oversight

International Monetary Fund: Trade Policies of IMF Borrowers

Published by the Government Accountability Office on 1999-06-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                       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
                                                                         1
                                    International Monetary Fund (IMF), the Omnibus Appropriations Act for
                                    1999 (P.L. 105-277) required us to report on the degree to which IMF
                                               2
                                    borrowers restrict free and open trade and whether their export policies
                                    may adversely affect, or result in unfair trade practices against, U.S.
                                                 3
                                    companies. 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)
                                                                                                4
                                    describe 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 (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.




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                   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
                                                                                        5
                   tariff rates for the United States, Japan, and European Union (EU)
                                                                       6
                   countries were between 3 percent and 7 percent. 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.




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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,
                                                           7
Indonesia, and Korea have made changes to trade policies. 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.




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                                           8
the countries’ financial crises. 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
                                                           9
relief from “unfairly traded” imports under U.S. trade law, 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.




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                             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
IMF Borrowers’ Trade         progress, many policies remain that restrict free and open trade, and some
                             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.

Borrowers’ Trade             We analyzed the import barriers of IMF borrower countries using several
                                                                                                    10
                             available measures of restrictiveness, including average tariff rates;
Restrictiveness Has Fallen   nontariff barriers; and indexes constructed by the IMF, the Heritage
                                                                    11
                             Foundation, and the Fraser Institute. 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
                                                                                                     12
                             that during this period the number of countries labeled “restrictive” 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
                                                                                                  13
                             to 7 percent, and the number of open countries rose to 48 percent. Other
                             indicators also confirmed this liberalization trend across the full group of
                             98 IMF borrowers.

About One-half of            Despite the progress made in reducing trade barriers, many restraints
                             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.




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                              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
                                    14
                              report 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.

Borrowers’ Restrictiveness    Our analysis shows that the 98 current IMF borrowers restrict trade to
                              about the same extent as the 78 IMF member countries that do not owe
Levels Are Similar to Those                     15
                              funds to the IMF. 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.




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Figure 1: Percentage of IMF Borrowers
and IMF Nonborrowers in Each IMF
Restrictiveness Index Category




                                        Source: IMF.



                                                                                                                             16
Most Borrowers Are WTO                  Of the 98 IMF borrowers, about two-thirds are WTO members. 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                                                       17
                                        WTO dispute settlement procedures. Many IMF borrowers have also
Respondents in Trade                    undertaken additional WTO liberalization commitments, as well as made
Disputes                                commitments under bilateral agreements with the United States on
                                        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.




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                               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.

Few Borrowers Have Much        Only a few of the 98 IMF borrowers are large enough traders to
                               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.




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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.




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                             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                                            18
                             Indonesia, Korea, and Thailand. These countries accounted for about
Brazil, Indonesia,           7 percent of U.S. trade in 1998.
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.

Financial Crises Have        Any analysis of import barriers and export policies in Brazil, Indonesia,
                             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.




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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
                   19
for trade accounts.

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
             20
conclusion. 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).




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                             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.

U.S. Concerns About Trade    The U.S. government has focused considerable attention in the last 3 years
                             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.
                                                 21
                             automobile exports 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.

U.S. Concerns Over the       Since 1996, the United States has formally invoked WTO dispute
                             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.




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                                  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.




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              22
trade law. 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
                            23
filed a Section 301 petition 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.




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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



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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.



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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
                                                                              24
                                 program was a prohibited export subsidy 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
                                                                      25
                                 locally acquired production inputs. 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




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                                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
                                                                                                          26
                                “national cars” and to sell the national cars luxury tax-free for 3 years.
                                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.




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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.




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                          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
Korea’s, and Thailand’s   disbursements of IMF funds. As part of their recent arrangements, Brazil,
                          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.

Purpose of Trade          A fundamental objective of the IMF’s mission, as embodied in article I of
                          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



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                          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.

Brazil Is to Modify Two   Since December 1998, Brazil made several trade commitments within the
                          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.




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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
                                              a
                                               MERCOSUL 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.



Indonesia Is to Remove                        Since November 1997, Indonesia has made many changes to its trade
                                              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
                                                                                                           27
                                              Indonesia’s efforts to date in reforming its trade system. 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).




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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.
                                               a
                                               Performance criterion.
                                               Sources: Indonesia's letters of intent, IMF, U.S. Treasury Department.




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Korea Has Eliminated Some                 As part of its recent IMF financing arrangements, among other actions,
                                          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.




Other IMF Conditions Could                In addition to trade liberalization measures, as part of their IMF financing
                                          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
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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
          28
portfolio 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.




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                              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
Policies on the United        consumers. However, the large macroeconomic changes in these countries
                              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 Can Distort   Export policies such as subsidies to producers and low-cost financing for
                              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



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                               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
                                                    29
                               U.S. imports in 1998, 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.

The United States Is an        Brazil, Indonesia, Korea, and Thailand are leading world exporters. The
                               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
to Be Among Those Most         that the four countries ranked among the world’s leading exporters in 1998
                               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
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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.

Commerce Is Monitoring        The executive branch has implemented programs to detect and deter
                              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.

Some U.S. Imports From        To shed light on whether the export policies of Brazil, Indonesia, Korea,
                              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                                                                    30
                              showed large increases in U.S. imports in 1998. 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
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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.




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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




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                                                                                                                        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
                     b
Total (all products)                                                                                                              $9,370,226
                                                a
                                                nesoi stands for "not elsewhere specified or indicated."
                                                b
                                                additional products at a more detailed level also met the criteria.
                                                Sources: U.S. Department of Commerce statistics and GAO calculations.




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Some U.S. Industries           Though we did not separately collect production statistics for these items,
                               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
                                                                                                  31
                               under the U.S. Generalized System of Preference (GSP) program. 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.




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                               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.

Investigations Into Industry   Some investigations into complaints over harm from export policies by
                               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.
Major Increases in Imports     Overall U.S. imports of steel were up by 9 million metric tons in 1998, and
                               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.




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                           The ITC is conducting fact-finding investigations of imports of forest
                                                               32
                           products at the Congress’ request. 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.

Concerns Exist in Other    Textiles and apparel imports are increasing sharply, even though U.S.
                                                                                    33
                           limits on the quantity imported (quotas) are in place. 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
                                    34
                           growth, 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
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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
          35
produced.

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
                    36
European markets. 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.




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                      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
                                                                          37
                      contributing to rising imports from Asian suppliers. 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
                                                                           38
                      Brazilian and Korean suppliers of synthetic rubber 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
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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
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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



Letter                                                                                                1


Appendix I                                                                                           44
                         Korean Import Policies                                                      44
Priority Import          Brazil                                                                      51
Policies of Korea,       Indonesia                                                                   55
                         Thailand                                                                    56
Brazil, Indonesia, and
Thailand
Appendix II                                                                                          59
                         Mechanisms Available to Anticipate and Remedy Adverse                       59
WTO Disputes and           Effects of Foreign Export Policies
U.S. Countervailing      U.S. WTO and CVD Cases Involving Korea                                      61
                         Brazil                                                                      63
Duty Cases Involving     Indonesia                                                                   64
Export Policies of       Thailand                                                                    65

Brazil, Indonesia,
Korea, and Thailand
Appendix III                                                                                         67

Comments From the
Department of the
Treasury
Appendix IV                                                                                          68
                         Assessing Borrowers’ Trade Restrictiveness                                  68
Objectives, Scope, and   Four Countries’ Import Barriers and Export Policies                         69
Methodology              Trade Liberalization in Four Countries’ IMF Programs                        70
                         Assessing the Potential U.S. Impact of the Countries’                       70
                           Export Policies


Appendix V                                                                                           73

GAO Contacts and
Staff
Acknowledgments


                         Page 42                      GAO/NSIAD/GGD-99-174 IMF Borrowers’ Trade Policies
          Contents




Tables    Table 1: Trade Liberalization in Brazil’s Recent IMF                          22
            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)


Figures   Figure 1: Percentage of IMF Borrowers and IMF                                  7
            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                       GAO/NSIAD/GGD-99-174 IMF Borrowers' Trade Policies
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Priority Import Policies of Korea, Brazil, Indonesia, and Thailand




                                           1
does not give national treatment 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.




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Appendix I
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



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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
                                                          2
imported vehicles. After a U.S. Section 301 investigation 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.




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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
                                                       3           4
Korea remained on the U.S. government’s Special 301 “watch list” 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.




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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



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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.
                                                 5
For example, certain sanitary and phytosanitary 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.




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         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.



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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



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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



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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
                                                                      6
following the earlier consultations. These included tariff rate quotas 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.”




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            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,
                                                     7
            Indonesia’s average unweighted tariff 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.




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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



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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



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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.




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Appendix II

WTO 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
                                                                1
Remedy Adverse         levied on the subsidized imported goods. CVD laws are administered
                       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.




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                    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,
                                                  2
                    immaterial, or unimportant. 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.

The WTO Subsidies   While U.S. CVD law addresses foreign subsidized imports in the United
                    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.
                             3
                    industry.

                    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.




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                        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.



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  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.




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             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



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            Appendix II
            WTO 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



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             Appendix II
             WTO 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
                         4
             exemption. 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.




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    Appendix II
    WTO 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
                                                                                        1
                        IMF credit and loans outstanding in calendar years 1997 or 1998. 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                                  2                    3
                        including average tariff rates; nontariff barriers; 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.




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                         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,
Policies                 they are among the 10 top current borrowers and currently have IMF
                         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.
                                                        4
                         To identify the priority 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.




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                          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
Programs                  arrangements, we defined their “recent” IMF programs as those that
                          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
Countries’ Export         the rank of Brazil, Indonesia, Korea, and Thailand as exporters among IMF
                          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
                                                     5
import increase thresholds were analyzed further. First, we netted out
import surges that appeared to be coming at the expense of other foreign
                                       6
suppliers, instead of U.S. producers. Second, we determined whether
price declines had occurred for the remaining items by calculating unit
                                         7
values of imports at the 10-digit level. 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.
6
    Specifically, only product sectors that showed increases in overall U.S. imports were further analyzed.
7
 At 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.




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