International Trade Files, Lot 57D284, Box 112

Position Paper for the United States Delegation to the Fourth Session of the Contracting Parties to the General Agreement on Tariffs and Trade ( GATT )1

confidential

TAC D–58/502

Quantitative Restrictions on Exports3

the problem

For a variety of reasons, many of the contracting parties to the GATT maintain quantitative restrictions on their exports. Many of these export restrictions appear entirely consistent with various provisions of the GATT, but a significant number of such restrictions appear to be at variance with those provisions. The problem is to determine a position with respect to export restrictions at the next session of the Contracting Parties.

recommendation

See last section of Discussion, “Suggested course of action”.

discussion

The present situation—The export restrictions now in effect among GATT member countries have been built up over a long period of [Page 696] time and with a variety of motivations. Long before World War II for example, export restrictions were being imposed by various countries with protective objectives; the prohibition on the export of tobacco seed by the U.S. is a case in point. Since World War II, an extensive system of export restrictions has been developed by most countries of the world for various other purposes, such as to control the flow of materials relating to military security, to control the export of products subsidized or price-fixed at home, to control the export of products in short supply, and so forth.

For the most part, however, export restrictions have been imposed since the end of the war as adjuncts of the network of bilateral trade agreements which were developed by most countries of the world to meet existing payments difficulties. These agreements have had infinite variety, to accommodate the special problems of each pair of countries. In general, however, they have commonly contained agreements by each country on at least two lists of products: one list for which country A agreed to issue export licenses and country B to issue import licenses, thereby making possible the export of those products from A to B; and a second list for which country B was committed to issue the export licenses and country A import licenses, thus clearing the way for exports from B to A. The two lists were calculated so that, if the transactions in contemplation were in fact consummated, the currency flowing each way would be about equal; in that way, neither country would have to make a net payment to the other in settlement of trade between them.

As long as countries lacked the means to pay for the goods of other countries and as long as most products were in short supply, it was essential in the operation of a bilateral trading system that extensive export and import controls be maintained. In the absence of import controls, the consumers of any country might make inordinate purchases of the goods that another country was glad to export, thereby imperilling the importing country’s program for the acquisition of products basic to the continued operation of its economy. And, conversely, if export controls were abandoned, commodities in scarce supply might be drained off from the country lacking such controls, thereby imperilling the operation of its economy.

However, as the system of bilateral trade agreements has come to be extended and refined, added motivations have begun to develop for the retention of export controls. Some of these added motivations have been:

(1)
Countries extensively engaged in the export of so-called nonessential products, notably Holland, Belgium, Switzerland, France and Italy, have found it desirable to retain export controls upon products desired by other countries in order to use their release as a bargaining weapon for obtaining commitments from the other country [Page 697] to the licensing of certain minimum volumes of non-essential import products. Belgium, for example, is understood to be maintaining export licenses on steel products which are in plentiful supply in Belgium, in order to be in a position if necessary to create shortages in the markets of countries where Belgian steel occupies an oligopolistic position. This bargaining position is then used to assure the acceptance by the other country of Belgian glass, lace, vegetables, and similar products.* Indeed, in a review of its quantitative restrictions before an OEEC group last October, Belgium stated that it would be her policy to restrict exports to debtor countries by “an equal percentage in all categories across the board to maintain a balance between essentials and less essentials”. Similarly, Italy in April 1949 was understood to be licensing the export of steel to Austria and to be requiring Austrian steel buyers to bargain with Italian vegetable exporters in order to obtain steel export permits.
(2)
A second motivation in maintaining export restrictions, closely analogous to the first, was to use such restrictions as a means of bargaining for products from trading partners which were in short supply.
(3)
In addition, countries desirous of fostering their fabricating industries have restricted the export of the raw materials and semi-processed products of those industries but have been more liberal in licensing the export of finished products. This practice has persisted in some cases, even though no shortage of raw materials or semi-processed products exists in the exporting country to justify the maintenance of the restrictions.§ Thus, South Africa requires exporters to sell 75% of their cattle hides and 50% of their goatskins to local tanners. Similarly, the Dominican Republic and Haiti maintain a prohibition on the export of mahogany and certain other hardwoods for the dual purpose of conservation and the protection of local handicraft industries. Similarly, Brazil prohibits the export of Hevea rubber plants** and oiticica (a source of drying oil) seeds††; Indonesia prohibits the export of coffee and oil palm planting [Page 698] materials;‡‡ and Denmark closely restricts the export of Landrace hogs.§§
(4)
Countries desirous of assisting their individual exporters to avoid price-cutting among themselves in their foreign sales have required that such sales be made at stated minimum prices, as a condition for the acquisition of export licenses. Such situations are understood to exist with respect to Swedish pulp and Indian mica,║║ and are probably quite widespread in other cases. At times, this practice may be motivated by balance-of-payments considerations, that is, by an effort to maximize the return on foreign sales in scarce currencies. But the probability is that the practice is much more commonly motivated by the simpler commercial objective of assisting a local industry in the attainment of an oligopolistic or monopolistic position in its sales.

In some degree, the situations described above will tend to correct themselves, as shortages disappear and competition is intensified in international trade. But, at best, competition in many major products will remain less than perfect and oligopolistic situations will not be uncommon. Accordingly, the probability is that the kinds of restriction described above will commonly persist in significant volume in the absence of corrective action. The purpose of this paper is to explore the measures which might be taken at the forthcoming GATT session which would contribute to the elimination of such situations.

The relevant GATT provisions—The general rule of the GATT on the subject of export restrictions is contained in Article XI, paragraph 1, which provides:

“No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import licenses, or other measures, shall be instituted or maintained by any contracting party on the … exportation or sale for export of any product destined for the territory of any other contracting party.”

Paragraph 3 of the same Article defines “export restrictions” as including restrictions made effective through state trading operations.¶¶

There are a number of major exceptions to this general prohibition, which considerably limit the applicability of the general rule. To begin with, under the Protocol of Provisional Application, the part of the Agreement relevant to this problem is applied only provisionally, that [Page 699] is, “to the fullest extent not inconsistent with existing legislation”. Thus, the U.S. prohibition on the export of tobacco seed, which is required by law, and certain similar export restrictions on agricultural products which were cited earlier in this paper are not subject to the interdiction of Article XI, paragraph 1.*

Other significant exceptions to that paragraph are to be found in the Agreement proper. One group of such exceptions applies to situations arising out of commodity shortages. Paragraph 2(a) of Article XI provides that the general rule of paragraph 1 shall not extend to “export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting … country”. This exemption, however, does not relieve the contracting party applying restrictions from the nondiscriminatory, most-favored-nation provisions of the GATT.

Article XX, paragraph I(i) exempts from all the provisions of the GATT, except the nondiscrimination provisions, any measures “involving restrictions on exports of domestic materials necessary to assure essential quantities of such materials to a domestic processing industry during periods when the domestic price of such materials is held below the world price as part of a governmental stabilization plan; Provided that such restrictions shall not operate to increase the exports of or the protection afforded to such domestic industry, and shall not depart from the provisions of this Agreement relating to nondiscrimination …”, and subject to the further requirements that such measures are not applied in a manner which would constitute a disguised restriction on international trade. Finally, Article XX, paragraph II(a) exempts from all the provisions of the GATT until not later than January 1, 1951 any measures essential to the acquisition or distribution of products in general or local short supply, or essential to the control of prices by a contracting party undergoing shortages subsequent to the War; but here again arbitrary or unjustifiable discrimination is not tolerable and the principle must be observed that all contracting parties are entitled to an equitable share of the international supply of the scarce product.

In addition to exemptions relating to shortage situations, exemptions are to be found in Articles XI and XX for restrictions imposed on a number of other grounds. Among those which are especially relevant to the problem considered in this paper are “Export prohibitions or restrictions necessary to the application of standards or regulations for the classification, grading or marketing of commodities [Page 700] in international trade …” (Article XI, paragraph II(b)). The phrase “restrictions necessary to the … marketing of commodities …” is presumably to be construed narrowly in view of its context. Another relevant exception which should be noted is that applicable to measures which are “necessary to secure compliance with laws and regulations which are not inconsistent with this Agreement, including those relating to … the enforcement of [state trading]4 monopolies …”.

Another important exception is found in Article XIV, paragraph 4, which authorizes export controls by countries in balance-of-payments difficulties where such controls are necessary to divert the country’s export to hard-currency markets.

Finally, the general exemption contained in Article XXI under the heading of “Security Exceptions” is, of course, applicable to export restrictions.

It is reasonably clear that export restrictions cannot be justified on the basis of the balance-of-payments exceptions to the GATT, except in connection with hard-currency set-aside schemes of the kind contemplated by Article XIV, paragraph 4. The general rule with respect to these exceptions appears first of all in Article XII, paragraph 1; but that paragraph is limited to import restrictions. Paragraph 2, which amplifies paragraph 1, contains the same limitation. And Article XIV, which authorizes the discriminatory application of quantitative restrictions under certain circumstances, limits that authorization to restrictions applied “under Article XII”, i.e., to import restrictions.

It is also evident that, except for the exemption provided by the Protocol of Provisional Application and by the Security Exceptions Article, countries are not justified under any GATT exception in following a policy of using the release of scarce materials as a bargaining weapon in bilateral agreements, wherever such bargaining leads (as it necessarily must) to a discriminatory pattern of such restrictions.

Tactical pro’s and con’s—If the U.S. should decide to raise the issue of export restrictions at the next Session of the GATT, the likelihood [Page 701] is that a discussion of the issue will create certain difficult and delicate problems.

In the first place, Czechoslovakia will almost certainly seize the occasion again to press its complaint that existing U.S. export controls are in violation of the GATT. This issue was raised at Annecy and was the occasion of extensive debate and recrimination.

On the other hand, it is clear that the Czech position would be defeated if pressed to a vote before the contracting parties; this is even more certain than it was at Annecy, since in the interim closer agreement on export licensing controls has been reached with a number of OEEC countries which are also GATT countries. Moreover, the probability is that the time devoted to the Czech charges could be limited substantially more than was the case at Annecy, in view of the fact that this would be a repeat performance on which the contracting parties had already expressed themselves. In any case, if the U.S. were to decide to raise the export restriction issue, it would be well to consult with the Chairman of the Contracting Parties in advance to determine how best to limit any discussion which the Czechs might precipitate.

Another moderately embarrassing problem arises out of the fact that the U.S. is required by law to maintain certain export restrictions, i.e., the restriction on the export of tobacco seed, which would be in violation of the GATT provisions were it not for the Protocol of Provisional Application. Moreover, the U.S. is an indirect party to the restrictions on the export of rubber tree strains which are maintained by a number of Latin American countries party to the GATT.

Nevertheless, there are compelling reasons for raising the issue of export restrictions at this time. The most compelling is the fact that the protective incidence of existing export restrictions is becoming far more widely appreciated and recognized than has heretofore been the case. Current deliberations within the OEEC on the subject of dual pricing have served to highlight the abuses practiced through export restrictions. To date none of the complainant countries appears to have invoked the relevant GATT provisions either because of a failure to appreciate the relevance of these provisions or because of a judgment that the use of the GATT commitment would prove ineffectual. An effective contribution by the GATT to a problem of such general interest and importance would contribute substantially to its prestige and the general level of its future effectiveness.

Moreover, the economic benefits to be derived from the lifting of export restrictions inconsistent with the GATT would clearly be substantial. The immediate economic benefits to be derived from the lifting of such restrictions to the extent that they were inconsistent with the GATT would be substantial in themselves. In addition, effective [Page 702] limitations on the use of export restrictions would in turn limit the effectiveness of the bilateral trade agreement as a technique in trade bargaining and thus would influence countries in their future decisions on the extent to which resort should be had to such agreements. Finally, the elimination of certain export restrictions would remove the justification for many import restrictions which now are rationalized as being a necessary offset to the export restrictions of other countries.

Suggested course of action—The following course of action is suggested:

(1)
The U.S. should place the subject of export restrictions on the agenda for the Fourth Session.
(2)
The U.S. should make a statement in plenary session introducing the problem. The statement should be couched in terms designed to avoid the “policeman” kind of approach; it should deal with the problem as one with which all the contracting parties are jointly concerned. The statement should cover the following points:
(a)
That there are increasing indications of the existence of export restrictions in effect by GATT members under circumstances not sanctioned by the GATT;
(b)
That the situation appears to be sufficiently widespread to justify the attention of the collective Contracting Parties, rather than placing reliance solely upon the complaints of individual contracting parties;
(c)
That a working party should be set up to recommend measures by the Contracting Parties to deal with the situation.5
(3)
The U.S. should then seek agreement in the working party and among the Contracting Parties on the following points:
(a)
An agreement that, subject to the provisions of the Protocol of Provisional Application, export restrictions designed with certain express objectives, e.g., tie-in sales, bargaining for short-supply items of other countries, protection of processing industries, prevention of price cutting, whether used in connection with the bargaining of bilateral agreements or otherwise, violate the provisions of the GATT;
(b)
A request that the individual contracting parties review their existing export restrictions in the light of the GATT provisions, notably Articles XI and XIII, and the Contracting Parties’ conclusions pursuant to this resolution, and undertake [Page 703] such revisions as may be necessary to bring them into conformity with those provisions and conclusions;
(c)
A recommendation that contracting parties who consider themselves adversely affected by export restrictions of other contracting parties which appear inconsistent with the provisions of the GATT should avail themselves of the consultation procedures provided for in the GATT, with a view to ironing out their difficulties;
(d)
An instruction to the Secretariat to circulate the contracting parties prior to the next Session with a questionnaire on their existing quantitative restrictions on exports as defined in Article XI, except those subject to the Security Exception provision and the Protocol of Provisional Application, such questionnaire to call for a description of each such restriction and an indication of the GATT provision which exempts such restrictions from Article XI, paragraph 1.6

  1. The Fourth Session of the Contracting Parties (CP’s) (not to be confused with a tariff negotiating “round”) was scheduled to convene in Geneva on February 23. Regarding the United States Delegation to this session, see Department of State Bulletin, February 27, 1950, p. 339.
  2. This was a document of the Interdepartmental Committee on Trade Agreements (TAC). TAC had had a continuous existence from June 23, 1934, when it was established by letter of the Secretary of State directed to the heads of the various departments and agencies concerned with matters of foreign trade. The governing Executive Order at this time was E.O. 10082, October 5, 1949 (see Foreign Relations, 1949, vol. i, p. 723, footnote 2). The membership in 1950 consisted of the Departments of State, Agriculture, Commerce, Labor, Defense, and the Treasury, the Economic Cooperation Administration (ECA), and a Commissioner of the United States Tariff Commission. TAC was the highest-level policy-formulating body in the Executive Branch on trade agreements (and from 1947, GATT) policy, making final recommendations to the President relative to the conclusion of trade agreements and for the provisions to be included therein. (The work at the operational level was done by a number of country subcommittees responsible for preparing material with respect to designated countries and areas.) A master file of TAC minutes and documents for the years 1934–1953 is found in Department of State Lot File No. 59D599.
  3. The State Department was very anxious to have this issue discussed at the CP’s fourth session, although some members of the committee showed a certain disinclination. At a TAC meeting on February 6, the State member expressed the opinion “… that the export restrictions are clearly not in accord with one of the GATT provisions. … the provisions of an international agreement die when not used. … the time seemed ripe to bring up the question of the violation of the GATT by export restrictions. …” (TAC M–35/50 and 36/50, Feb. 6, 1950, Lot 59D599, Box 302)
  4. Cf. ECE, “Economic Survey of Europe in 1948”, reprinted as Committee Print of U.S.H. Rep., Com. on For. Affairs, p. 93: “Moreover, Belgium was able to press its trading partners to accept considerable quantities of less essential goods as a condition for the sale of scarce items.” [Footnote in the source text.]
  5. Repto Tel. 7038, Paris, Oct. 25, 1949, Confidential. [Footnote in the source text. Documents cited in source text footnotes have not been verified or otherwise accounted for.]
  6. Report on Efforts being made by Participating Countries to Reduce or Eliminate Trade Barriers, Bilateral Trade Treaties Desk, Trade Section, OSR, Paris, p. 10, Confidential. [Footnote in the source text.]
  7. This practice has resulted in many of the so-called “dual pricing” situations found in Europe today. [Footnote in the source text.]
  8. Tel. No. 8, Pretoria, Jan. 9, 1950, Confidential. [Footnote in the source text.]
  9. Foreign Commerce Weekly, Vol. XV, No. 11, June 10, 1944, p. 16, and id., Vol. XXVII, No. 5, May 3, 1947, p. 15. [Footnote in the source text.]
  10. Memo from C. O. Erlanson, Assoc. Head, Div. of Plant Exploration and Introduction to S. B. Fracker, Research Coordinator, Agric. Research Adm., June 9, 1949. [Footnote in the source text.]
  11. Decree Law No. 904, Nov. 30, 1938, cited in memo to E. R. Sasscer, In Charge, Div. of For. Plant Quarantines, Dept. of Agric., June 14, 1949. [Footnote in the source text.]
  12. Export Ordinance Nos. 560, Nov. 23, 1935, and 623, Nov. 19, 1936, cited in memo in preceding fn. [Footnote in the source text.]
  13. Memo from B. T. Simms, Chief, Bur. of Animal Ind., to B. T. Shaw, Acting Administrator, Agric. Research Adm., July 7, 1949. [Footnote in the source text.]
  14. A–1112, New Delhi, Oct. 27, 1949, Unclassified. [Footnote in the source text.]
  15. Presumably this provision would not go so far as to prohibit minimum sale prices by a state export monopoly where such sale prices could be analogized to the maintenance of an export tariff. But it might well prohibit such price maintenance where the analogy could not be so drawn. [Footnote in the source text.]
  16. The present policy of the Executive Branch is, of course, to obtain the elimination of these restrictions by legislative action, in connection with the ratification of the ITO Charter. [Footnote in the source text.]
  17. Brackets appear in the source text.
  18. Article XV, paragraph 9, provides that “nothing in this Agreement shall preclude … the use by a contracting party of restrictions or controls on imports or exports, the sole effect of which … is to make effective …” exchange controls or exchange restrictions in accordance with the Articles of Agreement of the International Monetary Fund. While this might be used as a basis for justifying export restrictions in some circumstances, it is difficult to see how such justification could apply to any restrictions other than those related to export set-aside schemes. [Footnote in the source text.]
  19. For example, the Dutch justify the maintenance of quantitative restrictions on imports of Swedish furniture on the grounds that the Swedes are preventing the export of timber to the Dutch furniture industry except at prices well in excess of those paid by Swedish furniture manufacturers. [Footnote in the source text.]
  20. This subparagraph initially read: “(c) That a working party should be set up to develop the next steps which the Contracting Parties should take to consider or to deal with the situation.” The change was made by TAC at its February 6 meeting.
  21. At its February 6 meeting TAC deleted a final subparagraph (“e”), which would have instructed the Secretariat to prepare a request based on the questionnaire.

    As a result of these actions, the United States Delegation submitted to the fourth session of the CP’s a memorandum, “Review of Application of Quantitative Restrictions on Exports designed to Stimulate Exports or to Afford Protection to Domestic Industry” (Doc. GATT/CP.4/14, Feb. 23, 1950, Lot 57D284, Box 112).