NAC Files, Lot 60 D 1371

Document Prepared in the Department of State for the National Advisory Council Staff Committee 2

confidential

NAC Staff Doc. 547

Recent Exchange and Trade Restrictions Imposed by Belgium

problem

What action should the United States take with respect to the import restrictions recently imposed by Belgium against the dollar area?

recommendations

1. The United States should, either individually or jointly with Canada, inform Belgium

(a)
that in our view its restrictions on dollar imports are of negligible value in meeting its intra-European trade and internal problems, and are inconsistent with its commitments under the GATT and with the provisions and objectives of the Fund; and
(b)
that unless Belgium promptly removes the restrictions in question, we will raise the matter in the GATT and the Fund.

2. If Belgium fails promptly to remove the restrictions in question, the United States and Canada should, either jointly or separately, bring the matter up before the Fund and should seek action by the Fund for the elimination of the restrictions. In consideration of the matter in the Fund, the U.S. representative should be guided by Section F of the Discussion with regard to various points of interpretation which may arise regarding the applicability of the Fund provisions to the Belgian case.

3. Simultaneously with the action under paragraph 2 above, the United States and Canada, either jointly or separately should notify [Page 1507]the Executive Secretary of the GATT that they consider that the conditions set forth in Article XXIII have been created by the Belgian restrictions, that the matter is urgent, and that they wish the Ad Hoc Committee for Agenda and Intersessional Business to consider the problem.

4. The United States should promptly consult with Canada with a view to working out a coordinated approach along the lines indicated above.

discussion

A. The Belgian EPU Surplus

In late August Belgium’s strong surplus position in the EPU resulted in her extending credit to the other EPU members in an amount which exhausted her quota of $360 million. A further $30–$40 million was made available by Belgium on the basis of 50% gold payment and 50% extension of credit to the EPU but the surplus continued to increase at a rapid rate and Belgium demanded a revised settlement arrangement. The development of the Belgian surplus is shown in the following table:

(In Millions of Dollars)
1950 3rd quarter - 2. 8
4th quarter + 8. 7
1951 1st quarter + 83. 6
2nd quarter + 146. 3
3rd quarter + 188. 0

After considerable negotiation, it was agreed that Belgium would receive a maximum gold payment of $80 million in the settlement of its trade for the last quarter of 1951 and would extend credit to the EPU for any excess over the $80 million.

It should be emphasized that Belgium does not have a balance-of-payments problem or a serious prospect of a balance-of-payments problem in the sense of having very low monetary reserves or a serious threat to her reserves. Belgian holdings of gold and convertible currencies have increased from $722 million in December 1950 to $785 million in September 1951 and a balance-of-payments projection prepared by ECA Brussels indicates that these reserves are expected to increase by $55 million during fiscal 1952 (calculated without reference to any dollar import restrictions). That Belgium’s monetary reserves previously have not been considered unduly low is attested to by the fact that in connection with the review of balance-of-payments restrictions maintained under Article XII of the GATT, Belgium reported, both in 1949 and 1950, that she did not maintain such restrictions. Now her reserves are increasing from levels previously considered satisfactory. This does not mean, however, that her intra-European surplus problem is not serious. The maintenance of the surplus compels Belgium [Page 1508]to ship goods to the rest of Europe on credit, to countries whose future ability to pay is uncertain. Moreover, if she insists on demanding much more gold in payment for these goods, she imperils the existence of the European Payments Union and exposes herself to the possibility of discrimination against her by other European countries, along the lines which existed prior to the formation of EPU. This would be a hard blow to the progress so far made in the direction of European economic cooperation.

Accordingly, Belgium has taken a number of steps designed to reduce her intra-European surplus. (See Annex [Appendix] A for details.) The most direct measure has been the introduction of export restrictions on various products to the rest of Europe. Among the other measures aimed at the same objective has been the introduction of dollar import restrictions. These restrictions are designed to insure that, for most products, Belgians will buy in Europe any supplies that are available there, before turning to a non-European source.

B. The Significance of the Belgian Action

The first basis on which the Belgian action can be tested is whether it does what it is intended to do, that is, reduce the Belgian surplus and strengthen EPU. The short answer to this question is that it may slightly reduce the Belgian surplus problem, though at the risk of some unnecessary inflation in Belgium; and it will create new risks, grave in character, that the EPU will degenerate from its initial conception as an interim step toward world multilateral trade, to a simple preferential trading bloc which insulates Europe from dollar competition and impedes the rise of European productivity.

The conclusion that dollar restrictions will make only a small contribution to the Belgian surplus problem is based on the fact that the cut in dollar imports, according to tentative estimates, will be in the neighborhood of $20 million quarterly. Only a portion of this $20 million will be replaced by goods from other EPU countries, perhaps $8 to $10 million. Thus, the goods obtained would be higher priced and there would be less of them. But the magnitude of the Belgian intra-European surplus problem is indicated by the fact that for the last quarter of 1951 the surplus is estimated at $200 million to $250 million. At best, therefore, the contribution made by the dollar restrictions measure could only be described as modest. With respect to the internal financial stability of Belgium, the effect of the dollar restrictions, in so far as the total supply of goods available is decreased, may be inflationary.

The impact of these measures on the nature of EPU, however, is likely to be out of all proportion to their direct economic effect. EPU has been frankly a preferential system so far, but one whose avowed objective has been the ultimate reestablishment of world-wide multilateral trading. The preferential aspect of the scheme was to be [Page 1509]achieved by reducing restrictions among its members more rapidly than with the outside areas, not by raising new obstacles to goods from outside the area. The NAC decision authorizing the European trade liberalization movement states in part:

“The United States has consistently supported a reduction of trade barriers among OEEC countries and other steps toward effective economic integration of European economies that will contribute to a more efficient allocation of resources, provided that such steps are a part of a program designed to restore multilateral trade on a world basis and global convertibility of currencies.”

The Belgian action, in imposing new barriers to goods from outside the OEEC area, violates the concept on which the program was initially supported by the United States. As presented by the Belgian representative to the EPU Managing Board on September 5, “. . . this step has been taken very reluctantly by the Belgian government which fears that it may lead to an increase in the level of prices and believes that it constitutes a step backward on the road to convertibility and is by no means justified by the financial or the foreign exchange position of the country.” The new Belgian restrictions will interfere with the achievement of the objective of increasing efficiency and productivity.

More than that, the Belgian step sows the seeds for the dissolution of the European trade liberalization scheme itself. It recognizes that a country is entitled to channel its trade on a preferential basis with one or more other countries for reasons different than a simple lack of currency. This principle, in extense, means that the Scandinavians, could channel their trade to one another, or that France could channel its trade to Italy, on the basis of any political or commercial consideration which seemed persuasive at the time.

The Belgian action is equally significant in its implications for U.S. commercial policy. The action of Belgium in imposing restrictions on dollar imports for reasons not related to safeguarding its external financial position and balance of payments imperils the maintenance of a liberal U.S. trade policy which will permit the rest of the world to earn dollars here. Congressional and public support for such a policy is already exceedingly tenuous. Congressional failure to approve the ITO Charter, the incorporation of restrictive amendments in the last renewal of the Reciprocal Trade Agreements Act, and the enactment of Section 104 of the Defense Production Act imposing, in violation of our international commitments, restrictions on imports of fats and oils and other products into the United States are a few of the indications of the weakness of the U.S. support for a liberal trade policy.

The Belgian action would fortify the enemies of U.S. trade policy and weaken the support of its friends. The GATT has always been the subject of criticism by certain domestic interests on the ground [Page 1510]that it permitted other countries to impose restrictions on U.S. goods while at the same time the United States was prohibited from taking such action. This criticism could be answered in the past on the basis that other countries did not have the financial resources to permit unrestricted importation of dollar goods, but in the Belgian case this justification admittedly does not exist. The GATT will undoubtedly lose support in this country if it appears that other members intend to evade their obligations when these begin to favor the United States.

A U.S. reaction in terms of further defections from the principles and objectives of a liberal trade policy may be one of the most unfortunate consequences of the Belgian action. The abandonment of the balance-of-payments test as a limitation on the imposition of quantitative restrictions may lead many people in the United States to the conclusion that the objectives of relatively free, multilateral trading and full currency convertibility cannot be achieved, and that the United States is being placed in the position of being the “goat” for foreign restrictionism. Such an attitude would likely be reflected in a reversal of our present trade policy of reducing trade barriers and may well lead to the adoption of trade restrictions by the United States for protective and other commercial purposes. Such action on our part could result in a drastic reduction in the dollar earnings of other countries, especially by the OEEC countries. This possible raising of additional obstacles to trade with the United States would thus frustrate the ECA program and retard the achievement of our re-armament goals.

C. Belgian Position

The Belgian delegation to the Sixth GATT Session has conceded that Belgium is not suffering from the type of balance-of-payments difficulties which, according to Article XII of the GATT, are a prerequisite for the imposition of quantitative import restrictions. They have maintained that the institution of dollar restrictions is necessitated by a threat to Belgium’s general financial stability, arising from the large credits which she has been forced to grant as a result of her EPU surplus. Since consultations under Article XII would require Belgium to justify her restrictive measures according to the balance-of-payments criteria set forth in that Article, criteria which she admittedly cannot meet, Belgium has naturally resisted such a course of action. Instead she has argued that the measures were instituted under Article XV–9(b) of the GATT, which permits the use of restrictions on imports or exports where such restrictions are solely for the purpose of making effective exchange controls permitted under the Articles of Agreement of the IMF, in this case Article XIV. Since the relevant Fund provisions make no mention of balance-of-payments justification for the use of restrictions, Belgium [Page 1511]apparently believes that this course of action offers her a way to justify her action while avoiding the test of Article XII of the GATT.

D. Position of the United States

During the Sixth Session of the Contracting Parties, the U.S. delegation strongly opposed the Belgian contention that it was entitled to impose dollar import restrictions under Article XV of the GATT and Article XIV of the IMF Agreement. The position was taken that the provisions of the GATT, as a whole, were designed to require that such quantitative trade restrictions be subject to the tests and procedural requirements of Article XII. The delegation expressed the strong view that these tests and procedures should be complied with and that a working party should be established to determine, in consultation with the IMF, whether the Belgian measures meet the balance-of-payments criteria of the GATT. The U.K., Canada, and Cuba supported the view that Belgium should consult with the Contracting Parties under Article XII.

E. Status of Belgian Restrictions under GATT

The validity of the Belgian restrictions under GATT was not pressed to a decision at the Sixth Session. In a carefully worded statement winding up the debate on the matter at the Sixth Session, the Chairman of the Contracting Parties summarized the position of Belgium that its restrictions were consistent with the GATT and the Belgian Delegation at the Sixth Session had given some indication that the restrictions in question might be removed in the near future. The way was left open for the United States or any other contracting party feeling the restrictions to be inconsistent with the GATT to invoke the complaints procedures of the GATT against Belgium if it so wished.

There are two complaints procedures in the GATT which might conceivably be applicable to this case. One is Article XII–4(d) of GATT and the other Article XXIII.

Article XII–4(d) permits any contracting party which believes that another contracting party is applying balance-of-payments restrictions under Article XII inconsistently with the standards and requirements of that Article, to bring the matter before the Contracting Parties for discussion and settlement. If the matter is not settled to the satisfaction of the parties concerned and if the Contracting Parties determine that the restrictions are inconsistent with Article XII, the party applying the restrictions must either remove them or face the possibility of retaliatory action being authorized against her. Such retaliatory action would take the form of the withdrawal from the offending country of tariff concessions or other benefits of the Agreement.

[Page 1512]

At the Sixth Session the Belgian delegation recognized that the restrictions did not meet the test of Article XII and stated that they were not being applied under Article XII. Thus there would be no point in invoking Article XII–4(d) against Belgium. The fact that the Belgians admit that the restrictions are not being applied under Article XII does not necessarily mean that the restrictions are inconsistent with the GATT and must be withdrawn to avoid penalty, since the restrictions might conceivably be justified under other Articles of the GATT. This is precisely the position Belgium has taken. As explained above, Belgium claims that the restrictions are being applied under Article XV–9(b) of the GATT and that it is therefore acting completely in accord with its obligations under GATT.

A more general complaints procedure is available in Article XXIII of GATT, which affords a basis for examining the validity of any measures imposed under the GATT, whether under Article XII or XV or still some other provision. In fact, Article XXIII may be invoked not only where a specific obligation of the GATT may have been violated but even where there has been no such violation but action has been taken by one party which nullifies or impairs the benefits which another party expected to derive from the Agreement. Under this provision if a contracting party feels that a benefit under the Agreement is being nullified or impaired or attainment of an objective of the Agreement is being impeded as a result of violation of the Agreement by another contracting party or as a result of other action whether or not it violates the Agreement, the parties concerned may consult with a view to a satisfactory adjustment of the matter. If no such adjustment is effected, the matter may be referred to the Contracting Parties for settlement. The Contracting Parties may, if they consider circumstances serious enough, authorize the suspension of the application of tariff concessions or other GATT obligations to the contracting party applying the measure which gave rise to the complaint. Any contracting party from whom tariff concessions or other GATT benefits may have been so suspended is then free to withdraw from the Agreement if it wishes.

Article XXIII would clearly be usable in the Belgian case. If the United States desired to proceed against Belgium in the GATT, it could invoke this Article, arguing that the Belgian restrictions are inconsistent with the provisions of the GATT but that even if they are not, they nullify or impair benefits which the United States expected to get as a result of its adherence to the Agreement.

At their Sixth Session, the Contracting Parties to the GATT agreed to the establishment of an ad hoc Committee for Agenda and Intersessional Business. This committee, to be presided over by the Chairman of the Contracting Parties and to meet in Geneva on the call of the Executive Secretary, was set up to deal, among other things, with [Page 1513]urgent matters arising between the Sixth and Seventh Sessions. Such urgent intersessional business will be considered by the Committee upon the request of a contracting party (or parties). In response to a US request (or joint US-Canadian request) to take up the Belgian problem, the Committee could establish a working party which would examine all the relevant facts and views and submit a report thereon to the Seventh Session or, if the matter were of sufficient urgency, the Committee might request the convening of a Special Session.

F. Status of Belgium Restrictions under the Fund Agreement

Except in certain specific situations, the imposition of restrictions by a member of the International Monetary Fund with respect to current payments in the currency of another member is an action clearly contrary to the purposes of the Fund as enumerated in the Articles of Agreement. Article I states, inter alia, that the Fund is intended to assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. Article VIII, Sec. 2 specifically enjoins members from imposing restrictions on current international payments and transfers—and particularly those of a discriminatory nature (Article VIII, Sec. 3)—without the consent of the Fund. Article XIV, however, allows a member to defer the assumption of the obligations of Article VIII and to avail itself of exceptional privileges with respect to the imposition of exchange restrictions during the current “Postwar transitional period.”

In justification of the application of the discriminatory exchange restrictions against the dollar area described above, Belgium has cited Article XIV of the Agreement. Section 2 of this Article permits a member, without the specific approval of the Fund, to “maintain and adapt to changing circumstances (and, in the case of members who have been occupied by the enemy, introduce where necessary) restrictions on payments and transfers for current international transactions.” The authority to maintain, adapt, or introduce restrictions on current payments is not unconditional, however, and Article XIV, Sec. 2 further states that: “Members shall, however, have continuous regard in their foreign exchange policies to the purposes of the Fund; and, as soon as conditions permit, they shall take all possible measures to develop such commercial and financial arrangements with other members as will facilitate international payments and the maintenance of exchange stability. 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.”

[Page 1514]

Moreover, Article XIV, Sec. 4 states: “The Fund may, if it deems such action necessary in exceptional circumstances, make representations to any member that conditions are favorable for the withdrawal of any particular restriction, or for the general abandonment of restrictions, inconsistent with the provisions of any other articles of this Agreement. The member shall be given a suitable time to reply. . . .” This provision clearly establishes the mechanism through which the Fund could take action to obtain the withdrawal of Belgium’s restrictions against the dollar. Belgium might defend its position by arguing that the Fund does not have a sound basis for making representations under Sec. 4 and that, as a country occupied by the enemy, it has certain power under Sec. 2 which render Sec. 4 inapplicable in any event. The issues that may arise in connection with the interpretation and applicability of the two sections are discussed below.

Since the Articles give no explicit power to the Fund to determine the need for introducing restrictions, Belgium might argue that a member occupied by the enemy has absolute power to determine the necessity for introducing restrictions under Sec. 2. The unqualified acceptance of this interpretation, however, would be tantamount to granting Fund members license to violate the purposes of the Fund and thus lead to the international financial irresponsibility that the Fund was designed to prevent. Such an interpretation therefore would conflict with the very existence of the Fund, could not have been intended and consequently must give way to a treatment of Article XIV that would allow Fund intervention where a member applies restrictions that appear to be unreasonable in the prevailing circumstances. The Belgian reasoning could also be attacked by pointing out that the Fund has already established its power to limit the freedom of action of members under Article XIV, Sec. 2. In its memorandum on multiple currency practices transmitted by the Managing Director to all members on December 19, 1947, the Fund specified that there must be agreement between the Fund and the member as to the necessity for a multiple currency practice before it may be introduced.

If unable to rebut this argument, Belgium could nevertheless hold that it is not satisfied that the withdrawal of its restrictions against the dollar would not have the result of unduly encumbering its access to the resources of the Fund. In view of the position taken by the Belgian representatives at the Sixth Session of the Contracting Parties, however, that they have no justification for their restrictions under Article XII, Sec. 2 of the GATT (i.e. that there is no imminent threat of a serious decline of Belgium’s monetary reserves and the monetary reserves are not very low) it is difficult to see how Belgium could support this contention. Having taken such a clear position with respect to its reserves, Belgium could not argue that it expects [Page 1515]the withdrawal of its restrictions to result in its becoming a poor credit risk for the Fund, and the Fund could well assert, in view of the circumstances, that there is no substantial basis for any doubts that Belgium might nevertheless state it has as to its ability to obtain access to the resources of the Fund. The Fund could also assert that, once a specific case comes before it, its judgment as to whether a member’s access to the Fund’s resources would be unduly encumbered is controlling since, in the final analysis the Fund is the sole judge of whether its resources can be made available to a member.

In addition to the implicit and explicit limitations placed by Section 2 on a member’s freedom to impose restrictions, Article XIV, Sec. 4, as indicated above, clearly establishes the Fund’s right in exceptional circumstances to make representations to a member that conditions are favorable for the withdrawal of exchange restrictions. The Fund has already formally decided that it may make such representations at any time—not only five years after the date on which the Fund begins operation, i.e. March 1952—and that it has the power to determine when “exceptional circumstances” exist. In making such representations and considering the member’s reply, the Fund is, however, obliged by Article XIV, Sec. 5 to “recognize that the post-war transitional period [is]3 one of change and adjustment and . . . give the member the benefit of any reasonable doubt.”

In discussing the applicability of Sec. 4 with the Fund, Belgium might challenge the existence of “exceptional circumstances” required before the Fund may make representations for the withdrawal of restrictions. In view of the Fund’s apparent authority to determine whether “exceptional circumstances” exist, however, it probably would appear more fruitful to Belgium to contend that (i) conditions are not in fact favorable for the withdrawal of restrictions, and (ii) the economic reasons for the imposition of the restrictions are manifestly substantial and therefore, even if the Fund should question Belgium’s position on the favorability of conditions, it would have to give Belgium the benefit of the doubt.

This line of argument could not be easily dismissed but it could be answered along the following lines: The Fund has always regarded balance-of-payments difficulties that exert pressure on a member’s reserves as the principal justification for the imposition of exchange restrictions. Belgium has conceded that a case of this kind cannot be made. While the Fund is not prevented from taking cognizance of justifications of a different kind, it could well be argued (along the lines indicated earlier in this paper) that the reasons advanced by Belgium are not substantial. Moreover, Belgium’s current reserves and [Page 1516]the amount of dollars currently available to Belgium from the EPU would warrant restraint in applying restrictions so clearly contrary to the basic purposes of the Fund.

In general it would probably be desirable to avoid as much as possible a “legalistic” treatment of the issues and instead emphasize the damage to the Fund’s objectives of an admittedly retrogressive action taken by any Fund member whose present and prospective reserve position is so strong as Belgium’s. An expression of concern by the Fund might give Belgium pause and result in the voluntary withdrawal of the new restrictions without formal Fund action. If Belgium were not persuaded to do this, consideration would have to be given to whether the Fund should censure Belgium or go so far as to declare Belgium ineligible to use the resources of the Fund (Article XV, Sec. 2).

It has been suggested that the Fund might, under Article XII, Sec. 6, decide in this case to transmit to Belgium and “publish a report . . . regarding [Belgium’s]4 monetary or economic conditions and development” on the ground that they “directly tend to produce a serious disequilibrium in the international balance of payments of members”. This procedure would require a two-thirds majority of the total voting power. In view of the vote needed and the seriousness of the conclusion that would be required, this course of action does not appear to be desirable.

One question which is almost certain to arise in any discussion of the Belgian problem in the Fund is the distinction between exchange restrictions and trade restrictions. This question is of general importance in defining the respective areas of jurisdiction as between the Fund and the GATT. The question has a particular importance in this case inasmuch as Belgium is claiming that the restrictions on dollar imports to which the United States and other countries have taken exception in GATT are simply restrictions (presumably “trade” restrictions) to enforce exchange restrictions permitted under the Fund.

There are various ways in which trade restrictions might conceivably be distinguished from exchange restrictions, but the distinctions, at least those which have been suggested thus far, seem to break down under closer analysis and appear unrealistic, if not meaningless. The Fund, therefore, should not attempt to distinguish between trade and exchange restrictions when the Belgian case is under review; it should evaluate the complex of exchange and trade restrictions as a whole in determining the justification for them.

In taking this position, the United States representatives should be careful, however, not to say that trade and exchange restrictions are [Page 1517]the same and that there is no distinction between them. It should be argued only that it is profitless to attempt to make the distinction for the purposes of the Fund in examining the Belgian situation.

The reason for this caveat is to protect our position in the event the Belgian restrictions are taken up in the GATT and it is necessary to question the Belgian justification of the restrictions under Article XV–9(b) of the GATT. That Article permits import and export restrictions, “the sole effect of which, additional to the effects permitted under Articles XI, XII, XIII, and XIV, is to make effective” exchange controls or exchange restrictions permitted under the Fund Agreement. If the question came up in the GATT, the United States may wish to argue that it is not the sole effect of the import and export restrictions to make effective the exchange controls. This argument would not be logically tenable, however, if we should claim that there is no distinction between exchange and trade restrictions.

Appendix A

The following additional measures relating to trade and payments between Belgium and the EPU countries have also been put into effect:

(1) All commodity exports to the EPU countries are subject to control by the central authorities.

(2) Authorized banks are no longer permitted to buy EPU currencies or debit foreign accounts in Belgian francs in the name of EPU residents without prior authorizations. Such authorization will be readily granted when there is evidence that (a) the goods have actually been shipped and (b) the goods did not originate in the dollar area. Five percent of the proceeds of exports to the EPU area are withheld from Belgian exporters for a period of six months and used to provide easy credit facilities for Belgian importers.

(3) Exporters to EPU countries who are no longer obliged to surrender foreign exchange proceeds to the Government are now authorized either to retain it, use it for payments to EPU countries, or sell it to other residents. These alternatives avoid the 5 percent retention scheme which applies to exchange sold at the official rate.

(4) A ceiling has been established on the Belgian franc holdings of each commercial bank in each EPU country. Transfers to these accounts from EPU central bank accounts with the National Bank of Belgium will be authorized to the extent necessary to replenish such holdings when they have been used for authorized payments.

(5) All payments by BLEC [?] residents to EPU countries must be made either in the currency of the country concerned or by crediting the Belgian franc account of a commercial bank (not a private [Page 1518]account). No new accounts of EPU residents may be opened without prior authorization.

  1. Master file of the documents of the National Advisory Council on International Monetary and Financial Problems for the years 1945–1958, as maintained by the Bureau of Economic Affairs of the Department of State.
  2. The Staff Committee of the National Advisory Council on International Monetary and Financial Problems (NAC). The NAC was established in 1945 by the Bretton Woods International Agreements Act, July 31, 1945 (59 Stat. 512), and was an interdepartmental committee charged with coordinating the policies and operations of the representatives of the United States and its agencies with respect to the International Monetary Fund and the International Bank for Reconstruction and Development. The Department of State’s NAC file is located in Lot 60 D 137.
  3. Brackets in source text.
  4. Brackets in source text.