Chapter 5

Changes in Quantitative Restrictions, Exchange Controls, and Tariffs by Countries With Which the United States Has Trade Agreements

INTRODUCTION

This chapter of the report reviews what the various countries with which the United States has trade agreements have done to carry out their own obligations under the agreements. In many instances, a country's ability to fulfill its trade-agreement obligations has been closely related to the postwar recovery of its economy which, in turn, often has been dependent to a considerable degree on United States and Canadian aid in the form of loans and other types of extraordinary governmental assistance.

During the last year or two, emphasis has shifted from exchange controls and quantitative trade restrictions to problems of economic 1/

expansion. The balance-of-payments difficulties that for so long impeded the removal of restrictions on dollar imports have not disappeared, and are still serious for some countries. However, the dollar balances have increased for nearly all countries, and they have been able to build up their gold and dollar reserves to a point where at least some of the direct restrictions on dollar trade can be safely removed. Despite this improvement, most countries with inconvertible currencies--or currencies with only limited convertibility--are at present less prepared for full convertibility than they were 2 years ago.

1 See, for example, Organization for European Economic Cooperation, Seventh Report of the OEEC: Economic Expansion and its Problems, Paris, 1956.

Inflationary pressures have been largely responsible for the setback in the movement toward general convertibility and the complete removal of exchange controls and quantitative restrictions on imports. The current tendency for most countries is to concentrate more heavily on measures to combat inflation at home, in the hope that they can thus strengthen their external financial position. Monetary and fiscal measures--in the form of stricter credit controls, stricter controls of internal investment, higher taxation, and other anti-inflationary devices--are increasingly employed to stabilize the internal economies of countries; they also serve to keep the demand for imports in correspondence with a country's capacity to produce and to compete in export markets. Countries have been stimulated to employ domestic measures of this kind by the realization that failure to control inflation is the chief impediment to the restoration of their currencies to full con

vertibility.

Resort to anti-inflationary measures is especially strong in the Western European countries that belong to the Organization for European Economic Cooperation (OEEC), which has undertaken to guide its members in the adoption of substitutes for exchange controls and quantitative trade restrictions. Even among these countries, whose economic problems are substantially alike, the measures that are employed to correct maladjustments in the national and international sectors of the economies still vary considerably. Nevertheless, the general trend toward the use of anti-inflationary measures is definitely observable. Accordingly, more attention is given in this report than in previous reports to measures of this kind.

Most of the countries with which the United States has trade agreements are contracting parties to the General Agreement on Tariffs and Trade. These countries are, therefore, subject--as is the United States-to the numerous provisions of the agreement. During all or part of the period covered by this report--July 1, 1955, to June 30, 1956--trade agreements were in force between the United States and 33 countries under the General Agreement, and between the United States and 10 other countries on the basis of bilateral arrangements. Both types of agreement are concerned primarily with tariff concessions. The contracting parties have agreed to maintain these concessions and not to take any unilateral action that would impair or nullify them. Rates of duty that are bound against increase may not be increased--either by increasing the duty itself or by applying or increasing other charges on imports-without the consent of the other interested party or, under the General Agreement, other interested parties. Increases in rates of duty or other charges on imports are subject to renegotiation, just as the original concessions were subject to negotiation. The introduction of such changes without agreement of the interested parties usually gives rise to charges of violation by the country or countries whose interests are adversely affected; such charges themselves usually lead to efforts to settle the issue through negotiation. Failure to reach agreement in such cases has sometimes led to the termination of bilateral agreements to which the United States was a contracting party. A few countries have withdrawn from the General Agreement, but none has withdrawn because of its failure to reach agreement with other contracting parties on such matters.

The Contracting Perties to the General Agrcement are concerned primarily with the reduction of import duties and the relaxation and eventual elimination of exchange controls and quantitative restrictions on imports. Contracting parties are expressly forbidden to employ such trade restrictions, but exception has been made to the general prohibition against the use of quantitative restrictions by permitting their use for balance-of-payments reasons. That is, countries in external financial difficulties--typically those countries with a persistent dollar shortage--may employ such restrictions as a safeguard against depletion of their reserves of scarce currencies. Countries that are

in balance-of-payments difficulties are obliged to relax these restrictions as soon as their balance-of-payments position permits. They are expected also to take the necessary steps to make their currencies fully convertible, so that the restrictions may be entirely removed.

After quantitative restrictions are no longer required for balanceof-payments reasons, most contracting parties are reluctant to lose the incidental protection afforded by them. At least they are reluctant to eliminate such restrictions suddenly--especially for certain domestic commodities that they consider particularly vulnerable to import competition. This reluctance has forced the Contracting Parties to make exceptions to the rule against employing quantitative restrictions to protect domestic products from foreign competition. Individual contracting parties have asked the Contracting Parties for permission to continue for a limited time to use such restrictions to protect a domestic industry or branch of agriculture that has become adjusted to the protection afforded during the application of the restrictions for

balance-of-payments reasons. To meet the insistent demand of certain countries for the right to employ quantitative restrictions in such cases, the Contracting Parties have arranged at various times to grant temporary waivers from a country's obligation to eliminate quantitative restrictions. Each successive measure for freeing imports from quantitative restrictions, however, more closely approaches the so-called hard core of hyperprotected products, and therefore meets with increasingly stronger resistance. Unlike the balance-of-payments situation, which permits discrimination against imports from hard-currency countries, the use of quantitative restrictions for protectionist reasons in hardcore cases must be on a nondiscriminatory basis.

Of the 43 countries with which the United States had trade agreements in force during all or part of the period from July 1, 1955, to June 30, 1956, 27 restrict imports for balance-of-payments reasons and discriminate between sources of supply. There are 23 General Agreement countries in this group, as well as 4 countries with which the United States has trade agreements on a bilateral basis. The General Agreement countries are Australia, Austria, Brazil, Burma, Ceylon, Chile, Denmark, Finland, France, the Federal Republic of Germany, Greece, India, Italy, Japan, the Netherlands, New Zealand, Norway, Pakistan, the Federation of Rhodesia and Nyasaland, Sweden, Turkey, the United Kingdom, and 1/ The bilateral trade-agreement countries are Argentina,

Uruguay.

1/ In 1955 these 23 countries reported to the Contracting Parties to the General Agreement on Tariffs and Trade that they maintain restrictions on imports to safeguard their balance of payments and exercise some degree of discrimination as between sources of supply, as permitted under article XIV, or under Annex J, of the General Agreement. See Contracting Parties to the General Agreement on Tariffs and Trade, Basic Instruments and Selected Documents, Fourth Supplement, Decisions, Reports, etc. of the Tenth Session, and Index, Sales No.: GATT/1956-1, Geneva, 1956, p. 47.