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The Uruguay Round: Revitalizing the Global Trading System

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
January 1989
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Governments seek common ground for further trade liberalization; a review of progress to date

The General Agreement on Tariffs and Trade (GATT), custodian of the multilateral trading system based on equal treatment of trading partners, has helped achieve much in its four decades of operation: average tariffs in industrial countries on industrial products have declined greatly; growth of world trade has outstripped that of output, including a twenty-fold increase in the volume of trade in manufactures; and GATT’s membership has quadrupled since its inception to 96 countries accounting for over 85 percent of world trade.

In spite of these successes, the world trading system fostered by GATT is increasingly under protectionist pressure. Growing resort to discriminatory nontariff measures, prompted by macroeconomic imbalances and inadequate structural adjustment, has partly offset the substantive tariff liberalization of the post-World War II period. GATT rules, in some instances, have proved imprecise or inadequate, enabling many countries to bypass them with impunity; the need for such rules in some areas—services and intellectual property rights—was unforeseen when GATT was established. The shifts in the balance of world economic power since the late 1940s have been accompanied by an escalation of trade tensions among GATT members (both among industrial countries and between industrial and developing countries). There has also been a shifting in the relative strengths of major trading nations and groups, and an increasing tendency toward regionalism and bilateralism at the expense of multilateralism.

Clearly these developments call for a comprehensive response. Such a response came in Punta del Este, Uruguay, in September 1986 when trade ministers of GATT member countries launched a new round of multilateral trade negotiations (MTN), commonly known as the Uruguay Round.

Objectives and approach

The Ministerial Declaration launching the Uruguay Round spelt out its overall and specific objectives and established a time frame of four years for its completion. The Round aims, inter alia, at further liberalizing trade, strengthening the role of the GATT, increasing GATT’s responsiveness to the evolving international economic environment, and fostering cooperative action to strengthen the relationship between trade and other economic policies affecting growth and development.

Issues in Group of Negotiations on Services (GNS)

Services have become an increasingly important part of the foreign trade of both industrial and developing countries. Multilaterally agreed definitions or rules do not exist for trade in services, since services comprise a variety of activities affected by diverse conditions and by often sensitive domestic policies such as those on immigration, foreign ownership, and nationalized banking. The inclusion of services in the Uruguay Round was controversial. Developing countries eventually agreed to the inclusion, because of the legal separation of the entities negotiating on goods and services, and the general acceptance that inclusion of services in the Round did not imply recognition of services as part of GATT.

Ministers agreed at Montreal that the GNS will prepare a draft by the end of 1989, which would permit negotiations for the framework of principles and rules for trade in services to become effective by the end of the Uruguay Round. Such a framework will be based on the principles of transparency, nondiscrimination, and national treatment (i.e., treating foreign enterprises similarly to domestic enterprises). Negotiations should provide for the progressive liberalization of trade in services, with due respect for national policies, and for increasing participation of developing countries. Developing countries won a major concession by gaining agreement on the possibility of inclusion of labor mobility in support of services involving the use of manpower.

The new Round is viewed by many participants as essential to keep protectionist demands at bay and to restore faith in a well-functioning multilateral trading system. There have been seven MTNs in the past, but the Uruguay Round is the most ambitious of its kind. It goes beyond the traditional concerns (such as tariffs) of past MTNs, gives greater recognition to the links between trade and other economic policies, covers areas that in the past were largely neglected (agriculture), or relegated to special regimes (textiles and clothing), and explores new areas (services). In addition, discussions of systemic issues related to the functioning of the GATT are an integral part of the negotiations.

To conduct the negotiations, a Trade Negotiations Committee (TNC) was established with two subsidiary bodies, the Group of Negotiations on Goods (GNG) and the Group of Negotiations on Services (GNS). The GNG was further divided into 14 negotiating subgroups (see box on GNG). GATT member governments also committed themselves to observing a “standstill” (i.e., forswearing of new restrictions) and “rollback” (i.e., elimination) of trade-restricting measures that are inconsistent with GATT; a Surveillance Body was established to oversee compliance with these commitments.

First two years

The Uruguay Round participants spent 1987–88 (prior to the mid-term review of December 1988) preparing the ground for future exchanges of concessions. Much of the early discussion was devoted to clarifying the content and defining the modalities of the negotiations.

Meanwhile, there were some problematical developments. Recourse to new trade restrictions increased, and several countries alleged contraventions of the standstill accord. For example, Chile complained about import licensing of apples by the European Community (EC); the EC was concerned about the emergence of Buy American programs in the United States; the United States objected to import curbs on certain dairy products by Canada; and Canada complained about the EC’s ban on imports of meat from animals given artificial hormones.

Regarding the rollback, only the EC put forward a proposal to remove certain quantitative restrictions, provided similar offers were made by other participants. The absence of significant rollback offers may be an indication that any major rollback would probably come at the end of the negotiations, because many countries are unwilling to give anything away unilaterally.

The participants’ approach to the pace of the negotiations was also quite varied. Some (e.g., the United States) called for early agreements in selected areas, to help sustain the momentum of the negotiations and send a positive signal to the international community concerning the direction of the Uruguay Round. Others, such as the EC, doubted the feasibility of achieving selected agreements and looked more toward seeking a global agreement, with balanced progress in most of the negotiating areas.

Progress in the individual negotiating groups was uneven, reflecting the wide divergence of views. Negotiations in many of the groups appeared to be informally linked: for example, concrete steps on nontariff measures were linked to progress on safeguards (to protect domestic producers against injurious imports), and progress on subsidies was linked to progress on agriculture.

Developing countries took an active part in all the negotiating groups. In their view, insufficient attention was given in the discussions to the principle of differential and more favorable treatment for them, which is embodied in GATT and reiterated in the Ministerial Declaration. Many of them were concerned about increasing calls by industrial countries for developing countries (especially the newly industrializing economies) to assume more GATT obligations.

Mid-term review

The Mid-Term Review of the Uruguay Round by the Trade Negotiations Committee (TNC) was convened at ministerial level in Montreal during December 5–9, 1988. The Managing Director of the IMF and the President of the World Bank also addressed these meetings.

Although the ministerial meetings were extended by a day, negotiators were unable to agree on a comprehensive package because of four unresolved issues: (1) lack of compromise on agriculture between the United States and the EC; (2) trade-related aspects of intellectual property rights; (3) safeguards; and (4) textiles and clothing.

When it became clear that agreement would not be reached on agriculture, the United States expressed its willingness to approve a package of measures excluding agriculture—a position acceptable to the EC. However, a split in the Cairns Group (of 14 developed and developing food-exporting countries, excluding the United States and EC) made approval impossible. This led to the suspension of the Mid-Term Review.

Issues in Group of Negotiations on Goods (GNG)

Tariffs: Tariff levels in industrial countries have been reduced through successive GATT negotiations. The mid-term review of the Uruguay Round in Montreal agreed on a substantial reduction or elimination of tariffs by all participants.

Nontariff measures: The proliferation of nontariff measures has led GATT members to search for better discipline in this area. It was recognized at Montreal that the reduction of nontariff measures by all participants was critical to the success of the Uruguay Round, and broad negotiating guidelines were established toward that end.

Natural resource-based products: Market access for nonferrous metals and minerals, forestry products, and fish and fisheries products is affected by subsidies and other nontariff support programs. The text agreed at Montreal aims to liberalize fully trade in such products.

Textiles and clothing: Trade in textiles and clothing has been relegated by multilateral action to a special regime outside normal GATT rules for almost three decades. Developing countries emphasize the need for an early return to normal GATT rules, but most industrial countries oppose this because of possible ill effects on their domestic producers. No agreement was reached in Montreal.

Agriculture: Agriculture has historically been considered special for socioeconomic and strategic reasons, and has remained largely outside GATT’s normal regulatory framework. The high costs of agricultural protection and subsidies have led to a widespread recognition of the need for multilateral discipline, but views on the appropriate framework vary widely between the United States and the European Community—two of the main exporters.

The United States would like to see the complete phasing out, originally over a ten-year period, of all agricultural subsidies and import barriers; under the US proposal, support to farmers need not be abolished, but it should not be linked to the type or amount of commodity produced. The EC views this as politically infeasible. It prefers an agreement on short-term measures to reduce agricultural imbalances, leaving basic reform to be negotiated over the long term. The Cairns Group has suggested a compromise proposal for a short-term reform program, to take ten years or less, after which a long-term framework would be developed to remove all agricultural trade restrictions and subsidies and fully integrate agriculture into GATT rules. No agreement was reached at Montreal.

Tropical products: The Ministerial Declaration launching the Uruguay Round recognized that special attention should be given to liberalization of tropical products, since these are the main source of export earnings for many developing countries. Agreement was reached in Montreal on a list of concessions by developed importing countries on tropical products. Canada, Switzerland, and the United States indicated that they will not implement their offers on tropical products before the April 1989 meeting of the Trade Negotiation Committee, while the EC said that it will take certain limited measures. In contrast, Australia, Austria, Finland, New Zealand, Norway, and Sweden decided to implement their offers immediately.

GATT articles: Several GATT provisions are under review. Proposals for change include reform of GATT rules on trade restrictions for balance of payments purposes, customs unions and free trade areas, and state trading provisions. It was agreed to continue work in these and other areas.

MTN agreements and arrangements: The negotiations aim to improve, clarify, or expand, as appropriate, the Agreements and Arrangements negotiated in the preceding Tokyo Round. These cover such widely divergent and technically unrelated subjects as government procurement, dumping, subsidies, technical barriers to trade, customs valuation, and import licensing. The text agreed at Montreal notes that substantive negotiations have begun.

Safeguards: The GATT’s main safeguard provision is Article XIX, which allows temporary restrictions on imports where domestic producers are seriously affected. In practice, however, these provisions have been ineffective. GATT members have been unable to reach a comprehensive safeguards agreement, mainly because of differences between proponents of nondiscriminatory safeguards and those who favor selective action against imports from particular supplying countries.

Subsidies and countervailing measures: To bring greater discipline to the use of subsidies, the GATT’s “subsidies code” prohibits export subsidies on manufactures. The code permits the imposition of countervailing duties to offset the adverse effects on domestic producers from imports of competing products that benefit from subsidies (export or domestic) in their country of origin. The Subsidies Code has proved to be difficult to interpret, and negotiations for its reform, therefore, have been complex and difficult. A flexible framework for negotiations was agreed at Montreal.

Trade-related aspects of intellectual property rights: Industrial countries argue that GATT rules are needed to adequately protect intellectual property rights. Many developing countries emphasize that the group’s work should be confined to the trade-distorting or trade-restrictive aspects of intellectual property rights, rather than establishment of new regulatory regimes which they consider to be within the purview of the World Intellectual Property Organization. No agreement was reached in Montreal.

Trade-related investment measures: The text agreed at Montreal stipulates that participants should continue examination of the restrictive and distorting effects of these measures and define new provisions, as appropriate.

Dispute settlement: The Montreal agreement encompasses a comprehensive overhaul of GATT’s dispute settlement rules and procedures, aimed at ensuring the prompt and efficient resolution of disputes. In particular, time limits are established for the conclusion of various phases of the dispute settlement process.

Functioning of the GATT system: The negotiations are centered on three aspects: to enhance GATT surveillance of trade policies; to improve the effectiveness and decision making of GATT as an institution; and to enable GATT to play a more active part in global economic policymaking. Progress was made at Montreal, where Ministers agreed to establish a Trade Policy Review Mechanism to permit a regular, collective evaluation of the trade policies of individual countries every two to six years, according to the world trade share of the country in question.

To improve GATT’s effectiveness, Ministers supported the convening of Ministerial level meetings of the CONTRACTING PARTIES of GATT at least once every two years. They also agreed that the Director-General of GATT should approach the heads of the IMF and the World Bank, as a first step, to explore ways to achieve greater coherence in global economic policymaking through strengthening the relationship of GATT with other relevant organizations.

The TNC decided to meet again at the level of high officials in April 1989, and to put “on hold” (i.e., freeze) the results achieved at Montreal. It authorized Arthur Dunkel, Director-General of GATT, to conduct high-level consultations on the four unresolved items in the interim. The TNC also declared its determination to complete the Uruguay Round as scheduled in 1990.

The results achieved in the negotiations include agreements of a largely procedural nature in ten areas of the negotiations on goods (see box on GNG), and an agreement on services (see box on GNS). Of the above, only the agreement on Tropical Products envisages the implementation of concrete liberalization measures. The agreement on services is of special importance because it represents a significant breakthrough, given the wide divergence in positions prior to Montreal on this issue; in particular, the decision to negotiate an agreement which may include labor mobility was a major concession to developing countries. It was also agreed to explore avenues for greater collaboration of GATT with the Fund and the Bank.

In the final Plenary, the Chairman of the TNC, the Director-General of GATT, the EC Commissioner in charge of foreign trade and the US Trade Representative deemed the review a success, because agreements emerged or differences were narrowed in most areas. The Ministers of Australia and New Zealand expressed deep disappointment about the lack of progress in agriculture, with the former stressing that this issue would require Washington and Brussels to reassess their positions and prepare their constituencies for change. Several Ministers from developing countries urged all developed countries that had made offers of liberalization on tropical products to implement them without waiting for the final outcome of the Mid-Term Review.

The inability to reach agreement on all issues is a measure of the wide-ranging and challenging nature of the Uruguay Round. The extension of the Mid-Term Review process beyond the week in Montreal simply acknowledges that more time is needed to resolve the difficult problems. Moreover, the numerous issues which were settled in Montreal are unlikely to be reopened in Geneva in April 1989, if an agreement emerges on the key remaining issues. In this sense, the results achieved in Montreal constitute a firm basis for a successful outcome of the Mid-Term Review. While real progress was made, it remains to be seen whether the unresolved issues—especially those in agriculture—will remain as intractable in April 1989 as in December 1988. If the Uruguay Round participants wish to deliver a strong message to the international trading community that the Round is on track, they will need to ensure that the April 1989 meetings resolve the remaining issues.

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