proceedings).

An earlier Paragraph 4, provides for the Fund participation in consultations by the BOP Committee on measures taken by a WTO member to safeguard its balance of payments.

Paragraph 6 provides for the Fund staff to be invited, and be able to attend as observer, meetings of the WTO Ministerial Conference, General Council, Trade Policy Review Body, the three sectoral councils, Committee on Trade and Development, Committee on Regional Trade Agreements, Committee on Trade-Related Investment Measures, and Committee on Trade and the Environment and their subsidiary bodies (excluding the Committee on Budget, Finance and Administration, the Dispute Settlement Body and dispute panels). The Fund staff is also to be invited to send an observer to meetings of the WTO DSB where matters of jurisdictional relevance to the IMF are to be considered, and also to be able to attend other meetings of the DSB.

Some WTO members, as well as outside trade observers, note that the Fund has an important say on balance of payments questions, and invocation by countries of their BOP rights to justify restrictions under GATT 1994 or GATS 1994. But the BOP committees, and relevant WTO bodies, after hearing the IMF views and views of the country invoking BOP rights, and of others, makes a report which is then approved by the WTO bodies.

The dispute settlement process arises where a country, may still feel that its trading rights have been injured by the country invoking BOP and take it up before a panel -- which is there only to adjudicate between the two parties on the basis of their mutual rights and obligations, with the panel's job one of promoting a settlement, and if needed give an adjudicatory ruling that will be binding, subject only to the views of the Appellate body.

The Fund having another say over the exchange issues would in effect make the IMF an 'interested party'. And given, the different power and decision-making structure in the IMF, and the fact that none of the industrial nations invoke BOP, the weight of its, often ideological assessments, and its role of support to the transnational banking industry, will pitch the IMF against the developing world.

This will be more so in cases where the disputes may involve the GATS provisions, where distinctions between current and capital account transactions may be involved.

But the latest IMF latest balance-of-payments manual (1993) on how transactions are to be recorded suggests there is now a grey area between the two accounts in respect of 'derivatives', classifying the 'interest' earnings in swops as a current account transaction and the capital as a capital account transaction.

But in many swap transactions, there is no real capital transaction involved. Party A might raise funds in X market (and X currency), where it may find it easier to do so, but might not find it useful for its payments or might not enthusiastic about the market or the rates and conditions. Party B might similarly have raised funds in another Y market and Y currency. In a swop transaction, the two might swap their streams of interest payments. But in many such transactions there is no exchange of principal.

These kind of derivative transactions now run into several scores of billions of dollars a day. Banks and other such institutions on Wall Street are constantly trying to make profits for themselves, and they frequently try to extend their use in new markets.

A developing country that has allowed a foreign bank to operate in its territory, under a GATS commitment, in particular activities, may find itself in difficulties because of the bank concerned extending its activities through derivative activities and when the country tries to restrict it because of outflows of foreign exchange, it might find itself challenged and facing not only its challenger but the IMF.

While the IMF could intervene on behalf of a developing country, given its past history, the intervention would more likely be to uphold the interests of the foreign banks, observers of the international financial scene feel.

In explaining the paragraph 8 provisions, the WTO secretariat says this has been included at the IMF request.

The WTO secretariat notes that Art XV:2 of the GATT 1994 provides that in all cases where the WTO has to consider problems concerning monetary reserves, bop or foreign exchange arrangements, the WTO shall consult with the IMF and "shall accept" the determination of the Fund whether the action by the Member in exchange matters is in accordance with the IMF articles. The secretariat also notes a similar provision in GATS, where members are authorized to apply restrictions on trade in services in the event of serious bop and external financial difficulties or threats, but that the restrictions shall be consistent with IMF Articles.

Under the IMF Articles, any member is enabled to impose restrictions on capital account transactions and precluded from seeking IMF funds to deal with capital account problems.

In trying to further financial liberalisation and the interests of the transnational financial enterprises, the IMF has been promoting the idea of doing away with this particular provision.

There has only been one case of a complaint involving exchange rate questions in the old GATT -- in 1954-1955 -- and did not lead to dispute panel.

In justifying the draft provision, and presenting itself as having fought to safeguard the WTO members interest, the secretariat note argues that the WTO secretariat "rejected" proposals by the IMF that panels be required to give "due regard" to the IMF submission or be "required to read and understand" the IMF submission.

The secretariat note says that as a result of the agreed wording, the IMF will have a "one-way" means of communicating with a panel on this narrow issue, but not any direct contact or right of interaction with a panel and will not be able to attend panel meetings unless invited by the panel. Also, if in a dispute an issue of consistency with the Fund's Articles of Agreement arises, one of the disputing parties would demand that the panel seek the IMF advice, that the WTO secretariat would then advise the panel to seek such advice.

The WTO note recognises the DSU has no provision about information to panels as contemplated, and it could even be argued that no such procedure (envisaged in paragraph 8 of the draft agreement) is possible either.

However, says the secretariat, that to argue that a DSU amendment would be needed, since the issue is not explicitly dealt with, would be contrary to past GATT practice under which dispute settlement procedures evolved as necessary. To require a formal amendment would lead to "undue rigidity" in a system that operates best with flexibility.

This is a strange argument which makes no distinction between the ways of the old GATT, a provisional treaty, where dispute rulings were not binding or automatic, and the WTO, a full international treaty, and its "rule-based system" as it is often claimed by its protagonists.