International Trade: GATT Treatment of Nonmarket Economy Countries

Published by the Government Accountability Office on 1990-08-01.

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


Evaluator. If you or your staff have any questions about the contents of
this fact sheet, please contact me on (202) 2754812.

Sincerely yours,

Allan I. Mendelowitz, Director
Trade, Energy, and Finance Issues

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Page 5   GAO/NSIAD-W-206FS   International   Trade
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                                         Appendix I
                                         GATf Provisions      for Nonmarket          Ermmnirs

                                         Five East European countries--Czechoslovakia,     Hungary, Poland,
                                         Romania, and Yugoslavia2 -are members of the GATT. Each one, how-
                                         ever, acceded at a different time and on the basis of different provi-
                                         sions. ( No nonmarket c3(*onomieswere among thr original drafting
                                         countries. While Czec~hoslovakia was an original contracting party, it
                                         was not a nonmarket clc’onomy at the time. Table I. 1 shows the status of
                                         nonmarket economy c~~~mtr~~ in G/.‘I”r.

Table 1.1: Current Status of Nonmarket
Economies in GATT                        Country                                                Status
                                         Bulgam                                                 Observer
                                         ChIna                                                  Observer
                                         Czechoslovakia                                         Contracting   party
                                         Hungary                                                Contracting   party
                                         Poland                                                 Contracting   party
                                         Homanla                                                Contracting   party
                                         Sowt       Union                                       Observer
                                         fugoslavla                                             Contracting   party

                                         :io~irce   GAO analvsts   of ‘var,,!~,’ I’ iia

                                         The GATTdrew upon t.h(~charter of the Mernational      Trade Organiza-
                                         t ion,’ an international organization that never came into existence, to
                                         establish import commitments for some nonmarket economy countries’
                                         accession to GATT.’ Alt bough import commitments are not included
                                         among the GXIT provrsicms, they have bren used for the accessions of
                                         f’oland and Romania

                                                                                                     GAO/NSIAD90-206FS   Intrmational   Trade
                         Appendix I
                         GATf Provisions   for Nonmarkrl   Economies

Entry of Nonmarket       GKN has adopted a pragmatic and gradual approach for handling the
                         accession of nonmarket economies into GATT. The Protocol of Accession
Economy Countries Into   of each nonmarket economy country has been drawn up with separate
GATT                     terms. Although GATT does not require it, nonmarket economy countries,
                         as many other acceding countries, can commit to a series of stages of
                         participation leading to full membership: observer status, provisional
                         accession, associate membership,? and full membership. (In practice,
                         however, participation   in each of these stages has not taken place in
                         recent years.) In the case of a nonmarket economy, this process allows
                         time for the country to adjust its international trading practices,
                         bringing them into conformity with cxrr obligations.

                         When a country seeks to become a contracting party to GATT, the process
                         of accession is not automatic or unconditional. Accession requires the
                         negotiation of a specific Protocol of Accession for that country and gen-
                         erally takes into account its current policies, laws, regulations, practices,
                         and the general character or condition of its economy. The Protocols of
                         Accession for Czechoslovakia, Hungary, Poland, Romania, and Yugo-
                         slavia vary considerably, rtlflecting differences in their economies and in
                         the timing of their accc>ssion.

                         Czechoslovakia, as a charter member of G~ZTI’,does not have a special
                         Protocol of Accession, as was required of members that later joined
                         GATT. Yugoslavia, as an associate member of GATT, initially    traded under
                         special provisions within GA’~I’,until its full accession in 1966 on the
                         basis of regular GATT obligations.

                         In the cases of Poland. IIungary, and Romania, however, the contracting
                         parties believed that specific undertakings were required, in addition to
                         those provided for in (;A’rT. to ensure that reciprocal trade concessions
                         would not be impaired by st,ate trading enterprises, central planning,
                         artificial prices, and bilateral trade agreements. These undertakings
                         have taken the form of Increased import commitments, periodic review
                         of the country’s trade. l~~)visions for country-specific    safeguards
                         against discriminatory     or unfair practices, and possible suspension of
                         the benefits of the Protocols of Accession. In return, the contracting par-
                         ties have granted th(isca countries most-favored-nation     status and have

                         Pagr !I                                       GAO ‘NSIAD-W-ZOWS   International   Trade
                                              GAIT Pmvisicms     for Nonmarket Economies

Table 1.2: GATT Provisions   for Nonmarket   Economv Countries
                                                  Effective    Import                                                           Elimination     of
                                   Year of        customs      commitment                         GATT                          quantitative
Countly                            accession      tariff       type                               review         Safeguards     restrictions
Crechoslovakla                     1948                 (No protocol,   ongmal contractmg       party)           NA             NA
Yuaoslavla                         1966          Yes                None                          No             No             NA
Poland                             1967          No                 7 percent   per year          Annual         Yes            No deadlIne
Romania                            1971          No                 Total imports not less        Biannual       Yes   ~~       End 1975”       -~
                                                                    than those Imports
                                                                    prowded for m 5-year
Hungary                            1973          Yes                None                          Biannual       Yes            Early 1975”

                                              NA = Not applvzable
                                              ‘In reality. quant!tatlve restrlctlons have not been totally ellmrx&d
                                              Source Organtratlon for Economic Cooperation and Development

Czechoslovakia                                Czechoslovakia was a founding member of GATE but became a centrally
                                              planned economy shortly after G~‘rr was established. No special adjust-
                                              ments within GATT were made once Czechoslovakia became a nonmarket
                                              economy. Because it acceded as a market economy, it has no special Pro-
                                              tocol of Accession. Czechoslovakia’s volume of trade at the time was not
                                              sufficient to warrant, any changes in its status within the GATT,
                                              according to several experts in the area.

                                              According to the Commerce Department, in 1951, MIT allowed the
                                              LJnited States to suspend GATT obligations toward Czechoslovakia. The
                                              [Jnited States was barred by legislation passed that year from extending
                                              most-favored-nation   treatment to Czechoslovakia and other Communist
                                              countries. In April 1990. the two countries signed a trade agreement
                                              that, when applied, will rely on GAlI' rules on trade including most-
                                              favored-nation status, provide for protection of intellectual property,
                                              and guarantee nondiscriminatorytreatmentregardingaccessto         cur-
                                              rcncy and banking accounts. This agreement has been submitted to Con-
                                              gress for approval.

Yugoslavia                                    Yugoslavia acquired GATT observer status in 1950, associate membership
                                              in 1959, and full, unconditional membership in 1966. During its asso-
                                              ciate membership, Yugoslavia made the transition to a decentralized
                                              economy, introducing tariffs and abolishing multiple exchange rates.
                                              These reforms earned Yugoslavia full membership in GATT based on the

                                               Pa@211                                                        GAO/NSIAMO-206FS   International   Trade
          Appendix 1
          GATf Provisions   for Nonmarket   Economies

          annual import commitments. According to the Department of State, this
          decision was driven by the imposition of martial law in Poland. ‘l’he
          LJnited States restored unconditional most-favored-nation  status to
          Poland in 1987.

          In light of its liberalized trade regime-which   included the establish-
          ment of a customs tariff in January 1988-Poland        has recently sought
          to renegotiate its Protocol of Accession to substitute a tariff schedule,
          similar to those of ot.hcBrGMT members, for it,s current ‘?-percent import
          commitment. According t,o a IWI‘K official, the United States supports
          Poland’s proposal to rcsnegotiatc its terms of accession to GATT,but will
          not commit to any particular outcome of the negotiations without first
          examining the ability of Poland’s reformed economy to undertake stan-
          dard GATT obligations such as national trratmcnt,L” nondiscrimination,
          market access, and fair trade.

Romania   Romania became an observer to WIT in 1957 and a full member in 1971.
          Like Poland, it acctd4 to (;KIT on the basis of adhering to global import
          commitments. l~nlikc~ l’oland, however. Romania was not required to
          commit to a specific. annual increase in imports from GATT cont.racting
          parties. Instead, Romania pledged to a “best efforts” type commitment
          to increase these imports by not less than th<l growth of total Romanian
          imports provided for irl its S-Year Plan.

          Another difference br,t wecn the Polish and Romanian protocols concerns
          the removal of quantit ativc restrictions. The contracting parties com-
          mitted to removing quantitative restrictions on Romanian exports
          within 3 years; no specific time commitment was made with respect to
          Poland. (In practice. hcwc~ver, the restrictions have not been totally
          eliminated for cithcr country.) In addition, the G.WTworking party
          review of Romania’s t radr development and commitments was to take
          place every 2 years, as opposed to the annual review in effect for
          Poland. Romania, furt hcrmore, st.atcd that it considered itself to be a
          de\,cloping country anti thlls belitved that, it was eligible for certain bcn-
          efits provided for tics\ (*loping countries Imder Part IV of GX’I”I‘.?

           Pa@. 13                                      GAO bFZ4LXlO-2OR~S   Inlemationnl   Tradr
                           Appendix I
                           GAlT Provisions   for Nonmarket   Economies

                           accorded normal most-favored-nation    status.“’ On the basis of a 1978
                           bilateral trade agreement, the IJnited States and Hungary reciprocally
                           apply the GATT.

Other Nor-market
Economies not Party

The People’s Republic of   China is an observer to GA’I’Tand has requested accession as a market
                           economy country.” (;.4’I‘T experts generally believe, however, that some
China                      sort of a transition mechanism would make more sense for China’s
                           accession than accession as a market economy. There is no consensus
                           among GATT experts on the kind of transition mechanism to be applied.
                           The pace of accession negotiations, underway since 1987, has slowed
                           considerably since tho government crackdown on student demonstra-
                           tions in June 1989, which called into question the future direction of
                           market oriented reform in China.

                           According to a lrQTK official, the United States is seeking a five-point
                           framework of commitments from China as a precondition to GATT mem-
                           bership: 1) a uniform trade regime would be applied throughout China;
                           2) China would addr(,ss and work to eliminate the GATT-inconsistent non-
                           tariff barriers to trade that are currently in place; 3) China would pro-
                           vide a much greater dcgrc>e of transparency regarding the operation of
                           its trading system than It has previously, including access on a regular
                           basis to trade informat ion and economic data currently not available; 4)
                           China would specify its intentions concerning economic reforms; and 5)
                           China’s exports would bc sub,ject t,o a special safeguards clause pending
                           completion of these rr~f’orms.

                            Page 15                                      GAO/NSIAWSO-206FS   International   Trade
Appendix   II

U.S. Application of GATT to
Nor-market Economies

                The United States was instrumental in developing the principles and
                institutional framework of the GATT and has traditionally     been one of its
                strongest supporters. However, the LJnited States is constrained by
                domestic legislation in its ability to apply GA4TT to nonmarket economy
                countries. Successive U.S. trade acts have barred, or set conditions on,
                the extension of most-favored-nation      treatment (under varying defini-
                tions over the years) to Communist or nonmarket economy counties.
                Under current U.S. law, embodied in Title IV of the Trade Act of 1974.
                certain nonmarket economy countries must satisfy, or receive a presi-
                dential waiver of, the freedom of emigration provision and certain other
                criteria contained in the act. This waiver must be granted by the Presi-
                dent on an annual basis. If a country satisfies the emigration criteria of
                the act, most-favored-nation     treatment is granted on a 3-year basis
                 linked with renewal of a bilateral trade agreement.’

                Since 1975, the IJnitcd States has relied on bilateral agreements with
                nonmarket economies to grant most-favored-nation       status. The substan-
                tive elements of the GATT have been incorporated into bilateral agree-
                ments that the llnited States signs with nonmarket economy countries.
                GATT provisions   are incorporated into a ITS. trade agreement to the
                extent that they do not conflict with the specific provisions of the bilat-
                eral agreement, in which case the latter takes precedence. This kind of
                agreement may be considered inconsistent with the GMT, because GATT
                rules call for compatibility  in domestic policy with GATT policy.

                The United States imposes “column 2” [non-most-favored-nation)        tariff
                rates on all nonmarket economy countries other than China, Hungary,
                Poland, and Yugoslavia.’ Products from these countries are assessed at
                the most-favored-nation   status rates. The denial of most-favored-nation
                status to Communist countries was originally authorized by the Trade
                Agreements Extension Act of 195 1. The act directed the President to
                withhold tariff rate reductions from countries dominated by the “world
                Communist movement.”

                As directed by the statute, the   President withdrew tariff concessions
                from all Communist countries,     except Yugoslavia, which was deemed to
                be exempt from the statute. In    1960, the President determined that
                Poland had shown t,he requisite    independence from the international

                Pil@=17                                    GAO/NSlAB90-206PS   International   Trade
-_____                                                                      -             ..-
    Appendix II
    U.S. Application of GATT to
    Nonmarket l?co~wmirs

     favored-nation or preferential   tariff   treatmwt    to all other countries and
     trading entities.

     Page 19                                       GAO ‘NSIAD90-206FS   International   Trade
Page 21   GAO/NSIA@9@206FS   International   Trade
GAO ‘NSlAD90206FS   International   Trade
Related GAO Products

              C’urrent Issues In I-S. Participation   In   the Multilateral   Trading System
              (c;no~ssr.~D-H5-l18.Sept. 23, 1985).

              I1.S. Laws and Kegulat ions Applicable To Imports From Nonmarket
              E:conomies Could 1%;Improved (ID-81.~5,Sept. 3. 1981 ).

(4X:X45)      Pagr 24                                        GAO/NSIAD-90.ZOGFS   International   Trade
GAO,) NSIAD-YO-ZOBFS Intenmtional   Trade

               Catudal, Honore M. “The General Agreement on Tariffs and Trade: An
               Article-by-Article Analysis in Layman’s Language,” Department of State
               Bulletin, July 1961, pp. l-18.

               Chapman, Margaret, ed. USSR Participation in the General Agreement
               on Tariffs and Trade (GAIT). Washington, DC: American Committee on
               U.S.-Soviet Relations, Sept. 1989.

               Ianni, Edmond M. “International Treatment of State Trading,”          Journal
               of World Trade Law, Nov.-Dec. 1982, pp. 480-496.

               Jackson, John H. World Trade and the Law of    GATT.   Indianapolis:     Bobbs-
               Merrill, 1969.

               Kennedy, Kevin C. “The Accession of the Soviet Union to      GATT,"     Journal
               of World Trade Law, Apr. 1987, pp. 23-39.

               Malmgren, Harald B. “The Soviet Union and the GATT: Benefits and Obli-
               gations of Joining the World Trade Club,” Institute for East-West
               Security Studies, Public Policy Paper, June 1989.

               Naray, P. “Application of the Most-Favoured-Nation      Treatment      in East-
               West Trade,” Acta Juridica, 1979, pp. 145-158.

               Patterson, Eliza R. “Improving GATT Rules for Nonmarket Economies,”
               Journal of World Trade Law, Mar.-Apr. 1986, pp. 185-205.

               “Present Situation of East European Countries in the International
               Trading System: Assessment and Implications,” Organization for Eco-
               nomic Cooperation and Development, Working Paper No. TC/WP(90)16.
               Mar. 14, 1990.

               Van Brabant, Jozef M. “Planned Economies in the GATT Framework: The
               Soviet Case,” Soviet Economy, Ed A. Hewett, ed., Silver Spring, MD: V.
               H. Winston and Sons, Inc., 1988, pp. 3-35.

               ---.   “The Soviet Union in the GATT?: A Plea for Reform,” The Interna-
               tional Spectator, Apr.-June 1989, pp. 72-93.

                Page 20                                 GAO/NSIAD9@206FSInternational          Trade
                                              Apprndix    II
                                              U.S. Application of GATT to
                                              Nonmarket Economies

                                               Communist movement required by the statute, and most-favored-nation
                                               tariff treatment was granted to Poland in 1960, Romania in 1975, and
                                               IIungary in 1978. Table II. 1 summarizes the most-favored-nation status
                                               of nonmarket economies with the United States.

Table 11.1: Nonmarket   Economy   Countries’ Most-Favored-Nation        Status With the United States
                                        MFN with United States           Current MFN
                                        at the time of GATT              status with United     Year MFN             Year MFN                Year MFN
Country                                 accession                        States                 granteda             suspended               resumed
Czechoslovakia                        Yes                                NO                          b                NA                     NA
Yugoslavia                             Yes                               Yes                         NA’              NA                     NA
Poland                                 Yes                               Yes                         1960             19a2-         -~       1987
Romania                                No                                NO                          1975             1988                   NA
Hungary                                NO                                Yes                         1978             NA                     NA
Chtna                                  NA                                Yes                         1979             NA                     NA
Soviet     Union                       NA                                NO’                         NA               NA                     NA
Bulgaria                               NA                                No                          NA               NA      -              idi

                                               ‘Subsequent to the 1951 Trade A$;reements Expansion Act

                                               ‘Czechoslovakia had MFN unlll 1951 MFN status WIII be relnstated “pan congressional       approval of the
                                               U S Crechoslovakta trade agreiwenl sIgned 111April 1990

                                                Not applicable

                                                ‘Yugoslavia never lost MFN stal~i from the United States
                                                The Sowt Unwon slgned a trade ;~greement with the United States r June 1990 MFN treatment WIII he
                                               graFted when Congress apprwrc2 Ihe agreemenl
                                               Source Departments of Slate alxi Commerce Organization for Economic Cooperation and Develops
                                               nenl U S Trade Represcnia’~~

                                               According t,o a IWK c&‘icial. the LJnited States will continue to apply
                                               Article XXXV (nonapplication     of GATT) or otherwise suspend GA4TT rela-
                                               tions with nonmarket clconomy countries as long as most-favored-nation
                                               status is withheld under the conditions imposed by Title IV of the 1974
                                               Trade Act. For example akhough the United States supported the G.41”L
                                               accessions of Romania and IIungary, the IJnited States did not extend
                                               t,hem most-favored-rlatio1~ treatment because of the provisions of the
                                                1962 Trade Agreem(\nt s Expansion Act.

                                               Currently, Title 11’ of the 1974 Trade Act does not allow for the applica-
                                               tion of the most-favot.c,tl-nation prolision of GATT to those countries sub-
                                               ject to the .Jackson-V:m~lc Amendment, except upon an annual waiver by
                                               the President. With t 11c~  chxc,t’ption of the Communist countries still not
                                                rccGving most,-favol.c~(l~Il;rt ion treatment. thtb United States grants most-

                                                Page 18                                                    GAO,‘NSLAD-90.BOBFS    International     Trade
           Appendix I
           GAlT Provisions   for Nonmarket   Economies

           According to a State Department official, an emphasis on China’s using
           its “best efforts” to achieve full compatibility with GATT probably will be
           written into China’s protocol. The only additional binding provision
           likely to be in China’s protocol will be a safeguard clause. According to a
           LISTR official, China’s protocol may be viewed as indicative  of the types
           of commitments and standards that would apply to the Soviet Union at
           the time of its accession to GATT.

           The 1980 ITS-China bilateral trade agreement provides (a) reciprocal
           most-favored-nation   tariff Ueatment on imports; (b) protection of pat-
           ents, copyrights, and trademarks; (c) procedures for the settlement of
           commercial disputes; and (d) safeguards against market disruption. On
           May 22, 1990, President Bush announced a l-year extension of most-
           favored-nation tariff trcsatment to China.

Bulgaria   Bulgaria became an observer to GATT in 1967 and applied for accession
           in September 1986. According to a IISTK official, until recently, proce-
           dural disagreements concerning how Bulgaria’s accession application
           should be approached delayed activation of the negotiations. According
           to the same source, Rugaria has requested consideration for accession
           as a market economy country, a position the l!nited States rejects. GATT
           will begin to consider Hulgaria’s accession application in late 1990, with
           a view to determine whether Bulgaria has undertaken sufficient eco-
           nomic reform to permit its accession.

           Page 16                                       GAO/NSIAD-SO-206FS   International   Trade

          The United States invoked Article XXXV” (nonapplication         of the GATT)
          when Romania joined GATT in 1971. Then, on the basis of a bilateral
          trade agreement, the United States granted Romania most-favored-
          nation status in 1975. Most-favored-nation      status was suspended in .July
           1988, by mutual agreement. The rest of the 1975 IJ.S.-Romania bilateral
          agreement is still in effect, including provisions regarding business facil-
          itation and intellectual property rights.

Hungary   Hungary became a full GOT member in 1973 after 7 years as an
          observer. Like Yugoslavia, Hungary sought GATT accession on the basis
          of tariff concessions. No commitment was made to increase imports
          from GATT members at a fixed percentage rate or on the basis of its past
          import performance, as was true of Poland and Romania. Although some
          GATT members had reservations      about this arrangement, Hungary was
          able to convince &TI’T that its primary method of trade protection was its
          tariffs. In view of Hungary’s economic reforms, this arrangement of
          mutual tariff reductions was accepted by the contracting parties.

          Certain conditions, however, were imposed on Hungary’s accession to
          the GATT. For example. Hungary’s trade regulations were subject to a
          biannual review by the GATT working party. In addition, some G.4TT con-
          tracting parties maintained quantitative restrictions on Hungary’s
          exports, with the provision that the restrictions would be phased out by
          December 31, 1974. This action, however, has not occurred. In a 1988
          bilateral agreement with Hungary, the European Economic Community
          agreed to e1iminat.c its remaining quantitative restrictions on Hungarian
          exports by the end of 19%. Hungary is currently considering whether
          its Protocol of Accession t.o GATT should be renegotiated.

          When Hungary acceded to the GATT, the IJnited States invoked Article
          XXXV (nonapplication       of the GATT), as it had for Romania. However, the
          IJnited States effect,ivcly accorded IIungary annually renewable most-
          favored-nation treatment from 1978 to 1989. after which Hungary was

          “Although    GA?T requin’s unamditional application of most-favored-nation     treatment among its sig-
          nattones, .4nicle XXXV pwmlts R rontracting party to withhold the applicatmn of its schedule of
          tanff concesswns. or of thv (‘nt IT? agreement. from another contracting party with which it has not
          entered into tariff negotiat nns Art~rle XXXV allows a contracting party to have no obligatmns pur-
          suant to a new G4TT mtmhrl

          Page14                                                   GAO/NSIAD80-206FSIntemationalTrade
         ___.                                                                                     -
         Appendix I
         GATT Provisions    for Nonmarket   Economies

          normal obligations (tariff concessions) among contracting parties. No
          conditions were attached to Yugoslavia’s becoming a full contracting
          party to GATT. However, at the time of its accession, Yugoslavia agreed
          to continue to liberalize its foreign trade regime. In effect, Yugoslavia
          acceded to GATT as a market economy. The United States and Yugoslavia
          enjoy   full   GATT WlatiOrls.

Poland    Poland became a cant I-acting party to GATT in 1967, having obtained
          observer status in 195i. The Protocol of Accession provides full applica-
          tion of GATT to Poland, including most-favored-nation  status, However,
          Poland’s terms of accession differ in three ways from most-favored-
          nation treatment a(,(-ordcd to other GATT comracting parties,

          First, in addition to agreeing to the provisions related to state trading
          enterprises already contained in GATT, Poland entered GATT by commit-
          ting to a 7 percent annual increase in the total value of its imports from
          the territories of GAW contracting parties. In return, the GATT con-
          tracting parties madr tariff concessions on Polish imports. Poland’s
          trade is further subject to an annual GATT review by a working party” to
          examine the fulfillment of its import commitments.

          Second, notwithstanding    Article XIII of GMT, the contracting parties are
          free to maintain quantitat ivc restrict ions on Polish exports. However,
          t,hc discriminatory  c~lcment in these restrictions cannot be increased and
          is supposed to be progressively relaxed over an undetermined period. In
          a September 1989 European Community-Poland           agreement, the Euro-
          pean Community committed to abolish its remaining quantitative
          restrictions on Polish exports from the Community within 5 years (or by

          Third, in the event of any market disruption, t,hc importing country may
          have recourse to a saf(,guard clause more rigorous than that generally
          provided for in the (;:TI“I‘. This safeguard clause allows a contracting
          party to restrict thaw exports from Poland that cause or threaten injury
          to domestic produc~(~rs

          In October 1982. the, 1lnited States suspended most-favored-nation                   treat-
          ment to Poland on thcx grounds that Poland had not been fulfilling                 its

          Pat&r 12                                      GAO/NSIAD-!JlK!06FS   Intrmational      Trade
GAIT Provisions   for Nonmarket    Fxonomies

agreed to gradually phase out the quantitative restrictions on their
exports that are inconsistent with Article XIII of GATT.~ According to the
Organization for Economic Cooperation and Development and an official
of the U.S. Trade Representative (IJSTR), the majority of quantitative
restrictions on the exports of Poland, Hungary, and Romania are
expected to be eliminated in the context of negotiations with the Euro-
pean Community, which is the only entity that still maintains them.

The Protocols of Accession for Poland, Hungary, and Romania each con-
tain a safeguard clause and a provision permitting the use of temporary
quantitative restrictions by the contracting parties. Concerning the safe-
guard clauses, in cases of alleged market disruption, bilateral consulta-
tion is required. If no solution is reached, selective safeguard measures
may be applied for as long a time as necessary to prevent or remedy any
injury. IJnder the Polish protocol, this safeguard right is not reciprocal,
but reserved solely for the other contracting parties. Romania and Hun-
gary both have reciprocal safeguard rights. The use of quantitative
restrictions is vaguely worded in all three protocols, calling for “pro-
gressive relaxation” of the restrictions in Poland’s case, and “removal”
in the cases of Romania and Hungary.

Unlike Yugoslavia, Poland and Romania obtained GATT membership
without adjusting their trading systems. Instead, both committed to
adhere to global import. commitments from GATT contracting parties
because neither Poland nor Romania had an effective customs tariff.
According to officials in the Departments of State and Commerce,
Poland’s and Romania’s import commitments generally have not been
met due to adverse economic conditions within these countries and hard
currency shortages.

The individual nonmarket economy countries that are contracting par-
ties to GATT are discussed below in the order in which they acceded to
GATT. Table I.2 summarizes the major features of their GATT accession.

 ‘Article XIII (Nondiscriminatory  Administration of Quuantitative Restrictions) states that a con-
 tracting party may not restrirl Imports from or exports to another GA’IT country unless the restnc-
 tion is applied to all GA’lT mcmtwrs.

 Page 10                                                 GAO/NSlAlWO-206I.S       IntemationaI   Trade
                       Appendix I
                       GATT Provisions   for Nonmarkrt   Economies

                       governments to regulate trade. Because tariffs have a different signifi-
                       cance in nonmarket economies than they do in market economies, a sub-
                       stitute for tariff reductions was needed. Thus, the use of import
                       commitments, as foreseen by the original International   Trade Organiza-
                       tion draft, was considered when some nonmarket economies showed an
                       interest in joining the GATT.

The Soviet Union and   The Soviet Union is not a GATT member but was granted observer status
                       on May 16, 1990. This status will enable the Soviet Union to attend most
GATT                   C;Ayr meetings and to participate in standing committees. However, the
                       Soviet Union will be precluded from participating in any decision
                       making and in settling trade disputes. Further, the Soviet CJnion will not
                       be allowed to take part, in the ongoing Uruguay Round of trade negotia-
                       tions scheduled to end in December 1990. The IJnited States supported
                       granting the Soviet, (Inion observer status before the U.S.-Soviet summit,
                       held in June 1990. as a sign of U.S. interest in bringing the Soviet [Inion
                       into the global economy.

                       IJntil the recent reforms in the Soviet IJnion and Eastern Europe, the
                       IJnited States was the leading opponent of Soviet participation in the
                       GATT, although the European Community        and Japan were also opposed
                       to Soviet observership. In the face of international support for Soviet
                       observer status in the GX~, these countries dropped their objections and
                       joined the other GATT members in stating their expectation that the
                        Soviet Union use it.s new status to achieve economic reforms and to
                        report back regularly to the GATT on its economic progress.

                        Although supportive of GATE’observership, the IJnited States has made it
                        known that the Soviet 1Tnion has a long way to go before it could be
                        considered for full mcmbcrship. Soviet accession to GATT poses concerns
                        due to the size and rigidity of its economy. According to an official at
                        the Department of Statct, previous nonmarket economy Protocols of
                        Accession” would be inadequate models for the Soviet IJnion due to the
                        differences in the size of the various economies and the Soviet Union’s
                        potential impact on t hc international trade system.

                        Page 8                                       GAO/NSIAD90206FS   International   Trade
Appendix   I

GATT Provisions for NonmarketEeonomies

                         The GAP was negot iatcbd in 1947 and came into force in 1948 as a set of
Introduction             disciplines and rulw for the conduct of intwnational        trade among
                         market economy count riw. ‘I’hc G.KI‘ is a framcwwk of rights and obli-
                         gations undertaken among its participants. wfcrr~l to as “wntracting
                         parties.” When a contrac1 ing party “,joins (;/VrI“’ it commits iWlf to
                         apply its national laws. rc~gulations. and prx~t ices in a manner consistent,
                         with the ~~1‘1’provisions. The GKY~cwrtains ;I list 01’ twgotiatcd tariff
                         schedrrlcs, principles. and rules govc~rnirrg trade among the signatories.
                         It also provides a f’orw~~ in whic.11 pat-ticipat ing nations can raise, dis-
                         cuss. and sct.tle trade clispr~tcs.

                         The basic obligations of the GN’I participants are to prwmote nontlis-
                         crimination and cwrnpcxtition in trade through oIwn mark&s. (3x0 ratting
                         parties of the GATT (,onrmit to grant each othc,r “m0St-f’i1vo~‘ctl-~~~~tion”
                         trade trcatmcnt and agwcs not to discriminate irr their trade policies and
                         practices. The G.WI’ aims 10 fostw wmpctition through national commit-
                         rnc‘nts to reduce tarlf’t’5 irllcl rrmow ot htbr barricw to tYiltl(‘.

Nonmarket Economies in   TradcL with nonmarkct wonomit~s wxs not irddK,sscd during the drafting
                         of’ G~YIY;thcrefow, t htw arc no gent~ral politics governing their acccs-
                         sionl to GAlT. The G%‘I?‘.how3vw. dew irwludc cwtain provisions that
                         pertain to state trading operations within ;I market -driven economy.
                         ‘I’hew provisions \wtxL inc,ludcd bccxcx~ (11~1  contracting parties rc~og-
                         nizcd that there may be somt’ dc~grtc of go\ cwrmont intcrvcntion within
                         21market economy. ‘l’tww provisions provitlc the only basis for the inte-
                         #&ion of nonmarkct cwnomics into the GY~I’ system. The provisions
                         address the valuat.iorr ~)t’csports from stat{\ trading wtcrprists   to impk-
                         rwnt antidumping anti cumtcrvailing      rncasllrcs, and addwss t lrt imposi-
                         t ion of quantitativcl txWxGons (i.cl.. quotas on c5ports from state
                         trading cntcrprisw 1.

                         Pap? 6

Appendix I                                                                                                ti
GATT Provisions for    Introduction
                       Other Nonmarket     ISconomies not I’arty to (X’YI                               15
Nonmarket Economies
Appendix II                                                                                             17
U.S. Application of
GATT to Nonmarket
Bibliography                                                                                            20

Related GAO Products                                                                                    24

Tables                 Table I. 1: Current Statr~s of Nonmarket I+onomirs in                              7
                       Table 1.2: GATT Provisions for iionmarkct Econom>                                 11
                       Table II. 1: Nonmarket I%vnomg Count rics’ Most-Favowd-                           18
                            Eation Status Wit 11the United Statc5


                           Page 4                                 GAO,‘NSIAD-YWOBFS   International   Trade
                       .    .

                    and the possibility of suspending their GATT rights if it was found that
                    they were not adequately t’ulfilling their obligations.

                    China is an observer to ~~1’1’and has requested accession. According to
                    an official at the Oft’ic~~of the ITS. Trade Representative, the conditions
                    under which China will negotiate its membership in the G,4TT may be
                    indicative of the conditions under &ich the Soviet Union’s accession to
                    the (;~l”r might be nc~gotiat od.

                    Although the     IJnited States is a strong supporter of the GATT,        legislation
                    has prevented     the I.nitcd States from applying GMT rules in         its trade
                    relations with    nonmarket economy countries. I1.S. laws have           barred or
                    set conditions    on the‘ extension of most-favored-nation  tariff       treatment, i
                    a central ~1’1    obligation. to nonmarket economy countries.

                    In preparing this fac.t sheet, we examined current literature on GATT
Scope and           treatment of nonmarkot economies, held discussions with officials from
Methodology         the Departments of State and Commerce, and sought the opinions of
                    outside> experts.

                    As requested, we did not obtain formal agency comments on this fact
                    sheet. However, WV disc-usscd the contents of this report with officials
                    from t,he Departments of State and Commerce and the U.S. Trade Repre-
                    scnt,ative and incorporated their comments where appropriate. Our
                    work was conducted 1)~ wc’en February and April 1990.

                    Appendix I discusses tile (;.wI provisions for nonmarket economy coun-
                    tries. Appendix II IX\VI~WSthe I’.!? application of the GATT to nonmarket
                    economy countries

                    As agrc>ed with your office. we will distribute this fact sheet to other
                    congressional officcks, t he I 7.S.Trade Representative, and the Secretaries
                    of State> and Comrnc~rc~t~.WV will make copies available to other parties
                    upon rv>qucst.

                    The major contributot’s to this fact sheet were .James McDermott, Assis-
                    tant Dir&or;  Elizabclt II Sirois, Project Manager; and Neyla Arnas,

                     page2                                       GAOiNSIAD-SO-206FSIntemationalTrade
--_-.          -.-.    .   ._,          ,,
                                             United   States   General   Accounting   Office

        iA0                                  Fact Sheet for the Chairman,
                                             Committee on Finance,
                                             U.S. Senate

        August        1996:
                                             GATT Treatment of
                                             Nonmarket Economy

GAO                United States
                   General Accounting  Office
                   Washington, D.C. 20548

                   National Security and
                   International Affairs Division


                   August 1, 1990

                    The Honorable Lloyd Bentsen
                    Chairman, Committ,ee on Finance
                    LJnitcd States Senate

                    Dear Mr. Chairman:

                    As requested, this fact sheet provides information on the General Agree-
                    ment on Tariffs and Trade’s (GATT) treatment of nonmarket economy
                    countries’ in international trade. It also addresses U.S. trade relations
                    with nonmarket economies in the context of the GATT. The information
                    provides a basis to assess conditions under which the Soviet Union
                    mi#ht enter the GATT. This material may be useful in evaluating the
                    I Inited States-Soviet trad(b agreement signed in June 1990.

                    The GATT was established m 1948 as a forum for conducting interna-
Background          tional trade among market economy countries. Trade with nonmarket
                    economies was not addressed during the drafting of the GATT, and there
                    are no general policies regarding their accession (membership) to the
                    GATT. Five East European nonmarket economy countries are members of
                    the (~1’7‘: Czechoslovakia, flungary, Poland, Romania, and Yugoslavia.
                    The Soviet LJnion and China were granted observer status’ in the GATT in
                     1990 and 1982, respectively. Once a leading opponent of Soviet partici-
                    pation in the GATT in the 1!%Os, the LJnited States dropped its objections
                    to grant,ing the Soviet I’mon observer status in 1989 as a sign of U.S.
                    interest in integrating t h(l Soviet LJnion into the world economy.

                   ---~       -
                    The c;A’I’?’has handled the accession of nonmarket economy countries on
Results in Brief    a case-by-case basis. Each of the five nonmarket economy GATT members
                    acceded at a different t imtt and under different conditions. These condi-
                    tions included tariff conct~~~ion~; adherence to import commitments on
                    products from GATT mcmb(,r countries; a “selective safeguard” provision
                    allowing for country-specific   trade restrictions, including quotas, in the
                    event of market disrupt ion; a periodic review of these countries’ trade;

                     Page 1                                   GAO/NSIAD-90.206FS   International   Trade