International Monetary Fund: Trade Policies of IMF Borrowers (Letter
Report, 06/22/1999, GAO/NSIAD/GGD-99-174).
GAO is required to report on the extent to which International Monetary
Fund (IMF) borrowers restrict free and open trade and whether their
export policies could harm or result in unfair trade practices against
U.S. companies. The 98 current IMF borrowers include several countries
that have received large-scale IMF financial assistance since the Asian
financial crisis began in 1997. This report (1) identifies the extent to
which current IMF borrower countries restrict international trade and
the borrowers whose trade has the potential to affect the United States;
(2) describes the reported trade barriers and export policies of four
IMF borrowers--Brazil, Indonesia, the Republic of Korea, and
Thailand--that are among those with the greatest capacity to affect the
United States and recent steps taken to reduce those barriers and modify
policies; (3) identifies actions the four countries have taken or plan
to take to liberalize their trading systems; and (4) determines the
extent to which the impact of the four countries' export policies on the
United States can be predicted and measured and which U.S. industry
sectors might be affected by recent changes in trade from these
countries.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: NSIAD/GGD-99-174
TITLE: International Monetary Fund: Trade Policies of IMF
Borrowers
DATE: 06/22/1999
SUBJECT: Macroeconomic analysis
Foreign financial assistance
International trade regulation
Tariffs
Foreign trade agreements
Exporting
International economic relations
Import restriction
Foreign governments
IDENTIFIER: Brazil
Indonesia
Korea
Thailand
Japan
European Union
NAFTA
North American Free Trade Agreement
India
Philippines
Mexico
Venezuela
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United States General Accounting Office GAO
Report to Congressional Committees June 1999
INTERNATIONAL MONETARY FUND Trade Policies of IMF Borrowers
GAO/NSIAD/GGD-99-174 United States General Accounting Office
National Security and Washington, D.C. 20548
International Affairs Division June 22, 1999 Congressional
Committees: To facilitate congressional oversight of U.S. policy
concerning the International Monetary Fund (IMF),1 the Omnibus
Appropriations Act for 1999 (P.L. 105-277) required us to report
on the degree to which IMF borrowers2 restrict free and open trade
and whether their export policies may adversely affect, or result
in unfair trade practices against, U.S. companies.3 The 98 current
IMF borrowers include a number of countries that have received
large-scale IMF financial assistance since the Asian financial
crisis began in 1997. The specific objectives of this report are
to (1) identify the extent to which current IMF borrower countries
restrict international trade and the borrowers whose trade has the
potential to affect the United States; (2) describe the reported
trade barriers and export policies 4 of four IMF borrowers that
are among those with the greatest capacity to affect the United
States-Brazil, Indonesia, the Republic of Korea (hereafter
referred to as Korea), and Thailand-and recent actions reported to
have been taken to reduce those barriers or modify policies; (3)
identify actions, in the context of their recent IMF financing
arrangements, the four countries have taken or are committed to
take to liberalize their trading systems; and (4) determine the
extent to which the impact of the four countries' export 1 The IMF
is an organization of 182 member countries that was established to
promote international monetary cooperation and exchange rate
stability and to provide short-term lending to member countries
that experience balance-of-payments difficulties. 2 With the
exception of some financing for low-income countries, the IMF does
not loan funds to a country, per se. Rather, the country
"purchases" the currency it needs from the IMF with an equal
amount of its own currency and then later "repurchases" its own
currency on terms established by the IMF. For the purposes of this
report, we will use the terms "financial arrangement,"
disbursement," and "loan" to refer to "purchases," and
"repayments" to refer to "repurchases." 3 The Omnibus
Appropriations Act for fiscal year 1999 (P.L. 105-277, Oct. 21,
1998) appropriated about $18 billion for the IMF and required us
to report on a seven-point mandate for reviews of the IMF. We have
divided this mandate into three reports-this report on the trade
policies of countries that borrow from IMF, one on the terms and
conditions of IMF financial assistance (International Monetary
Fund: Approach Used to Establish and Monitor Conditions for
Financial Assistance GAO/GGD/NSIAD-99-168, June 22, 1999); and a
third that addresses the IMF's financial condition, to be issued
by September 30, 1999. 4 For purposes of this report, "trade
barriers" are broadly defined as government laws, regulations,
policies, or practices that protect domestic products from foreign
competition. Trade barriers include tariffs and other import
charges; and nontariff import barriers such as quantitative
restrictions, state trade monopolies, restrictive foreign exchange
practices that affect a country's trade system, and quality
controls and customs procedures that act as trade restrictions.
Export policies include export- related subsidies; export
restrictions, such as export taxes; and performance requirements,
such as the requirement that companies export a certain percentage
of their production. Page 1
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
policies on the United States can be predicted and measured and
which U.S. industry sectors might be affected by recent changes in
trade from these countries. We selected Brazil, Indonesia, Korea,
and Thailand because, in addition to being significant U.S.
trading partners, they are among the top 10 top current IMF
borrowers and have current IMF financing arrangements. Unless
otherwise noted, data in this report are current as of April 30,
1999. Although the 98 current IMF borrowers all restrict trade to
some extent, Results in Brief only a few are large enough
traders to affect individual sectors of the U.S. economy.
According to IMF and other measures of trade restrictiveness,
borrowers have generally reduced their tariff and nontariff
barriers since 1990. However, according to the IMF measure, about
one-half still maintain moderate to restrictive barriers.
Borrowers' levels of trade restrictiveness are similar to
nonborrowers'. Few borrowers are large enough traders to
significantly affect even individual U.S. industry sectors-90
borrowers accounted for 5 percent of U.S. trade in 1998 while the
8 other borrowers accounted for 21 percent. However, a few
borrowers are significant U.S. trading partners and important
competitors to U.S. producers in world markets. We studied four of
the eight countries-Brazil, Indonesia, Korea, and Thailand.
Average tariff rates in all four countries have fallen over the
past decade. According to the Office of the U.S. Trade
Representative (USTR) and other sources, in 1998 Thailand had an
average tariff rate of about 18 percent, Korea had an average
tariff rate of about 8 percent, and Brazil's and Indonesia's rates
fell in between. In comparison, 1998 average tariff rates for the
United States, Japan, and European Union (EU)5 countries were
between 3 percent and 7 percent.6 Also, each of the four countries
maintained nontariff import barriers that the IMF considers to be
significant. Like about two-thirds of current IMF borrowers,
Brazil, Indonesia, Korea, and Thailand are all members of the
World Trade Organization (WTO), which establishes rules for
international trade and provides a forum for resolving trade
disputes. In recent years, the United States and other countries
have used WTO dispute procedures to challenge restrictive trade
policies in the four nations. 5 The European Union is a treaty-
based, institutional framework that defines and manages economic
and political cooperation among its 15 European member states:
Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden, and the United Kingdom. 6 As the IMF pointed out in
commenting on a draft of this report, these average tariff rates
are only for those products with tariffs that are a percentage of
the value of the product (known as "ad valorem" tariffs). Other
tariffs are per unit ("specific") or a combination of ad valorem
and specific tariffs. When these other types of tariffs are taken
into account, a country's average tariff rate increases. Page 2
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
Brazil, Indonesia, Korea, and Thailand have experienced either
rising trade surpluses or falling trade deficits with the United
States and other countries since their recent financial crises
began. The changes in the countries' U.S. trade balances were due
primarily to a large decline in U.S. exports to them. U.S. exports
to these countries declined because the countries' currency
devaluations made U.S. and other countries' exports to them more
expensive and because recessions in the four countries lowered
their demand for imported products, including those from the
United States. Even before the crises, the U.S. government was
particularly concerned about certain trade practices in these
countries, especially in Korea. The United States continues to
press such issues even as it gives priority to restoring the
overall health of crisis countries for their own and the U.S.'
benefit. Korean trade policies of concern have included barriers
to imports and distribution of beef, automobiles, and distilled
spirits; discriminatory airport procurement practices; and
possible subsidies that support steel exports. Policies of U.S.
concern in the other three countries have included possible
Brazilian subsidies to its steel industry, restrictions on
automobile imports in Thailand, and inadequate protection of
intellectual property rights, especially in Indonesia. The U.S.
government and others have reported some progress in the last 3
years in eliminating or modifying some of these trade policies as
part of the countries' commitments to the WTO and other
multilateral forums, and bilaterally, through trade agreements
with the United States. Countries in an IMF financing arrangement
sometimes have liberalized their trade systems within the context
of their arrangements, although in many cases the liberalization
has not been a condition of receiving disbursements of IMF funds.
As part of their recent arrangements, Brazil, Indonesia, and Korea
have made changes to trade policies.7 For example, under its IMF
program, Korea has eliminated four subsidies. Indonesia has
reduced or eliminated some import tariffs and export restrictions
that encouraged local processing; it also has committed to phase
out most remaining nontariff import barriers and export
restrictions by the time its IMF program ends in the year 2000.
However, the IMF programs in Brazil, Indonesia, Korea, and
Thailand focus primarily on macroeconomic and structural reforms
other than trade reform because, according to the Treasury and the
IMF, restrictive trade policies were not major causes of 7
Thailand's IMF program has no trade liberalization commitments
because, according to the Treasury Department, Thailand had fewer
distorting trade policies than the other three countries in our
review, and because inadequate financial supervision and central
banking errors were the root causes of its financial problems, not
trade-related policies or practices. Page 3
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 the
countries' financial crises.8 Further, the trade reforms that
Brazil, Indonesia, and Korea have undertaken are not intended to
assist the countries' trading partners, though this may result
from the reforms, but instead are aimed at helping the countries'
economies operate more efficiently. In addition to trade
liberalization measures, as part of their IMF programs, Korea,
Indonesia, and Thailand have committed to further open their
economies to foreign investment and to substantially restructure
their financial and corporate sectors. These commitments, if fully
implemented, could lead to increased U.S. investment in and trade
with these countries. The policies maintained by Brazil,
Indonesia, Korea, and Thailand to encourage exports could
potentially distort trade and displace production by U.S.
producers, even though they may benefit other U.S. companies or
consumers. However, the large macroeconomic changes in these
countries caused by their recent financial crises greatly
complicate predicting and measuring the policies' impact on the
United States because the macroeconomic changes have probably been
a more important source of recent changes in trade flows. Our
analysis of 1997-98 trade data reveals that overall U.S. imports
from Brazil, Indonesia, Korea, and Thailand rose moderately in
1998, but by less than U.S. imports from other trading partners.
However, products accounting for about 16 percent of the value of
U.S. imports from these four IMF borrowers registered large
increases and falling U.S. prices during this period. Some of
these product sectors, notably steel, have already been subject to
petitions by U.S. industry for relief from "unfairly traded"
imports under U.S. trade law,9 while the executive branch is
monitoring imports of others of these products, including
semiconductors, chemicals, and paper and paper products. 8 See our
report on IMF terms and conditions (International Monetary Fund:
Approach Used to Establish and Monitor Conditions for Financial
Assistance GAO/GGD/NSIAD-99-168, June 22, 1999) for more detail on
the causes of the recent financial crises of Brazil, Indonesia,
and Korea as well as Argentina, Russia, and Uganda. 9 For purposes
of this report, allegations of "unfairly traded" imports refer to
petitions for relief by U.S. industry from harm as a result of
imports that may be subsidized or dumped (unfairly priced).
"Unfairly traded" imports means imports that, after investigations
resulting in affirmative determinations by the Commerce Department
and the International Trade Commission (ITC), are subject to
outstanding countervailing or antidumping duty orders. Page 4
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Most
IMF borrower countries have reduced important barriers to trade
Although Still over the past decade. Although
progress has varied among countries and Somewhat Restrictive, over
time, generally tariff and nontariff barriers have fallen. Despite
this progress, many policies remain that restrict free and open
trade, and some IMF Borrowers' Trade IMF borrowers still maintain
very high restraints. However, borrowers' Systems Are
restrictiveness levels are similar to those of nonborrowers, and
about two- Liberalizing, and Few thirds are WTO
members. Only a few of the 98 IMF borrowers trade Are Large U.S.
Trade enough to have much ability to significantly
affect any individual sectors of Partners
the U.S. economy. We analyzed the import barriers of IMF borrower
countries using several Borrowers' Trade
available measures of restrictiveness, including average tariff
rates;10 Restrictiveness Has Fallen nontariff barriers; and
indexes constructed by the IMF, the Heritage Foundation, and the
Fraser Institute.11 Although these indicators do not
comprehensively measure all the policies that countries may use to
restrict trade, they do reflect important barriers and provide
information on the relative restrictiveness of countries among one
another and over time. Overall, we found that these measures
demonstrated growing trade liberalization. The IMF conducted a
study of 27 countries' trade policies during 1990-96, using its
own restrictiveness measures. The study found that during this
period the number of countries labeled "restrictive"12 fell from
63 to 41 percent, while the number of "open" countries rose from
11 to 33 percent. Taking the same 27 countries and reviewing their
progress through 1998, we found that the number of restrictive
countries further fell to 7 percent, and the number of open
countries rose to 48 percent.13 Other indicators also confirmed
this liberalization trend across the full group of 98 IMF
borrowers. Despite the progress made in reducing trade barriers,
many restraints About One-half of remain that
inhibit imports into IMF borrower countries. According to the
Borrowers Have Moderate IMF's measure, about one-half of
the 98 current borrowers maintain to Restrictive Trade
moderate (38 percent of borrowers) or restrictive (14 percent of
Barriers borrowers) barriers. The
Heritage Foundation and Fraser Institute 10 Average tariff rates
are the average of the applied rates across the entire tariff
schedule. 11 For more information on the indicators we used, see
appendix IV. 12 The IMF overall index combines information on
tariff and nontariff barriers to rank countries on a 10-point
scale. From this ranking, it classifies countries as "open"
(generally, average tariffs less than 10 percent and limited
nontariff barriers); "moderate" (generally, average tariffs
between 10 and 25 percent and significant but not pervasive
nontariff barriers); and "restrictive" (generally, average tariffs
higher than 25 percent and pervasive nontariff barriers). For more
information, see appendix IV. 13 Specifically, 17 out of the 27
countries studied by the IMF were initially labeled as
restrictive. In 1996, 11 countries were, and by 1998, only 2
countries remained in that category. Page 5
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
indicators also show a range of restrictiveness, although the
Heritage Foundation's measure reported less openness than either
the IMF or Fraser Institute indicator, placing over one-half of
borrowers in its most restrictive groupings. The tariff data we
reviewed showed that average tariffs for borrowers ranged from as
low as 0.1 percent to over 40 percent, but the majority fell
between 7 percent and 24 percent. In comparison, the United
States, the EU, and Japan maintain average tariffs of
approximately 3 to 7 percent. Thirty of the 98 borrowers are
listed in a March 1999 U.S. government report14 that identifies
the most significant foreign trade barriers that affect U.S.
exports. Most of the 30 countries listed were cited for having
inadequate intellectual property protection or for maintaining
restrictive import policies, such as setting investment barriers
and creating barriers to foreign participation in government
procurement. Our analysis shows that the 98 current IMF borrowers
restrict trade to Borrowers' Restrictiveness about the same
extent as the 78 IMF member countries that do not owe Levels Are
Similar to Those funds to the IMF.15 As figure 1 shows, the IMF
trade measure rates 48 of Nonborrowers percent
of borrowers as open, compared with 53 percent of nonborrowers; 38
percent as moderate, compared with 33 percent of nonborrowers; and
14 percent as restrictive, compared with 14 percent of
nonborrowers. Also, lesser economically developed borrowers and
nonborrowers alike tended to have higher levels of
restrictiveness. However, we did find that borrowers and
nonborrowers tend to use different types of policies to restrict
trade. Borrowers generally use higher tariff barriers, while
nonborrowers tend to use higher nontariff barriers such as import
quotas. 14 1999 National Trade Estimate Report on Foreign Trade
Barriers (Washington, D.C.: USTR, Mar. 31, 1999). 15 The IMF did
not calculate its trade restrictiveness indicator for 6 of its 182
members. Page 6
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Figure
1: Percentage of IMF Borrowers and IMF Nonborrowers in Each IMF
Restrictiveness Index Category Source: IMF. Of the 98 IMF
borrowers, about two-thirds are WTO members.16 WTO Most Borrowers
Are WTO membership commits them to following WTO
disciplines on their trade Members, and One-fifth
policies, providing some degree of market access, and complying
with Have Been Involved as WTO dispute
settlement procedures.17 Many IMF borrowers have also Respondents
in Trade undertaken additional WTO
liberalization commitments, as well as made commitments under
bilateral agreements with the United States on Disputes
investment and other matters. For example, 37 IMF borrowers have
signed the WTO agreement on basic telecommunications services, and
51 have reached bilateral accords with the United States on such
matters as investment and intellectual property. 16 The WTO was
created as a permanent organization to oversee implementation of
the Uruguay Round Agreements, to provide a forum for multilateral
trade negotiations, and to settle disputes. 17 The WTO dispute
settlement process has four main stages: (1) consultation and
conciliation, (2) establishment and deliberation of panels, (3)
appellate body review, and (4) implementation. Page 7
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
Despite greater integration into the world trading system and
growing trade, many borrower countries have been involved in trade
disputes with the United States. One-fifth (17) of the 98
borrowers have been subject to formal market access complaints
under the WTO's dispute settlement procedures. Only a few of the
98 IMF borrowers are large enough traders to Few Borrowers Have
Much significantly affect any particular sectors of the U.S.
economy. Eight Potential to Affect the U.S. borrowers
accounted for 21 percent of U.S. trade in 1998, while the other
Economy 90 borrowers accounted for 5
percent. As figure 2 shows, of these eight countries, Mexico
traded the most with the United States in 1998, accounting for
about 11 percent of U.S. trade; followed by Korea with 3 percent;
Brazil with 2 percent; and the Philippines, Thailand, Venezuela,
India, and Indonesia, with about 1 percent each. One of the other
90 borrowers could significantly affect U.S. companies or workers
in certain product sectors, however, if it comprised a large share
of U.S. trade of a particular product. For example, flat-rolled
iron and nonalloy steel imports from Russia account for
approximately 26 percent of U.S. imports of that product. Page 8
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Figure
2: IMF Countries' Shares of Total U.S. Trade, 1998 (Exports Plus
Imports, by Country) a Next top five consist of the Philippines,
1%; Thailand, 1%; Venezuela, 1%; India, 1%; and Indonesia, 1%.
Source: U.S. Department of Commerce. The eight largest U.S. trade
partners generally maintain moderate barriers to trade. According
to the tariff and other information we analyzed, most have average
tariffs between 10 percent and 20 percent and are rated by various
indicators as having significant nontariff barriers. For example,
Thailand's average tariff rate in 1998 was 18 percent, Brazil's
was 15 percent, and Indonesia's was 10 percent. Exceptions include
Korea, which in 1998 had an average tariff rate of 8 percent; and
India, with a 23 percent average rate. Mexico's average tariff
rate is about 13 percent for all countries outside of the North
American Free Trade Agreement (NAFTA), but its average tariff rate
on U.S. products is about 2 percent due to NAFTA. All eight of
these U.S. trade partners are members of the WTO, and most have
bilateral trade agreements with the United States. Page 9
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 We
evaluated the import barriers and export policies of four of the
eight Trade Barriers and IMF borrowers that accounted
for 21 percent of U.S. trade in 1998: Brazil, Export Policies of
Indonesia, Korea, and Thailand.18 These countries accounted for
about 7 percent of U.S. trade in 1998. Brazil, Indonesia, Korea,
and Thailand Financial crises in Brazil, Indonesia,
Korea, and Thailand have substantially affected their trade with
the United States, even as the U.S. government has remained
concerned about various trade policies in the four countries. The
four countries have experienced either rising trade surpluses or
falling trade deficits with the United States since their
financial crises began, due primarily to a large decline in U.S.
exports to them. Even before their crises began, however, the U.S.
government had been concerned about a number of these countries'
trade policies. Prior to the crises, much of the executive
branch's attention had been focused on import policies that
affected U.S. exports to the four countries, especially in Korea.
Import policies of concern in the four countries have included
Korean barriers to imports and distribution of beef, automobiles,
and distilled spirits, government procurement procedures in
airport construction, and import clearance procedures;
restrictions on automobile imports in Brazil and Thailand; and
inadequate protection of intellectual property rights, especially
in Indonesia. Export policies that the executive branch has been
concerned about include Korean government support to its steel and
semiconductor industries, and Indonesian government subsidies to
its automobile industry. The United States continues to press
these and other trade issues even as it places priority on
restoring the overall health of crisis countries for their own and
the U.S.' benefit. Any analysis of import barriers and export
policies in Brazil, Indonesia, Financial Crises Have
Korea, and Thailand must acknowledge the effects those countries'
recent Substantially Affected the financial crises have had on
their economies and trade. The crises that Four Countries' Trade
began in 1997 dramatically reduced incomes and demand for domestic
as well as imported goods. The value of these nations' currencies
declined, with each of the countries' currencies depreciating by
30-50 percent or more relative to the U.S. dollar in real
(inflation-adjusted) terms. The depreciations reduced the
purchasing power of local currencies, making it hard for these
countries to buy U.S. exports. The depreciations also made the
affected nation's exports more competitive on world markets. World
18 We selected these four countries because, in addition to being
significant U.S. trading partners, they are among the 10 top
current IMF borrowers and have current IMF financing arrangements.
Mexico is the largest U.S. trading partner among these countries.
We did not select Mexico because, although Mexico currently owes
debts to the IMF, it is not currently in an IMF financing
arrangement (that is, it is not eligible to borrow more funds from
the IMF), and because a substantial share of U.S.-Mexican trade
consists of special arrangements provided for under NAFTA. Page 10
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 prices
for key commodities fell, particularly for oil, agricultural
goods, and electronic products. Outflows of foreign capital and
domestic credit crunches reduced output and stalled commerce, with
direct implications for trade accounts.19 Even without policy
changes, such macroeconomic disturbances have a major influence on
overall trade levels and balances. Since their crises erupted in
1997, Indonesia and Thailand have widened their trade surpluses
with other countries, Korea's trade balance went from a deficit to
a surplus, and Brazil's deficit has fallen. Most of the shift was
caused by a decline in these nations' imports from abroad, rather
than by increases in their exports to other countries. Even though
the volume of their exports rose at a double-digit rate, the
dollar value of exports from these nations was actually lower in
1998 than it was in 1997 because dollar prices for many of their
goods were falling dramatically. The United States, meanwhile, has
seen a worsening of its trade deficit with all countries
worldwide, not only in absolute terms but also relative to the
size of its economy. From 1997 to 1998, the U.S. trade surplus
with Brazil fell; for Korea, a U.S. surplus changed to a deficit;
and for Indonesia and Thailand, U.S. deficits grew larger.
According to a March 1999 USTR report, U.S. government trade
policy in 1999 remains centered on assuring recovery in the
nations in financial crisis. Stabilization and growth are
necessary before customers in Brazil, Indonesia, Korea, and
Thailand can resume buying U.S. exports at levels at or above
those in the past. Healthy economies will also absorb more of the
output of local producers, easing pressures on U.S. firms
competing with these nations' suppliers. Economists also suggest
that the U.S. economy will suffer more if crisis countries are
unable to export as they recover. For example, a 1998 Brookings
Institution paper that analyzed the impact of the Asian financial
crisis on trade and capital flows reached this conclusion.20 In
essence, a downward spiral of falling production, consumption, and
imports would ensue, hurting both these four countries and the
United States. At the same time, U.S. efforts to address trade
policies of concern continue. Items being actively pursued with
Brazil, Indonesia, Korea, and Thailand include long-standing
import market access and export subsidy 19 Since foreign capital
flows must balance the trade deficit, when foreign capital leaves,
either the trade deficit must fall or the trade surplus must
increase. 20 Warwick J. McGibbin, The Crisis in Asia: An
Empirical Assessment, Brookings Institution Discussion Papers in
International Economics, No. 136 (Washington, D.C.: The Brookings
Institution, Apr. 1998). Page 11
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
issues, and the need to improve protection of intellectual
property rights. Since the crisis unfolded, two additional types
of issues have been added to the U.S. agenda: (1) ensuring that
the countries do not reverse the liberalization accomplished in
prior years; and (2) more vigorously addressing governmental and
industry practices that the U.S. government and industry believe
may have contributed to the crisis, such as directed credit and
other privileges for industries deemed by these nations'
governments to be important for economic development. The U.S.
government has focused considerable attention in the last 3 years
U.S. Concerns About Trade on eliminating or modifying certain
import policies in Brazil, Indonesia, Policies Have Focused on
Korea, and Thailand that had restricted U.S. exports to those
countries. the Four Countries' Import The United States has
invoked WTO dispute settlement procedures over Barriers
some of these policies and has signed bilateral trade agreements
to try to resolve other policies. The United States has had more
concerns about Korea's import policies than about the other three
countries in our review. The United States has invoked WTO dispute
settlement procedures against Korean policies concerning beef,
distilled spirits, airport procurement procedures, and import
clearance procedures that have delayed or impeded the entry of
U.S. products into Korea. Other Korean import policies that have
been high priorities for the executive branch include restrictions
on imports and distribution of pharmaceutical products, motor
vehicles, agricultural and food products, and cosmetics. In
Brazil, U.S. concerns have included policies that allegedly
discriminated against U.S. automobile exports21 and that restrict
the availability of import financing. In Indonesia, the main U.S.
concern has been over protection of intellectual property rights.
In Thailand, U.S. priorities have included high import duties on
certain agricultural and food products, high automobile tariffs,
inadequate protection of intellectual property rights, and
inefficient customs operations. Appendix I contains more
information on these and other U.S. priority import policies in
Brazil, Indonesia, Korea, and Thailand. Since 1996, the United
States has formally invoked WTO dispute U.S. Concerns Over the
settlement procedures over a number of Brazilian, Indonesian, and
Korean Four Countries' Export subsidies and has found
subsidies in Brazil, Korea, and Thailand to be Policies
countervailable under U.S. trade law; that is, that the subsidies
both were being provided by their governments and were conferring
a benefit to their companies under the meaning of those laws, or
were specifically 21 In March 1998, the United States and Brazil
signed an agreement settling the auto dispute. Page 12
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
prohibited by WTO agreements. In addition, the U.S. government has
been concerned about possible export policies, such as Korean
government- directed lending and support to its steel industry and
the Brazilian government's auto sector policies. Korea: U.S.
Concern About Steel Korea is the largest economy of the four
countries we reviewed and the Support and Several Export
world's seventh largest exporter. Korea was the U.S.' ninth
largest export Policies market in 1998,
dropping from its position of fifth largest in 1997 due to its
financial crisis. The United States ran a $7.4-billion merchandise
trade deficit with Korea in 1998, compared to a $1.9 billion
surplus in 1997. The trade deficit resulted from a 34 percent drop
in U.S. merchandise exports to Korea, from $25.1 billion in 1997
to $16.5 billion in 1998, and a 3.4 percent increase in Korean
merchandise exports to the United States, from $23.2 billion in
1997 to $23.9 billion in 1998. Major Korean exports to the United
States in 1998 included machinery and transport equipment, steel,
manufactured goods, and chemicals and related products. Over the
last 30 years, Korea has pursued a strongly export-oriented
economic development model with considerable government
involvement. Under this model, the Korean government has worked
closely with Korean financial institutions and large corporate
conglomerates to promote exports in targeted sectors, such as
heavy and chemical industries, consumer electronics, and
automobiles. The overinvestment in certain sectors and excessive
corporate debt that this development strategy eventually produced
contributed to Korea's recent financial crisis. Government
assistance to exporters has consisted of providing a range of
industry-specific subsidies, tax benefits, export financing,
export marketing assistance, government-influenced lending, and
research and development assistance. In recent years, the United
States has been concerned over Korean subsidies and other export
policies. Korean Subsidies and Internal Supports-U.S.-initiated
WTO Disputes and Countervailing Duty Cases: In February 1999, the
United States invoked WTO dispute settlement procedures against
Korean beef industry policies. The United States alleged that
Korean regulations discriminated against and constrained
opportunities for the sale of imported beef in Korea and that
Korea provided domestic support to its cattle industry in amounts
that exceeded its WTO tariff reduction schedule. The United States
and Korea engaged in formal consultations over this matter in mid-
March, and a panel to consider the matter was formed on May 26,
1999. Also, within the last 5 years, the Commerce Department has
determined that a number of Korean subsidies to its steel industry
were countervailable under U.S. Page 13
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 trade
law. 22 The three cases have involved stainless steel plate in
coils; stainless steel sheet and strip in coils; and certain cut-
to-length, carbon- quality steel plate. (App. II provides more
details concerning U.S. countervailing duty law, WTO subsidies
rules, and these specific cases.) U.S. Concerns About Other Korean
Policies: In addition to policies that the U.S. government has
formally raised in the WTO or found to be countervailable under
U.S. trade law, the executive branch has been concerned about
other Korean export and subsidy polices in the last 3 years. These
policies have involved government-directed lending, government
involvement in and support to the Korean steel industry,
restructuring of corporate conglomerates (particularly in the
automobile, steel, shipbuilding, and semiconductor industries),
and semiconductors. Government-directed Lending: The Commerce
Department has reported that it is monitoring whether the Korean
government may be influencing commercial banks to lend funds at
preferential rates to targeted industries-particularly to Korea's
steel and semiconductor industries. The U.S. government has raised
this issue with Korean government and industry officials on
numerous occasions. In addition, Korea's IMF and World Bank
programs contain reforms to Korea's financial system and corporate
sector that help to curtail the government's ability to direct
bank lending on noncommercial terms. As previously mentioned,
Commerce has examined potential subsidies resulting from alleged
government-directed lending to the Korean steel industry in three
recent countervailing duty investigations of certain Korean steel
products. Steel Industry: The U.S. government and U.S. steel
industry have been concerned for some time about Korean government
involvement in and support for its steel industry, such as below-
market-interest-rate loans extended by government-owned banks to
steel producers. Several actions have taken place in addition to
the countervailing duty cases previously discussed. In June 1995,
the U.S. Committee on Pipe and Tube Imports filed a Section 301
petition23 alleging that Korea restricted exports of 22
Countervailing duties are only imposed if the Commerce Department
determines that a countervailable subsidy is being provided and if
the International Trade Commission determines that an industry in
the United States is materially injured or threatened with
material injury, or that the establishment of an industry in the
United States is materially retarded, by reason of the subject
imports. 23 Section 301 of the Trade Act of 1974 (19 U.S.C. 2411),
as amended, provides the U.S. Trade Representative with the
authority to enforce U.S. rights under bilateral and multilateral
trade agreements and to respond to unjustifiable or discriminatory
foreign government practices that burden or restrict U.S.
commerce. Section 301 investigations can be initiated by USTR or
pursued by USTR in response to a petition filed by a person, firm,
or association. Page 14
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
domestically produced steel sheet, controlled domestic prices
below world prices, and diverted exports of pipe and tube products
from the EU to the U.S. market. The Committee withdrew its
petition in July 1995 when Korea agreed to establish a
consultative mechanism with the United States to provide
information about Korea's steel sheet, pipe, and tube production
and exports. The Korean government also agreed to notify the
United States of any measure to control steel production, pricing,
or exports, and to not interfere in steel pricing or production.
Although the consultative mechanism was extended for another year,
and bilateral consultations were held in 1996 and 1997, the United
States continued to raise concerns about Korean government
influence over private-sector decisions concerning steel. In 1997
and 1998, for example, the United States asked the Korean
government to respond to specific questions concerning Hanbo
(Korea's second largest steel producer), which collapsed
financially and is now being sold. The United States was concerned
that the Korean government may have provided subsidies to Hanbo
and directed Korean banks to extend credit to the company-actions
that may have contributed to prices that undercut competitors and
displaced U.S. steel exports to Korea and other countries. As a
result of a 30 percent surge in steel imports into the United
States during the first 10 months of 1998 compared to the same
period in 1997, of which about 6 percentage points came from Korea
(Japan and Russia were other important suppliers), the United
States initiated an extensive dialogue with the Korean government
to ensure that its steel sector would operate on a market-driven
basis rather than with Korean government help. In 1998, the Korean
government provided written assurances that it would not support,
or direct others to support, Hanbo and that the sale of the
company would be market based and managed by a reputable
international financial company. In addition, Hanbo temporarily
shut down production at one of its plants that was of particular
concern to the U.S. steel industry. The Korean government also
announced its intention to privatize Korea's largest and the
world's second largest steel producer, Pohang Iron and Steel
Company (POSCO). Since December 1998, the Korean government has
reduced its 33 percent stake in POSCO to 20.8 percent. The full
privatization of POSCO would serve to remove the Korean
government's influence from the company's pricing, production, and
other business decisions. In addition to monitoring POSCO's
privatization, the U.S. government is continuing to monitor steel
import trends and any potential Korean government support to other
steel companies. In addition, the U.S. government believes that,
if faithfully implemented, Korea's financial and Page 15
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
corporate restructuring efforts-particularly those involving bank
oversight and lending limits-should help guarantee that Korea's
steel corporations operate on a market-oriented basis.
Restructuring of Corporate Conglomerates: As part of Korea's
financial arrangements with the IMF, the Korean government is
trying to restructure the five largest Korean industrial
conglomerates, or "chaebol," to make them more commercially
oriented and to reduce their debt levels. These chaebol are
swapping certain assets and subsidiaries, as part of the so-
called "Big Deal." The World Bank is taking the lead in assisting
Korea with its corporate sector restructuring. The U.S. government
has flagged corporate restructuring as a systemic change that
could not only help the Korean economy regain and sustain its
stability but also enhance market access. The U.S. government has
submitted questions to the Korean government on the specifics of
certain restructuring efforts, including in the semiconductor
sector, and emphasized that as a whole the restructuring should
(1) yield more efficient, market-driven Korean firms without
uneconomic business lines that contribute to excess capacity; and
(2) be carried out in a manner that is consistent with Korea's
international obligations, particularly under the WTO Agreement on
Subsidies and Countervailing Measures. The Commerce Department
has reported that it is monitoring whether the Korean government
might provide certain subsidies-such as tax breaks or drastic debt
relief-as incentives to the companies to participate in the
restructuring. In addition to these practices, the U.S. government
in 1998 reported that Korea uses various tax-related measures that
benefit Korean exporters or foreign investors in Korea. These
include tax reserves for export losses and overseas market
development, exemptions or reductions in duties on imported
capital equipment to be used in exports, reductions in duties for
imported aircraft and vessel parts, tax concessions to encourage
foreign investment, tax concessions for overseas business losses,
tax exemptions for overseas business development, and tax credits
for investment in facilities. The Commerce Department also
reported on Korean subsidy practices that benefit specific
industry sectors. These sectoral practices include incentives to
sustain steel companies; tax exemptions or credits for firms in
designated manufacturing industries (machinery, electronics,
aviation, defense, fine chemicals, genetic engineering, new basic
materials, and antipollution technologies); tax incentives for
multinational corporations in computer software and
telecommunications; expense deductions for firms in traditional
industries; support to miners when mines are closed; incentives to
the stone industry; and assistance to small and medium-sized
enterprises. Page 16 GAO/NSIAD/GGD-99-174
IMF Borrowers' Trade Policies B-282825 Brazil: U.S. Focus Has Been
on Brazil was the U.S.' 11th largest export market in 1998. In
1998, the United Three Subsidies States ran a
$5-billion trade surplus with Brazil. Brazilian merchandise
exports to the United States totaled about $10 billion that year
and consisted primarily of machinery and other manufactured goods.
The Brazilian government does not provide many direct subsidies to
exporters; however, the United States has been concerned about
several that it does provide. WTO Disputes and Countervailing Duty
Cases: Since 1996, the United States has participated in WTO cases
involving two Brazilian subsidies. The United States invoked WTO
dispute settlement procedures and held consultations with Brazil
regarding various aspects of its automotive regime in August 1996,
including provisions in its WTO-notified subsidy program for
automobiles. In March 1998, the United States and Brazil signed an
agreement settling the dispute. (See app. I for more details on
this case.) The other WTO dispute was brought by Canada and
involved PROEX, a Brazilian government export financing program.
The United States reserved its rights as a third party in the
dispute. In April 1999, a WTO dispute resolution panel found that
PROEX's interest equalization program was a prohibited export
subsidy24 and that, because Brazil did not meet the conditions
that allow developing countries more time than developed countries
to remove prohibited export subsidies, the program must be
withdrawn immediately. In addition to these WTO cases, in the last
3 years the U.S. government has found one Brazilian subsidy to
manufacturers of certain hot-rolled flat-rolled carbon-quality
steel products to be countervailable. (See app. II for more
information about the PROEX dispute and the steel case.) Other
Brazilian Subsidies of U.S. Concern: The U.S. government has been
concerned about other Brazilian export programs. These programs
include tax and tariff exemptions for equipment and materials
imported for the production of goods for export, excise and sales
tax exemptions on exported products, and rebates on materials used
in the manufacture of exported products. Exporters enjoy
exemptions from withholding tax for remittances sent overseas for
loan payments and marketing, as well as from the financial
operations tax for deposit receipts on export products. Exporters
are also eligible for a rebate on social contribution taxes paid
on locally acquired production inputs.25 According to the Commerce
24 The interest equalization program subsidizes Brazilian exports
so as to equalize domestic and international interest rates for
export financing. 25 In commenting on a draft of this report, the
IMF stated that the subsidies described in this paragraph include
practices that any country with sales taxes based on the
destination principle would follow. In particular, the IMF said,
the EU's sales taxes rebate the entire value of the value-added
tax levied on Page 17
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
Department, tariff concessions Brazil introduced under its auto
regime in December 1995 raised questions about the regime's
consistency with the WTO's Agreement on Subsidies and
Countervailing Measures. Indonesia: Concern About In 1998,
Indonesia was the seventh largest U.S. trading partner among IMF
Automotive Subsidies borrowers but accounted for less
than 1 percent of U.S. imports and exports. In 1998, the United
States ran a $7.6-billion merchandise trade deficit with
Indonesia, an increase of $2.5 billion from 1997. The increase in
the merchandise trade deficit was mainly the result of a fall in
U.S. exports to Indonesia in 1998 of $2.2 billion. Indonesia is a
significant U.S. trading partner in some sectors, such as in U.S.
imports of wood and rubber products. Indonesia has notified the
WTO that it maintains a small number of subsidies. In October
1996, the United States and the EU initiated WTO dispute
settlement procedures against two Indonesian subsidies to its
automotive industry. One subsidy granted import duty relief to
certain automotive parts and accessories for use in assembling or
manufacturing motor vehicles based on the percentage of local
content in the finished vehicles. The other subsidy permitted an
Indonesian firm that was designated as a "pioneer" company to
import tariff-free finished automobiles designated as "national
cars" and to sell the national cars luxury tax-free for 3 years.26
Indonesia eliminated the subsidy to the pioneer company in January
1998 as a commitment to the IMF and, based on a June 1998 WTO
appellate body ruling, Indonesia has until July 1999 to eliminate
the local content subsidy. In addition to these automotive
industry subsidies, in March 1999 the U.S. Commerce Department
found that the Bank of Indonesia's rediscount export financing
program was an export subsidy; however, Commerce did not find it
to be countervailable due to its small size. (See app. II for more
details.) Thailand: United States Has Thailand was the 26th
largest export market for U.S. goods and 13th Found Several
Subsidies to Be largest supplier of goods to the United States
in 1998. That year, the U.S. Countervailable
trade deficit with Thailand increased by about $5 billion,
reaching an all- time high of $8.2 billion; the value of U.S.
merchandise exports decreased by about $2 billion, while Thai
merchandise exports increased by about $840 million. Thailand
maintains a number of programs aimed at exports as they cross the
border, and a similar mechanism functions in the case of
interstate trade in the United States for certain products. Sales
tax rates are considerably higher in Brazil than they are in U.S.
states, according to the IMF, and the burden that would be imposed
on exporters in the absence of such a rebate mechanism could be
considerable. 26 Japan joined the United States and the EU in
disputing this second Indonesian subsidy. Page 18
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
promoting exports in global markets, encouraging investment, and
establishing or expanding industrial development zones. These
programs include subsidies in the form of credits and tax
exemptions on certain exports, and reduced tariffs on raw
materials for products intended for reexport. In the past, the
U.S. government has found a number of Thai subsidies to be
countervailable, although in some cases no countervailing duty
order was issued because the ITC did not find material injury to
the competing U.S. industry. The countervailable Thai subsidies
have included export packing credits (short-term, preshipment
export loans); tax and duty exemptions that allow exporting
companies to import machinery and equipment free of import duties
and business and local taxes; import duty exemptions for raw
materials that allow companies to import raw and "essential "
materials used in the production, mixing, and assembly of exports,
free of import duties; and assistance for trading companies, which
provides certain incentives to eligible trading companies. (See
app. II for more details.) In addition to programs found to be
countervailable, the U.S. government has identified several other
Thai government export programs that are of potential concern.
These programs include subsidized credit on some government-to-
government sales of Thai rice, which benefit certain processed
agricultural products and manufactured goods. Page 19
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
Countries in an IMF financing arrangement sometimes have
liberalized Trade Liberalization in their trade systems within the
context of their arrangements, although in Brazil's, Indonesia's,
many cases the liberalization has not been a condition of
receiving disbursements of IMF funds. As part of their recent
arrangements, Brazil, Korea's, and Thailand's Indonesia, and Korea
have liberalized their trade regimes to some degree. Recent IMF
Financing Brazil has modified one subsidy program and pledged not
to introduce any Arrangements new trade
restrictions that hinder regional integration or are inconsistent
with the WTO. Indonesia has reduced or eliminated some import
tariffs and export restrictions and has committed to phase out
most remaining nontariff import barriers and export restrictions
by the year 2000. Korea has eliminated four subsidies and plans to
make the operation of its subsidy programs more transparent. Korea
is also making several changes to its import certification
procedures. Thailand's IMF program has no direct trade policy
commitments. One reason for this, according to the U.S. Treasury,
is that Thailand had fewer distorting trade policies than the
other three countries. Although Brazil, Indonesia, and Korea are
undertaking some trade reform, their IMF financing arrangements
focus primarily on macroeconomic and other structural reforms
rather than trade reform. According to the Treasury and the IMF,
restrictive trade policies were not major causes of the countries'
financial crises. Further, while several of the trade policies to
be eliminated or modified under the three countries' IMF programs
have been of concern to the United States and other countries, the
stated purpose of these measures is not to assist the four
countries' trading partners but instead it is to make their
economies operate more efficiently. That said, measures taken in
an effort to restore economic stability should also contribute to
market opening. In addition, as part of their IMF programs,
Indonesia, Korea, and Thailand plan to further open their
economies to foreign investment and to substantially restructure
their financial and corporate sectors. For example, Korea has
committed to end government-directed lending, which USTR views as
a very significant trade-related commitment. These commitments, if
fully implemented, could lead to increased U.S. investment in and
trade with these countries. A fundamental objective of the IMF's
mission, as embodied in article I of Purpose of Trade
its Articles of Agreement, is to facilitate the expansion and
balanced Liberalization in IMF growth of international
trade. According to the IMF, trade liberalization, at Financing
Arrangements both the national and global levels, is
thus an integral part of structural adjustment policies
incorporated in IMF programs and surveillance activities. As
such, countries that have borrowed from the IMF sometimes have
liberalized their trade systems within the context of their
financing arrangements. Borrowers have eliminated or reduced
tariffs or nontariff Page 20 GAO/NSIAD/GGD-
99-174 IMF Borrowers' Trade Policies B-282825 barriers to imports,
such as import quotas, licensing, or other restrictions. They also
have ended or altered export policies, such as subsidies and
export restrictions. In some cases, trade liberalization measures
have been IMF "performance criteria," which are conditions that a
borrower generally must meet in order to qualify for future
disbursements. In many cases, however, borrowers' trade
liberalization measures were not performance criteria, although
this does not mean that the IMF or the borrower considered the
measures to be unimportant to achieving the objectives of the
financial arrangements. According to the IMF, for some borrowers
trade reform can be a critical element of structural reforms. In
addition, IMF financing arrangements typically require that
countries pledge not to impose or intensify import restrictions
for balance-of- payments reasons. Brazil, Indonesia, and Korea
have undertaken some trade liberalization within the context of
their recent IMF financing arrangements. Nevertheless, their
overall IMF arrangements focus on macroeconomic and structural
reforms other than trade reform because restrictive trade policies
were not major causes of their financial crises, according to U.S.
Treasury and IMF officials. Reflecting this reality, only one of
the trade liberalization measures is a performance criterion-the
requirement that Indonesia reduce export taxes on logs and sawn
timber. Further, although several of the import and export
policies to be eliminated or modified under their IMF programs
have been of concern to the United States and other countries, the
stated purpose of these reforms is not to assist the four
countries' trading partners but instead it is to make their
economies operate more efficiently and thus help achieve the IMF
program objectives of resolving the countries' balance-of-payments
problems and preventing their recurrence. Since December 1998,
Brazil made several trade commitments within the Brazil Is to
Modify Two context of its IMF financing arrangements. As table
1 shows, Brazil has Export Programs and Not committed to limit
the scope of its interest equalization export subsidy Impose
Additional Trade program to capital goods, and, according to
the IMF, Brazil has kept its Restrictions pledge not
to impose any new trade restrictions that hinder regional
integration, are inconsistent with the WTO, or that are for
balance-of- payments purposes. Page 21
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Table
1: Trade Liberalization in Brazil's Recent IMF Financing
Arrangements, December 2, 1998, through April 30, 1999 Measure
Description
Status I. Import-related measures General Continue
promoting economic integration with Tariffs
were reduced on 98 products. No new trade restrictions MERCOSULa
and other regional trading have
been imposed that either hinder regional integration, are
partners.
inconsistent with the WTO, or that are for balance-of-payments
Increase trade with countries outside the
reasons. region. Do not impose trade restrictions that are either
WTO inconsistent or for balance-of-payments reasons. II. Export-
related measures Subsidies a. Limit the scope of
interest equalization export a. Measure was submitted to Brazil's
Congress in December 1998 financing program to goods with a long
but has not been approved. However, measure is in force production
cycle (capital goods).
(Brazilian law allows president to enact provisional measures
before congressional ratification). Measure was submitted as part
of a major tax reform proposal that called for a national value-
added tax. b. Suspend, for 1999, exporters' rebates on
b. Rebate was suspended for 1999. social contribution taxes
aMERCOSUL is the largest preferential trade arrangement in Latin
America and consists of Argentina, Brazil, Paraguay, and Uruguay.
Bolivia and Chile are associate members. Sources: Brazil's letters
of intent, IMF, U.S. Treasury Department. Since November 1997,
Indonesia has made many changes to its trade Indonesia Is to
Remove policies in the context of its
IMF financing arrangements. As table 2 shows, Unjustifiable Trade
Indonesia has reduced tariffs on a range of mainly agricultural
products Restrictions and
eliminated the government's monopoly on importation and
distribution of agricultural products. Also, Indonesia has pledged
to eliminate all other import and export restrictions by the end
of its IMF program in the year 2000, except for those necessary
for health, safety, environment, or security reasons. In March
1999 testimony, a Commerce Department official stated that the
U.S. government has been satisfied with Indonesia's efforts to
date in reforming its trade system.27 However, the official also
said that the true test of these reforms will come when increased
trade flows resume. 27 Testimony of the Honorable Patrick A.
Mulloy, Assistant Secretary of Commerce for Market Access and
Compliance, Before the House of Representatives, Committee on
Banking, Housing, and Urban Affairs (Mar. 9, 1999). Page 22
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Table
2: Trade Liberalization in Indonesia's Recent IMF Financing
Arrangements, November 5, 1997, through April 30, 1999 Measure
Description
Status I. Import-related measures Tariffs a. Reduce
tariffs on all items currently subject to tariffs a. Completed by
deadline. of 15% to 25% by 5 percentage points by March 31, 1998.
b. Reduce tariffs on all nonfood agricultural products to b. A cut
of 5 percentage points was made on February 1, a maximum of 10% by
2003. 1998. c. Reduce tariffs
on all food products to a maximum of c. Completed on February 1,
1998. 5%. d. Reduce tariffs on chemical, steel/metal, and fishery
d. Chemical tariffs were reduced by 5 percentage points on
products to 5%-10% by 2003.
January 1, 1998. Nontariff barriers a. Abolish import
restrictions on new and used ships. a. Completed in
February 1998. b. Eliminate government monopoly on agricultural
b. Completed as scheduled. commodity imports. c. Eliminate
government monopoly's rice import c. Completed by
March 1999. subsidy. d. Abolish local content regulations on dairy
products. d. Completed effective February 1, 1998. e.
Develop longer-term role for and restructure e. To
be done with World Bank assistance government agricultural state
trading enterprise. f. Allow private traders to import rice.
f. Completed in September 1998. g. Phase out all remaining
barriers, including quantitative restrictions, by end-program,
except for those necessary for health, safety, environmental, or
security reasons. II. Export-related measures Subsidies
a. Discontinue special tax, customs, and credit a.
National car project privileges were discontinued in privileges to
national car project. January 1998. b.
Phase out local content program by the year 2000. Aircraft program
Discontinue budgetary and extrabudgetary support.
Completed in January 1998. Export restrictions a. Reduce export
taxes on logs, sawn timber, rattan, a. Begun. See (b)
and minerals to 10% by December 2000 and gradually replace with
resource rent taxes. b. Reduce export taxes on logs and sawn
timber to b. Not completed by deadline. IMF waived
performance 20% by December 31, 1998.a
criteria. Completed in February 1999. c. Abolish export taxes on
leather, cork, ores, and c. Completed in February 1998.
aluminum waste products. d. Lift export bans on food commodities.
Replace d. Bans lifted September 1998 April 1999.
Export tax was quantitative restrictions on palm oil, olein, and
stearin imposed by April 22, 1998. The tax went up from 40%
to exports with export tax of 40% by April 22, 1998, and
60% in mid-summer 1998, but was reduced to 40% again in reduce tax
to 10% by December 31, 1999. February 1999.
e. Abolish provincial and local government export e.
Completed in January 1998. taxes. f. Eliminate all other export
restrictions by end- program, except for those deemed necessary
for health, safety, security, or environmental reasons.
aPerformance criterion. Sources: Indonesia's letters of intent,
IMF, U.S. Treasury Department. Page 23
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 As
part of its recent IMF financing arrangements, among other
actions, Korea Has Eliminated Some Korea has reduced some import
barriers, eliminated four trade-related Subsidies and Is Reviewing
subsidies, and made improvements to the transparency of its
subsidy Certain Import Policies programs. Korea
has met every deadline for implementing these measures, although
deadlines for completing some actions have not yet passed. Table 3
shows the implementation status of trade policy measures that
Korea has committed to the IMF to implement since its December
1997 IMF financing program began. Table 3: Trade Liberalization in
Korea's Recent IMF Financing Arrangements, December 4, 1997,
through April 30, 1999 Measure
Description Status I.
Import-related measures Tariffs
Reduce number of items subject to Number of
products covered was reduced adjustment (higher-than-normal)
tariffs from 62 to 38. used to protect domestic
producers against import surges. Nontariff barriers
a. Eliminate import diversification program, a. To be phased out
by June 1999. Sixteen which barred imports of 113 Japanese
items remain covered. products and affected U.S. exports to Korea
that contained substantial Japanese content. b. Review import
certification procedures. b. Plan completed by deadline.
Some By August 15, 1998, present to IMF a plan reforms
implemented during 1998, and to streamline and bring procedures in
line others planned. Reforms involve a wide with
international practice. range of products,
government ministries, and laws. II. Export-related measures
Subsidies a. Eliminate four trade-
related subsidies: a. All were eliminated by March 31,
1998. (1) reserves for export losses of exporters, (2) reserves
for exporters' overseas market development, (3) program to promote
exporters' use of minicomputers, (4) tax incentives for foreign
investment. b. Review all existing subsidy programs b.
Plan completed by deadline. Plan and their economic rationale and,
by proposed several measures to rationalize November
15, 1998, present to IMF a plan programs by enhancing
transparency, for rationalizing programs.
tightening supervisory control of tax benefits, and introducing in
the long term a more systematic and transparent budgeting system
for tax expenditures. Sources: Korea's letters of intent, IMF,
U.S. Treasury Department. In addition to trade liberalization
measures, as part of their IMF financing Other IMF Conditions
Could arrangements, Korea, Indonesia, and Thailand have committed
to further Significantly Affect the Four open their economies to
foreign investment and to substantially Countries' Trade
restructure their financial and corporate sectors. These
commitments, if Page 24
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 fully
implemented, could lead to increased U.S. investment in and trade
with these countries. For example, Korea has eliminated the
aggregate ceiling on foreign investment in Korean equities, as
well as the foreign investment ceiling on domestic bonds. Other
measures would facilitate friendly or hostile foreign mergers
with, or acquisitions of, Korean companies, while yet others would
ease restrictions in corporate foreign borrowing, the
establishment of subsidiaries of foreign banks and brokerage
houses, foreign direct investment, foreign acquisition of land,
and foreign exchange transactions. Similarly, measures related to
restructuring the financial sector would liberalize restrictions
on the ability of foreign financial institutions to merge with,
acquire, or invest in domestic Korean financial institutions and
would allow foreigners to become bank managers. According to the
IMF, the Korean economy has become much more open to foreign
investment since its recent financing arrangements began.
Indonesia, among other commitments, has pledged to open more
sectors of its economy to foreign investment and to remove
restrictions on permitting foreign banks to have branches in
Indonesia. Investment liberalization could lead to more U.S. or
other foreign direct or portfolio28 investment. This could
increase trade, because trade tends to follow investment. In
addition to liberalizing foreign investment, other structural
reforms being implemented by Brazil, Indonesia, Korea, and
Thailand within the context of their recent IMF financing
arrangements could affect their trade. For example, according to
the U.S. Treasury Department, under its IMF financing
arrangements, Korea has agreed to a fundamental overhaul of its
weak and noncompetitive financial system. Korea also has committed
to end government-directed lending. Brazil, Indonesia, and
Thailand are further privatizing state-owned enterprises. If
implemented successfully in conjunction with foreign trade and
investment liberalization, these structural reforms could have a
significant effect on U.S. and other foreign trade and investment
in these economies. Finally, to the extent that their IMF programs
as a whole lessen the duration and severity of these countries'
economic crises, the prospects for increased foreign trade and
investment would improve. The success of these programs depends on
many factors, including their macroeconomic and structural policy
changes. But success also depends on factors that are in part
outside of the borrowers' and the IMF's control, such as investor
confidence in the four countries' economies and macroeconomic
conditions in other countries. 28 Portfolio investments are assets
held in the form of marketable equity or debt securities. Page 25
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 The
policies maintained by Brazil, Indonesia, Korea, and Thailand to
Potential Impact of encourage exports could
potentially distort trade and displace production IMF Borrowers'
Export by U.S. producers, even though they may benefit other U.S.
companies or consumers. However, the large macroeconomic changes
in these countries Policies on the United caused by their recent
financial crises greatly complicate predicting and States Is
Difficult to measuring the policies' impact on the
United States because the Measure
macroeconomic changes are likely a major reason for recent changes
in trade flows. Moreover, overall U.S. imports from these nations
grew modestly in 1998, and many sectors registered declines.
Imports from Brazil, Indonesia, Korea, and Thailand also grew at a
slower pace than overall U.S. imports and than they have in
previous years. Nevertheless, in certain sectors such as steel and
chemicals, the United States faces substantial and growing import
competition from suppliers from one or more of the four countries.
Products accounting for about16 percent of the value of U.S.
imports from these four IMF borrowers registered large increases
in imports and falling prices over the past year. Mechanisms exist
to investigate and remedy situations, such as steel import surges,
where U.S. industry believes rising imports are attributable to
foreign government policy and harm its economic interests. Export
policies such as subsidies to producers and low-cost financing for
Export Policies Can Distort exports can harm U.S. companies by
displacing U.S. sales in the United Trade, but Assessing Their
States and other world markets. At the same time, they may benefit
U.S. Impact Is Difficult consumers and other U.S.
industries that use the imported products. Aside from any direct
economic impact, U.S. trade law and international trade agreements
such as the WTO agreements contain disciplines to limit the use of
subsidies and provide remedies for harmful effects of trading
partners' export policies in specified circumstances. In a prior
section, we identified export policies maintained by Brazil,
Indonesia, Korea, and Thailand. Relatively few of the policies
have been major sources of U.S. industry or government concern.
But some have been, particularly Korea's policies in the steel,
automotive, shipbuilding, and semiconductor sectors and Brazil's
policies in the steel and automotive sectors. Brazil and Korea
were among the top 10 countries cited in U.S. countervailing duty
investigations into complaints over unfairly subsidized imports
during 1980-97. Brazil was the top country cited, accounting for
about 11 percent of all cases filed. However, accurately weighing
the recent impact of export policies on U.S. industries is
difficult. First, as has been seen, the United States can expect
to face deteriorating trade balances and heightened competition
from key IMF borrowers because of their financial crises and the
accompanying Page 26 GAO/NSIAD/GGD-99-174
IMF Borrowers' Trade Policies B-282825 sharp currency devaluations
and shrinking demand in these markets. The strong performance of
the U.S. economy relative to that of other nations also draws in
imports. For now, U.S. output is rising, inflation is low, and
unemployment is at its lowest level in 30 years. These trends
provide a favorable backdrop for absorbing rising imports. Also,
U.S. imports from Brazil, Indonesia, Korea, and Thailand rose at a
slower pace than overall U.S. imports in 1998,29 and, for Brazil
and Indonesia, rose by less in 1998 than they had in previous
years. Indeed, substantial contractions were recorded in U.S.
imports from each of the four countries in many sectors. Another
factor that makes it difficult to determine the impact of export
policies is that such an investigation requires considerable
legal, economic, and industry information. Some of this
information is readily available, but much of it must be estimated
or specially collected and analyzed on a case- by-base basis. For
example, the U.S. government agencies responsible for
administering U.S. trade law, including the Commerce Department
and the ITC, conduct in-depth investigations regarding specific
allegations of improper subsidies and injurious effects on
domestic industries. Still, as a general rule, the larger the
distortion and the greater the trade affected, the more likely the
policy could harm the U.S. industry. Brazil, Indonesia, Korea, and
Thailand are leading world exporters. The The United States Is an
U.S. market receives a substantial portion of their export
shipments. Based Important Market for Brazil, on IMF data, the
four nations account for 35 percent of the total world Indonesia,
Korea, and exports of current IMF borrowers, with
Korea alone accounting for Thailand, and Thus Stands 16
percent of total exports from IMF borrowers. Recent WTO data
reveal that the four countries ranked among the world's leading
exporters in 1998 to Be Among Those Most and that
Korea was the world's 7th largest exporter, while Thailand,
Brazil, Affected by Their Export and Indonesia ranked
15th, 16th, and 17th, respectively. Collectively, the Policies
four sold $287 billion abroad in 1998, which is more than Canada,
but less than the United States and Japan. Figure 3 shows 1998
exports of Brazil, Canada, Indonesia, Japan, Korea, Thailand, and
the United States. 29 Total U.S. imports from all sources rose by
5.36 percent from 1997 to 1998. U.S. imports from Brazil rose by
4.40 percent; from Indonesia, by 3.04 percent; from Korea, by 4.22
percent; and from Thailand by 6.87 percent. Page 27
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Figure
3: World Exports, by Selected Nations, 1998 Source: WTO. The
United States is an important market for these four countries, but
its importance as a buyer did not increase substantially relative
to other nations in 1998. In 1998, the United States accounted for
an estimated 19 percent of Brazil's exports, 18 percent of
Indonesia's exports, and 16 percent of Korea's exports, according
to the U.S. Department of State. All of these shares were similar
to those recorded in 1997 and 1996. (Some 20 percent of Thailand's
exports were shipped to the United States in 1997, the latest year
for which data are available.) In 1998, the four countries
together accounted for about 7 percent of both U.S. exports and
imports, according to Commerce statistics. Industry analysts
report that U.S. suppliers face head-on competition from all four
countries in such sectors as steel and chemicals; automobiles
(Korea); orange juice (Brazil); wood and paper products (Indonesia
and Brazil); and poultry and pork (Thailand and Korea). However,
in many product sectors, these nations compete more with each
other and other nations than with U.S. suppliers. For example,
Brazil competes with China, Italy, Spain, Indonesia, and Korea in
footwear. Thailand competes with Mexico and the Philippines in the
supply of electric wire and cables. Korea and Japan compete with
U.S. producers in the United States and with each other in Asian
markets for semiconductor memory devices. In other industries,
such as many chemicals from Indonesia and semiconductors from
Thailand, the imports Page 28
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 are
raw materials or intermediate products used in final U.S.
production of higher value-added goods. The executive branch has
implemented programs to detect and deter Commerce Is Monitoring
potentially harmful effects of export subsidies by these four
nations (as Policies and Import Surges well as certain
others). These programs were developed by the Commerce to Detect
Potential Problem Department to respond to concerns by U.S.
industries. The industry Areas
concerns were twofold: that nations could use subsidies to export
their way out of their financial crisis and that the IMF
stabilization programs could allow these countries to resume
financial practices that had previously benefited strategic
industries to the possible detriment of U.S. firms and workers.
Commerce's special efforts involve (1) tracking existing and
prospective policies (export or production-related subsidies) by
key nations; and (2) monitoring U.S. imports in selected sectors-
including steel, semiconductors, autos, paper, and chemicals-that
are vulnerable to import penetration and that have faced unfair
trade practices in the past. Commerce staff report that they
identify import surges by examining the value, quantity, and price
of imports; the share of the U.S. market that has been captured by
imports (import penetration); and the level of industry concern.
The result is an early warning mechanism to flag potential
problems for further analysis and action, if appropriate. To shed
light on whether the export policies of Brazil, Indonesia, Korea,
Some U.S. Imports From and Thailand could pose a
potential threat to U.S. producers, we the Four Countries Have
supplemented the information on export policies presented in a
prior Increased Markedly in the section with an analysis
of imports from the four IMF borrowers that Past Year
showed large increases in U.S. imports in 1998.30 Textiles,
apparel, and steel were the product categories that experienced
the largest increases in imports from these countries. Other
important categories were certain primary or processed
agricultural and fishery products, chemicals, rubber products,
wood and paper products, and electric and nonelectric machinery.
The results of the multistage analysis revealed that products
accounting for $9.4 billion, or 16 percent, of U.S. imports from
Brazil, Indonesia, Korea, and Thailand both increased
substantially and registered price declines in 1998. Table 4 shows
the 62 product categories that met all of our criteria and, for
each product, the percentage increase in imports from 30
Specifically, we identified items that met certain value, import
market share, and import increase criteria. We then examined
whether prices were falling for these imports. See appendix IV for
details. Page 29
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 the
four countries. (An additional 300 items at a more disaggregated
level also met our criteria and showed substantial import
increases and price declines; these items accounted for $5.3
billion in imports from the four IMF borrowers.) For example,
imports of radio transmission apparatus from Korea rose by nearly
90 percent to reach a value of $788.4 million, while imports of
one category of flat-rolled steel from Korea rose by 36 percent,
to $355.8 million. Paper and paperboard imports from Indonesia
were up by 284 percent, amounting to $40.8 million. Page 30
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Table
4: U.S. Imports from Brazil, Indonesia, Korea, and Thailand That
Increased by More Than 15 Percent While Their Prices Fell, 1997-98
(thousands of dollars)
Change 1998 Product class
Product name 1997-98
Imports Brazil Sugars and Sugar Confectionary
Sugars (nesoia) including Lactose, Caramel 913.6%
$33,077 Inorganic Chemicals; Precious & Rare Earth Metals
Titanium Oxides 648.8
3,204 Misc. Edible Preparations
Extracts of Coffee, Tea or Mate, Roast Chicory 179.5
41,591 Salt, Sulfur, Earth & Stone, Lime & Cement, etc.
Kaolin and other Kaolin Clays (including Calcined) 171.1
7,479 Coffee, Tea, Mate & Spices
Pepper, Genus Piper, Genus Capsicum or Pimenta 68.7
30,353 Edible Preparations of Meat, Fish, Crustaceans, etc.
Prepared Meats, Meat Offal & Blood (nesoia) 63.0
104,753 Leather Art, Saddery, Handbags, etc.
Articles of Gut (nesoia), Goldbeater's Skin, etc. 58.0
6,754 Plastics, etc.
Cellulose and Chemical Derivatives (nesoia) 49.5
9,667 Iron and Steel
Flat-rolled Iron and Steel (600mm wide, cold rolled) 47.0
71,052 Rubber, etc.
Unvulcanized Rubber Forms (nesoia) and Articles 36.2
3,344 Iron and Steel
Pig Iron & Spiegeleisen in Pigs, Blocks, etc. 33.6
366,229 Oreas, Slag & Ash
Aluminum Ores and Concentrates 25.5
66,712 Misc. Chemical Products
Rosin & Resin Acids, Rosin Spirit, Run Gum, etc. 22.4
3,755 Iron and Steel
Flat-rolled Iron and Steel (600mm wide) 22.0
10,555 Salt, Sulfur, Earth & Stone, Lime & Cement, etc.
Natural Graphite 20.2
6,481 Indonesia Paper & Paperboard, etc.
Paper, Paperboard, etc. 284.2
40,777 Dairy Products, Birds' Eggs, Honey, etc.
Edible Products of Animal Origin (nesoia) 221.1
2,301 Aluminum, etc.
Household Articles (pot scour, aluminum, etc.) 71.5
45,730 Misc. Chemical Products
Rosin & Resin Acids, Rosin Spirit, Run Gum, etc. 69.7
2,469 Apparel Articles and Accessories (not knit), etc.
Men's or Boys' Undershirts (not knit or crochet), etc. 57.0
25,465 Essensial Oils, Perfumery, Cometics, etc.
Essential Oils Resinoid 50.4
36,057 Electric Machinery, Sound and TV Equipment, etc.
Primary Cells & Batteries, parts 36.5
52,522 Musical Instruments (parts and accessories)
Musical Instruments with Sound Electric Products, etc. 32.8
20,070 Coffee, Tea, Mate & Spices
Pepper, Genus Piper, Genus Capsicum or Pimenta 32.1
95,108 Edible Preparations of Meat, Fish, Crustaceans, etc.
Fish, Caviar and Caviar Substitutes 22.7
35,031 Feathers, Down, Artificial Flowers, Hair Art, etc.
Wigs of Hair and Articles of Human Hair (nesoia) 20.3
38,076 Korea Iron and Steel
Angles, Shapes & Sections of Iron and Steel 2980.1
139,776 Articles of Stone, Plaster, Cement, Asbestos, etc.
Millstones for Grinding Various Materials 348.8
6,816 Inorganic Chemicals; Precious & Rare Earth Metals
Cyanides, Cyanide Oxides and Complex Cyanides 266.0
5,073 Iron and Steel
Wire of Alloy Steel (nesoia) 92.0
7,965 Electric Machinery, Sound and TV Equipment, etc.
Transport Appar. for Radio, TV, TV Camera, 89.9
788,375 Recorders Misc. Articles of Base Metal
Wire, Rods for Soldering and Metal Spray, etc. 82.7
12,143 Misc. Edible Preparations
Ice Cream and other Edible Ice, with Cocoa or Not 80.5
1,615 Textile Articles (needlecraft, worn textile), etc.
Blankets and Traveling Rugs 71.4
16,221 Salt, Sulfur, Earth & Stone, Lime & Cement, etc.
Pumice, Emery, Natural Corundum and Garnet, etc. 70.7
951 Beverages, Spirits and Vinegar
Fermented Beverages (nesoia) (Cider, Perry, Mead, 61.6
1,161 etc.) Explosives, Pyrotechnics, Matches, etc.
Ferrocerium & other Pyrophoric Alloys, etc. 59.5
1,716 Products of Straw, Basketware and Wickerwork
Plaits and Products of Plaiting Materials, etc. 47.3
1,955 Articles of Iron or Steel
Nails, Tacks, Drawing Pins, etc. of Iron or Steel 37.8
118,946 Page 31 GAO/NSIAD/GGD-99-
174 IMF Borrowers' Trade Policies B-282825 Change 1998
Product class
Product name 1997-
98 Imports Misc. Articles of Base Metal
Safes, Cash or Deed Boxes of Base Metals
36.3 4,108 Iron and Steel
Flat-rolled Iron and Steel (600mm wide, hot rolled)
36.1 355,824 Plastics, etc.
Polymers of Styrene, in primary forms
35.6 44,316 Rubber, etc.
Soft Vulc. Rubber Plates, Sheets, Profile Shapes, etc.
33.6 5,081 Wadding, Felt, Yarn, Twine, Ropes, etc.
Metal Yarn, Textile Yarn, or Strip w/Metal
32.3 1,947 Mineral Fuel, Oil, Bitumin, Mineral Wax, etc.
Pitch and Pitch Coke from Coal Tar or other Mineral
30.9 16,730 Tars Electric Machinery, Sound and TV Equipment,
etc. Electric Water, Space and Soil Heaters and other
25.2 502,387 Dryers Musical Instruments (parts and
accessories) Pianos, Harpsichords and other
Keyboard Stringed 24.8 68,416 Instruments
Tools, Cutlery and Parts of Base Metals
Articles of Cutlery (nesoia), Manicure Sets, etc.
24.0 23,042 Photographic or Cinematographic Goods
Motion-Picture Film (exposed and developed)
23.2 23,966 Misc. Manufactured Articles
Molded Resin, etc. and Carving Material (nesoia)
19.8 12,126 Rubber, etc.
Hygienic or Pharmaceutical Articles of Vulcanized
17.8 1,743 Rubber Woven Fabrics, Tufted Fabric, Lace,
Tapestries, Etc. Labels, Badges, etc. of Textiles
17.2 4,676 Pearls, Precious Stones, Precious Metals, Coins,
etc. Imitation Jewelry
15.2 136,031 Thailand Ceramic Products
Ceramic Sinks, Washbasins, Water Closet Bowls, etc.
359.4 8,039 Photographic or Cinematographic Goods
Motion-Picture Film (exposed and developed)
238.9 8,374 Rubber, etc.
Hygienic or Pharmaceutical Articles of Vulcanized
126.6 3,603 Rubber Rubber, etc.
Articles of Apparel and Accessories of Vulcanized
51.9 222,510 Rubber Gums, Resins, and Other Vegetable Saps
and Natural Gums, Resins, Gum-Resins and Balsams
51.1 4,062 Extracts Aluminum, etc.
Household Articles (pot scour, aluminum, etc.)
44.5 63,675 Electric Machinery, Sound and TV Equipment, etc.
Electric Water, Space and Soil Heaters and other
23.4 166,568 Dryers Apparel Articles (knit or crochet), etc.
Men's or Boys Shirts (knit or crochet), etc.
17.8 137,651 Musical Instruments (parts and accessories)
Percussion Musical Instruments (drums, etc.)
17.6 6,129 Total
$4,082,327 Total (all products)b
$9,370,226 anesoi stands for "not elsewhere specified or
indicated." badditional products at a more detailed level also met
the criteria. Sources: U.S. Department of Commerce statistics and
GAO calculations. Page 32
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Though
we did not separately collect production statistics for these
items, Some U.S. Industries our examination of analyses
prepared by outside industry experts suggests Appear to Be
Vulnerable to that the United States produces most of these
fast-rising import items, Increased Imports; Others although
notable exceptions include certain primary products (for Are Less
so example, rubber) and certain machinery and
consumer electronic goods. We then assessed whether U.S.
industries that compete with the surging imports are particularly
vulnerable to import competition. For example, we examined the
tariff treatment of different import categories, including under
the U.S. Generalized System of Preference (GSP) program.31 Under
the program, certain imported products are not eligible for duty-
free treatment because they are import sensitive. Most textiles
and apparel, leather goods, and glass have been deemed import
sensitive by statute. For other product sectors in which imports
are surging, we examined industry reports and discussed the
factors contributing to the increases and potential vulnerability
of the U.S. industry with staff at the Commerce Department and the
ITC. According to these industry sources, some of the import
surges we identified are in industries where foreign unfair trade
practices do not appear to be an issue, while other import surges
are in industries where allegations of foreign unfair trade
practices already exist, and still other import surges have a more
tenuous relationship to policy or adverse impact. In some cases,
the industry sources we consulted cited factors other than "unfair
imports" as the primary cause of surging imports: * Market
factors, such as a slight increase in U.S. coffee consumption and
the need for more natural rubber for the larger tires being used
in U.S. motor vehicles appear to be the primary factors in
increased U.S. imports. * In the fishery sector, rising imports
of shrimp from Indonesia and Thailand appear to be tied to the
strong U.S. economy; virtually all shrimp imported into the United
States is destined for restaurant consumption, which has risen
with U.S. incomes. * Other increases are explained by resource
endowments; for example, the United States is consuming more
natural dyes and fragrances that are only available from nations
with rain forest conditions, such as Brazil. Industry reports also
suggest that a variety of factors are at play in many sectors that
heighten competitive pressures on U.S. firms, including the
ongoing globalization of production, the emergence of new
competitors in 31 The GSP program provides duty-free treatment for
specified nations and products as part of an overall effort to
help developing nations diversify and increase their exports. Page
33
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Asia
and elsewhere, and the price pressures that ensue from falling
demand and excess capacity (some of which preceded the crisis).
Some industries are calling for forceful action and strong
enforcement of U.S. trade laws. Other industries, such as
chemicals and forest products, say the most helpful U.S.
government response would be pursuit of lowered trade barriers in
these countries to provide new opportunities to U.S. exporters.
Some investigations into complaints over harm from export policies
by Investigations Into Industry Brazil, Indonesia, Korea, and
Thailand are currently underway under U.S. Complaints Over Export
trade statutes. In addition, export policies of Brazil and
Indonesia have Policies Are Underway in been subject to
dispute settlement procedures in the WTO. Steel is the Some of the
Sectors Having sector with the largest number of cases pending
under U.S trade law. Overall U.S. imports of steel were up by 9
million metric tons in 1998, and Major Increases in Imports
imports captured 30 percent of the U.S. market, up from 24 percent
in 1997. Various cases involve Brazilian, Indonesian, and Korean
suppliers, as well as suppliers in Russia and Japan. Korea's POSCO
is the world's second largest steel firm, and Brazil is among the
top five U.S. import suppliers of steel. On January 7, 1999, the
President outlined a seven-point action plan for responding to the
rise in steel imports. Various plastic and rubber goods and
textiles are also under investigation. Semiconductors and other
microelectronic products have been subject to dumping and
intellectual property right infringement in the past; the
executive branch continues to monitor imports, and Korea is among
the top five U.S. import suppliers of microelectronics (including
semiconductors). In addition, Brazil's aircraft subsidies were
recently found to be inconsistent with WTO rules. The United
States is a major consumer, not a producer, of these regional jets
but has had long-standing concerns over Brazil's export financing
program, which applies to other sectors. In some recent
countervailing duty cases, the U.S. Commerce Department determined
the magnitude of the subsidies provided to be fairly small. Within
the past 9 months, Commerce has found subsidies to Indonesian
producers of rubber thread to be less than 3 percent of the
thread's value, and countervailable subsidies of 6.62-9.45 percent
for Brazilian hot-rolled steel. Subsidies for Korean stainless
steel and strip were somewhat larger, up to 29 percent. In certain
cases, the ITC has determined that imports were not causing injury
to U.S. industry. In April 1999, for example, the ITC made a
negative injury determination regarding synthetic rubber from
Korea, Brazil, and Mexico, and in May 1999 the ITC made a negative
injury determination in a case involving stainless steel round
wire from Korea and other countries. Page 34
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 The
ITC is conducting fact-finding investigations of imports of forest
products at the Congress' request.32 ITC analysts suggest that
U.S. suppliers face competition from hardwood plywood, and
printing and writing paper from Indonesia; our data show paper
imports are rising rapidly and prices are down. Commerce analysts
report that the forest product industry employs more workers than
the steel industry and some mills in the Northwest have recently
closed in the face of weak demand and falling prices. Industry has
reportedly expressed concern that rising imports from Indonesia
may be due to unfair trade practices but has yet to file a formal
case. Pulp imports from Brazil are also up but are reportedly from
the Brazilian production facilities of U.S. firms. Textiles and
apparel imports are increasing sharply, even though U.S. Concerns
Exist in Other limits on the quantity imported (quotas) are in
place.33 A few instances of Sectors, too, but Rising
investigations into "unfair trade" in textiles have occurred,
including Imports May Be Primarily textile products from
Thailand and a recently filed petition alleging Due to Other
Factors dumping of polyester staple fiber from Korea.
However, Commerce analysts report that in general the surges that
occurred in the past 2 years appear to be caused by market forces
and exacerbated by the financial crises that began in mid-1997,
rather than government policies. Brazil, Indonesia, Korea, and
Thailand are all WTO members and have bilateral quota agreements
with the United States that establish comprehensive limits on
virtually all categories of their textile and apparel exports to
the United States. While these limits apparently had considerable
room for growth,34 imports from Indonesia have fallen sharply in
recent months as shipments approached the upper limits associated
with such quotas. Sugar from Brazil and imports of rice from
Thailand are among the agricultural and fishery products with
rising imports and falling prices. Governmental policies exist in
these two sectors but do not appear to be major factors in the
rise. (In Brazil's case, other factors are at work, and in
Thailand's case, the program involves government-to-government
sales, which do not occur for the United States). However, the
United States has identified Thailand's subsidies on some
government-to-government sales of rice in its annual inventory of
foreign trade barriers. Orange juice 32 The investigations are
fact finding in nature, as opposed to investigations into unfair
trade practices. 33 Total U.S. imports of textiles and apparel
rose by 20.1 percent from 1996 to 1997 and by 13.3 percent in
1998. Imports from three of the four IMF countries rose: by 14
percent from Indonesia, the U.S' 10th ranking import supplier; by
27.8 percent from South Korea, the 7th ranking supplier; and by
29.7 percent from Thailand, the 9th-ranked supplier. 34 Korea, for
example, had fairly low "fill rates" for U.S. quotas on textiles
and apparel items. The double-digit growth registered in the last
several years has brought those fill rates close to 90 percent in
certain categories. Page 35
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825
imports from Brazil also rose considerably in 1998, but much of
the rise appeared to be due to weather, which contributed to a
bumper crop in Brazil and a poor crop in Florida, where 90 percent
of U.S. orange juice is produced.35 Chemical imports are causing
price pressures on U.S. producers in the United States and other
country markets. The 70-year record of U.S. surpluses in the
chemicals trade was unbroken in 1998 but fell by nearly a third
from 1997 levels, largely as a result of lower U.S. exports to
Asia and other developing regions and higher U.S. imports from the
EU. Industry analysts attribute most of the worsening to
collapsing demand in Asia, which depressed U.S. and EU sales
there. (U.S. exports of chemicals to Asia fell by more than 15
percent from 1997 to 1998.) However, capacity expansions that
reflect both ongoing globalization of production activity by U.S.
and other firms and government policies in such nations as Korea
and Thailand preceded the onset of the crisis. For example, the
chemical industry is the leading manufacturing sector recipient of
loans from the Korean Development Bank, and Korea's production
capacity in the chemical industry rose by more than 27 percent
between 1995 and mid- 1998. Even so, Korea supplied just 1.3
percent of total U.S. imports of chemicals in 1998. In autos,
competition to U.S. firms from Korean auto exports is rising. The
25 percent plunge in domestic demand in Korea in 1998 halved
domestic shipments. Production fell by 30 percent, and Korean auto
makers were forced to turn increasingly to overseas markets for
sales. According to statistics by the Korean Automobile
Manufacturers Association, fully 75 percent of Korean cars were
exported in 1998, versus 50 percent the year before, and the total
number of units exported rose slightly. The U.S. market is Korea's
second largest for car exports, but Commerce officials report that
competition with U.S. makers is particularly intense in European
markets.36 Meanwhile, despite Korea's compliance with a bilateral
agreement with the United States on Korean market access for
autos, there has been a virtual halt of import purchases in
Korea's shrinking market. 35 However, the ITC recently determined
that removing an existing antidumping duty order on Brazilian
orange juice would mean a continuation or recurrence of material
injury to the U.S. industry from such imports. 36 Passenger cars
were among the leading U.S. imports from Korea in 1998, but the
number of units imported fell by 5 percent. Page 36
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 Auto
parts imports from Brazil are also increasing and could in
principle be related to government policies, which require firms
that make cars in Brazil to meet minimum export performance and
local content levels in order to receive tax and other benefits.
However, in accordance with a bilateral agreement with the United
States, the Brazilian government policy is due to change by
January 1, 2000, and Commerce officials we contacted were unaware
of current complaints by U.S. industry. The few products that show
substantial import increases appear to be original equipment parts
made in Brazil and destined for their U.S. auto manufacturing
facilities. Imports of pianos, string, and other musical
instruments also show large increases. The ITC recently released
a report analyzing factors contributing to rising imports from
Asian suppliers.37 However, the ITC reports that there were no
claims that the rising imports were due to export policies of
those countries. The situation in the tire and synthetic rubber
industries shows how firm structure, customers' responsiveness to
price, and the globalization of sourcing affect industry attitudes
toward surging imports. Three of the four companies making tires
in the United States are multinational firms that produce and sell
tires globally; the three control 65 percent of the world tire
market and reportedly have increased production and imports from
such countries as Indonesia since mid-1997, when the rupiah
(Indonesia's currency) plummeted. A fourth firm sells all of its
production in the larger U.S. retail (consumer) market, where
Korean, and to a lesser extent, Brazilian firms, compete largely
on the basis of price. This firm is concerned about the 60 percent
increase in imports of Korean tires. The firm has, however, filed
briefs opposing findings of dumping against Brazilian and Korean
suppliers of synthetic rubber38 because it needs such low-cost
inputs to remain competitive with tires from Korea, Indonesia, and
Brazil. We requested comments on a draft of this report from the
Departments of Agency Comments and the Treasury, Commerce, and
State; the IMF; the Office of the U.S. Trade Our Evaluation
Representative; and the ITC. The Treasury provided written
comments on a draft of this report, which are reprinted in
appendix III. The comments characterized the report as balanced
and informative. All six organizations 37 U.S. International Trade
Commission, Pianos: Economic and Competitive Conditions Affecting
the U.S. Industry (investigation No. 332-401), USITC publication
3196 (Washington, D.C.: May 1999). 38 At the time, emulsion
styrene-butadiene rubber was the subject of a dumping
investigation, which has since been terminated. Page 37
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 also
provided technical and clarifying comments, which we incorporated
as appropriate. For example, the IMF and USTR asked that we
clarify the role that trade liberalization plays in IMF financing
arrangements. At the IMF's suggestion, we have pointed out that
facilitating the balanced growth of international trade is part of
the IMF's core mission as embodied in its Articles of Agreement,
and that, according to the IMF, trade liberalization is an
integral part of IMF programs and surveillance activities. At
USTR's request, we have noted that, in addition to trade and
investment liberalization, other policy measures that Brazil,
Indonesia, Korea, and Thailand are taking under their IMF
financing arrangements to restore economic stability should also
contribute to market opening; for example, Korea has committed to
end government-directed lending. We are sending copies of this
report to Senator Connie Mack, Chairman, and Senator Charles Robb,
Ranking Minority Member, Joint Economic Committee; Senator William
Roth, Chairman, and Senator Daniel Moynihan, Ranking Minority
Member, Senate Committee on Finance; Senator Phil Gramm, Chairman,
and Senator Paul Sarbanes, Ranking Minority Member, Senate
Committee on Banking, Housing, and Urban Affairs; Representative
Benjamin Gilman, Chairman, and Representative Sam Gejdensen,
Ranking Minority Member, House Committee on International
Relations. We are also sending copies of this report to the
Honorable Robert Rubin, the Secretary of the Treasury; the
Honorable Madeleine Albright, the Secretary of State; the
Honorable William M. Daley, the Secretary of Commerce; the
Honorable Charlene Barshefsky, the U.S. Trade Representative; the
Honorable Jacob Lew, Director, Office of Management and Budget;
the Honorable Allan Greenspan, Chairman of the Federal Reserve;
and the Honorable Michel Camdessus, the Managing Director of the
IMF. Copies will be made available to others upon request. This
report was prepared under the direction of Harold J. Johnson,
Associate Director, International Relations and Trade Issues, and
Susan S. Westin, Associate Director, Financial Institutions and
Markets Issues. Page 38 GAO/NSIAD/GGD-99-174
IMF Borrowers' Trade Policies B-282825 Please contact either Mr.
Johnson at (202) 512-4128 or Ms. Westin at (202) 512-8678 if you
or your staff have any questions about this report. Other GAO
contacts and staff acknowledgements are in appendix V. Henry L.
Hinton, Jr. Assistant Comptroller General National Security and
International Affairs Division Nancy Kingsbury Acting Assistant
Comptroller General General Government Division Page 39
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies B-282825 LIST
OF CONGRESSIONAL COMMITTEES The Honorable Jesse A. Helms Chairman
The Honorable Joseph R. Biden, Jr. Ranking Minority Member
Committee on Foreign Relations United States Senate The Honorable
Ted Stevens Chairman The Honorable Robert C. Byrd Ranking Minority
Member Committee on Appropriations United States Senate The
Honorable Jim Leach Chairman The Honorable John J. LaFalce Ranking
Minority Member Committee on Banking and Financial Services House
of Representatives The Honorable C.W. Bill Young Chairman The
Honorable David R. Obey Ranking Minority Member Committee on
Appropriations House of Representatives Page 40
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 41
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Contents 1
Letter 44 Appendix I Korean Import Policies
44 Priority Import Brazil
51 Indonesia
55 Policies of Korea, Thailand
56 Brazil, Indonesia, and Thailand 59 Appendix II
Mechanisms Available to Anticipate and Remedy Adverse
59 WTO Disputes and Effects of Foreign Export
Policies U.S. WTO and CVD Cases Involving Korea
61 U.S. Countervailing Brazil
63 Duty Cases Involving Indonesia
64 Thailand
65 Export Policies of Brazil, Indonesia, Korea, and Thailand 67
Appendix III Comments From the Department of the Treasury 68
Appendix IV Assessing Borrowers' Trade
Restrictiveness 68 Objectives,
Scope, and Four Countries' Import Barriers and Export Policies
69 Trade Liberalization in Four Countries' IMF Programs
70 Methodology Assessing the Potential U.S.
Impact of the Countries' 70 Export Policies
73 Appendix V GAO Contacts and Staff Acknowledgments Page 42
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Contents Table
1: Trade Liberalization in Brazil's Recent IMF
22 Tables Financing Arrangements, December 2, 1998, through
April 30, 1999 Table 2: Trade Liberalization in Indonesia's Recent
IMF 23 Financing Arrangements, November 5,
1997, through April 30, 1999 Table 3: Trade Liberalization in
Korea's Recent IMF 24 Financing
Arrangements, December 4, 1997, through April 30, 1999 Table 4:
U.S. Imports from Brazil, Indonesia, Korea, and
31 Thailand That Increased by More Than 15 Percent While Their
Prices Fell, 1997-98 (thousands of dollars) Figure 1: Percentage
of IMF Borrowers and IMF 7
Figures Nonborrowers in Each IMF Restrictiveness Index
Category Figure 2: IMF Countries' Shares of Total U.S. Trade, 1998
9 (Exports Plus Imports, by Country) Figure 3: World Exports, by
Selected Nations, 1998 28
Abbreviations ASEAN Association of Southeast Asian
Nations CVD Countervailing duty EU European
Union GPA Government Procurement Agreement GSP
Generalized System of Preferences IMF International
Monetary Fund IPR Intellectual property rights ITC
U.S. International Trade Commission MERCOSUL South America's
common market NAFTA North American Free Trade Agreement
OECD Organization for Economic Cooperation and
Development POSCO Pohang Iron and Steel Company SEO
Subsidies Enforcement Office TRIPS Trade-related Aspects
of Intellectual Property Rights USTR U.S. Trade
Representative WTO World Trade Organization Page 43
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
The U.S. government has focused considerable attention in the last
3 years on eliminating or modifying certain import policies in
Brazil, Indonesia, Korea, and Thailand that had restricted U.S.
exports to those countries. The United States has had more
concerns about Korea's import policies than about the other three
countries in our review. For example, the United States has
invoked World Trade Organization (WTO) dispute settlement
procedures against Korean policies concerning beef, distilled
spirits, airport procurement procedures, and import clearance
procedures. In Brazil, the United States was involved as a third
party in a WTO dispute over Brazilian policies that allegedly
discriminated against automobile imports and that restrict the
availability of import financing. In Indonesia, the main U.S.
concern has been over protection of intellectual property rights
(IPR). In Thailand, U.S. priorities have included high import
duties on certain agricultural and food products, high automobile
tariffs, inadequate protection of intellectual property rights,
and inefficient customs operations. Korea has historically been
considered one of the most difficult export Korean Import Policies
markets in the world because of its many market access barriers.
Even before its 1997 financial crisis and the establishment of
financial arrangements with the International Monetary Fund (IMF),
however, Korea had already begun to address some of its trade
barriers because of its growing international trade links. These
links, which implied a stronger reliance on international trade
rules and principles, have gradually encouraged a more active role
for Korea in international trading organizations that require
greater market openness and trade liberalization among their
members, particularly the WTO and the Organization for Economic
Cooperation and Development (OECD), which Korea joined in 1996.
The United States has identified a wide range and number of
barriers that impede the import of U.S. goods and services into
Korea. Within the last 3 years, U.S. government agencies have been
particularly active in reporting on and trying to address Korean
import barriers related to the following practices:
Pharmaceuticals: Korea's treatment of foreign, research-based
pharmaceuticals is one of the top priorities on the U.S. trade
agenda with Korea. The Office of the U.S. Trade Representative
(USTR) named pharmaceuticals trade issues as a bilateral trade
expansion priority in a 1999 report to Congress. Under its
national health insurance system, Korea Page 44
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
does not give national treatment1 to imported drugs in terms of
listing and pricing on the system's reimbursement schedule. The
current system discourages medical providers from dispensing
imported drugs by allowing them a higher profit margin from
reimbursement for domestic drugs and by requiring additional
administrative procedures for reimbursement from imported drugs.
According to USTR, U.S. pharmaceutical producers also face
nonscience-based requirements for clinical testing, inadequate and
ineffective protection of test data against unfair commercial use,
and lack of coordination between Korean health and IPR authorities
that allows patent infringement. In response to high- level
bilateral consultations and correspondence, the Korean government
has indicated that it is taking steps to address some of the U.S.
government's and industry's concerns. According to a U.S. Commerce
Department official, Korea has also agreed to reimburse medical
providers for imported drugs in the near future. The executive
branch is continuing to work with the Korean government to address
concerns related to trade in pharmaceuticals. Beef Market Access:
Korea restricts the quantity, distribution, and display of
imported beef through a variety of measures, including
requirements that imported beef be sold in separate retail
establishments and be imported by certain designated entities.
Since 1990, the U.S. government has negotiated several agreements
with Korea that provide for annually increasing market access
levels for beef imports; guarantee direct commercial relations
between foreign suppliers and Korean retailers and distributors;
and ensure that increasing volumes of beef would be sold through
commercial channels instead of through a quasi-government agency.
Korea has also pledged to remove all nontariff barriers on beef by
2001. In 1997 and 1998, however, Korea did not meet its quota
commitments on the importation of foreign beef. In February 1999,
after failing to reach agreement with Korea on reforming its beef
importation practices, the United States initiated WTO dispute
settlement procedures alleging that Korean regulations
discriminate against and constrain opportunities for the sale of
imported beef in Korea. The United States also alleged that Korea
imposes sale markups on imported beef, limits import authority to
certain groups, and provides domestic support to the Korean cattle
industry in amounts that cause Korea to exceed its aggregate
measure of support as reflected in Korea's WTO tariff reduction
schedule. A panel to consider the matter was established in May
1999. Australia also 1 National treatment is a commitment to treat
imported goods no less favorably than domestically produced goods.
Page 45
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
initiated WTO dispute resolution procedures against Korean beef
practices on April 13, 1999. Airport Procurement Procedures:
Foreign companies had traditionally been limited in their
opportunities to bid on government procurement contracts until
Korea became a signatory to the WTO Government Procurement
Agreement (GPA). During negotiations over Korea's accession to
this agreement, the U.S. government reportedly received a
commitment from Korea that entities responsible for airport
construction would be subject to GPA disciplines. However, soon
after negotiations were concluded, Korea created another entity--
the Korea Airport Construction Authority--to manage procurement
for the new Inchon international airport, one of the largest
public works projects in Asia. The Korean government has
subsequently changed the construction authority to the Inchon
International Airport Corporation. Korea now asserts that, because
neither the airport construction authority nor the airport
corporation are expressly listed as covered entities in its GPA
schedule of concessions, procurement for the Inchon international
airport is not covered by the GPA. USTR reports that U.S. firms
have repeatedly faced discriminatory tendering practices that
hamper their ability to compete effectively for related
procurement practices in the airport project. In February 1999,
the United States requested consultations with Korea under WTO
dispute settlement procedures. In May, the United States requested
the establishment of a WTO dispute settlement panel on Korea's
procurement practices after WTO consultations held on March 17
failed to resolve the issue. Anti-import Activities: Over the
years, the U.S. government has reported that frugality campaigns
by Korean civic groups and media organizations have encouraged
Koreans to avoid imported products and services and that the
campaigns may have involved some Korean government support. In
addition, the U.S. government has identified some Korean
government practices that have specifically targeted imports. For
example, in the past, the Korean government selected Korean
lessors of imported automobiles for tax audits. Since the spring
of 1997, the Korean government has publicly announced that it does
not support anti-import activities and has promulgated guidelines
to its officials on ensuring nondiscrimination against imports. In
addition, the Korean president has urged Koreans to base their
purchasing decisions on price and quality, rather than on the
country of origin of the goods, and a 1998 U.S.-Korean auto
memorandum of understanding states that the Korean government will
effectively and expeditiously address all instances of anti-import
activity associated with motor vehicles. The U.S. government,
however, continues to watch for Page 46
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix I
Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
reports of anti-import activity, and raises instances of such
activity with the Korean government. Motor Vehicles: As a result
of market access barriers in the automotive sector, foreign
automobiles comprised less than 1 percent of the Korean motor
vehicle market in 1998, compared to about 6 percent in Japan, over
25 percent in the European Union (EU), and about 30 percent in the
United States. In an October 1997 report to the Congress, the
United States identified Korean barriers to motor vehicles as a
priority foreign country practice, the elimination of which is
likely to have the most significant potential to increase U.S.
exports. Although the United States and Korea had already signed a
memorandum of understanding on improving market access for foreign
motor vehicles in September 1995, the United States had
subsequently failed to reach agreement with Korea over remaining
market access concerns. The concerns involved tariff and tax
disincentives on imports, onerous and costly auto standards and
certification procedures, automobile financing restrictions, and a
pervasive anti-import climate for imported vehicles. After a U.S.
Section 301 investigation2 and bilateral negotiations over these
concerns, the United States and Korea concluded a memorandum of
understanding in October 1998 to improve market access for foreign
motor vehicles in Korea. Under the agreement, Korea agreed to
broaden coverage of the 1995 memorandum of understanding to
include minivans and sport utility vehicles; streamline Korean
standards and certification procedures and adopt self-
certification procedures by 2002, lower and/or eliminate taxes on
automobiles, bind Korean tariffs on vehicles in the WTO at 8
percent (formerly, Korea's tariff was 80 percent), introduce
secured automobile financing, and implement a program to improve
public perceptions of foreign automobiles. The executive branch is
monitoring Korea's compliance with the agreement. Distilled
Spirits Taxes: Korea applies lower taxes to its domestically
produced distilled spirit, called "soju," than to imported
alcoholic beverages. As a result of various Korean taxes and
tariffs on foreign distilled spirits, the tax burden on imported
liquor is higher than that for soju. In fact, according to the
U.S. government, the tax burden on U.S. whiskey in Korea is more
than four times greater than that on soju. In 1997, the United
States and the EU brought the matter to the WTO, arguing that
Korea levied discriminatory taxes against imported distilled
spirits. 2 Section 301 of the Trade Act of 1974 (19 U.S.C. 2411),
as amended, provides the U.S. Trade Representative with the
authority to enforce U.S. rights under bilateral and multilateral
trade agreements and respond to unjustifiable or discriminatory
foreign government practices that burden or restrict U.S.
commerce. Section 301 investigations can be initiated by USTR or
pursued by USTR in response to a petition filed by a person, firm,
or association. Page 47
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
Both the WTO dispute settlement panel in July 1998 and the WTO
appellate body in January 1999 ruled in favor of the United States
and the EU in the case. In March 1999, Korea informed the WTO that
it was considering options for implementing the WTO's
recommendations. In April 1999, the United States and Korea
requested that the period of time for Korea to implement these
recommendations be determined by arbitration. Korea requested 15
months, which the United States and the EU opposed. The arbitrator
subsequently determined that Korea had 11.5 months to comply with
its WTO commitments in this case. Movie Screen Quotas: By
requiring Korean movie theaters to show domestic Korean films at
least 106 or 146 days each year, Korea in effect imposes a quota
on foreign films, thereby deterring trade in films and cinema
construction and the expansion of theatrical distribution in
Korea. The U.S. government has repeatedly raised this issue with
the Korean government, including during a March 1999 trade mission
to Korea. Currently, this issue is under discussion in
negotiations over a bilateral investment treaty. Intellectual
Property Rights: IPR-related concerns in Korea have involved
limited retroactive copyright protection, incomplete trademark
laws; inconsistent interpretation and implementation of patent
laws; software piracy; production and export of counterfeit goods;
and deficient laws on countering unfair competition and protecting
trade secrets. Although Korea remained on the U.S. government's
Special 3013 "watch list"4 in 1997, 1998, and 1999, the U.S.
government acknowledges that Korea has made significant efforts to
strengthen its IPR laws and enforcement. For example, pursuant to
its obligations under the WTO Agreement on Trade- Related Aspects
of Intellectual Property Rights (TRIPS), Korea passed four acts on
patents, utility models, designs, and trademarks in 1995 and
implemented new copyright, computer software, and customs laws in
1996. In March 1998, Korea's revised trademark law became
effective and a new patent court was established. Nevertheless, in
negotiations over a bilateral investment treaty, the U.S.
government has asked Korea to resolve some remaining
inconsistencies involving its TRIPS obligations. 3 Under the
"Special 301" provision of the Omnibus Trade and Competitiveness
Act of 1988 (19 U.S.C. 2242), USTR performs an annual review to
identify countries that do not provide adequate or effective
protection for intellectual property rights. If a country is
designated as a "priority foreign country," USTR must decide
within 30 days whether to initiate a Special 301 investigation
into the country's IPR practices. 4 USTR has created a "priority
watch list" and a "watch list" under Special 301 provisions to
indicate countries where particular problems exist with respect to
IPR protection or enforcement or market access for persons relying
on intellectual property. Page 48
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
For example, according to USTR, Korea still does not provide full
retroactive protection to existing copyrighted works. Similarly,
Korea's trademark law still does not protect some famous U.S.
cartoon characters because they have not been registered with
Korean authorities. Also, the U.S. government has raised Korea's
failure to provide TRIPS-consistent data protection and full
coordination between Korea's IPR and health authorities to
preclude patent infringements. Telecommunications: U.S. equipment
and services companies have traditionally encountered a range of
market barriers in the Korean telecommunications sector. The
United States first cited Korea in 1989 as a priority foreign
country for trade barriers in the telecommunications field
involving discriminatory procurement practices, "buy local"
policies, lack of transparency (openness), and inadequate trade
secret protection. Despite a 1992 bilateral agreement and a 1993
exchange of letters addressing Korea's telecommunications trade
barriers, in July 1996 the United States designated Korea as a
"priority foreign country" under Section 1374 of the Omnibus Trade
and Competitiveness Act of 1988. Subsequent bilateral negotiations
resulted in a July 1997 agreement in which Korea agreed to
implement a range of policies to address remaining U.S. concerns
and enhance U.S. market access. These policies included national
treatment for foreign companies; government nonintervention in
private sector procurement; increased transparency in criteria and
procedures relating to services licensing, equipment
certification, and type approval; increased foreign ownership in
domestic service providers; enhanced protection of intellectual
property and proprietary information; clear guidelines for
technology transfer; transparent procedures for satellite services
authorization; procompetitive regulatory measures; and an enhanced
independent regulatory role for the Korean Communication
Commission. Korea also agreed to eliminate tariffs on information
technology products and to increase limits on foreign ownership of
domestic telecommunications services companies. As a result of the
agreement, the United States revoked Korea's priority foreign
country designation as of August 1997. The United States is
continuing to monitor Korea's implementation of the agreement as
well as U.S. industry concerns over possible Korean government
involvement in promoting the consolidation of private cellular
telecommunications operators and wire- line companies under
current conglomerate restructuring plans. Financial Services:
Korea has traditionally restricted foreign participation and
involvement in its insurance, banking, and securities sectors.
However, Korea has been liberalizing many of these restrictions in
recent years, particularly in the context of its WTO, OECD, and
IMF Page 49 GAO/NSIAD/GGD-99-174 IMF
Borrowers' Trade Policies Appendix I Priority Import Policies of
Korea, Brazil, Indonesia, and Thailand commitments. According to
the U.S. Treasury Department, under its IMF financing
arrangements, Korea has agreed to a fundamental overhaul of its
weak and noncompetitive financial system. The prudential
regulatory framework is being strengthened and restructured, and
banks and other financial institutions are now expected to operate
in a more transparent and financially sound manner. Additionally,
Korea committed to the IMF to make its OECD commitments on
financial services liberalization part of its WTO commitments,
which would make them subject to the WTO's binding dispute
settlement mechanism. For the insurance industry, Korea included
expanded market access and national treatment of foreign insurers
in its WTO schedule of liberalization measures as part of the 1997
WTO financial services agreement. Similarly, in consultation with
the IMF and the World Bank, Korea is implementing considerable
structural reform in its banking sector to ensure that it operates
on a fully commercial basis. The Korean government has also
committed to the IMF to refrain from interfering in bank lending
or managing decisions, to open its capital markets significantly
to foreign participation, to permit foreign financial institutions
to participate in mergers and acquisitions of Korean financial
institutions, to allow foreign banks to establish subsidiaries or
branches in Korea, and to liberalize foreign exchange controls.
Under its IMF financial arrangements, Korea is also implementing
considerable liberalization of its securities market by removing
or lifting ceilings on foreign investment in Korean stocks, bonds,
or commercial paper. Import Clearance Procedures: The U.S.
government reports that Korea's import clearance procedures often
delay entry of U.S. imports into Korea. For example, certain
sanitary and phytosanitary5 barriers frequently delay some U.S.
agricultural and food exports from entering Korea for 2 to 4
weeks, and sometimes up to 2 months, except for perishable fruits
and vegetables, which take a maximum of 5 days. Problems with
import clearance procedures involve Korea's ingredient listing
requirements, sanitary and phytosanitary rules, standards and
conformity assessment procedures, and arbitrary actions by Korean
inspectors. Korea has addressed some of these issues in response
to U.S.-initiated WTO dispute settlement procedures. Specifically,
Korea agreed to expedite clearance procedures for fresh fruits and
vegetables, to use the concept of scientific risk assessment in
developing a quarantine pest list and setting fumigation
requirements, to revise some of its food additive standards to
bring them closer to international standards, and to eliminate
sorting requirements 5 Phytosanitary measures refers to various
regulations governments may adopt to protect human, animal, or
plant life or health. Although phytosanitary measures may result
in trade restrictions, governments generally agree that in certain
cases they are necessary and appropriate. However, governments may
disagree about the need for or appropriateness of particular
phytosanitary measures. Page 50
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
and requirements on ingredients listing by percentage for all
ingredients. Under its IMF financial arrangements, Korea also
presented a plan in August 1998 to streamline various import
certification procedures and bring them in line with international
practices. Cosmetics: The U.S. government has identified several
impediments to the entry and distribution of foreign cosmetic
products in Korea. These include requirements for the Korean Food
and Drug Administration to approve imports of the same cosmetic
products if they have different countries of origin, the Korean
government's delegation of authority to the domestic industry
association to screen advertising and information brochures, the
mandatory provision of proprietary information on imported
cosmetics to Korean competitors, redundant testing, restrictions
on sales promotions involving gifts with purchases, and burdensome
import authorization and tracking requirements. The executive
branch cited Korea's cosmetics-related trade barriers as a
bilateral priority in a 1997 report to the Congress because the
Korean government had not fully addressed U.S. concerns despite
consultations between the two governments. In January 1998, the
Korean Food and Drug Administration abolished the annual testing
requirement for imported cosmetics and authorized importers to
perform the required self-testing. Nevertheless, significant
delays still remain for final government approval for the local
sale of products developed outside of Korea, and cosmetics are
still subject to the same rigorous and time-consuming approval
process as pharmaceuticals and nutritional supplements. The U.S.
government is working in conjunction with the EU to address
cosmetics trade issues with the Korean government. According to
the Brazilian government, trade liberalization is a key Brazil
element in its efforts to consolidate the country's economic
stabilization process. Brazil's economic liberalization-initiated
in 1990 and accelerated with the Real Plan in 1994-has resulted in
a more open trade regime with generally lower tariffs and reduced
nontariff barriers. Alongside its liberalization efforts, Brazil
has pursued further economic integration through MERCOSUL (South
America's common market) and negotiations to establish the Free
Trade Area of the Americas. The 5-year-old Real Plan, introduced
after nearly a decade of economic stagnation and periods of
hyperinflation, was the key element underpinning Brazil's efforts
to stabilize its economy. Access to Brazilian markets in a
significant number of sectors is characterized as generally good-
with competition and participation by foreign firms through
imports, local production, and joint ventures. Page 51
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
However, some key liberalization measures introduced by the
government of Brazil since 1995 have not been fully implemented-
including some measures to eliminate government monopolies and to
remove the distinction between foreign and national investors. In
addition, the Brazilian government implemented temporary
restrictive measures during 1996-98 to slow increasing trade
deficits. Since 1990, Brazil has relied primarily on tariffs to
regulate imports, rather than on nontariff barriers. Although
Brazil's average import tariff increased from about 12 percent in
1996 to about 15 percent in1998, it remained significantly below
the 1990 level of 32 percent. Within the last 3 years, U.S.
government agencies have been particularly active in reporting on
and addressing trade barriers related to Brazilian protection of
IPR, import financing restrictions, phytosanitary restrictions on
wheat, discriminatory automobile policies, and customs valuation
practices and import licensing system. Intellectual Property
Rights: In April 1993, USTR identified Brazil as a priority
foreign country under "Special 301" because Brazil failed to
provide adequate and effective intellectual property rights
protections. Later that year (May 1993), USTR initiated a Section
301 investigation of Brazil's IPR regime and requested
consultations. As a result of Brazil's commitment to improve the
protection of intellectual property and provide greater market
access for intellectual property products, USTR terminated its
investigation in early 1994 and removed Brazil's designation as a
priority foreign country. However, because of Brazil's lack of
progress in implementing changes to its IPR regime, Brazil was
placed on the priority watch list in April 1995. Subsequent
improvements in IPR protection resulted in Brazil being first
moved down to the watch list in 1996 and eventually being removed
from the list entirely in 1997, when a series of IPR laws was
promulgated. While the new laws represent progress in Brazil's IPR
regime, deficiencies in the TRIPS-consistency and enforcement of
some of these laws resulted in Brazil being placed back on the
watch list in 1999. Specifically, USTR has identified problems
with Brazil's Industrial Property Law, which includes a domestic
working requirement for patents that is not consistent with TRIPS.
In addition, USTR reported that Brazil's uneven enforcement of
copyright laws is a serious and growing concern. Deficiencies in
the Brazilian government's efforts to improve copyright
enforcement have contributed to increasing piracy rates. Problems
were particularly acute with respect to sound recordings and
videocassettes-with virtually all audiocassettes sold in 1998
being pirated copies. Overall, the sound Page 52
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
recording industry saw its piracy losses double in 1998. The U.S.
government contends that the Brazilian government's efforts to
patrol its border and ports have been inconsistent (a significant
amount of the pirated material enters Brazil through Paraguay) and
that the Brazilian government has not provided police the tools or
training to enforce the laws. Furthermore, proposed legal changes
that could reduce criminal penalties for intellectual property
crimes and remove police authority to initiate some searches and
seizures have become a particular concern for the U.S. government.
According to USTR, Brazil's generally inefficient courts and
judicial system have complicated the enforcement of intellectual
property rights. The U.S. executive branch believes that Brazil
should increase fines so as to create a true deterrent to
copyright infringement, increase the effectiveness of the criminal
enforcement system, and decrease delays in the judicial process.
Import Financing Restrictions: In April 1997, Brazil-imposed
requirements effectively prohibited import financing for less than
180 days on purchases from non-MERCOSUL countries and raised costs
for any import financing of less than 1 year. Specifically, Brazil
required importers to purchase foreign exchange for financing
purposes at least 180 days in advance of the due date for short-
term supplier credit (that is, less than 360 days in duration).
Brazil also prevented export credit agencies such as the U.S.
Export-Import Bank from offering short-term credits for certain
categories of purchases (for example, raw materials, spare parts,
and others). According to a Commerce Department official, these
restrictions were implemented as a reaction to Brazil's burgeoning
trade deficit and to combat currency speculation. It is estimated
that these measures added 3 to 5 percent to the cost of affected
imports. The U.S. government raised its concerns bilaterally with
the Brazilian government regarding the WTO- consistency of this
policy and joined as a third-party observer in the March 1998 WTO
dispute settlement consultation between Brazil and the EU. The EU
requested consultations with Brazil in January 1998. Although WTO
consultations are still pending, Brazil eliminated its import
finance restrictions in March 1999 for most practical purposes,
according to the Commerce Department. Phytosanitary Restrictions
on Wheat: The access of U.S. wheat to the Brazilian market was
removed in September 1996, when the government of Brazil
effectively banned U.S. wheat imports due to concerns about the
wheat fungus Tilletia controversa Kuhn. Prior to 1996, U.S growers
exported about 750,000 tons of wheat to Brazil-a leading importer
of wheat. However, the United States and Brazil reached agreements
on U.S. hard red winter wheat after Brazil eliminated its
phytosanitary restrictions Page 53
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
on this type of wheat in April 1998. Brazil's decision was based
on strong scientific evidence presented in a pest risk assessment.
Although Brazil's government published an executive order to allow
entry of U.S. hard red winter wheat into Brazil in November 1998,
the United States has not made any wheat sales to Brazil since the
executive order was signed. The United States continues to work
bilaterally with Brazil to resolve outstanding issues that
restrict market access for other types of wheat as well as other
U.S. exports such as poultry. Automobile Program: In December
1995, Brazil enacted an auto program that offers automobile
manufacturers reduced import duties on automobiles and automobile
parts, and other benefits if they export certain quantities of
parts and vehicles and meet local content targets in their
Brazilian plants. This program adversely affects U.S. exports of
autos and auto parts to Brazil by distorting investment, sourcing,
and production decisions. The United States also believes that the
program violates the WTO's provisions on trade-related investment
measures. As a result, the United States requested WTO dispute
settlement consultations with Brazil on these measures in August
1996. In October 1996, USTR initiated a Section 301 investigation
of Brazil's practices. In January 1997, USTR requested additional
consultations with Brazil in the WTO, focusing specifically on new
aspects of its auto regime that were introduced following the
earlier consultations. These included tariff rate quotas6 for
Korea, Japan, and the EU, and incentives to establish production
facilities in specific regions of Brazil. The United States and
Brazil signed an agreement settling the dispute in March 1998, and
USTR terminated its investigation. In this regard, Brazil
committed to eliminate the trade- and investment-distorting
measures in its auto regime by December 31, 1999, and agreed not
to extend the WTO trade-related investment measures to MERCOSUL
partners when they unify their auto regimes in the year 2000.
Currently, USTR is monitoring Brazil's implementation of the March
1998 agreement, and Brazil is negotiating with its MERCOSUL
partners to establish a new auto regime. The U.S. government is
monitoring Brazil's MERCOSUL negotiations. Customs Valuation and
Import Licensing: In January 1997, Brazil's Secretariat of Foreign
Trade implemented a computerized trade documentation system to
handle import licensing. According to USTR, as 6 Tariff rate
quotas allow a set quantity of a commodity to be imported at a
guaranteed low tariff rate called the "in-quota" duty. Imports in
excess of this quantity are subject to an agreed higher tariff
rate called the "out-quota duty." Page 54
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
of January 1, 1999, the system charged a fee of Real$30 per import
statement and Real$10 per product added to the statement. An
increasing number of products are exempt from automatic licensing.
In addition, beginning in October 1998, Brazil issued a series of
administrative measures that required additional sanitary and
phytosanitary, quality, and safety approvals from various
Brazilian government entities for products subject to nonautomatic
licenses. The October measures and the use of minimum price lists
in conjunction with licensing have been characterized by Brazil as
a deepening of its existing import licensing regime and as part of
a larger strategy to prevent under-invoicing. However, according
to USTR, the use of minimum price lists raises questions about
whether Brazil's regime is consistent with its obligations under
the WTO, and these practices have proven to be a barrier to U.S.
exports. According to U.S. government and WTO sources, in recent
years Indonesia Indonesia has liberalized its foreign trade and
investment systems and has taken a number of important steps to
reduce protection. The Indonesian government has done so by
issuing periodic deregulation packages that have incrementally
reduced overall tariff levels, simplified the tariff structure,
replaced nontariff barriers with more transparent tariffs, and
encouraged foreign and domestic private investment. According to
USTR, Indonesia's average unweighted tariff7 has fallen to 9.5
percent from 20 percent in 1994, and about 160 tariff lines
remained subject to restrictive import licenses, down from 1,112
lines in 1990. A November 1998 WTO report on Indonesia's trading
system commended Indonesia for its trade and investment
liberalization. However, the report noted that the pace of trade
and investment liberalization had slowed during 1994-96. It added
that, prior to its financial crisis, Indonesia had made limited
progress in removing nontariff import barriers and export
restrictions and that liberalization in agriculture and forestry
had lagged reforms in other sectors. Despite this progress,
Indonesia still maintains a number of restrictions to imports and
foreign investment, according to the U.S. government and the WTO.
In recent years, Indonesian barriers to imports included high
tariffs on certain items; quantitative restrictions on some
agricultural and other goods; and barriers to service imports,
including restrictions on wholesale and retail distribution.
Barriers to foreign investment have included restrictions and
prohibitions in certain sectors, such as film and video
distribution and forest concessions. Since 1996, the most
prominent import 7 Unweighted tariffs are the simple average
applied tariff rate across the entire tariff schedule unadjusted
for trade volumes. Page 55
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barrier issue between the United States and Indonesia has
concerned Indonesia's IPR protection. Since April 1996, Indonesia
has been on the U.S. government's priority watch list for
inadequate intellectual property protection. The U.S. executive
branch has cited the following reasons for this designation: (1)
trademark infringement, including software, book, video,
videocassette disk, drug, and apparel piracy; (2) audiovisual
market access barriers; (3) inconsistent enforcement and
ineffective legal system; and (4) amendments to the copyright,
patent, and trademark laws that the U.S. government believes are
not fully consistent with Indonesia's obligations under the WTO
TRIPS agreement. In June 1998 the U.S. executive branch presented
to the Indonesian government a plan for improving IPR protection
that could result in Indonesia's removal from the priority watch
list. However, according to USTR, Indonesia has not been able to
devote significant resources to improving or enforcing its IPR
regime due to its severe economic crisis. Thailand's average
tariff rate in 1998 was about 18 percent. In addition, as Thailand
one of the 10 members of the Association of Southeast Asian
Nations (ASEAN), Thailand has pledged to reach and maintain
tariffs on trade with its ASEAN partners of between 0 and 5
percent by 2003. Generally, the Thai government has continued to
lower tariff rates pursuant to goals established in 1994. However,
USTR and other U.S. government agencies have identified several of
Thailand's trade policies and practices that affect U.S. exports
to Thailand, such as weak IPR enforcement. These barriers include
the following: Inadequate Protection of Intellectual Property
Rights: This is the leading trade issue between the United States
and Thailand. In this regard, USTR initiated Section 301
investigations in 1990 and 1991 regarding Thailand's lack of
adequate protections over intellectual property. Both
investigations found Thailand's copyright and patent protections
to be unreasonable and burdensome to U.S. commerce. Thailand made
significant improvements to its IPR legal regime and enforcement
efforts in the 1990s. Despite this progress, Thailand has remained
on the U.S.' Special 301 "watch list" since November 1994 because
of long-standing IPR enforcement weaknesses. According to USTR's
1999 National Trade Estimate report, the U.S. copyright industry
estimates it lost nearly $200 million from intellectual property
rights infringements in Thailand. In response to these concerns,
the Thai government implemented a series of legal reform
initiatives, established a special Intellectual Property and
International Trade Court, and concluded an intellectual property
enforcement action plan with the United States. However, U.S.
government officials maintain that significant enforcement
problems remain, piracy rates continue to climb, and Page 56
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
monetary penalties or jail sentences are rarely imposed to deter
such crimes. In February 1999, a new enforcement strategy was
implemented, but at the time of our report no information
regarding the success of this effort was available. High Tariffs
on Automobiles: In addition to currently applied domestic auto
sector protections (local content restrictions), which must be
removed by January 1, 2000, pursuant to Thailand's commitments
under the WTO agreement on trade-related investment measures,
Thailand imposes significantly high tariffs on automobiles. While
Thailand's overall average tariff rate is relatively low when
compared with its ASEAN neighbors, its tariffs on automobiles
remain high at 80 percent. However, Thailand's automobile tariffs
have never risen to an actionable level, in part because
Thailand's tariffs are bound in the WTO, and Thailand actually
applies lower tariffs ranging from 42.5 to 68.5 percent.
Furthermore, some U.S. car manufacturers assemble automobiles in
Thailand, thus avoiding the higher tariffs. These manufacturers,
however, pay tariffs up to 35 percent on automotive parts imports.
Thailand recently announced its latest plans to bring its national
car policy into conformity with its agreement on trade-related
investment measures obligations as required by January 1, 2000.
The plans are being studied by U.S. government officials.
Inefficient Customs Operations: USTR and the State Department
report that Thailand's customs clearance processes are arbitrary,
irregular, and inefficient. In 1997, the United States and nine
other chambers of commerce, including Japan's, vigorously and
publicly complained about Thailand's customs procedures. The U.S.
government is concerned about excessive paperwork and formalities,
lack of coordination between customs and other import-related
agencies, and lack of modern computerized processes. However,
Thailand has made progress in reforming some areas of its customs
operations, such as express shipment handling, payment procedures,
and document simplification. The U.S. embassy in Bangkok, the U.S.
Customs Service, the IMF, and others have provided the Thai
government with technical assistance to improve the customs
clearance process. High Duties on Certain Agriculture and Food
Products: Specific duties for most agricultural and food products,
with the exception of wine and spirits, no longer exist, but
import duties on high-value fresh and processed foods remain high
at about 60 percent. As a signatory to the WTO, Thailand committed
to reduce tariffs and began to do so in 1995. However, by the end
of the tariff reduction phase-in period in 2004, duties Page 57
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand
will still be in the 30 to 40 percent range for most consumer-
oriented food products, with the notable exception of apples and
raw tree nuts. In addition to high tariffs, time-consuming and
cumbersome licensing and registration procedures can delay the
entry of new products into the Thai domestic market. Investment
Restrictions: Thailand's agreement with the IMF contains a
commitment to accelerate privatization of state holdings in the
areas of energy, public utilities, telecommunications, and
transportation. Progress in this regard has been slow, but the
Thai parliament has recently passed significant bankruptcy,
foreclosure, and privatization laws that are aimed at expediting
the privatization process. This, in turn, is expected to increase
opportunities for U.S. investors to gain market access to those
service sectors. Under the 1966 Treaty of Amity and Economic
Relations, with the exception of a few sectors, the United States
is exempted from restrictions on foreign equity investment in
Thailand. However, there are still Thai government restrictions
in the communications, transport, and banking sectors; the
exploitation of land and natural resources; and the trade of
domestic agricultural products. Page 58
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Disputes and U.S. Countervailing Duty Cases Involving Export
Policies of Brazil, Indonesia, Korea, and Thailand U.S.
countervailing duty (CVD) laws and the WTO Agreement on Subsidies
and Countervailing Measures provide redress mechanisms against the
adverse effects of subsidization. U.S. companies may file CVD
petitions directly with the Commerce Department. Commerce and the
International Trade Commission (ITC) separately determine if the
subsidies are countervailable and have harmed U.S. industry. To
obtain redress through the WTO's subsidies agreement, a U.S. firm
informally brings its concerns to the U.S. government, which
investigates the matter and then, if warranted, raises the issue
in the appropriate WTO forum. We reviewed the export policies of
four current IMF borrowers: Brazil, Indonesia, Korea, and
Thailand. Since 1996, the United States has formally invoked the
WTO's dispute settlement procedures over a number of Brazilian,
Indonesian, and Korean subsidies and has found subsidies in
Brazil, Korea, and Thailand to be countervailable under U.S. trade
law. For example, the United States invoked dispute settlement
procedures against Korean subsidies to its beef industry and a
Brazilian subsidy to its auto industry, and determined that both
countries were providing countervailable subsidies to their steel
industries. Among other actions, the United States invoked WTO
dispute settlement procedures against Indonesia's automotive
subsidies and determined a variety of Thai subsidies to be
countervailable. Under the Tariff Act of 1930, as amended, U.S.
firms that are materially Mechanisms Available injured by foreign
subsidized goods in the U.S. market can obtain relief to
Anticipate and from certain actionable subsidies by
seeking to have countervailing duties levied on the subsidized
imported goods.1 CVD laws are administered Remedy Adverse
jointly by the Department of Commerce and the ITC. Effects of
Foreign Export Policies An interested party may
file a CVD petition with Commerce alleging that a U.S. industry is
materially injured, or is threatened with material injury, by
reason of imports that are being subsidized by foreign
governments. If the petition demonstrates a reasonable indication
that a subsidy exists and is causing material injury, Commerce and
the ITC conduct separate but parallel investigations. The Commerce
Department determines whether the imported product is being
subsidized, either directly or indirectly. An actionable subsidy
exists when the foreign firm making or exporting the product (1)
receives a "financial contribution" by a government or public
body, (2) receives a "benefit" from that contribution, and (3)
receives a financial contribution that is "specific" (that is, it
is based upon export performance or limited to a certain industry
or group of industries). 1 19 U.S.C. 1671, et seq. Page 59
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix II WTO
Disputes and U.S. Countervailing Duty Cases Involving Export
Policies of Brazil, Indonesia, Korea, and Thailand The ITC
determines whether a U.S. industry is materially injured, or
threatened with material injury, or that the establishment of an
industry in the United States is materially retarded, by reason of
imported subsidized products. Material injury is defined as a harm
that is not inconsequential, immaterial, or unimportant.2 In
determining the threat of material injury, the ITC considers
whether the subsidy practice indicates the likelihood of
substantially increased imports and whether such an increase would
result in material injury to U.S. industry. If the Commerce
Department finds an actionable subsidy and the ITC finds material
injury, Commerce will then issue a CVD order instructing the U.S.
Customs Service to collect additional duties on the imported
product in an amount equal to the subsidy margin determined by
Commerce in its investigation. While U.S. CVD law addresses
foreign subsidized imports in the United The WTO Subsidies
States, under the WTO's Subsidies and Countervailing Measures
Agreement Agreement, U.S. industries have a redress
mechanism against foreign subsidies that affect U.S. business in
markets outside the United States, including the subsidizing
government's market. Under the subsidies agreement, a subsidy is
defined as a financial contribution that imposes a cost on the
government providing it, and confers a benefit to certain
enterprises. The subsidy must be causing serious prejudice to a
U.S. industry.3 In 1995, the U.S. Commerce Department created the
Subsidies Enforcement Office (SEO) to assist U.S. businesses by
monitoring foreign subsidies and identifying subsidies that can be
remedied under the WTO's subsidies agreement when they adversely
affect U.S. business interests. One of the focuses of the SEO's
subsidies monitoring program is to ensure compliance with the
subsidy-related conditions of the IMF stabilization packages and
to uncover subsidy practices that are actionable under the WTO's
subsidies agreement. Unlike U.S. CVD law, a concerned U.S.
business does not file a formal petition with the SEO to allege a
foreign subsidy in violation of the WTO subsidies agreement.
Instead, the SEO receives information concerning foreign subsidy
practices through informal contacts with U.S. businesses, trade
associations, U.S. embassies, and the SEO's own monitoring
efforts. 2 Section 771(7) of the act (19 U.S.C. 1677(7)). 3
Article 6.1 of the Agreement on Subsidies and Countervailing
Measures. Page 60
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Disputes and U.S. Countervailing Duty Cases Involving Export
Policies of Brazil, Indonesia, Korea, and Thailand Once the SEO
has evaluated all available information on the particular alleged
subsidy, SEO will confer with USTR on how to proceed. In many
cases, an effective way to proceed is through informal channels,
bilateral meetings, and in WTO subsidies agreement committee
meeting discussions. However, formal enforcement mechanisms are
also provided for under the WTO subsidies agreement, including
dispute settlement action in the WTO. The WTO Committee on
Subsidies and Countervailing Measures also provides regular
surveillance. In May 1999, the United States participated in
review by the committee of the full notifications submitted to the
WTO by countries that were due on July 1, 1998. Korea's
notification was among those that were discussed at that review.
Over the past 2 years, the United States has posed a series of
questions to all four IMF borrower countries in our review
regarding their WTO subsidy notifications. In addition, it invited
the three Asian borrowers to discuss their IMF financing
arrangements at a special meeting held in April 1998. The U.S.
government tracks export and domestic policies of various
countries for possible subsidization and routinely examines
subsidies notified to the WTO for conformity with the subsidies
agreement. The SEO also has created a "Subsidies Enforcement
Library" that contains such WTO notifications, Federal Register
notices associated with past U.S. CVD cases, and other
information. Commerce and USTR jointly prepare an annual report to
Congress on the WTO subsidies agreement. In addition, USTR, State,
and Commerce include export policies in their regular reports on
trade barriers. Finally, an interagency task force under the
leadership of the U.S. Department of the Treasury is reviewing
trade policies of key IMF borrower countries, including export
policies. All of these rely heavily on industry to identify and
make known potential problems. In February 1999, the United States
requested consultations under the U.S. WTO and CVD
WTO dispute settlement mechanism concerning Korean government
Cases Involving Korea support to its beef industry. The United
States alleged that Korean regulations discriminated against and
constrained opportunities for the sale of imported beef in Korea.
The United States also alleged that Korea provided domestic
support to its cattle industry in amounts that exceeded its WTO
tariff reduction schedule. The United States contended that such
support amounts to domestic subsidies that contravene the WTO
Agreement on Agriculture. A panel was formed to consider the
matter on May 26, 1999. Australia also initiated WTO dispute
settlement procedures against Korean beef practices in the WTO on
April 13, 1999. Page 61 GAO/NSIAD/GGD-
99-174 IMF Borrowers' Trade Policies Appendix II WTO Disputes and
U.S. Countervailing Duty Cases Involving Export Policies of
Brazil, Indonesia, Korea, and Thailand Also, within the last 5
years the Commerce Department has conducted three CVD
investigations, all involving potential Korean government
subsidies to its steel industry. Commerce launched the first of
these investigations in April 1998 to determine whether Korea was
providing countervailable subsidies to certain Korean producers
and exporters of stainless steel plate in coils. In its final
determination in March 1999, Commerce ruled that the subsidy
existed but that it was not countervailable due to its small size.
Nevertheless, prior to Korea's recent IMF financing arrangements,
the Commerce Department found certain other Korean subsidy
programs to be countervailable. These subsidies involved *
government-influenced lending, * government infrastructure
investments at a port facility used predominantly by a state-owned
steel company, * short-term export financing, * tax reserves for
export losses, * tax reserves for overseas market development, *
investment tax credits, and * electricity discounts from a
government-owned power company. In July 1998, the Commerce
Department began another investigation to determine whether Korea
was providing countervailable subsidies to certain Korean
producers and exporters of stainless steel sheet and strip in
coils. In its final determination in June 1999, Commerce ruled
that such countervailable subsidies were being provided. These
subsidies involved * government influenced lending; * the
purchase of one steel company's divisions by another state-owned
steel company; * government-supported infrastructure development
at a port facility used predominantly by a state-owned steel
company; * export industry facility loans; * short-term export
financing; * tax reserves for export losses; * tax reserves for
overseas market development; * investment tax credits; * utility
rate discounts from the government-owned electricity provider; *
loans from the National Agricultural Cooperation Federation; and *
two-tiered pricing structure for domestic customers of one steel
company. Page 62 GAO/NSIAD/GGD-99-174
IMF Borrowers' Trade Policies Appendix II WTO Disputes and U.S.
Countervailing Duty Cases Involving Export Policies of Brazil,
Indonesia, Korea, and Thailand Finally, in March 1999, the
Commerce Department initiated an investigation to determine
whether Korea, among other countries, was providing
countervailable subsidies to certain manufacturers, producers, or
exporters of certain cut-to-length, carbon-quality steel plate. As
part of the investigation that was still ongoing as of April 30,
1999, the Commerce Department is reviewing alleged countervailable
subsidies involving * a two-tiered pricing structure to domestic
customers of one steel company; * government-directed credit
programs; * Korea's Private Capital Investment Act; *
government-supported infrastructure development at a port
facility; * certain tax programs and asset revaluation under
Korea's Tax Reduction and Exemption Control Act; * special cases
of Tax for Balanced Development Among Areas; * certain industry
promotion and research and development subsidies; * Overseas
Resource Development loan and grant programs; * free trade zones;
* excessive duty drawbacks; * port facility fees; *
preferential utility rates; * a scrap reserve fund; * export
insurance rates by the Korean Export Insurance Corporation; *
short-term export financing; * Korean Export-Import Bank loans; *
Export Industry Facility Loans and Special Facility Loans; and *
loans from the Energy Savings Fund. Since 1996, the United States
has participated in two WTO dispute Brazil settlement
proceedings involving Brazilian subsidies. The United States
invoked WTO dispute settlement procedures and held consultations
with Brazil regarding various aspects of its automotive regime in
August 1996, including provisions in its WTO-notified subsidy
program for automobiles. In March 1998, the United States and
Brazil signed an agreement settling the dispute. (See app. I for
more details.) Japan and the European Union have also invoked WTO
dispute settlement procedures in response to various aspects of
Brazil's automotive regime. These consultations were pending as of
April 30, 1999. In a second dispute, in June 1996, Canada
requested consultations with Brazil regarding its claim that
export subsidies granted by PROEX, a Brazilian government export
financing program, to foreign purchasers of Brazil's Embraer
aircraft were inconsistent with the WTO's Agreement on Page 63
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Disputes and U.S. Countervailing Duty Cases Involving Export
Policies of Brazil, Indonesia, Korea, and Thailand Subsidies and
Countervailing Measures. Canada later requested establishment of a
WTO dispute settlement panel to review the matter. The United
States and the European Union reserved their rights as third
parties in the dispute. One of the many U.S. submissions to the
panel challenged Brazil's position that it could provide export
subsidies to counter nonexport credit subsidies offered by another
WTO member. In April 1999, the dispute settlement panel found that
Brazil did not meet the conditions that allow developing nations
more time than developed nations to remove prohibited export
subsidies, such as PROEX. The panel declared that PROEX's interest
equalization program was a prohibited export subsidy and that it
must be withdrawn without delay. In addition to the WTO disputes,
the U.S. government has preliminarily determined one Brazilian
subsidy to its steel industry to be countervailable. In October
1998, the Commerce Department began investigating whether Brazil
was providing countervailable subsidies to manufacturers of
certain hot-rolled flat rolled carbon-quality ("hot-rolled") steel
products. In its preliminary decision in February 1999, Commerce
ruled that some equity infusions and debt-to-equity conversions
provided to several of these manufacturers were countervailable
because they were inconsistent with the usual investment practices
of private investors. The net subsidy rate for these manufacturers
ranged from 6.62 percent to 9.45 percent. The Commerce Department
also preliminarily ruled that tax deferrals that were provided to
some of the same steel manufacturers were not countervailable
because they were not limited to any specific industry. According
to USTR, since 1996, Indonesia's most controversial trade policy
Indonesia has been its efforts to develop an indigenous
automotive industry. Two programs were involved. One program,
which was begun in 1993 and was to be continued until the year
2000, granted import duty relief to certain automotive parts and
accessories for use in assembling or manufacturing motor vehicles
based on the percentage of local content in the finished vehicles.
The other subsidy related to the 1996 establishment of a national
car program. Under this program, Indonesian companies designated
as "pioneer firms" were permitted to import tariff-free finished
automobiles designated as "national cars," and to sell the
national cars luxury tax free for 3 years. A single Indonesian
company was granted pioneer status, and in 1996 it began importing
finished national cars from Korea, where they were produced by a
company that was jointly owned by the Indonesian company and a
Korean firm. In October 1996, 6 months after Indonesia announced
the establishment of its national car program, the United States
and the European Union Page 64
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Disputes and U.S. Countervailing Duty Cases Involving Export
Policies of Brazil, Indonesia, Korea, and Thailand initiated WTO
dispute settlement procedures against the program and against the
other automotive sector subsidy, the local content tariff
exemption.4 After its financial crisis began and while the WTO
dispute settlement procedure still was ongoing, Indonesia
committed to the IMF to eliminate the national car program by
removing its special tax, customs, and credit privileges. In
January 1998, while the WTO dispute was ongoing, Indonesia revoked
these privileges as a commitment to the IMF. Indonesia also
pledged to the IMF to phase out tariff privileges tied to local
content levels, although a WTO panel had not reached a final
decision. In June 1998, the WTO panel issued a final ruling
against Indonesia, and Indonesia was given until July 1999 to
eliminate the second subsidy. In January 1999, the Indonesian
government announced that it would formulate a new national car
policy that would conform to its WTO obligations. In addition to
the national car program, during 1997-99 the U.S. government has
investigated one other Indonesian export subsidy under U.S. CVD
law. In response to a complaint from a U.S. company regarding
extruded rubber thread, on March 26, 1999, the Commerce Department
found that the Bank of Indonesia's rediscount export financing
program was a subsidy because, during 1997 under the program,
"special" exporters received financing at a lower rate than was
available to other firms. However, the Commerce Department
determined that the subsidy provided to the two Indonesian
producers of extruded rubber thread products in question was not
countervailable because the subsidy amounted to less than 3
percent of the value of the products. Since 1996, the United
States has not formally raised concerns about Thai Thailand
subsidies in the WTO; however, in the past the U.S. government has
found a number of Thai subsidies to be countervailable. Some of
these programs were found to be countervailable with regard to
certain apparel, steel pipe and tubing, ball bearings, and pocket
lighters, but no CVD order was issued with respect to pocket
lighters because the ITC did not find material injury to the
competing U.S. industry. These programs were found to be
countervailable: * Export packing credits, which are short-term,
preshipment export loans, provided and recorded on a shipment-by-
shipment basis, and approved new export packing credit loans
totaling $500 million to stimulate export activity in reaction to
Thailand's lagging exports were countervailable. The Commerce
Department determined that this program was countervailable 4 At
the same time, Japan initiated WTO dispute procedures against the
national car program only. Page 65
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Disputes and U.S. Countervailing Duty Cases Involving Export
Policies of Brazil, Indonesia, Korea, and Thailand in the context
of investigations of certain apparel, steel pipe and tubing, and
other products. * Tax certificates for exporters, which are
issued by the Thai government to exporters, and which are
transferable, were found to be countervailable; these certificates
also rebate indirect taxes and import duties levied on inputs used
to produce exports. * Tax and duty exemptions that allow
exporting companies to import machinery and equipment free of
import duties and business and local taxes were countervailable. *
Income tax exemptions that allow companies to obtain 3 to 8 year
exemptions from payment of corporate income tax on profits derived
from net profits for losses incurred during the tax exemption
period were found to be countervailable. * Goodwill and royalties
tax exemption status, which is granted to promoted businesses for
income arising from goodwill, royalties, and other payments for a
period of up to 5 years were countervailable. * Tax deductions
for dividends that allow promoted businesses receiving tax
exemptions to receive an additional deduction from taxable income
for dividends received from promoted activities were found to be
countervailable. * Assistance for trading companies, which the
Board of Investments authorized in 1978 to provide certain
incentives to eligible trading companies, were countervailable. *
Duty exemption for raw materials that allows companies to import
raw and "essential " materials used in the production, mixing, and
assembly of exports, free of import duties were found to be
countervailable. * Permission to maintain foreign currency bank
accounts, which allows a Thai company to hold a foreign currency
account, is countervailable in the event the account is
denominated in U.S. dollars. Page 66
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix III
Comments From the Department of the Treasury Page 67
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
Objectives, Scope, and Methodology This report (1) identifies the
extent to which current International Monetary Fund (IMF) borrower
countries restrict international trade and the countries whose
trade has the greatest potential to affect the United States; (2)
describes in detail the reported trade barriers and export
policies of four IMF borrowers that are among those with the
greatest capacity to affect the United States-Brazil, Indonesia,
the Republic of Korea, and Thailand-and recent actions reported to
have been taken to reduce those barriers or modify policies; (3)
identifies actions, in the context of their current IMF programs,
the four countries have taken or are committed to take to
liberalize their trading systems; and (4) determines the extent to
which the impact of the four countries' export policies on the
United States can be predicted and measured and which U.S.
industry sectors might be affected by changes in trade from these
countries. Except where otherwise noted, we included information
as of April 30, 1999. We defined IMF borrower countries as those
98 member countries that had IMF credit and loans outstanding in
calendar years 1997 or 1998.1 These 98 countries have used IMF
credit at some point during the past 10 years and still have
outstanding obligations. To determine the degree to which current
IMF borrower countries restrict Assessing Borrowers'
international trade, we analyzed several indicators of
restrictiveness, Trade Restrictiveness including average tariff
rates;2 nontariff barriers;3 and indexes constructed by the IMF,
the Heritage Foundation, and the Fraser Institute. The IMF index
is composed of three measures: an index of average tariff rates
and other duties on imports, an index of nontariff barriers, and
an overall index that rates trade restrictiveness on a 10-point
scale that weights nontariff barriers heavier than tariff
barriers. The overall index classifies countries as either "open"
(1 to 4), "moderate" (5 to 7), or "restrictive" (8 to 10). 1 This
includes credit from the use of the IMF's General Resource
Account, as well as from loans made under three concessional
(below-market-interest-rate) programs, the Structural Adjustment
Facility, the Enhanced Structural Adjustment Facility, and the
Trust Fund. 2 Average tariff rates are the average of the applied
rate across the entire tariff schedule. We obtained information on
average tariff rates from various sources, including the World
Trade Organization (WTO), the United Nations Conference on Trade
and Development, the Asia-Pacific Economic Cooperation forum, the
Interamerican Development Bank, the International Trade Commission
(ITC), and the Office of the U.S. Trade Representative (USTR). 3
Nontariff import barriers include quantitative restrictions, state
trade monopolies, restrictive foreign exchange practices that
affect a country's trade system, and quality controls and customs
procedures that act as trade restrictions. Page 68
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
Objectives, Scope, and Methodology Although these indicators do
not comprehensively measure the wide variety of policies that
countries may use to restrict trade, they do reflect important
barriers and provide information on the relative restrictiveness
of countries among each other and over time. We also collected
information on borrowers' tariff levels from other sources. We
then compared how the IMF index rated countries to the way the
Heritage and Fraser Institute measures did so. We found that the
three organizations' measures rated countries similarly and that
the tariff rates used by the three indexes were similar to the
tariff rate data we collected independently. Finally, we
supplemented this information with information from USTR and the
WTO on membership in the WTO, the existence of other multilateral
and bilateral trade agreements with the United States, formal
market access disputes filed, and types of barriers identified in
USTR's annual National Trade Estimate Report on Foreign Trade
Barriers. We selected four of the eight current IMF borrowers for
more detailed Four Countries' Import study-Brazil, Indonesia,
Korea, and Thailand. We selected these four Barriers and Export
countries because, in addition to being important U.S. trading
partners, they are among the 10 top current borrowers and
currently have IMF Policies financing
arrangements. Mexico is the largest U.S. trading partner among
current IMF debtors, and Mexico is the fourth largest current IMF
debtor. We did not select Mexico for our study, however, because
Mexico is not currently in an IMF financing arrangement and thus
is not currently eligible to borrow more funds from the IMF, and
because U.S.-Mexican trade is governed by the North American Free
Trade Agreement. To identify the priority4 import barriers and
export policies of Brazil, Indonesia, Korea, and Thailand, we
relied principally on USTR's most recent three (1997-99) National
Trade Estimate Report on Foreign Trade Barriers. These reports
identify those foreign import policies and practices that have the
greatest potential to affect U.S. exports. We also relied upon
USTR's Trade Policy Agenda and Annual Report of the President of
the United States on the Trade Agreements Program. These reports
identify the executive branch's annual trade priorities. We also
used recent State Department Country Reports on Economic Policy
and Trade Practices. In addition, we interviewed U.S. government
officials from USTR, the Department of Commerce, and the
Department of State. We reviewed the results of countervailing
duty reviews and investigations by the ITC and the Department of
Commerce's International Trade Administration, which 4 We use
"priority" to characterize these policies because the U.S.
government has been particularly active in reporting on and
addressing certain trade practices in specific sectors. Page 69
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
Objectives, Scope, and Methodology were reported in the Federal
Register. And we met with officials from the Department of the
Treasury and the IMF to discuss import and export policies in the
context of each country's current IMF program. Information on
foreign laws and policies does not reflect our independent legal
analysis but is based on interviews and secondary sources. To
identify and determine the status of trade liberalization measures
that Trade Liberalization in Brazil, Indonesia, Korea, and
Thailand have undertaken or have committed Four Countries' IMF
to undertake within the context of their recent IMF financing
arrangements, we defined their "recent" IMF programs as those that
Programs started since June 1997 when the
Asian financial crisis began in Thailand. Several of the countries
technically have had more than one IMF financing arrangement since
then because their original programs were expanded. We considered
a measure to be trade liberalization in nature if it involved
eliminating or lowering either tariffs or nontariff barriers to
imports; concerned policies that promote exports, such as
subsidies; or involved export restrictions. We reviewed public and
nonpublic country and IMF documents, including the countries'
letters of intent and memorandums of economic and financial
policies. We also reviewed IMF staff reports on the countries'
progress in attaining the objectives of their financing programs
and met with IMF and U.S. government officials. We based our
general discussion of the potential impact of export policies
Assessing the Potential on economic literature and reports that
explain how the U.S. government U.S. Impact of the
analyzes the impact of imports and export policies on trade. We
identified the rank of Brazil, Indonesia, Korea, and Thailand as
exporters among IMF Countries' Export borrowers by
examining data prepared by the IMF. The latest available Policies
data cover 1997. We identified the four nations' ranks as world
exporters by examining the WTO's April 1999 report on world trade
in 1998. Exports net of intra-European Union trade were used. We
identified the rank of Brazil, Indonesia, Korea, and Thailand as
suppliers of specific product groups by examining the U.S.
Department of Commerce's 1999 Industrial and Trade Outlook report
and the ITC's 1998 annual Trade Shifts report. To identify which
of the four countries' export policies might harm U.S. industries,
we reviewed the results of countervailing duty reviews and
investigations by the ITC and the Department of Commerce's
International Trade Administration, which were reported in the
Federal Register. We looked exclusively at subsidies; that is,
financial contributions by a government that confer a financial
benefit to selected companies, or that are prohibited by WTO
agreements. We also relied on the Commerce Department's Electronic
Subsidies Enforcement Library to review countervailing duty cases
filed, and spoke with officials from the Page 70
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
Objectives, Scope, and Methodology Department's Subsidies
Enforcement Office to discuss those cases. In addition, we
reviewed each of the four countries' most recent export subsidy
notifications to the WTO's Committee on Subsidies and
Countervailing Measures. However, information contained in these
notifications was dated. To determine which subsidies were subject
to the WTO dispute settlement activity or investigations under
U.S. countervailing duty law, we reviewed the most current
Overview of the State-of-Play of WTO Disputes in addition to the
Commerce Department sources previously cited. Where practicable,
we identified overlaps and linkages between the various types of
policies and issues, but the available information was not always
clear or detailed enough to identify such linkages. We identified
products that showed rising imports and falling prices by
examining trade data for the years 1997 and 1998. Specifically, we
identified product sectors showing large increases in U.S. imports
from the partner by analyzing all U.S. imports from these nations
at both the 4- and the 10-digit levels of aggregation of the U.S.
Harmonized Tariff Classification System. Products that met certain
value, market share, and import increase thresholds were analyzed
further.5 First, we netted out import surges that appeared to be
coming at the expense of other foreign suppliers, instead of U.S.
producers.6 Second, we determined whether price declines had
occurred for the remaining items by calculating unit values of
imports at the 10-digit level.7 The result of this screening
process was that 62 4-digit items, amounting to $4.1 billion in
imports, showed the specified increases in imports and price
declines, as did 300 10-digit harmonized schedule products,
accounting for $5.3 billion in imports. In reviewing whether a
domestic U.S. industry exists, we examined regular monitoring
reports and secured staff-level insights by selected industry
experts at the ITC, the U.S. Department of Commerce, the U.S.
Department of Agriculture, and other sources. A limitation of this
approach is that it is somewhat imprecise and based on at-hand
information, which may be limited. However, it was not practicable
to use other currently available 5 The criteria used at the 4-
digit level were (1) value, $500,000 minimum value of imports of
the product category from the partner in 1998; (2) market share,
the partner accounted for at least 5 percent of total U.S. imports
of the product; and (3) import increase, imports of the product
from the partner had increased by 15 percent or more in value
terms from 1997 to 1998. The criteria used at the 10-digit level
were: (1) minimum value, $1 million; (2) market share, 5 percent
of the U.S. import market; and (3) import increase, 20 percent in
value or quantity terms. 6Specifically, only product sectors that
showed increases in overall U.S. imports were further analyzed.
7At the 4-digit level, unit values at all of the 10-digit product
categories were calculated and then averaged to determine whether
prices fell for the 4-digit category. Page 71
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Appendix IV
Objectives, Scope, and Methodology information on U.S. production
because it is dated and did not neatly match the classifications
used for trade and tariff analysis. We identified products that
were eligible for Generalized System of Preferences treatment by
examining codes in the U.S. tariff schedule identifying such
treatment. We discussed the leading import surges and price
declines identified with staff at the U.S. Department of Commerce
and the ITC. We relied upon these informal contacts as well as
information on export policies developed in a previous section and
information on formal petitions for import relief made under U.S.
trade law to identify products where concern exists by U.S.
producers about harm from imports and/or unfair trade practices by
Brazil, Indonesia, Korea, and Thailand. Such information is
instructive but must be recognized as indicative only. Fully
identifying and analyzing the factors contributing to rising
imports; the nature, extent and impact of competition from imports
on U.S. producers; and the extent of export subsidies would
require information that is beyond the scope of this report. We
performed our work between November 1998 and May 1999 in
accordance with generally accepted government auditing practices.
Page 72 GAO/NSIAD/GGD-99-174 IMF
Borrowers' Trade Policies Appendix V GAO Contacts and Staff
Acknowledgments Elizabeth Sirois, (202) 512-8989 GAO Contacts
David Genser, (202) 512-9617 In addition to those named above, Kim
Frankena, Tim Wedding, Michael Acknowledgments Zola, David
Artadi, Carlos Evora, and Rona H. Mendelsohn made key
contributions to this report. Page 73
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 74
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 75
GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies Page 76
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