Research Branch CANADA AND GATT. Current Issue Review 79-20E. William Neil Economics Division. 27 August 1980 Reviewed 20 January 1982

Transcription

1 Current Issue Review 79-20E CANADA AND GATT William Neil Economics Division 27 August 1980 Reviewed 20 January 1982 Library of Parliament Bibliothèque du Parlement Research Branch

2 The Research Branch of the Library of Parliament works exclusively for Parliament, conducting research and providing information for Committees and Members of the Senate and the House of Commons. This service is extended without partisan bias in such forms as Reports, Background Papers and Issue Reviews. Research Officers in the Branch are also available for personal consultation in their respective fields of expertise. N.B. Any substantive changes in this publication which have been made since the preceding issue are indicated in bold print. CE DOCUMENT EST AUSSI PUBLIÉ EN FRANÇAIS

3 CANADA AND GATT ISSUE DEFINITION The multilateral trade negotiations conducted under the auspices of the General Agreement on Tariffs and Trade (GATT) were concluded in June 1979 with the first phase of the tariff reductions coming into effect 1 January The negotiations, generally referred to as the Tokyo Round in reference to the city where they were first begun in 1973, have been the longest and the most complex undertaken since the GATT was founded in The fact that they were successfully completed during a period of economic uncertainty and a rising wave of protectionist sentiment is seen as a major accomplishment. The resulting package includes tariff reductions, a general reform of the procedures and rules governing the conduct of world trade and, for the first time, a series of codes aimed at curbing the growing proliferation of non-tariff barriers to trade. Despite its size, Canada is one of the largest trading nations in the world and has been an active participant in the negotiations. Since it will be 8 years before the tariff reductions are fully implemented and the non-tariff barrier codes have yet to be ratified, it is not certain what the precise impact will be on the Canadian economy. However, most observers are cautiously optimistic and expect that the Canadian economy will benefit from the freer international trade. BACKGROUND AND ANALYSIS The GATT refers both to a treaty setting out the rules of international trade and to an institution based in Geneva which promotes freer world trade. The GATT has its origins in the period of reconstruction

4 following World War II. It was initially intended to complement the proposed International Trade Organization (ITO). As negotiations on the ITO became more complex and lengthy, the 23 negotiating countries decided to put a trade liberalizing measure into use until the ITO charter could be ratified. In January of 1948, nine countries (including Canada) put the GATT into effect. As it became apparent that the ITO charter would never be ratified, the GATT took on the further institutional responsibilities as an international organization aimed at promoting freer world trade. The Gatt has grown since 1947 to a point where now well over four-fifths of the world's trade falls under its auspices. From the original nine participating countries, it has expanded to 84 contracting parties. This group is composed of all the western industrialized countries, many of the less developed countries, and some of the central market economies with the Soviet Union and China being notable exceptions. Beyond the contracting members, three countries have acceded provisionally to the treaty and a further 24 apply the GATT rules pending final decisions as to their future commercial policies. The administrative structure of the GATT places the Session of Contracting Parties, which meets annually, at the head of the organization. Between sessions the Council of Representatives is authorized to act on both routine and urgent matters at its approximately nine meetings a year. The Consultative Group of 18 is composed of high-level government officials and meets thrice annually to review trade developments. Functioning under these bodies are the standing committees, working parties and panels of conciliation that handle the on-going issues and problems that arise on a day-to-day basis. The GATT treaty revolves around four fundamental principles. The first, known as the "most favoured nation" clause, requires that any concession given to one country must be given to all countries. Exceptions are made for regional trading blocs and some measures aimed at helping the developing countries. A second principle is that domestic industries should be protected by tariffs and not other commercial measures such as import quotas or government procurement policies. The latter, the so-called non-tariff barriers (NTB's) have become more important as the overall level of tariffs

5 has fallen. The intent of this rule is to make the extent of protection clear and to enable foreign firms to compete with domestic producers on an open basis. The third principle is the idea of consultation to avoid injury to the trade of other countries. Members are able to call upon the GATT for a fair settlement of cases in which they think their rights are being withheld or compromised by other members. There are waiver procedures whereby a country may, when its economic or trade circumstances so warrant, seek an exemption from particular GATT obligations. There are also escape provisions for emergency action in certain defined circumstances. Finally, the GATT provides a framework within which negotiations are held for the reduction of tariffs and other barriers to trade and a structure for putting the results of such negotiations into practice. Since 1947, the GATT has conducted seven different "rounds" of multilateral trade negotiations. The first five were: 1947 in Geneva; 1949 in Annecy, France; 1951 in Torquay, England; 1958 and in Geneva - the latter is sometimes referred to as the Dillon Round in reference to the U.S. Treasury Secretary at the time, Douglas Dillon. These multilateral trade negotiations reduced tariffs through a series of country-by-country, item-by-item deals. This meant that negotiations were conducted on a more or less bilateral basis between the various countries and the results were then made available to the other signatories through the most favoured nation principle of the GATT. However, as the contracting parties to the GATT increased, this type of negotiation became very complex and time consuming. The Dillon Round of was disappointing to many and it became apparent that the country-by-country method of negotiating was becoming too unwieldy to produce significant results. The sixth round of the GATT negotiations, the Kennedy Round ( in Geneva), approached the problem of reducing tariffs in a different fashion. For the first time, an "across-the-board" formula was employed. With some exceptions, tariffs on industrial products were reduced by a fixed percentage regardless of their level. The Kennedy Round resulted in tariff cuts averaging more than 35 per cent on goods worth approximately $40 billion. For industrial products the tariff cuts generally ranged between 35 and 50 per cent. The main industrial countries instituted tariff

6 reductions of 70 per cent of their dutiable imports (excluding grains, meats and dairy products). Canada did not make across-the-board cuts due to a smaller and less diverse industrial base; it made selective trade cuts instead covering $2.5 billion in trade, $2 billion of which was with the U.S. The abandonment of Canada's anti-dumping mechanism was considered to be a significant concession as was the fact that Canada's tariff cuts were implemented within a shorter period than those of the other countries. A. Canada's International Trade Before moving to a discussion of the recently completed Tokyo Round, it would be appropriate to give a general description of Canada's international trade. There are a number of factors that influence trading patterns. One of the fundamental factors is a country's resource endowment. Canada is a major exporter of raw materials due to an abundance of natural resources relative to other industrialized countries. Trade is also influenced by differences in productivity, prices, production costs, exchange rates and consumer tastes. Trading patterns are similarly affected by policy decisions such as tariffs, non-tariff barriers and industrial or trade promotion measures. It is these policy decisions that are discussed within the context of the GATT. International trade is very important to Canada and, therefore, so are the negotiations conducted under the Gatt. Canada would be a big loser should there be an increase in protectionism and a return to restrictive trade practices. This country is the only one of the major industrialized countries that does not have access either to a large domestic market (such as the U.S. or Japan) or belong to a major regional grouping (such as the EEC). The GATT makes it possible for Canada to export to these areas under established rules and to overcome some of the disadvantages facing a small country. The Canadian economy is one of the most internationally integrated among the major industrialized countries. One measure of this integration is the ratio of exports and imports to Gross National Product (GNP). In 1979, the ratio of Canada's exports to GNP was 25.1 per cent while the

7 corresponding import ratio was 24.1 per cent. By comparison, in the U.S. during 1979, the ratios of exports and imports to GNP were 7.5 per cent and 9.2 per cent respectively, while Japan's export/gnp ratio is 10.2 per cent and its import/gnp ratio 10.9 per cent. Canada thus has a greater economic dependence on international trade than the other major industrialized countries. Despite its relatively small economy, Canada is the seventh largest trading nation in the world. The U.S., West Germany, Japan, France, the United Kingdom and Italy, in that order, are larger. In 1979, world trade was approximately $1,500 billion of which the EEC accounted for over 33 per cent, the U.S. almost 12 per cent, Japan 8 per cent and Canada 4 per cent. The general composition of Canada's merchandise trade is outlined in Tables 1 and 2. The largest portions of Canada's exports can be classified as fabricated material and end products. Since 1975, they have been roughly equal although the exports of end products declined in However, this last category is dominated by exports of automotive products to the United States under the Auto Pact and last year's decline in the overall share of end products can be directly attributed to the drop in automotive products exports. Exports of other finished products (such as the category of machinery and equipment) have remained at roughly the same percentage of total exports. Exports of fabricated materials comprise roughly one-third of Canadian exports. Within this classification are found exports of wood and paper products, iron and steel and non-ferrous metals. The combination of fabricated materials and crude material exports accounts for well over half of total exports and lends justification to the claim that Canada's exports are based on natural resources. It should be pointed out, however, that most of these products are the result of sophisticated technology and specialized skills without which they could not be exported. Also, some of these exports, although classified as raw or fabricated cannot really be exported in any other form. This is particularly true with forest products since lumber and newsprint go into end products such as houses and newspapers. With the exception of crude petroleum, the various categories of Canadian imports have remained roughly constant since End products dominate Canadian imports and far exceed Canadian exports of finished

8 Table 1 Canada's Exports by Commodity Grouping, (percentage) Animals and Edible Products Crude Materials Crude petroleum and natural gas Fabricated Materials Wood and paper products End Products Automotive products Machinery and equipment Source; Statistics Canada, Summary of External Trade Table 2 Canada's Imports by Commodity Grouping, (percentage) Animals and Edible Products Crude Materials Crude petroleum Fabricated Materials Chemical products Textiles End Products Automotive products Machinery and equipment Source: Statistics Canada, Summary of External Trade

9 products. This large deficit in finished goods is more than offset by the surplus in crude and fabricated exports, so that there is usually a surplus in Canada's overall merchandise trade balance. The composition of Canada's trade where exports are based on natural resources and imports consist primarily of finished products is the reverse of Canada's major trading partners - the U.S., the EEC and Japan. The U.S., the EEC and Japan together represent well over fourfifths of Canadian exports and imports. (See Tables 3 and 4.) The U.S. is by far Canada's largest trading partner, accounting for 70 per cent of imports and almost two-thirds of exports. It accounts for an even larger proportion of Canada's finished products, and is in fact the only country among our major trading partners that receives more manufactured exports than exports of crude materials. Canada's exports to the U.S. declined in 1980 as a result of the downturn in the U.S. business cycle. The EEC share of Canada's merchandise exports and imports is generally around 10 per cent. Canadian exports to the EEC consist principally of raw and semi-finished products with a small amount of manufactured goods. Imports from the EEC countries are largely made up of finished products. Japan is the second most important country for Canadian exports and imports. Canadian exports to Japan consist almost entirely of raw and semi-finished goods. Less than 3 per cent of Canadian exports to that country fall in the category of manufactured goods. Canadian imports from Japan are three-quarters manufactured goods with automotive products, at one-quarter of total imports being the major category. B. General Results of the Tokyo Round The seventh round of tariff negotiations, known as the Tokyo Round, were concluded in June in Geneva. Begun in 1973, the talks were the longest and most complex ever undertaken. The participating countries have produced a trade package that can be divided into three basic areas: 1) tariff concessions; 2) non-tariff measures; and 3) framework for world trade issues. The tariff concessions negotiated in the Tokyo Round have been substantial, with the industrialized countries agreeing to reduce tariffs on

10 Canada's Table 3 Exports by Geographic Area, (percentage) U.S. EEC Japan Latin America Other OECD Rest of World Source: Statistics Canada, Summary of External Trade Table 4 Canada's Imports by Geographic Area, (percentage) U.S. EEC Japan Latin America Other OECD Rest of World Source: Statistics Canada, Summary of External Trade

11 industrial products by almost one-third. The reductions are to be phased in over an eight year period beginning on 1 January Tariffs on trade in industrial products among the industrialized countries will average 4.9 per cent once the Tokyo Round reductions have been implemented. A considerable amount of tariff "harmonization" has been achieved at the Tokyo Round as a result of the adoption of "the Swiss formula" whereby higher tariffs were reduced by greater amounts than lower tariff rates. Generally, tariffs on end products have been reduced more than tariffs on fabricated materials. The most significant reductions have been concentrated in non-electrical machinery, wood products, chemicals and transport equipment. Smaller reductions were made in tariffs on textiles and leathers. In agricultural trade, tariff concessions cover approximately onequarter of the world trade ($12 billion of the $48 billion in 1976). The United States, Canada, the EEC, Japan and Sweden agreed to eliminate all duties on civil aircraft, aircraft parts and repairs on civil aircraft as of January 1, This agreement will mean that there will be free trade in civilian aircraft, a sector which involves an estimated $100 billion in sales each year. A multilateral agreement has also been signed to govern world trade in beef. The objectives of this agreement are to promote the "expansion, liberalization and stabilization" of the world trade in beef, veal and live cattle. An International Meat Council will be established to oversee this agreement. Similarly, an International Dairy Arrangement has been signed that also came into effect on 1 January It is hoped the agreement will reduce the instability and uncertainty which has characterized the trade in dairy products in recent years. The IDA will also supersede the arrangement on skimmed milk powder and milk fat negotiated earlier in the GATT. Particular provisions have been made with respect to trade in milk powder, milk fats (including butter) and bulk cheeses. An International Dairy Products Council will be established to administer this arrangement. A major initiative of the Tokyo Round was to develop rules of conduct to govern non-tariff trade barriers. NTB's refer to such restrictive practices as import quotas, customs valuations, government procurement practices and technical barriers to trade. As the general level of tariffs has

12 10 been falling, the importance of NTB's to trade has increased. Since NTB's can be classified into several categories, the negotiators decided to approach them in a similar fashion. The result has been a series of codes containing consultation and dispute settlement provisions to control the use of various kinds of NTB's. The customs valuation code is intended to provide a fair, uniform and neutral system for valuation of goods for customs purposes, conforming to commercial realities and outlawing the use of arbitrary or fictitious valuations. Since governments and their agencies are the largest purchasers of goods in most countries, a government procurement code has been devised to allow foreign firms to compete with domestic manufacturers. This code is an attempt to make government procurement practices more "transparent" to the foreigner so that he may at least have the opportunity of competing for government contracts. It has been agreed that the code will apply only to government contracts that are worth more than $200,000. The code on subsidies and countervailing duties has been one of the most difficult and important issues in the NTB discussions. The result has been a two-part system. With respect to subsidies, the Gatt would prohibit the use of export subsidies on industrial products and would limit the use of agricultural subsidies. The code with respect to countervailing duties is similar to that governing antidumping at present in that countervailing duties cannot be applied without proof of injury. A standards code has been devised to eliminate some of the technical barriers to trade. This is an attempt to adopt common international standards in health, safety, consumer or environmental protection. An import licensing code has also been adopted to set out the rules that would simplify the procedures to be followed when a nation requires a license to import goods. The Tokyo Round also presented to the participants the opportunity to review and improve the workings of the GATT framework for international trade. Briefly, agreement has been reached on four topics. First, the developing countries would be exempt from some of the agreed trade concessions, since their economies lack the necessary strength and diversity

13 11 that would enable them to make fully reciprocal trade concessions. However, as their economies improve they will be expected to participate more fully. Second, an agreement has been drafted governing the use of "safeguard" actions for development purposes. It will provide greater flexibility to developing countries in meeting the changing needs of their economic development. Third, the contracting parties have agreed on a draft declaration outlining the use of trade measures (mainly export controls) for balance of payments reasons. Finally, the GATT members have felt it necessary that all signatories should agree to a draft declaration that reaffirms their commitment to the provisions on notification, consultation, dispute settlement and surveillance within the Gatt. C. Canada and the Tokyo Round Although it is too early to determine the exact impact the Tokyo Round will have on Canada, the results are bound to be significant given Canada's heavy reliance on foreign trade. As a major trading nation, Canada will find the conditions under which it engages in foreign trade substantially altered as a result of the Tokyo Round negotiations. Tariffs on Canadian exports to the U.S., the EEC and Japan will be reduced by roughly 40 per cent. Once these reductions are implemented, manufactured exports will face tariffs that average 4 per cent, although chemicals, textiles and footwear will be subject to higher duties. Approximately 80 per cent of Canadian exports to the U.S. will be entering duty free and more than 90 per cent will bear a tariff of 5 per cent or less. Manufactured exports to the EEC and Japan will face tariffs in the range of 5-7 per cent. There will be exceptions: the EEC will maintain higher tariffs on some products such as footwear, textiles and chemicals, while Japan will keep its high tariffs on non-ferrous metals and textiles. Negotiations within the agricultural sector, while somewhat disappointing overall, have resulted in some positive concessions for Canada. The U.S. has agreed to reduce tariffs on cattle, meat, certain grains and grain products, oilseeds and vegetable oils, potatoes, horticultural products and certain fish products. The EEC will reduce tariffs on meat offals, white pea beans, blueberries, canned and frozen corn, tobacco, maple products and

14 12 some fish products. The EEC will also increase its import quota for aged cheddar cheese. Similarly the Japanese have agreed to increase their beef import quota and reduce tariffs on tobacco, rye, rapeseed, mustard seed, vegetable oils and some fish products. The drafting of a code on subsidies and countervailing duties represents a major gain for Canada. The new code will change present U.S. law by requiring that countervailing duties only be applied once it is determined that there has been an "injury" to the domestic market. The U.S. use of countervailing duties in the past has not required an injury test and has led to much uncertainty with respect to Canadian exports. On the other hand, the GATT is explicitly recognizing that subsidies are legitimate devices that can be used to promote policies of regional and industrial development. However, the GATT is trying to restrain the use of subsidies that indirectly (or directly in some cases) lead to export promotion schemes. In the past, countries have used countervailing duties to combat what they considered to be export subsidies. The new agreement is structured so that the first step in such a case would be bilateral consultation between the countries involved. Should these consultations not provide a satisfactory solution, the affected country then has the right to approach the GATT and ask that retaliatory measures be taken against the subsidizing country. The new code on customs valuation is also of particular interest to Canadians. Under the old "fair market value" method, Canadian customs valuations (upon which duty would be paid) were often significantly higher than those of other countries. This practice eventually came to be regarded as an added degree of protection for domestic manufacturers. After the phase-in period, customs valuation will be based on the transaction price for the goods in international markets. This change in valuation has been estimated to be comparable to a 10 per cent reduction in overall tariffs and as high as 40 per cent for some industries such as clothing and textiles. While the overall trade package is expected to benefit Canada, there were some disappointments. Canadian negotiators were unable to persuade other countries to adopt the "sector" approach to tariff negotiations. This approach was an attempt to reduce the escalating tariffs that raw material exports are subjected to as they are processed. By focussing on one

15 13 sector (for example copper), the higher tariffs facing the finished products would be reduced the most and thus would allow more processing to be done in Canada before export. The U.S., the EEC and Japan felt that tariff harmonization was more important and thus the more general Swiss formula was used. The negotiators had also hoped to reduce the tariffs facing petrochemical exports, particularly to the U.S., but no significant reductions were gained. It was also hoped that Canada could improve the terms of exports for its paper industry to Japan and the EEC but again the results fell short of objectives. PARLIAMENTARY ACTION The agreements reached in Geneva were presented to the House of Commons as an accompaniment to the Budget Speech of 18 December Despite the subsequent defeat of the Government, the first phase of tariff reductions was implemented by an Order-in-Council (PC ) on 14 January 1980 so that Canada could stay within the terms of the agreement. The new non-tariff measures on technical barriers to trade, anti-dumping and subsidies and countervailing duties will not require legislative changes as it will only be necessary for administrative changes setting out the new procedures and regulations to be implemented. However, there will be some revision of Canadian law which will necessitate legal changes. For example, the new anti-dumping code provides for the setting of minimum prices on goods sold to this country as a way of identifying and preventing dumping. Such price setting is not allowed under the current law and so it will have to be rewritten. These changes will likely be presented to Parliament sometime this year. The other non-tariff codes will be treated differently. The new customs valuation code will require an extensive revision of the legislation, and since it represents a drastic change for Canada, this country has been granted a four year transition period in order to make the necessary revisions. The code on government procurement will come into effect this year as soon as the federal government makes the required changes.

16 14 CHRONOLOGY Multilateral Trade Negotiations under the Gatt Geneva - First multilateral trade negotiations conducted under the Gatt involved 23 nations Annecy, France Torquay, England Geneva Geneva Geneva, The Kennedy Round of Gatt negotiations marked the first use of an across-the-board approach to tariff reductions. September Multilateral trade negotiations were announced at Ministerial Meeting in Tokyo. April Results of negotiations were announced in Geneva. 9 October The Speech from the Throne announces that the Tokyo Round Agreements will be presented to Parliament for approval during the Fall session. 1 January Date for implementing the first phase of tariff reductions. January Date for introduction of codes governing non-tariff barriers. SELECTED REFERENCES (1) General Agreements Tariffs and Trade - What it is? What it does, Gatt, October (Library of Parliament HF1721/C65/A54/1977) (2) Kock, Karin, International Trade Policy and the GATT , Almquist and Wiksell, Stockholm, (Library of Parliament HF1721/K62) (3) Provincial Bank of Canada, "Canada at the Multilateral Trade Negotiations of Gatt", Economic Review, Vol. VIII - No. 2, March-April (Library of Parliament HCIII/A2P76) (4) Canada, Department of Industry, Trade and Commerce, Canada's Trade Performance , Volume 1: General Developments, Minister of Supply and Services, November (Library of Parliament HF3226.5/A36/ Vol. 1)