International Trade Files, Lot 57D284, Box 110
Position Paper for the United States Delegation to the Fourth Session of the Contracting Parties to GATT 1
Certain Aspects of Quantitative Import Restrictions
Two separable problems with respect to quantitative import restrictions may be considered in the Fourth GATT Session:
- What can be done to reduce the protective incidence of quantitative import restrictions whose ostensible purpose is to protect a country’s balance of payments?
- What position should the U.S. take with respect to the discriminatory application of quantitative restrictions as against different countries, where the difference in treatment is not justified on balance-of-payments grounds?
See pages 12 to 14 and 21 to 23, below under headings “Proposed action”.
I. The Protective Incidence Problem
The present situation. A very high proportion of international trade is conducted today in accordance with the provisions of bilateral trade agreements. Immediately after World War II, these agreements were highly restrictive in form: They typically contained a list of products 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.
The motivations leading to these bilateral agreements were extremely complex. To begin with, both countries were anxious to obtain as much as they could of products in short supply available in the other country and to limit their own exports of short-supply products to a minimum. Moreover, the country which would have been a debtor in the absence of restrictions between the two countries was anxious to limit its purchases to an amount not in excess of its sales, in order to avoid the payment of scarce reserves in settlement of the bilateral balance.*
As the scarce supply situation has tended to improve, bilateral agreements between countries in Western Europe have become less restrictive in form.† Since the need to obtain export commitments on the part of other countries has substantially declined, bilateral agreements have been tending more and more to be written in terms of commitments to grant import licenses, with no express commitments on the export side. Moreover, the commitments regarding imports have become increasingly liberal: A number of countries have recently followed a policy of agreeing to the unrestricted import of certain products [Page 705] from some of the countries with which they have bilateral trade agreements. This trend has culminated in a new pattern which has emerged in recent months, particularly in agreements to which Germany and Belgium have been parties, namely, a pattern which provides that all products should be imported freely from the other country party to the bilateral agreement, except for an enumerated list of restricted or prohibited imports.‡
These liberalizing trends have, of course, been given great impetus by the OEEC trade liberalization program.2 OEEC countries have been required under this program to eliminate quantitative restrictions on imports from other OEEC countries on products which in the aggregate cover at least 50 percent of the privately-traded imports from those countries in a previous base period; the 50 percent standard has had to be met separately for foodstuffs, raw materials, and manufactured products. Moreover, the OEEC countries are committed in principle to the progressive elimination of such restrictions among themselves.§
The protective element in import restrictions. It is, of course, axiomatic that any system of import control of the kind associated with bilateral agreements tends to determine not only the volume but also the composition of the imports of the controlling country. It follows, therefore, that any system of quantitative restrictions on imports, whether or not developed for the bona fide purpose of dealing with a current balance-of-payments difficulty, almost invariably has a significant protective incidence. For such a restriction, unless accompanied by the most severe limitations upon domestic capital investment, is bound to stimulate the production of commodities which are directly or partially competitive with those excluded. Indeed, one could hardly take issue with a country if, in the development of a scheme of quantitative restrictions genuinely intended to meet a balance-of-payments difficulty, it developed its list of restricted products [Page 706] on the basis of the degree to which alternative domestic sources could be created.║
Nevertheless, many of the devices which have been developed and justified by GATT members as part of the mechanism for dealing with their current balance-of-payments difficulties contain features whose prime or sole motivation is clearly the protection of domestic industry, rather than the protection of monetary reserves. While the importance of the protectionist objective as a motivation in the development of seeming balance-of-payment import restrictions had always been recognized in the abstract, events arising out of the current OEEC trade liberalization program have suggested that the relative importance of the protectionist objective may be far greater than is generally appreciated.
During the course of discussions before the OEEC Trade Committee, representatives of a number of major European countries readily agreed that the quantitative restrictions on imports imposed by their respective countries on certain major commodities were primarily for protectionist, rather than balance-of-payments, purposes. Thus, the French asserted that some of their quantitative restrictions were intended to protect their fresh fruit and vegetable industry and to prevent German competition; the Belgians asserted that their reason for excluding some 30 percent of their imports from the lists to which the liberalizing measures were applicable was to protect home industries; the Irish stated that a small range of commodities was subject to quota for protective purposes; the Dutch stated that their failure to include some 21 percent of imports in lists of liberalized products was for the purpose of protecting young industries; and the Portuguese, Swedes, Swiss, Italians, Germans and Danes made similar observations.¶
As a result of these ready admissions, and of its qualitative judgment of the significance of the measures of liberalization offered by the various OEEC countries, the Central Group of the OEEC summarized the situation as follows:
“It appears that most countries have limited their proposals to those commodities in which domestic producers will suffer least from [Page 707] free competition with other participating countries. … The liberalization of trade in Europe is hampered by the desire of member countries to retain some measure of protection. In certain cases it is even possible that the desire for protection may be the true motive for the maintenance of quantitative restrictions while payment difficulties are only the pretext. In most cases this attitude arises from the fact that most countries fear the changes in the structure of their economy which may result from the liberalization of trade. . . . Countries subject to de facto discrimination, particularly because of their creditor position in Europe, are avoiding the adoption of measures of liberalization on too large a scale in order to retain a bargaining counter. They are stressing the reciprocity which they expect from other countries in such a way as to safeguard both the volume and the nature of their exports.”**
It is reasonably evident that the practice of employing ostensible balance-of-payments quantitative restrictions for protective purposes is not confined to OEEC countries alone. Most non-OEEC countries under circumstances similar to those which led to the admissions by OEEC countries summarized above, would have been obliged to make similar admissions.††
Notwithstanding the admissions in the OEEC and the almost universal judgment of experts that ostensible balance-of-payments restrictions now in effect throughout the world contain protectionist elements not necessary for the achievement of balance-of-payments objectives, only a few specific cases have been found in which this fact is evident on its face beyond any serious possibility of rebuttal.
Those cases are provided by several of the new type of bilateral agreement—the type which eliminates quantitative restrictions between the trading partners on all products except those listed in the agreement. In general these agreements represent a substantial advance over the traditional form of bilateral trade agreement which tends to limit trade to those products listed in the agreement. At the same time, the new form of agreement discloses the protectionist objectives of the parties much more starkly than does the old form. This is the case because if the provisions of the agreement were in fact confined to balance-of-payments objectives and if they contained no protectionist motivation, only one party, but not both, would be imposing [Page 708] import restrictions, namely, the country which, in the absence of such restrictions, could be expected to develop a net deficit in its bilateral relationship. It follows that the country which would develop a credit balance in the absence of restrictions between the two countries must be imposing its import restrictions for protectionist, not balance-of-payments, reasons.‡‡
The protectionist motivation of these bilateral agreements is perfectly evident from an examination of certain specific cases.
[Here follows a recital of the provisions of three 1949 trade agreements, respectively between Belgium-Luxembourg and (West) Germany, Belgium–Luxembourg and Switzerland, and Sweden and West Germany, and the citation of a restrictive clause in the Minutes of the Austro-French trade negotiations signed November 25, 1949.]
The relevant GATT provisions. The relevant GATT provisions bearing on the protective incidence problem are exceedingly complex. The basic rule is found in Article XI, paragraph 1:
“No prohibitions or restrictions other than duties, taxes or other charges, whether made effective through quotas, import or export licenses or other measures, shall be instituted or maintained by any contracting party on the importation of any product of the territory of any other contracting party or on the exportation or sale for export of any product destined for the territory of any other contracting party.”§§
However, Article XII provides a major exception to the general rule of Article XI. Paragraph 1 of Article XII provides that any contracting party, in order to safeguard its external financial position and balance of payments, may restrict the quantity or value of merchandise permitted to be imported. Such restrictions, however, should not be maintained except to the extent necessary to forestall the imminent threat of, or to stop, a serious decline in the monetary reserves of the contracting party, or, in the case of a contracting party with very low monetary reserves, to achieve a reasonable rate of increase in those reserves. Finally, as conditions improve, contracting parties are under an obligation to relax any restrictions applied for balance-of-payments [Page 709] reasons, maintaining them only to the extent that their reserve position still justifies.
Paragraph 9 of Article XV also bears on the problem. The paragraph provides that nothing in the GATT shall preclude the use by a contracting party of restrictions or controls on imports or exports, where the sole effect of such trade restrictions is to make effective exchange controls or restrictions which are in accordance with the Articles of Agreement of the International Monetary Fund. The relevant provision of the Fund is found in Article XIV, Section 2, which provides in part:
“In the post-war transitional period members may, notwithstanding the provisions of any other articles of this Agreement, maintain and adapt to changing circumstances … restrictions on payments and transfers for current international transactions. Members shall, however, have continuous regard in their foreign exchange policies to the purposes of the Fund; . . . . In particular, members shall withdraw restrictions maintained or imposed under this Section as soon as they are satisfied that they will be able, in the absence of such restrictions, to settle their balance of payments in a manner which will not unduly encumber their access to the resources of the Fund.”
Taken as a whole, the exceptions to Article XI, paragraph 1, do not appear to offer any justification to member countries to impose import restrictions for protectionist purposes. It would appear that when the avowed purpose of a given restriction is to protect the domestic industry, rather than to safeguard a country’s balance of payments, that restriction is in violation of the GATT.║║
Proposed action. U.S. interest in this general problem derives from three factors. First, the protectionist element of quantitative restrictions in intra-European trade is proving a major stumbling block to the OEEC trade liberalization program. The U.S., therefore, may well be justified in availing itself of all international obligations which might be used as a means of eliminating that element from intra-European quantitative restrictions. Second, the long-range self-interest of the U.S. requires that the protectionist use of quantitative restrictions should be resisted at every opportunity. Otherwise, the widespread use of such quantitative restrictions against U.S. exports may well continue beyond the period when it is justified by dollar shortages. Finally, the U.S., as a principal sponsoring party of the GATT, is interested in enhancing the effectiveness and, hence, the prestige of the organization [Page 710] as a means of assuring its continued existence as a useful international instrument.
It is suggested that the proposals below should be placed on the agenda as a separate item. The occasion of the review of import restrictions required by Article XIV(1)(g),3 which is already on the agenda, might conceivably be used as a springboard for implementing the recommendations of this paper; but the drawback in such an approach lies in the fact that the Article XIV review is limited to the discriminatory aspect of import controls, rather than to their protective incidence as a whole.
Insofar as it may be helpful to achieve the adoption of the proposals described below, the U.S., in informal discussions with the contracting parties which are also members of the OEEC, may refer to the report of the Central Group of the OEEC on import restrictions and to any other OEEC materials to which it might be politic to refer.
The working party should recommend to the Contracting Parties the following specific propositions:
- That the Contracting Parties condemn the use of the quantitative restrictions ostensibly imposed for balance-of-payments reasons as a means of achieving protectionist objectives, on the grounds that such misuse is inconsistent with the provisions of the GATT; and that this condemnation make reference to, but not be limited to, such specific practices as it may be possible to reach agreement on in the working party (such as seasonal quotas and minimum import price requirements).
- That the Contracting Parties request member countries to review their systems of import controls and their bilateral agreements with a view to eliminating any such provisions.
- That the Contracting Parties recommend to member countries which consider it necessary to enter into bilateral agreements as a means of meeting their balance-of-payments difficulties, that they should not place limitations on imports in such agreements but instead should provide for consultation in the event unmanageable balances develop; or, where this approach is not practicable because of an obviously unbalanced relationship between two countries which the debtor country could not finance, that import restrictions should not be applied by such prospective creditor country, and should not be applied by such debtor country except for the smallest practicable number of products.
- That the Contracting Parties also recommend to member countries which maintain import restrictions as a means of meeting their balance-of-payments difficulties, that in general they confine their specific limitations to the smallest possible number of products.
- That the individual contracting parties be requested to submit to the Contracting Parties by January 1, 1951, a report on the measures taken pursuant to the resolutions set out above or, if no such measures [Page 711] have been taken, on the reasons why they considered no action to be necessary.4
II. The Problem of Discriminatory Application of Quantitative Restrictions
The present situation. The OEEC trade liberalization program has had the very commendable objective and effect of reducing trade barriers among OEEC countries. Individual countries are implementing their trade liberalization commitments in the OEEC by two types of measures. The first type consists of the setting up of “free lists”, i.e., lists to which no limits on imports are applied, provided those imports emanate from a specified list of countries. The various OEEC countries have followed different policies in their enumeration of the list of countries eligible for free list privileges. Some, like Britain, Switzerland and Austria, have framed their liberalization measures on a world-wide basis; Switzerland and Austria have declared that certain listed products may be freely imported from all countries of the world, while Britain has included all countries except those whose currencies are scarce, i.e., Belgium, Switzerland, Canada, the U.S. and other so-called “American-account” countries. Other countries, like Belgium-Luxembourg, France, Trizone Germany, Italy, Greece, Portugal, Denmark, Netherlands and Norway,¶¶ have confined the free list eligibles to some or all of the other OEEC members.
In addition to setting up these unilateral free lists, some OEEC countries have also specified a list of products which they would be willing to put on a free list for the benefit of other countries, provided such other countries were willing to extend similar measures of liberalization. This opportunity for negotiation is ordinarily not extended universally but is offered only to certain other countries. For example, Belgium, Denmark, France, the Netherlands, Norway, Portugal, Sweden, Germany, Italy and Austria all have limited their offers of bilateral negotiation on specified lists of products to some or all of the OEEC countries.
Finally, some countries have instituted, or are giving consideration to the institution of, global quotas on imports.* But, here again, each country specifies those other countries which would be eligible to compete [Page 712] for such global quotas. And, here again, the eligible countries are not universal. For example, the global quotas set up by Denmark and Norway are all limited to OEEC country sources, while Sweden’s global quotas are available to OEEC countries and non-OEEC sterling area countries.
While these measures of trade liberalization tend to further the objectives of the GATT in reducing trade barriers on a significant volume of international trade, at the same time they are tending to raise questions whether OEEC members are engaging in a line of action inconsistent with the general nondiscriminatory provisions of the GATT. The Finns have already informally raised this issue because of the impact of certain Danish measures upon Finnish export trade,† and there are indications that the Czechs may raise the issue at the Fourth Session as a means of embarrassing the U.S.
The relevant GATT provisions. The relevant provisions of Articles XI and XII bearing on this problem have been summarized in a preceding section.
In general, they prohibit the use of quantitative restrictions on imports but grant a broad exemption for such restrictions when applied to safeguard the monetary reserves of a country in balance-of-payments difficulties. These provisions, it should be noted, do not of themselves justify the use of discriminatory import restrictions. Standing by themselves, these provisions would authorize only a nondiscriminatory application of quantitative restrictions in view of the provisions of the GATT which guarantee general most-favored-nation treatment.
Article XIII, paragraph 1, of the GATT makes this point crystal clear by providing that: “No prohibition or restriction shall be applied by any contracting party on the importation of any product of the territory of any other contracting party … unless the importation of the like product of all third countries … is similarly prohibited or restricted.” The Article then goes on to require the use either of global quotas or of country allocations based either on common consent or a historical import pattern, as a means of implementing the nondiscriminatory application of import restrictions.
Authorization for the use of discriminatory balance-of-payments import restrictions under certain circumstances is found in Article XIV. That Article provides that a country which is applying restrictions under Article XII (that is to say, a country which is applying import restrictions to safeguard its balance of payments) may apply such import restrictions along certain discriminatory patterns. One [Page 713] discriminatory pattern of balance-of-payments import restrictions which is permitted is a pattern having the equivalent effect to exchange restrictions which the contracting party is authorized to apply under Article XIV of the Articles of Agreement of the International Monetary Fund. Another acceptable discriminatory pattern which may be used in applying balance-of-payments import restrictions is the pattern which the contracting party was applying on March 1, 1948 or any adaptation of such pattern required by changing circumstances. Finally, contracting parties which have so elected are authorized to apply their discriminatory balance-of-payments import restrictions in a manner which departs from a nondiscriminatory pattern if that departure (a) would result in the importing country’s obtaining additional imports, (b) would not constitute part of an arrangement which would reduce the country’s earnings of gold or dollars, (c) would not cause unnecessary damage to other contracting parties and (d) would not result in the import of products at prices substantially higher than those available from hard-currency sources.‡
[In the original paper as presented for consideration to TAC on March 3, there followed a five-page section captioned “Consistency of OEEC measures with U.S. policies and GATT provisions.” As a result of the March 3 TAC deliberations, this section was stricken and the following was substituted.]
The Delegation should seek to avoid the issues set out above from being raised at the Fourth Session. If they are raised, however, the Delegation should attempt to avoid any definitive resolution of them at the Session and, accordingly, should take the following line:
- Under the GATT discriminatory restrictions for balance-of-payments reasons which cannot in fact be justified on these grounds are not permissible and should be removed.
- The determination of whether particular restrictions are discriminatory requires careful examination. Further, if the restrictions are discriminatory, the determination of whether these restrictions can be justified on balance of payments grounds requires study and analysis of the external financial position of the particular countries concerned and the balance-of-payments relationships between them. The necessary information bearing on these aspects would have to be presented before any decision could be reached.
- In order that an adequately documented case may be presented to the Contracting Parties, it would be desirable for the affected parties first to take the matter up between themselves in accordance with the provisions of Article XXIII before raising the matter with the Contracting Parties.
- In discussing this issue, the Delegation should be careful to avoid statements which would appear to justify the limitation of trade liberalization measures to OEEC countries on the basis of Article XXIV dealing with customs unions and free trade areas. This article is not applicable because there is no agreement among these countries to achieve a customs union or free trade area nor is there agreement on any specific interim plan to achieve these objectives.
- Adopted by TAC at its meeting on March 3, 1950 (Doc. TAC M–65/50, March 3, 1950, Lot 59D599, Box 302), with revision noted in bracketed note on p. 713.↩
- Other motivations also existed, among which was a desire of promoting the export of non-essential products. [Footnote in the source text.]↩
- This observation and those which follow do not apply to bilateral agreements involving East-West trade in Europe. [Footnote in the source text.]↩
- There is no reliable evidence available to indicate whether these liberalizing tendencies have developed in bilateral agreements between Western European and non-European countries. The likelihood is that they have not. [Footnote in the source text.]↩
- For documentation on the OEEC, see vol. iii, pp. 611 ff.↩
See OEEC Council Decision, Paris, July 4, 1949, C(49)88 (Final), Restricted, which provides in part:
“That participating countries shall forthwith take the necessary steps for the progressive elimination of quantitative import restrictions between one another, in order to achieve as complete a liberalization of intra-European trade as possible by 1950.” [Footnote in the source text.]↩
- One might conceivably insist that a country in balance-of-payments difficulties should refuse to permit the creation or expansion of domestic industries whose foreign competitors have been excluded, particularly where such creation or expansion would require the diversion of domestic resources from other uses in which they would otherwise be fully employed. Although such a position might be justifiable on the grounds that it would help avoid the development of new vested interests anxious to retain quantitative restrictions, it is probably not a negotiable position at this time. [Footnote in the source text.]↩
- For a more detailed presentation of these statements, see Annex A attached. [Footnote in the source text. Annex A not printed.]↩
- OEEC Council, Liberalization of Intra-European Trade, First Report by the Central Group, Paris, Oct. 28, 1949, C(49)167, Restricted. [Footnote in the source text.]↩
- This assumption is fortified by the fact that Chile, for example, maintains quantitative restrictions on a range of products which initially she attempted to justify on the basis of economic development, in accordance with the procedure laid down in Article XVIII of the GATT. When it became apparent that she might have difficulty in justifying some of these measures pursuant to the standards of Article XVIII, she shifted the basis for her justification to balance-of-payments considerations. [Footnote in the source text.]↩
- It might conceivably be argued that these exclusions by both parties can be justified on balance-of-payments grounds because the lists of products subject to limitations represent the unpredictable elements in the trade movements between the two countries, hence the elements which unless controlled might result in a substantial unforeseen surplus or deficit in the bilateral relationship. This contention might have merit if the products subject to restriction represented a really significant proportion of the total trade between the two countries. But in most bilateral agreements of this type, this is not the case; the products chosen for limitation are obviously those in which political considerations lead to a maximum of protection. [Footnote in the source text.]↩
- It should be noted that Article XI, paragraph 3, provides that the term “import restrictions” includes restrictions made effective through state trading operations. [Footnote in the source text.]↩
- Note should be taken, however, of the provisions of Article XVIII of the GATT which permit quantitative restrictions on imports in connection with the economic development of a member country, provided certain express criteria are met. This provision has so far not been used broadly, partly because the Contracting Parties have laid a heavy burden of proof upon a member country invoking the provision. [Footnote in the source text.]↩
- See p. 748.↩
- On February 23 the United States submitted to the fourth session of the CP’s a memorandum entitled “Review of Application of Quantitative Restrictions on Imports designed to Afford Protection to Domestic Industry (Doc. GATT/CP.4/13, 23 February 1950, Lot 57D284, Box 112).↩
- Sweden has followed an intermediate policy by including in its list of eligible countries the non-OEEC sterling area countries. [Footnote in the source text.]↩
- Here and elsewhere in this paper, the phrase “global quotas” is given the meaning commonly accorded the term in Europe, i.e., a quota available to be filled in whole or in part by more than one country. [Footnote in the source text.]↩
- Legtel 455, Helsinki, Nov. 5, 1949, Secret. [Footnote in the source text. Not printed.]↩
- Canada, Ceylon, Lebanon, South Africa, Southern Rhodesia, Syria, and the UK have so elected. [Footnote in the source text.]↩