Towards An Open-World-Economy by Frank McFadzean, Sir Alec Cairncross, W. M. Corden, Sidney Golt, Harry G. Johnson, J. E. (James Edward) Meade, T. M. Rybczynski (1972)

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Towards
an Open World
Economy
REPORT BY AN ADVISORY GROUP
Chairman
Sir Alec Cairncross W. Corden

Sidney Golt Harry G. Johnson
James T.
with Background Papers by

Hugh Corbet Brian Hindley
Harry G. Johnson Seamus O'Cleireacain
David Robertson David Wall
PALGRAVE MACMILLAN
Trade Policy Research Centre
The Trade Policy Research Centre was established in 1968 to
promote independent analysis and public discussion of commercial
and other international economic policy issues. It is a privately
sponsored non-profit organisation and is essentially an entrepreneu-
rial centre under the auspices of which a variety of activities are
conducted. As such, the Centre provides a focal point for those in
business, the universities and public affairs who are interested in
international economic questions.
The Centre is managed by a Council which is headed by Mr.
Frank McFadzean, Chairman of"Shell" Transport and Trading. As
Vice-Chairman and Director of Studies, Professor Harry G. Johnson,
of the London School of Economics and University of Chicago, is
FRANK S. McFADZEAN
Chairman
PROFESSOR HARRY G. JoHNSON
Director of Studies
PROFESSOR JOHN ASHTON PROFESSOR JAMES MEADE
PROFESSOR A. J.
BROWN ALAN F. PETERS
SIR ALEC CAIRNCROSS T. M. RYBCZYNSKI
JAMES A. CLAY LORD SEEBOHM
WILLIAM M. CLARKE HoN. MAXWELL STAMP
w.M. CORDEN PAUL STREETEN
SIR ALEXANDER GLEN JOHN WADSWORTH
SIDNEY GoLT SIR Eruc WYNDHAM WHITE
SIR RoY HARROD MAuRICE ZINKIN
HuGH CoRBET
Director
in charge of the Centre's research activities, while the Director is Mr.

Hugh Corbet. The members of the Council, set out above, represent
a wide range of experience and expertise.
Having general terms of reference, the Centre does not represent
any consensus of opinion. Intense international competition,
v
technological advances in industry and agriculture and new and
expanding markets, together with large-scale capital flows are
having profound and continuing effects on international production
and trading patterns. With the increasing integration and inter-
dependence of the world economy there is thus a growing necessity
to increase public understanding of the problems now being posed
and of the kind of solutions that will be required to overcome them.
The principal function of the Centre is the sponsorship of research
programmes on policy problems of national and international
importance. Specialists in universities and private firms are commis-
sioned to carry out the research and the results are published and
circulated in academic, business and government circles throughout
Britain and in other countries.
Studies arising out of the Centre's two farm-policy projects are
being published as Agricultural Trade Papers, while occasional papers
are appearing as Thames Essays; and, in addition, there is a general
series of books on World Economic Issues in preparation. Meetings and
seminars are organised from time to time.
The Centre, which is registered as an educational trust under
the Charities Act 1960, and its research programmes are fmanced by
foundation grants, corporate donations and membership subscrip-
tions.
Vl
Contents
Trade Policy Research Centre. . . . . . . . . . . . . . . . . . . . . . . . . . . v
Biographical Notes.................................... x
Foreword by Frank McFadzean . . . . . . . . . . . . . . . . . . . . . . . . . xm
Part I General Statement

PROPOSALSFORFUTURETRADESTRATEGY
By Frank McFadzean (Chairman), Sir Alec Cairncross, W. M.
Gorden, Sidney Golt, Harry G.Johnson,]ames Meade and T. M.
Rybczynski . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
General Consensus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Industrial Tariffs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . IO
Developing-Country Exports......................... I4
Safeguard Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . I 5
Non-tariffBarriers to Trade . . . . . . . . . . . . . . . . . . . . . . . . . . I7
Invisible Trade and Capital Movements................ 2I
Agricultural Trade.................................. 24
East-West Trade.................................... 27
Adjustment Assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Most-favoured-nation Principle. . . . . . . . . . . . . . . . . . . . . . . 30
Complaints Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Institutional Arrangements. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Summary ofRecommendations....................... 36
Part II Background Papers

Chapter I
COMMERCIAL POLICY AND THE MONETARY
CRISIS OF I97I
By Harry G. johnson................................... 43
Four Serious Problems............................... 44
American Loss ofPatience............................ 47
Danger in European Pique . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Commitments on Trade Liberalisation................. 51
Vll
Chapter 2
OPTIONAL NEGOTIATING TECHNIQUES ON
INDUSTRIAL TARIFFS
By Hugh Corbet and Harry G. Johnson . . . . . . . . . . . . . . . . . . . . 57
Significance of Extant Tariffs. . . . . . . . . . . . . . . . . . . . . . . . . 6o
Price ofWait-and-See Posture........................ 6r
Another MFN Round............................... 62
Sector-by-Sector Negotiations........................ 64
Tariff Harmonisation................................ 66
Progressive, Linear and Automatic Reductions. . . . . . . . . . 68
Chapter 3
EXPANSION OF COMMERCIAL TRADE IN
AGRICULTURAL PRODUCTS
By T. E. Josling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
European Community's Common Agricultural Policy... 75
Pressures for Policy Reform. . . . . . . . . . . . . . . . . . . . . . . . . . 78
Possible Reforms in Present Framework................ 8r
International Agreement on Agricultural Trade. . . . . . . . . 83
Preliminary Position on Trade Negotiations . . . . . . . . . . . . 87
Chapter 4
DEVELOPING COUNTRIES IN THE
LIBERALISATION OF WORLD TRADE
By David Wall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Background to Generalised TariffPreferences........... 93
Harmonisation of Preference Schemes................. 96
Importance of Adjustment Assistance. . . . . . . . . . . . . . . . . . 97
Chapter 5
PROVISION FOR ESCAPE CLAUSES AND OTHER
SAFEGUARDS
By David Robertson.................................... 103
General Circumstances of Negotiation . . . . . . . . . . . . . . . . . ros
Experience of Escape Clauses... . . . . . . . . . . . . . . . . . . . . . . ro8
Prerequisites for Effective Machinery. . . . . . . . . . . . . . . . . . r II
Necessary Escape Provisions.......................... II3
Vlll
Chapter 6
NEGOTIATIONS FOR OVERCOMING NON-TARIFF
BARRIERS TO TRADE
By Brian Hindley...................................... 127
Difficulties of Negotiating on Non-tariff Barriers........ . 128
Consideration of Negotiating Strategies............ . . . . 132
Chapter 7
ADJUSTMENT ASSISTANCE TO IMPORT
COMPETITION
By Seamus O'Cleireacain................................ 137
GovernnnentProgrannnnes.... ... . . ... . ...... ... . . ... . 139
Criteria for Adjustnnent Assistance. . . . . . . . . . . . . . . . . . . . . 141
Costs of Adjustnnent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
Social Costs oflnstantaneous Adjustnnent. . . . . . . . . . . . . . . 145
Design of an Adjustnnent Assistance Progrannnne. . . . . . . . . 149
Sunnnnary.......................................... 154
Chapter 8
POSITION OF MFN PRINCIPLE IN FUTURE TRADE
NEGOTIATIONS
By Hugh Corbet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
Innpact ofEuropean Policy on Annerican Thinking....... 159
Ennphasis on Principle of Reciprocity. . . . . . . . . . . . . . . . . . 162
Use of Article 24. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
A* lX
Biographical Notes
Members of Advisory Group
FRANK McFADZEAN (Chairman of the Advisory Group) is
Chairman of the "Shell" Transport and Trading Co. Ltd., London,
and a Managing Director of the Royal Dutch Shell Group of
Companies. Mr. McFadzean is Chairman of the Trade Policy
Research Centre and a Visiting Professor of Economics at the
University of Strathclyde where he is also Chairman of the Steering
Board of the Strathclyde Division of the Scottish Business School.
Sir ALEC CAIRNCROSS, Master of St. Peter's College, Oxford,
was formerly Chief Economic Adviser to the British Treasury and
Head of the Government Economic Service. He is also Chancellor
of the University of Glasgow, where he was Professor of Applied
Economics from 1951 to 1961, having previously been Economic
Adviser to the Organisation for European Economic Cooperation.
In 1957-59 Sir Alec was a member of the Radcliffe Committee on
British banking.
W. M. CORDEN, Nuffield Reader in International Economics at
the University of Oxford, has made numerous contributions to the
development of international trade theory, particularly on the
concept of effective protection. Dr. Corden was previously a
Professorial Fellow in the Research School of Pacific Studies at the
Australian National University. He is the author of The Theory of
Protection (1971) and Monetary Integration (1972).
SIDNEY GOLT, an economic consultant, was previously Deputy
Secretary of the Department of Trade and Industry, in the British
Government (197o-71), having earlier been Adviser on Commercial
Policy to the Board of Trade (since superseded by the DTI). Apart
from his participation in negotiations under the General Agreement
on Tariffs and Trade, Mr. Golt took part in the negotiation of the
European Free Trade Association and was later chairman of the
Organisation for Economic Cooperation and Development's high-
level group on tariffpreferences for developing countries.
X
HARRY G. JOHNSON is Professor of Economics both at the
London School of Economics and Political Science and at the
University of Chicago. Professor Johnson is Vice-Chairman and
Director of Studies of the Trade Policy Research Centre in London.
Before going to Chicago he was Professor of Economic Theory at
the University of Manchester from 1956 to 1959. Among his recent
contributions to international economics have been Aspects of the
Theory of Tariffs (1971), Essays in Monetary Economics (r967) and
Economic Policies towards Less Developed Countries (r967).
JAMES MEADE, a Fellow of Christ's College, University of

Cambridge, took part, as Director of the Economic Section in the
British Cabinet Office, in the establishment of the post-war system
of international trade and payments. Professor Meade was later a
member of the panel of experts which in 1958 produced, under the
auspicies of the GATT, the Haberler Report on Trends in International
Trade. From 1947 to 1957, he was Professor of Commerce at the
London School of Economics, later becoming, until 1970, Professor
of Political Economy at the University of Cambridge. Among his
many publications are Problems of Economic Union (1953) and Theory
of Customs Unions (1955).
T. M. RYBCZYNSKI, Chief Economist at Lazard Bros. & Co.

Ltd., is Chairman of the Society of Business Economists and a
Visiting Professor of Economics at the University of Surrey.
Before graduating, he contributed to the subject of economics "the
Rybczynski theorem", one of the fundamental principles of inter-
national trade theory. For a time Mr. Rybczynski was a part-time
Lecturer in Economics at the London School of Economics and
Political Science.
Authors of Background Papers

HUGH CORBET has been Director of the Trade Policy Research
Centre, London, since its inception in 1968, having previously been
a specialist writer on The Times. Since 1965, he has been Secretary
of the Foreign Affairs Club, also in London.
Xl
BRIAN HINDLEY has been a Lecturer in Economics at the London
School of Economics and Political Science since 1967. Dr. Hindley
was previously an Assistant Professor of Economics at Queen's
University, Kingston, in Canada.
T. E. JOSLING, a Lecturer in Economics at the London School of

Economics and Political Science, is a Consultant to the Trade
Policy Research Centre. Dr. Josling has also been engaged on work
for the Home-Grown Cereals Authority and for the Food and
Agriculture Organisation of the United Nations.
SEAMUS O'CLEIREACAIN is a Trade Policy Research Centre

Fellow in the Department of Economics at the University of
Reading. After University College, Dublin, and the Universities
of Detroit and Michigan, Dr. O'Cleireacain was a Lecturer in
Economics at the latter's residential college.
DAVID ROBERTSON is a Reader in Economics at the University

ofReading and also lectures at the Civil Service College in London.
From 1963 to 1966, Mr. Robertson was an economist in the Secre-
tariat of the European Free Trade Association, Geneva, after a period
on the economic staff of Unilever Ltd. in London.
DAVID WALL, Lecturer in Economics at the University of Sussex,

has worked on a consultancy basis for the Overseas Development
Administration and for a number of international organisations,
including the World Bank and the United Nations Conference on
Trade and Development.
xu
Foreword
At its 1972 annual meeting, held in Paris on June 7 and 8 of that
year, the Ministerial Council of the Organisation for Economic
Cooperation and Development (OECD) examined the perspectives
for intemational trade. Four years had elapsed since the successful
conclusion of the marathon Kennedy Round of tariff negotiations
conducted under the auspices of the General Agreement on Tariffs
and Trade (GATT). The OECD Ministerial Council accordingly
agreed that broader opportunities for further progress towards the
general aim of liberalisation of intemational trade should be
explored.
In order to examine the trade problems defmed by the ministerial
meeting, a high-level group of personalities designated by their
respective govemments and, in one instance, by the Commission of
the European Community was formed by the Secretary-General of
the OECD, Emile van Lennep, and announced on December 8,
1971. The high-level group, under the chairmanship of Jean Rey,
the former President of the Commission of the European Com-
munity, was asked to identify "trade and related problems", assess
their relative urgency, consider how they might be dealt with and
set out options for their solution.
If the Rey group served no other purpose, it would-and has-
focussed govemmental attention on the fundamental problems
facing the world economy. These last have been the subject of
intensive and highly professional study in the United States, and
elsewhere, ever since the completion of the Kennedy Round
negotiations. On the other side of the Atlantic, however, attention
has generally been diverted from global issues by the difficult
negotiations on the enlargement of the European Community. The
next phase in the movement towards an open world economy has
had to wait on the conclusion of those negotiations.
Now that the "enlargement" negotiations have been completed,
and the United Kingdom along presumably (at the time of writing)
with Denmark, Ireland and Norway are to become full members of
the Common Market on January I, 1973, the European Community
is able to devote more concerted attention to the development of
Xlll
its relations with the United States, Japan and the other developed
countries, as well as with the countries of the Third World towards
whom it shares with other advanced economies a special responsi-
bility. At the Group ofTen meeting (in Washington in December
1971) which settled, for the time being, the monetary crisis of 1971
it was agreed that in parallel with a reform of the international
monetary system there should be a reform of the international
trading system.
Arising out of the Smithsonian accord, the European Com-
munity undertook, in a joint declaration with the United States
early this year, to commence preparations for a further round of
multilateral trade negotiations beginning in 1973. Shortly after, in
a similar joint declaration with the United States, the Japanese
Government also undertook to start preparations for multilateral
trade negotiations next year under the auspices of the General
Agreement on Tariffs and Trade (GATT). Since then other sig-
natory countries to the GATT have associated themselves with
these declarations.
In an unduly lengthy period between major multilateral trade
negotiations there has been a noticeable decline in international
commercial relations. The preoccupations with domestic and
regional problems have resulted in neglect of global ones. In the
absence of any significant initiatives for maintaining the momen-
tum of world trade liberalisation it was only to be expected that,
among industrially advanced economies, the industries wanting
special protection from import competition would be able to wrest
the initiative from those interests which have been responsible in
the past for sustaining liberal trade policies. That is why it will be
necessary for governments, as they prepare for another GATT
round, to reassert the liberal trade philosophy that most industrially
advanced economies have over two hundred years generally come
to accept. To do that they will need to agree on a programme of
trade liberalisation that, apart from addressing fundamental prob-
lems, is capable of inspiring public imagination and support.
Over the past four years, the Trade Policy Research Centre has
sought clarify the major issues confronting the international
economic system, especially in regard to commercial policy ques-
tions.With the establishment of the OECD high-level group on trade
and related problems, it seemed an opportune moment to draw
together recommendations based on the results to date ofthe TPRC's
XlV
research programmes, for which purpose an advisory group was
formed under my chairmanship. The other members of the advisory
group have been Sir Alec Cairncross, Max Carden, Sidney Golt,
Harry Johnson, James Meade and T. M. Rybczynski. Many of them
have played key roles in commercial diplomacy while others have
made outstanding contributions to international economics.
Early on, we had discussions with Sir Richard Powell, the British
member of the OECD group, and offered the papers published in
this volume for his initial use and subsequently had several meetings
with him. These discussions-and others the Director of the Centre,
Hugh Corbet, had with senior officials of the GATT and the OECD
-revealed five areas of particular concern to governments as they
look forward to the forthcoming Geneva negotiations. They can be
posed as questions :
I. What institutional changes should be made to improve
the management of the world economy, particularly in respect
to the GATT and the International Monetary Fund (IMF)?
2. What place, if any, should most-favoured-nation treat-
ment have in future international trade arrangements in view
of the proliferation of discriminatory trade agreements?
3. Given that future trade negotiations must cover trade in
agricultural products, what courses are open that would not
involve radical changes, in the short-run, in the principles and
fundamental character of the European Community's common
agricultural policy?
4· If one of the objectives of future trade negotiations is to
be the elimination of substantially all industrial tariffs and the
introduction of rules of competition covering non-tariff
methods of protection, as has been proposed in various quarters,
what safeguards against market disruption should be incor-
porated in international trade agreements and, moreover, what
provision should be made for adjustment assistance to import
competition?
5· Finally, what consultative processes and legal procedures
should be adopted to ensure adherence to internationally agreed
rules of behaviour in international trade?
The advisory group decided that the above questions had to be
discussed in the context of the broad range of issues facing the world
economy. Background papers were accordingly prepared under the
supervision of Professor Johnson, as the Centre's Director of Studies,
XV
and drawing on current and completed work conducted under the
TPRC's auspices. These papers provided the basis for the general
statement which is the first part of the present volume.
The second part of the volume contains the background papers
whose authors bear responsibility for the views they express. While
the papers are not necessarily endorsed in every detail by the advisory
group, they do set out more fully the arguments behind the pro-
posals advanced in the general statement, which makes footnote
references to them and to other studies published by the Centre.
Finally, it ought to be emphasised that the Centre, having general
terms of reference, does not represent any consensus of opinion. The
report of the advisory group does not therefore purport to represent
the views of others associated with the Centre.
FRANK McFADZEAN
Chairman
Trade Policy Research Centre
London
July, 1972
XV1
PART I
General Statement
Frank McFadzean
Chairman
Sir Alec Cairncross
W.M.Corden
Sidney Golt
Harry G. Johnson
James Meade
T. M. Rybczynski
GENERAL STATEMENT
Proposals for Future Trade Strategy

by ADVISORY GROUP
Towards the end of World War II, many of the world's most
expert officials on commercial and monetary affairs, with many of
the most highly qualified academics in the field, were engaged on a
new and challenging exercise, the deliberate planning of insti-
tutional arrangements that would together constitute a viable frame-
work for the re-establishment of a liberal international system of
trade and payments. The Bretton Woods negotiations, as they were
called, after the location of the exercise in the United States, pro-
duced two institutions. The International Monetary Fund (IMF)
was established as a means of improving the system of payments
and currencies. In order to augment the flow of capital from rich
to poor countries, there was also established the International Bank
for Reconstruction and Development (IBRD), otherwise known as
the World Bank. Almost concurrently, negotiations in Geneva
produced, in place of the originally intended International Trade
Organisation, the General Agreement on Tariffs and Trade (GATT)
as an instrument for pursuing the liberalisation of world trade.l
At the time, it was generally understood that all these aspects of
international economic relations-money, trade and development-
were inter-related and of a piece. But that understanding has become
faded in actual practice. Two major reasons can be given.
One reason has been institutional. The IMF and IBRD are
situated in Washington, and essentially have been in the same
building, while the GATT is in Geneva. In addition, the IMF and
1 For authoritative accounts of the development of the post-war system of international
trade and payments, see Richard N. Gardner, Sterling-Dollar Diplomacy: Anglo-American
Collaboration in the Reconstruction of Multilateral Trade (Oxford: Clarendon Press, 1956) and
Gerard Curzon, Multilateral Commercial Diplomacy (London: Michael Joseph, 1965).
Also see Karin Koch, International Trade Policy and the GATT 1947-67 (Stockholm:
Almqvist & Wiksell, 1969) and Kenneth W. Dam, The GATT Law and International Economic
Organisation (Chicago and London: University of Chicago Press, 1970).
3
4 GENERAL STATEMENT
the IBRD hold common annual meetings at which specific prob-

lems and general issues are discussed, but at which the GATT is
not represented. More recently, the growing membership of the
GATT forum, where the actual negotiations on trade problems are
conducted, has meant that the developed countries have been
acquiring a preference to discuss, and at least clarify, the broad
commercial policy issues of direct concern to them in the frame-
work of the Organisation for Economic Cooperation and Develop-
ment (OECD) before taking them further in a more universal
setting. Consideration of trade questions has thus been, and is
being, institutionally separated from consideration of monetary and
development questions.
The second major reason why understanding of the inter-
relationship of commercial and financial questions has waned is
more fundamental. Monetary and development issues can be
discussed in terms of general theoretical principles into which
points of detail can be fitted quite readily. While, on the other hand,
the principles of free trade and non-discrimination in commercial
relations are quite clear, their interpretation and application to
government policy is extremely complicated. By contrast, then, to
fmance and development, trade raises a host of issues that are diffi-
cult to relate to basic principles, particularly within an institution
that is not explicitly an international authority, but is instead an
international agreement on complex rules of behaviour to which
national governments are expected to adhere.
This dichotomy has affected the way in which the three major
international economic institutions have developed. For the evolu-
tion of the IMF and the IBRD has been a relatively straight-forward
matter of realising, accepting and pursuing the implications of their
objectives. On the other hand, the evolution of the GATT has been
more a matter of signatory countries exploiting loopholes in the
General Agreement; sometimes such exploitation has been con-
tained, as over export credit subsidies, but on other occasions the
signatory countries have simply acquiesced, as over import charges.
Following the successful completion of the Kennedy Round of
GATT tariff negotiations in 1967,2 and with the gradual establish-
ment of the European Community, new problems in the develop-
ment of the international trading system have emerged either in
results of the Kennedy Round negotiations are analysed in Ernest Preeg, Traders and
2The
Diplomats (Washington: Brookings Institution, 1970).
PROPOSALS FOR FUTURE TRADE STRATEGY 5
fact or in the general tlllderstanding of the issues and objectives of

further trade liberalisation. Other factors have affected the situation.
One has been the discrimination against trade with the rest of the
world implicit in the European Community's customs tu1ion and
common agricultural policy. Another has been the prospective
enlargement of the European Commtlllity, the free trade agree-
ments negotiated with the "non-applicants" of the European
Free Trade Association (EFTA) and the "association" and other
preferential trade agreements to be negotiated with Mediterranean,
African and Caribbean members of the Commonwealth.3 Then
there have been policy choices made by the United States in response
to its balance-of-payments difficulties.4 These and others have con-
stituted a serious risk of a de facto retreat from the liberalisation
objectives of the GATT into protectionism and regional dis-
crimination.s
There is danger that the self-interested actions of governments
will destroy the liberal system of international economic relations
so painfully built up over twenty years of thought and negotiation.
While the time has come for reforms, the system did contribute to
the post-war reconstruction and then the growing prosperity of
Western Europe, to which self-confidence and a sense of security
have been restored. With the restoration of some semblance of
order in world economic affairs, the developing cotllltries and the
exporters of temperate-zone agricultural products, not all of which
are part of the Third World, are now beginning to expect more,
not less, from the international system of trade and payments. They
have begllll to entertain hopes that a coordinated approach to their
problems might at last be possible.
The monetary crisis of 1971 served to dispel much of the com-
3 In addition, a number of island-states in the Indian and Pacific oceans were also offered,
as a result of the "enlargement" negotiations, association agreements with the Common
Market.
4 For an American critique of the United States Administration's measures of August 15,
1971, see C. Fred Bergsten, "The New EconOinics and U.S. Foreign Policy", Foreign Affairs,
New York, January, 1972. Also see Dr. Bergsten's article, "Crisis in U.S. Trade Policy", in
the July, 1971, issue of the same journal.
A statement of the Administration's position can be found in Peter G. Peterson, A Foreign
Economic Perspective (Washington: Council on International EconOinic Policy, Executive
Office of the President, 1971).
5 Cf. Theodore Geiger, "Toward a World of Trade Blocks", The Atlantic Community
Quarterly, Washington, Winter, 1971-72. The analysis is elaborated upon in Geiger, Trans-
atlantic Relations in the Prospect of an Enlarged European Community (London, Washington and
Montreal: British-North American Committee, 1971).
6 GENERAL STATEMENT
placency about the international system that had developed since

the Kennedy Round negotiations. On the one hand, the measures
taken by the United States on August 15-the imposition of a
temporary import surcharge, the decision no longer to convert
dollars into gold and the introduction of a tax credit to assist
exporters-seemed to be a further symptom of a possible movement
towards trade warfare. Yet, on the other hand, the measures could
be seen as a warning to governments of the dangers of creeping
protectionism. In resolving the immediate crisis, settled in the so-
called Smithsonian accord, reached on December 18, 1971, by the
Group of Ten at a meeting in Washington, the advanced countries
recognised-at least at the time-the necessity for a positive and
far-reaching initiative for carrying forward the liberalisation of
world trade.
As a result of the gradual deterioration in international com-
mercial relations after the completion of the Kennedy Round
negotiations, there has been a noticeable decline of confidence in
the GATT system, which is vaguely thought to have become
outmoded. The principles and rules of the General Agreement are
said by some to be in need of extensive revision. It may be though
that they do not need to be reformed as much as they need to be
reasserted. For it sometimes seems that GATT principles are now
more honoured in the breach than in the observance. Whether that
is the case or not, any amendments to, or elaboration of, the instru-
ment which has governed international trade for quarter of a
century would best be handled in the context of further multilateral
trade negotiations. The circumstances of the middle 1970s are not
propitious for a renegotiation of the General Agreement from start
to fmish.
Since its inception in 1968, the Trade Policy Research Centre has
devoted much of its research effort, in several different programmes,
to the issues involved in formulating a major new trade initiative.6
The problems are complex, both because the environment of inter-
national relations has greatly changed since the days of Bretton
Woods, economically and politically, and because the process of
negotiating tariff reductions has revealed many new and difficult
dimensions of the problem of establishing reasonable and fair rules
of competition for a liberal trading world.
6 Someof the publications arising out of these studies are set out in the Bibliography at the
end of this volnme.
The statement begins with a brief outline of what is considered

to be a general consensus of informed opinion on the desirable
objectives of future policy. It then proceeds to deal with how, in
broad terms, solutions to specific problems might be attained.
GENERAL CoNSENsus
Since the conclusion of the Kennedy Round negotiations there

has developed a substantial body of opinion that would support the
following assessment of international trade policy:
First, emphasis should be put on the increasing integration, and
growing interdependence, of the world economy. Intense com-
petition, large-scale capital flows, technological advances in industry
and agriculture, still greater economies of scale and the development
of rapid transport and communications, and of new and expanding
markets, are all factors that are having profound and continuing
effects on international trade and production patterns. In addition,
six rounds of multilateral tariff-cutting negotiations have helped to
promote a doubling of world trade over the last decade; indeed,
world trade has been expanding twice as fast as world income.
It would be desirable, from the point of view of economic
growth and efficiency, to eliminate the remaining tariffs on indus-
trial products traded among the developed countries. To permit this,
however, improved methods must be found for relieving excessive
economic and social stress resulting from sharp and sudden changes
in the international competitive position of important domestic
industries. This raises the problem though that these new methods
may simply be used for protectionist purposes in substitution for
old-fashioned tariffs and quotas.
As tariffs are reduced, so-called non-tariff barriers to inter-
national trade gain in significance. Complex issues are raised over
their definition and in the assessment of their importance. There
are also problems in determining whether and which of such
barriers are protective in intent or in effect serve a genuine social
purpose. It is an easy answer to propose the development of inter-
national rules of fair competition-or, more precisely, codes of fair
practice by governments in relation to competition between domes-
tic and foreign producers-to be policed by the GATT or possibly
some ad hoc body or bodies. The problem is how to negotiate those
rules and secure adherence to them.
Although the GATT recognised the socio-political problems
8 GENERAL STATEMENT
associated with agriculture, the rules governing trade in agricultural

products were never intended to diverge as widely as they have from
those governing industrial trade; in fact, they now approximate to
the law of the jungle. At least a start must be made on restoring
more orderly trade in agricultural products, establishing rules which,
while paying some regard to the special features of agricultural
production, are conducive to efficient trade on the basis of com-
parative advantage, by reducing and regularising the protection
accorded by importing countries to their domestic agriculture and
opening up their markets to the exporting countries. (It must be
recognised, too, that some exporting countries resort to unfair
methods of competition via export subsidisation and dumping.)
In view of the downward trend of official development assistance,
there is a need to give special attention to the provision of export
markets for the less developed countries. This, however, raises the
issue of" market disruption", which is two-sided involving:
(a) actions by the developed countries to increase the flexi-
bility of their industrial policies and their capacity to absorb
rapid increases in exports from less developed countries, and
(b) actions by the less developed countries to restrain the
rate of growth of their exports to particular markets at par-
ticular times and also to diversify both their export range and
their foreign markets.
With the increasing integration of the world economy, com-
mercial trade, foreign investment and flows of dividends, interest
and royalties have become increasingly inter-related. A significant
contribution to this process results from the activities of multi-
national enterprises. Multinational corporations are obviously
becoming a more and more important factor in international
economic relations. In spite of recent academic attention, more
thought and study is required on the problems they may be raising,
and on the solutions to those problems. We therefore suggest that
before international negotiations on the operations of multinational
enterprises are considered, the facts and issues should be subjected to
further and close examination, perhaps by an inter-governmental
working party, possibly under OECD auspices.
Given the complexity of the problems raised by non-tariff
barriers and by agricultural trade, as well as past experience, there
is little hope of significant progress being made in the resolution of
these problems, with a view to moving towards worldwide free
trade, if they are tackled simply on a piecemeal or an item-by-item

basis. Naturally each product or group of products will require its
own international team of experts. But with respect to most
products it is improbable that they would lend themselves to satis-
factory bargains being reached on a basis of reciprocity and mutual
balanced advantages, because of the problems of measurement
involved and also because the significance of non-tariff measures,
both in industry and agriculture, varies from country to country.
Successful negotiations, attaining substantial results, will require
negotiation on the individual items within a framework of equal
commitment to initially agreed broad policy objectives-as in the
Kennedy Round negotiations only more so-in order that the
bargaining process will be looking towards an overall beneficial
result, with mutual gains and losses balanced out on average.
One of the major factors responsible for regressive tendencies
away from free trade principles in recent years has been the mal-
functioning of the international monetary system. In particular, the
combination of a commitment to the maintenance of fixed exchange
rates and an insistence on independence in national fiscal and mone-
tary policy has produced severe strains on the international mone-
tary system, reflected in balance-of-payments deficits and the resort
to restrictions on international trade and capital movements as a
means of correcting them. This resort is in principle futile, although
it may appear to work transitionally, but it is established as legiti-
mate policy under the circumstances. Hence a liberal system of
international economic relations will always be in jeopardy so long
as the international monetary system functions no better than it has
done in the past.
A prerequisite of an effective initiative towards a more liberal
international trading system is a reform, then, of the international
monetary system. Various ideas, of differing degrees of probable
effectiveness, are available. They indicate two alternatives:
(a) a greater flexibility in exchange rates among the major
currencies to allow countries the policy independence they now
desire to exercise, without obliging them to impose, or excusing
them for imposing, balance-of-payments restrictions on inter-
national transactions; or
(b) harmonisation of national fiscal and monetary policies
to the extent required to maintain international monetary
equilibrium at fixed exchange rates.
10 GENERAL STATEMENT
The latter is the declared objective of the European Commu nity,

and might conceivably be feasible, at least in conjunction with a
floating or easily-adjustable pegged-exchange rate for a commo n
European currency against the American dollar. But two necessary
conditions for the effective implementation of such a solution put
it beyond the bounds of possibility at the present time. For there
would need to be concerted controls on short-term capital move-
ments. In addition, there would need to be harmonisation of wage
determination by both labour unions and employers as well as by
governments, thus necessitating an international incomes policy.
Greater flexibility in exchange rates therefore seems the more
practical solution and one that might be negotiable against the
background of the 1971 monetary crisis.
INDUSTR IAL TARIFFS
Tariff reductions on industrial goods are probably the easiest
element to deal with in a program me for the liberalisation of world
trade. It must be acknowledged though that, as matters stand, the
reduction and elimination of tariffs on industrial products traded
between developed countries has to be part of a more compre-
hensive "package" including non-tariff barriers, agriculture and
developing-country exports. Moreover, in some cases tariffs in
developed countries have been kept up, and their restrictive effect
even supplemented by quotas, for plainly protectionist purposes,
including defence against market disruption by imports mainly from
less developed countries. On the question of tariff reductions there
are two key issues.
The first issue concerns the objective of further multilateral tariff
negotiations. As with the Kennedy Round negotiations, they will
have to be motivated by a high objective, compelling enough to
induce in the major trading partners a political commit ment to their
eventual success. Tariffs on industrial products traded between
developed countries have been reduced to very low levels. In fact,
their average level, weighted by OECD trade, is now 8.3 per cent
for the United States, 8.4 per cent for the European Community,
10.2 per cent for the United Kingdo m (ignoring Commo nwealth
preferences) and 10.9 per cent for Japan. Merely to aim at halving
the industrial tariffs that remain (which was the objective of the
Kennedy Round negotiations) might not be deemed worth the
effort. This suggests that, if governments are to be serious about
PROPOSALS FOR FUTURE TRADE STRATEGY II
further multilateral trade negotiations, one of the objectives should

be the elimination of all, or substantially all, outstanding tariffs on
industrial products traded between developed countries.
If multilateral trade negotiations are viewed in an historical
context, it can be seen that freer trade could be the only realistic
objective of the free-enterprise world in the 1950s and 1960s, given
the need to restore orderly conditions in international commerce
following the disorders of the 1930s and 1940s. The 1970s should be
the beginning, therefore, of a new phase in the movement towards
an open world economy in which free trade can be regarded as not
only a realistic but also a necessary objective.7
In practice this would mean that negotiations would largely be
about the industries to be excepted from a general movement to
free trade among developed countries or are to be allowed a longer
transition period in which to adjust to international competition.
The end result would probably leave some protection for industries
regarded by various countries as essential to their national interests.
And there would need to be more elaborate provisions negotiated
for safeguards against market disruption.
The second issue concerns the approach or technique of negotia-
tion. Here there might be said to be four options:
(a) negotiations on traditional GATT lines based on reci-
procal bargaining and most-favoured-nation (MFN) treatment,
(b) negotiations on the harmonisation of tariffs,
(c) negotiations on a sector-by-sector or an industry-by-
industry basis, and
7The elimination of all, or substantially all, tariffs on industrial products traded among
developed countries has been recommended as a new policy objective for governments in a
number of special studies in recent years sponsored by government, business and research
organisations.
See, for instance, the work of the International Chamber of Commerce, based on a report
b)' Jean Royer, The Liberalisation cif International Trade during the Next Decade (Paris: Inter-
national Chamber of Commerce, 1969).
Among the most notable reports in the United States have been the Presidential Com-
mission on International Trade and Investment Policy, United States International Economic
Policy in an Interdependent World, Williams Report (Washington: U.S. Government Printing
Office, 1971); US Foreign Economic Policy for the 1970s: a New Approach to New Realities, a
Policy Report by an Advisory Committee (Washington: National Planning Association);
and The United States and the European Community: Policies for a Changing World (New York:
Committee for Economic Development, 1971).
Also see the report of a conference of economists jointly sponsored by the Institut de la
Communaute Europeene pour les Etudes Universitaires, Brussels, the Japan Economic
Research Centre and the Brookings Institution that was published as Bergsten et al., Reshaping
the International Economic Order (Washington: Brookings Institution, 1971).
(d) negotiations for an agreement on progressive, linear and

automatic reductionss over an agreed period on the lines of the
European Community and EFTA.
These options should not be regarded, however, as mutually ex-
clusive of one another. 9
The MFN clause in the GATT requires tariff concessions that
have been negotiated between two or more signatory countries to
be extended unconditionally to all adherents to the General Agree-
ment. In the past it has therefore had the effect of limiting the
progress of multilateral negotiations to the pace of the least willing
participants. The Kennedy Round negotiations, based on across-the-
board or linear tariff reductions, were designed to overcome resis-
tance to progress posed by the traditional system, but on the
"sensitive" products in tariff schedules they in effect reverted to
item-by-item bargaining. Before the completion of the marathon
negotiations, which nearly broke down several times, it was recog-
nised that a different approach would be required in any future
tariff-cutting exercise.to The tariffs that remain, apart from those
which retain only a certain "nuisance" value, are unlikely to yield
to conventional negotiating techniques. Stronger resistance can be
expected from the interests protected by them. Another traditional
type of negotiation would thus probably be so encumbered with
"exceptions" that the effort required to reach agreement could well
far exceed the will to do so.
What of the other negotiating options? Negotiations aimed at
harmonising tariffs, proposed in order to overcome the problem of
"tariff disparities", would require countries with high rates of duty
in their tariff schedules to make larger concessions than those with
more even rates of duty. The idea implies a rejection of the principle
of reciprocal bargaining at a time when on all sides renewed
emphasis is being put on the need for reciprocity in multilateral
trade negotiations. Exploration of the sectoral approach has sug-
gested strongly that that technique has little practical applicability,
since there are very few industries in which the nature of the trade
8 The formulation used by the Director-General of the GATT, Olivier Long, "Toward
Better Trade Relations in the 1970s", an Address to the Trade Policy Research Centre and
the Foreign Affairs Club, London, January 24, 1972.
9These options are analysed in Chapter 2 below.
10See the statement by the then Director-General of the GATT, Sir Eric Wyndham White,
"International Trade Policy: the Kennedy Round and Beyond", an Address to the Deutsche
Gesellschaft fur Auswartige Politik, Bad Godesberg, October 27, 1966.
is such to make bargaining possible among advanced countries on a

reciprocally advantageous basis, without bringing into the picture
the effects on the competitive positions of related industries.
An agreement on progressive, linear and automatic tariff reduc-
tions over an internationally agreed transition period would satisfy,
since it would entail an equal commitment from all parties, the
principle of reciprocity. It would also serve to meet the objective of
tariff harmonisation and to contain the problem of exceptions from
tariff liberalisation. Furthermore, by permitting the most willing
participants to set the pace, this approach could provide the basis
for an imaginative counter to protectionist pressures and restore the
momentum of world trade liberalisation.
The question arises as to the length of the period of transition to
tariff-free trade. A variety of past experiences suggest that (i) since
industry will have plenty of advance warning to plan for the tran-
sition to zero tariff positions once the decision has been taken, and
(ii) provided there is some adequate form of adjustment assistance
for the industries most adversely affected, the majority of industries
will be able and indeed anxious to adjust rapidly. A prolonged
period of gradual adjustment to the inevitable is wasteful as con-
trasted with an adjustment calculated to fit within the planning
period firms usually employ. In this respect, it might be recalled,
both the European Community and EFTA eliminated tariffs on
trade among their members well ahead of the schedules originally
agreed. It is therefore suggested that a five- to ten-year transition
period starting soon after the end of the negotiations should provide
ample time for industry to adjust.
This assumes, of course, that governments both seek to maintain
full employment during the transition period, and are prompt to
make any exchange-rate adjustment required to absorb the effects
of tariff-free trade in their international competitive positions. But
governments should be urged to stress, and publicise, the importance
they place on their commitment to adjustment policies, both
external and internal.
Indeed, the negotiations should be concerned, as discussed below,
with reaching some international understanding on appropriate
domestic policies for assisting regions, firms and workers to adjust
to import competition and other economic changes in a developing
world economy. As noted above, the negotiations should in practice
largely be about the industries to be excepted, on grounds of
"national security" or "national interest", from a general movement

to tariff-free trade among developed coWitries. In this respect, and
whatever form they take, the negotiations should also be concerned
with appropriate safeguards against market disruption, possibly
necessitating substantial revision of the GATT's Article 19. Certain
industries might be accorded a longer transition period in which to
adjust to tariff-free competition. On the schedule for tariff dis-
armament, the enlarged European CommWiity may prefer the
burden of the duty reductions to fall in the second half of the
transition period, given its own period of transition up to 1977-
although industry in Western Europe has already had ample time
in which to gear up to the market changes that are envisaged.
DEVELOPING-COUNTRY EXPORTS
The concept of giving special tariff treatment to developing
coWitries to assist the promotion of their exports has been accepted
in principle, but so far only a tentative first step has been taken to
implement tariff preferences in practice, while quotas and "volWitary
export restraints" on some major products have continued in
force.ll In this respect, quotas or "ceilings" on generalised tariff
preferences in favour of developing coWltries (even if administered
in a liberal way) tend to defeat the purpose of such preferences, which
is to provide an additional incentive for new investors and new
exporters.
The net value of what has been done for less developed coWltries
through special tariff treatment is therefore highly problematical.
Major reasons have been the malfWictioning of the international
monetary system, referred to above, and the associated drift by
developed coWitries away from liberal trade principles. If
(a) the international monetary system were improved and,
specifically, exchange rates became more flexible,
(b) the developed coWltries introduced more comprehensive
adjustment assistance programmes (on lines to be described
below) and
(c) a further move was made by developed coWitries towards
free trade among themselves,
it would be possible for the industrialised world to be more generous
in opening trade opportWlities for less developed coWitries.
11 The position of developing-country exports is discussed in Chapter 4 below.

Tariff-free trade among the developed countries would eliminate

the argmnent for tariff preferences except insofar as certain products
of special interest to them were reserved from the zero-tariff regime.
Developing countries might then demand explicit developed-
country subsidies on their exports. All they need, though, is equal
access with developed countries to industrial markets. The objective
of tariff-free trade among developed countries should not be frus-
trated in order to maintain tariff preferences in their markets for
developing countries. Free competition over the whole market
area of the developed countries would greatly help to promote
diversification of production in less developed countries among
products and markets and so ease the problem of market disruption.
It is accordingly proposed that the liberalisation of trade among
developed countries, however itself negotiated, should be auto-
matically extended to less developed countries on a non-reciprocal
most-favoured-nation basis, subject to special safeguards against
market disruption.
SAFEGUARD PROVISIONS
The provision of such safeguards should not be considered specifi-
cally in terms of developing-country exports. As indicated above,
the careful definition of safeguards against market disruption would
need to be an integral part of any further multilateral trade negotia-
tions, particularly if their objectives were to include the elimination
over an agreed period of substantially all tariffs on industrial pro-
ducts traded among developed countries.12
International acceptance of the need for greater flexibility in the
international adjustment mechanism, through more frequent
changes in exchange rates, should obviate the need for a general
"escape clause" that can be invoked when a country gets into
balance-of-payments difficulties. If greater flexibility is not generally
accepted, the GATT's Article 12 should be rewritten since quantita-
tive restrictions, the one recourse that the article permits, have
proved to be an inadequate means of providing relief from external
pressures.
Escape clauses should be chiefly concerned with the provision of
temporary protection for individual industries or regions unable to
12 Chapter
5 below reviews the provision of safeguards in the GATT and in the European
Community and EFTA.
cope with increased foreign competition. But a sharp and sudden

increase in imports should not be regarded automatically as sufficient
reason for invoking escape-clause protection. A decline in the
international competitive position of an industry, or a group of
firms in an industry, can result from a variety of causes. Where an
industry's difficulties result from its own shortcomings, or from its
failure to adapt or to develop in the face of changing supply or
demand conditions, the use of trade restrictions should be kept to
a minimum. An expansion of imports should still be permitted.
Temporary protection against market disruption should only be
given in order to allow time for the necessary adaptations, or
adjustments, to be carried out. Moreover, the burden of adjustment
should be home by domestic resources, not passed on to foreign
suppliers. Indeed, the application of safeguard provisions should
be allied with a complementary programme ofadjustment assistance,
not substituted for it, and there should be international machinery
for the surveillance of the temporary protection.
Traditional tariff theory suggests that safeguards should take the
form of import surcharges because these (i) are visible, (ii) restrict
trade in an impersonal and ostensibly non-discriminatory way,
(iii) are subject to continual review through the GATT and (iv)
could be subjected to international rules requiring them to be phased
out and over a pre-announced period of years. The proceeds of
such tariff surcharges might be used for adjustment assistance. The
use of import quotas and voluntary export restraints for this purpose,
however, has developed precisely because tariffs on traditional lines
have proved incapable of preventing market disruption and some
effective device is needed.
Thus the use of "quota safeguards" should be subjected to closer
international supervision than hitherto. In line with this, govern-
ments imposing import quotas, under an escape-clause provision,
should be required at the outset to increase them automatically by a
reasonable percentage per year. Such a requirement would serve to
stimulate the necessary adaptation and adjustment in the
industry being temporarily relieved of competititive pressures.
In short, it might be said that in the reform of the international
trading system, as governments prepare for the next phase in the
movement towards an open world economy, safeguards against
market disruption should be made more liberally available, but
under more strict conditions than have previously been applied.
There is a case for fixing quotas in terms of physical quantities

rather than values. Two reasons can be given. Physical quotas pro-
vide more certainty about safeguarding domestic production and
employment than do value quotas where prices may be reduced to
increase sales volume. Secondly, physical quotas encourage the
exporter to charge what the market will bear, and to "trade up"
from lower to higher qualitites. It may be reasonably assumed that
the problem of market disruption arises less seriously with high-price
high-quality goods than with low-cost low-quality goods.
It might also be worth exploring the suggestions sometimes made
that, through an appropriate international agency,
(a) the revenue from import surcharges imposed to counter
market disruption should be transferred as compensation to
the governments of the countries affected, and
(b) quota safeguards should be administered as export quotas
by the governments of the exporting countries rather than as
import quotas by the governments of the countries restricting
imports,
thereby enabling the exporting countries instead of the restricting
ones to enjoy the incidental benefits accruing from the effects of
restriction in raising prices in the importing country.
NoN-TARIFF BARRIERS TO TRADE
Rules on the control of non-tariff distortions of international
competition, more commonly (if less accurately) referred to as
"non-tariff barriers to trade", are contained in the GATT, principally
in Part II of the General Agreement. Besides being incomplete,
many of the rules have been rendered inoperative by the Protocol
of Provisional Application, under which most countries signed the
treaty. The protocol, dated October 30, 1947, allowed countries
to derogate from GATT rules where pre-existing legislation was
inconsistent with Part II. It thus applies to the major trading nations
and, as a result, many non-tariff measures of growing significance
cannot be said to contravene international obligations.
The archetypal non-tariff barrier is the quota restriction, which is
covered by the existing rules of international trade embodied in the
GATT, where what is required is a stiffening of the rules to make it
harder either to impose quotas or keep them on without clear
international justification of their necessity and appropriateness. The
real problems are raised by other non-tariff interventions that have
B
attracted more attention in recent years, notably public procurement

policies, aids to specific industries, customs valuation methods and
procedures, anti-dumping and countervailing duty laws and indus-
trial standards. These pose rather different problems both of appro-
priate methods of approach and of likelihood of successful resolu-
tion.13
The obvious lines of solution take the form of rules of competi-
tion, alternatively described as codes of good conduct on the part
of governments. Customs valuation methods and anti-dumping and
countervailing duty laws, being legislated along with tariffs and
visible to the exporter and importer, would seem to lend themselves
most easily to this approach, which would require reinforcement by
an appropriate complaint and adjudication procedure.14 Customs
administration would be rather harder to fit into this framework, for
many of the commo n complaints about delays and so on concern
practices that may be dictated by the cost or difficulty of proper
staffmg. But a code could presumably be devised, and such aspects as
unnecessarily complex customs documents, long delays over
processing them and inordinately high charges for doing so could
be outlawed as protective in effect.
At the other extreme, industrial standards pose a very difficult
problem indeed, and there is recent evidence that, more than being
a mere source of general inefficiency in the allocation of world
resources, there is a tendency for them to be used for protectionist
purposes. Accordingly they would probably best be left to be dealt
with by the current (and glacial) processes of international meetings
and consultations among technical experts.
Public procurement policies and special aids to industries also
pose difficult problems. Special aids, such as shipbuilding subsidies
and low-interest export credits, have a tendency to become mutually
off-setting and a source of global economic inefficiency-in that they
direct world resources into inefficient industr ies-wit hout having
13For a fuller discussion, if in general terms, of how non-tariff barriers to trade might be
broached in a multilateral negotiation, see Chapter 6 below. An economic analysis of certain
of the principal non-tariff measures can be found in Brian Hindley, Britain's Position on Non-
tariff Protection, Thames Essay No. 4 (London: Trade Policy Research Centre, 1972). In
addition, see Robert E. Baldwin, Non-tariff Distortions of International Trade (Washington:
Brookings Institution, 1971).
14Some interesting proposals on how adherence to rules of competition might be secured
are contained in Gerard and Victoria Curzon, Global Assault on Non-tariff Trade Barriers,
Thames Essay No.3 (London: Trade Policy Research Centre, 1972), pp. 5-10.
PROPOSALS FOR FUTURE TRADE STRATEGY I9
much effect in distorting comparative advantage among countries in

the specific industry concerned. They should be manageable by
international agreements on the permissible limits of such aids.
Regional policies, on the other hand, raise difficult problems in
distinguishing between social betterment policies and export
subsidisation. Rough justice could probably be secured simply by
agreement that regional aids should be provided as general help,
not as simply export subsidies to industry; and that they should be
available to all actual or potential industries in the region, not
concentrated on an industry or a group of industries that may be
exporters who are losing their comparative advantage.
Public procurement policies are more likely to be used with
deliberate protective intent. But because they are national policies,
concerning choices involving national sovereignty, and sometimes
genuinely affecting national security, they are likely to be difficult to
deal with by international arrangement. One aspect of the problem,
the tying of foreign aid to the purchase of domestic products or the
hiring of domestic experts, is indirectly related to the deficiencies of
the international monetary system. If that system were to be ade-
quately improved, aid-tying could be removed by an international
agreement, which might be facilitated by the fact that the number
of countries involved is small. Direct procurement for domestic
government use may reflect a mixture of (i) commercial advantage
in dealing with a supplier ofknown reliability, even at a somewhat
higher quoted price, {ii) protection of domestic enterprises, and
(iii) some concept of national strategy for economic growth or
military defence.
There are various approaches to reducing the protectionist
element and making sure that other elements are persuasive:
(a) international discussion and agreement with each indivi-
dual country on the industries it considers important enough
to its national interests to support by exclusive procurement
arrangements;
(b) open tendering, with a pre-announced and inviolable
margin of preference for domestic over foreign tenders; and
(c) international agreement, properly backed by complaints
and arbitration procedures, on the maximum margin of pre-
ference it is legitimate for a government to accord to domestic
suppliers.
In general, and because of their nature and complexity, non-tariff
barriers to trade should be broached in stages. As a :first stage, effort

should on the limited objective of devising general
rules of competition, in order to secure commitments from govern-
ments to consult and negotiate on the elaboration of those rules at a
second stage and to establish, in effect, the framework in which such
consultations and negotiations could proceed. Since the GATT
already contains adequate rules on some non-tariff interventions, it
might be enough in those cases to make Part IT of the General
Agreement binding on all signatory coWltries, by withdrawing the
Protocol of Provisional Application. The first stage should be
pursued concurrently with the negotiations on industrial tariffs,
agricultural measures, developing-coWltry exports and other
questions. After detailed rules of competition have been interna-
tionally agreed, the next stage would be to obtain their implemen-
tation, which should be all the easier for having earlier obtained
commitments to general rules that were in turn part of a broader
trade agreement.
Movement to the second and third stages on any particular
category of non-tariff protection would not necessarily have to
wait on progress in other categories. Those categories that are
related most closely to the conventional tariff-that is, quantitative
restrictions and restraints on imports and exports respectively,
customs valuation methods and procedures and anti-dumping duty
laws-should be part of a general roWld of multilateral trade
negotiations. Industrial standards, on the other hand, should be
regarded at once as too difficult, and too peripheral to the establish-
ment of fair international competition, to tackle in general negotia-
tions. On both public procurement and special aids to industry, it
would probably be best for governments, in the present state of
knowledge and political settlement, to be content with a ":first
stage" agreement in any overall package. This is not to say, however,
that where a particular government has a particular policy that
clearly and definitely protects its domestic producers from foreign
competition for no acceptable reason of national interest it should
not be incorporated in the overall bargaining process.
In connection with special government aids to industry, and with
public procurement for that matter, there is likely to arise, as tariffs
are further reduced and eventually eliminated, a greater temptation
on the part of governments to resort to non-tariff methods of
protection, which is one reason why the importance of adjustment
assistance policies has been emphasised. The point is developed

below, but at this juncture it is proposed that, as a principle underlying
all rules of competition, governments should at least agree not to
pass on to other countries the costs of their adjustment policies in
respect of both industry and agriculture.
INVISIBLE TRADE AND CAPITAL MOVEMENTS
The term "invisible trade" includes three different kinds of
earnings. These are transport services (mainly shipping and aviation),
fmancial services (like insurance, banking and commodity market
commissions) and, thirdly, earnings and expenditure on the services
of capital assets such as interest and dividends and profits on past
investments and royalties and franchise fees for the use of various
kinds of productive knowledge. Along with the invisibles of this
last type have to be considered the capital account transactions
that provide these earnings.
An attempt has been made in the OECD to overcome obstacles
to invisible trade. Two sets of rules of competition have been nego-
tiated, namely the Code of Liberalisation of Current Invisible
Operations, and the Code of Liberalisation of Capital Movements.
But it is widely acknowledged that the OECD codes are only
partially effective. Countries are able to get around them by
policies which employ moral persuasion, such as voluntary controls
on foreign lending, rather than policies embodied in legislation.
The codes are difficult to enforce and, in addition, the membership
of the OECD is very limited to deal adequately with the global
problem of restrictions on invisible trade.
Regarding transport services, it has to be accepted that shipping
is characterised by a tendency towards chronic over-capacity, with
subsidies in most countries being based on social as well as economic
considerations. The most that can be hoped for is a greater harmoni-
sation of shipping policies with a view to reducing the incidence of
subsidies and making for more open competition. With respect to
civil aviation, mostly concerned with passengers, the hope must be
that the companies will refrain from interfering with competition to
the extent experienced in the shipping industry. Consideration might
be given to including transport services in the rules of competition
covering non-tariff barriers.
On grounds of general principle, it seems clear that interna-
tional competition in the provision of financial and other services
is as desirable as competition in the provision of visible goods;

however, all countries impose restrictions on such competition,
frequently for balance-of-payments reasons, though sometimes to
strengthen the monetary control of their central banks. Tackling the
problem of invisibles effectively is dependent, then, in large part, on
a prior improvement in the international monetary system.
Since, in addition, the restrictions on international fmancial
competition are imposed by a different branch of government than
restrictions on trade, and also are imposed for reasons usually related
to general economic interest rather than explicitly to protect
domestic fmancial enterprises, international discussion of the pro-
blem with a view to increasing freedom of competition should
proceed in an exploratory fashion. For while the principle of
competition is clear, its application to a welter of taxation laws and
regulations is not so apparent; that is to say, the policy issues are
not yet clearly defmed. This is nonetheless an area of concern of
increasing importance. In the nature of things, the richest countries
are likely to be pulled by their evolving expertise, and pushed by
competition from other developed countries, away from agriculture
and manufacturing and towards increased reliance on exports of
invisibles.
As regards the "interest, dividends, profits and royalties" com-
ponent of invisibles, the basic question concerns the freedom of
international transactions in the capital assets on which these re-
present the returns to the investor. There is a conventional official
view, developed from the experience of the 1930s and in the period
since World War II, that freedom of trade in goods is beneficial,
but freedom of trade in securities is a source of trouble that needs to
be interfered with by official controls on international capital
movements and investment. This view reflects the fact that it is
primarily private individuals who bear the brunt of chops and
changes in the flow of goods, and primarily central banks and
treasuries that have to cope with the effects of international capital
movements on their balances of payments at fixed exchange rates.
In recent years, also, with the growth of the operations of multina-
tional enterprises, there has come to be widespread popular sus-
picion and distrust of direct foreign investment and a belief that
something should be done to control it.
In both cases-portfolio capital movements and direct foreign
investment-belief in the need for control has been clearly associated
with the aforementioned defects of the international monetary

system. The lack of exchange-rate flexibility has provided an
environment conducive to "speculative" capital movements which
have been embarrassing to national monetary authorities. It has led
to capital flows of direct investment in response to relative currency
over-valuations and under-valuations which have possibly been
unjustifiable in the light of long-run considerations of profitability
and have certainly been awkward for monetary managers. Again,
progress is dependent on improvement in the world's monetary
system, so that intervention in international capital movements on
balance-of-payments grounds are rendered unnecessary.
The improvement in question would permit an international
agreement to prohibit interventions on the invisible side of the
current account (for instance, regulations requiring repatriation of
earnings, on the one hand, and blockage of repatriation of earnings
by exchange controls, on the other). Such an agreement should be
part of the negotiations for freer trade, although it would require a
different group of experts that have hitherto taken little or no part in
trade negotiations.
The larger question, however, concerns the freedom of capital
movements themselves. The multinational enterprise is a special
agency of such movements; and with respect to it this report has
already recommended a "wait and see" policy posture. As regards
the broader question of capital movements in general, there is a
general case for freedom of capital movement as a more efficient
method of achieving the methods of freedom of trade, since capital
has to move to labour only once while traded goods have to keep
moving. There is an exception that arises if rates of taxation on
capital differ greatly between countries. In that case capital may
move to countries where its social as distinct from its private returns
(the social including the taxes) is lower where it goes than it was
where it came from. In practice this does not seem to be an impor-
tant problem, but if governments find it is, it would be more
efficient for them to remove the distorting fiscal influences unilaterally
or by negotiation than to retain the distortions and seek to counter
their influence by imposing controls on capital movements.
It is therefore suggested that, in future, multilateral GATT nego-
tiations should at least have on the agenda consideration and dis-
cussion of the interactions among trade, foreign investment and
invisible earnings with a view to reaching agreement on possible
GENERAL STATEMENT
principles and procedures for liberalising trade in capital assets and

the international flow of earnings on them. 15
AGRICULTURAL TRADE
The main issue in recent years in international trade in temperate-
zone agricultural products has been the European Community's
common agricultural policy (CAP) and its effects, in particular, on
United States agricultural exports. American policy in the past set a
precedent for the CAP, while the agricultural policy of Japan can
also be subjected to substantial criticism. No country, whether
exporting or importing, can be held blameless for the chaotic
situation currently prevailing in world agricultural trade, a situation
in which the world market has been virtually segregated into
national markets with international trade a residual activity involving
a struggle for sales quite unrelated to basic comparative advantage.t6
The benefits of freedom of trade exist as much in agricultural as
in industrial production. In fact, agriculture is as much an industry
as any other activity, in the sense that it uses both advanced tech-
nology and a large amount of inputs purchased from other industries
(as well as selling a high proportion of its products to other industry
as inputs rather than to the consumer as the final product). The basic
problem is that, given low price and income elasticities of demand
for much of the output, the immobility of farm labour off the land,
and the inappropriateness of farm sizes to the requirements of highly
capitalised efficient farming capable of generating reasonably high
farm incomes, agriculture in many highly industrialised countries
has become a social problem because the incomes it generates for
farmers are considered unacceptably low by prevailing standards.
The most direct and efficient solution to the problem would com-
bine:
(a) a long-run policy of moving labour off the land,17 expand-
15In a sense, rules on invisible transactions would provide the link, institutionally, between
commercial and monetary policies.
16For a general discussion of the difficulties in agricultural trade, see Chapter 3 below,
in which the author sets out the principles of an international position that takes into account
the interests of the major importing and exporting countries.
17 With this objective in mind, emphasis is put on the role that might be played by regional
development policies in the European Community, to provide off-farm employment in
rural areas, in all the three contributions to Hermann Priebe, Denis Bergmann and Jan Horring,
Fields cif Conflict in European Farm Policy, Agricultural Trade Paper No. 3 (London: Trade
Policy Research Centre, 1972). Increasing emphasis is also being put on "rural development"
ing average farm size and promoting efficiency by various

means so as to make the remaining farm population self-
sustaining at a reasonable income level, with
(b) a short-run policy of providing adequate incomes directly
to the farmers who are considered to be intolerably poor.
Instead, for reasons not to be entered into here, government
policy has merely attempted to remedy what is a social problem
of low incomes largely by the indirect method of raising the prices
of the farmer's products. This method is inefficient for three major
reasons. It does least good for the poorest and least productive
farmers.ls It raises the cost of food to the consumer, and the urban
poor are the relatively largest consumers of food, so that poverty
elsewhere is accentuated. And it generates excess food production.
This last obliges the government concerned either, if it is a net
importer, to reinforce the subsidy to domestic production by exclud-
ing imports from lower-cost foreign sources of supply or, if it is a
net exporter, to choose among the unattractive and costly options
of storing the surplus to no purpose, dumping it on world markets
at subsidised prices, or controlling the right of farmers to produce in
the first place.
Production quotas are both expensive and inefficient and may,
in any case, run counter to the income-raising objectives of farm
price-supports. While the burden of coping with the resulting
global surpluses, one way or another, falls in many cases on the
developed countries, there can be no doubt that a substantial part of
the burden falls on the developing-country producers or potential
producers of the products in question, products in which they
frequently have a comparative advantage by virtue of either natural
resources or cheap labour.
The ideal policy, as already mentioned, would combine long-run
policies in the United States: see Don Paarlberg, "Farm Programmes: the American
Experience", an Address to the Trade Policy Research Centre, London, February 28, 1972.
18This is demonstrated statistically in a major income-distribution analysis of farm-support
programmes in the United Kingdom in T. E. Josling and Donna Hamway, "Distribution of

Costs and Benefits of Farm Policy", in Josling et al., Burdens and Bentifits of Farm-Support
Policies, Agricultural Trade Paper No. 1 (London: Trade Policy Research Centre, 1972),
pp. so-ss.
a
The point was also emphasised in a French Government report, Prospective long terme de
I' agriculture Franrais 1968-Ss, Vedel Report (Paris: Ministry of Agriculture, 1969). Also see
Denis Bergmann et al., A Future for European Agriculture, Atlantic Paper No. 4 (Paris: Atlantic
Institute, 1970). .
B*
labour migration and improved efficiency with short-run direct

income transfers not tied to production quantities. Assuming the
ideal to be impossible of contemplation, let alone achievement,
present price-support policies could be improved, to the benefit
of world efficiency in resource allocation, in two major ways.
(a) In the first place, there is no reason why consumers
should be deprived of the advantages of cheap food as an
unnecessary by-product of a policy of raising the product prices
received by farmers. A system of deficiency payments, perhaps
a modified version of the British system, or alternatively a
system of payments to farmers based on marketing certificates,
could be used to guarantee the farmer a target price for his
output while letting market prices to consumers be determined
by world competition-t hereby eliminating the need for quotas,
variable import-levies and all the other apparatus of overt
interference in international trade.t9
(h) Second, and this would be envisaged by the first step,
which would make the subsidy to farmers an explicit charge on
the treasury, governments could be subjected to international
pressure both to keep their prices to farmers in some degree of
alignment with world market prices (though above them)
and to review continually the question of whether the cost of
their subsidies to their farmers were indeed a cheaper method of
handling the farm income problem than the cost of alternative
policies directed more accurately to the real natUre of the
problem.
Agricultural policy does not have to be conducted on an all-or-
nothing basis: the shift from price support to income support could
be implemented gradually over a period.
The marketing certificate system proposed above could work, on
the basis of experience in the United States with cereals, in the
following way. The farmer would receive for his produce (i} the
price at which he sells on the market and (ii) the value of a certificate
which is set by the government in order to bring the net price to a
level considered satisfactory. Such a scheme would differ from that
of deficiency payments in two ways:
ltJf the European Community was to reduce its common external tariffs to zero it might,
in its place, harmonise some taxes (such as the value-added tax) which could be raised or
lowered on a Community basis in order to support agricultural incomes, regional develop-
ment or adjustment assistance.
(a) The users of the produce, such as domestic millers,

can be made to "purchase" the certificates on grain used
domestically, thus recouping some of the cost of certificate
payments to farmers. The cost of certificates to the miller need
not be the same as their redemption value to the farmer, any
difference being made up by the exchequer.
(b) Certificate payments on exported products can be set at a
lower level to discourage surplus production. On introducing
certificates in the European Community the threshold price
would be reduced. The extent to which imports would be in-
creased and farm prices reduced would depend on the way in
which the policy was run.
The advantage of the system would be that it would provide
much more flexibility. Prices could diverge between farmers for
structural or equity reasons if desired. Grain costs to the livestock
sector could be lowered. Export restitutions could be contained.
Rather than relying on the instrument of the variable import-levy
(or the export restitution) to achieve various payment objectives,
the certificate system would allow a much greater degree of control
over the various facets of the market.
In view of the fact that the problem of world trade in agricultural
products has been getting steadily worse for a long time, there
should be established as part of a multilaterally negotiated "package"
a high-level working party-including exporters as well as impor-
ters-to examine the effects of the agricultural price-support policies
of the major countries with respect to:
(a) their effectiveness in achieving their desired objective of
obtaining income redistribution towards the existing farm
population;
(b) their disruptive effects on world trade in agricultural pro-
ducts; and
(c) alternative methods of achieving the social objectives in
question that might be socially more effective, conceivably less
disruptive of world trade and at the same time politically accep-
table.
EAST-WEST TRADE
Expanding trade between the free-enterprise world and the
centrally-planned economies of the Soviet Union, Eastern Europe
and China is made difficult by two factors in the latter group of
GENERAL STATEMENT
coWltries. First, foreign trade per se is a subordinate consideration

in the conduct of centrally-planned economies. Exports are only
important as a means of obtaining the foreign exchange required to
purchase products abroad that are not produced domestically or, at
any rate, are not produced in the amoWlt or to the quality desired.
Such imports have to be worked into the central plan of the economy
before the purchases can actually be made. Exports and imports are
thus closely balanced bilaterally, not multilaterally, and this is the
second inhibiting factor.
On the other side, many free-enterprise coWltries maintain
restrictions against products of centrally-planned economies; in
some cases import quotas are applied, while in others MFN treat-
ment is withheld-although only Czechoslovakia, Poland and
Rumania are contracting parties to the GATT. Any reduction of
barriers to imports from centrally-planned economies would
need to be negotiated on a reciprocal basis. It is here that problems
anse.
Free-enterprise coWltries, however, have begWl to relax
controls on imports from centrally-planned economies, which for
their part have begWl to show greater interest in East-West trade.
While it is difficult to suggest general measures for expanding that
trade, studies in the Economic Commission for Europe and the
GATT might concentrate on how joint ventures, sub-contracting
agreements and other specific arrangements might be developed.
Consideration might be given to an institutional setting, perhaps
Wlder the auspices of the United Nations, where East-West trade
discussions could include China.
Czech, Polish and Rumanian (and maybe Hungarian) participa-
tion in forthcoming GATT negotiations should prepare groWld
for other centrally-planned coWltries to engage in multilateral
trade arrangements. The experience should also shed some light on
how to deal with problems of partial state-trading as practised by a
number of developing countries and by a few developed coWltries
as well.
ADJUSTMENT AssisTANCE
As was implied in previous sections, much of the recent retreat
into protectionist policies is attributable on the one hand to the
defects of the international monetary system, which have streng-
thened traditional arguments for trade intervention on balance-of-
payments grounds, and on the other to the social and political

problems raised by foreign competition-especially rapidly develop-
ing foreign competition amounting to market disruption-with
established domestic industries. As has been stressed repeatedly, the
path ahead towards the liberalisation of world trade would be cleared
of many opposed obstacles if the international monetary system were
reformed in the direction of greater exchange-rate flexibility and
greater harmonisation of domestic fiscal, monetary and wages policy.
The other aspect of the problem is the development of more
effective adjustment assistance policies, designed to cushion the
impact of economic changes that reflect themselves in severe com-
petition from imports, loss of domestic market shares, unemploy-
ment, low profits and bankruptcies and so forth.zo Ideally any
country attempting to share in the modem world of technological
advance, growth and change should have policies designed to
maximise its economic flexibility and its capacity to adjust to
economic change by moving resources rapidly and efficiently out
of lower-yielding into higher-yielding economic activities. Thus
adjustment assistance for changes emanating from international
trade developments should be only one aspect-and an undifferen-
tiated aspect-of some general policies designed to help the economy
cope efficiently with changes emanating from all sources.
Thinking on the needs of an efficient and competitive capitalist
system has not yet reached such a level of sophistication. The public
is expected to put up with the adverse effects of changes emanating
from domestic economic developments, or from developments in
export markets, while having an acceptably legitimate claim for
assistance with respect to changes emanating from increased import
competition (even though increased import competition may merely
be the other side of the coin of increased export competitiveness).
Traditionally, this assistance has taken the form of protection by
tariffs, import quotas and other measures designed to cancel out the
foreigner's comparative advantage and give the domestic producer a
margin of preference in the domestic market at the expense of the
domestic consumer.
It must be acknowledged though that those whose livelihoods are
threatened by imports have a legitimate claim for some kind of
help. If help via trade restriction is to be ruled out, some other form
20 See Chapter 7 below for a brief analysis of the case for adjustment assistance.
of help is needed; hence the case for adjustment assistance. If we

disregard distress arising from imports that enter a country only
because the exchange rate is over-valued, for which the proper
remedy is an exchange-rate adjustment, there are two alternative
kinds of adjustment assistance that are possible, of which one is the
proper kind for a capitalist economy-growth and change and
growth through change-and the other is merely a substitute for
more traditional forms of protection.
(a) The appropriate kind of adjustment assistance primarily
seeks to move resources out of import-competing industries
that are no longer competitive. There may arise cases, it is true,
where ownership on traditional lines provides unnecessarily
inefficient management and the industry can be rescued by
policies designed to modernise managerial methods, bring
technology up to contemporary standards and inject fresh
capital from more aggressive sources.
(b) The inappropriate kind of "assistance" gives protection
through the injection of subsidised capital and credit, subsidised
research and investment in more modern machinery and
subsidised provision of more skilled labour. It may well waste
more resources than protection of more traditional kinds,
because it is not amenable to legislative control, review and
assessment.
It is strongly recommended that this distinction between appro-
priate and inappropriate types of adjustment assistance be kept
firmly and dearly in mind in any exploration of proposals for and
methods of adjustment assistance. The distinction should also be
clearly recognised in the structure of any international regulations
for trade liberalisation; that is, it should be incorporated in any
provisions-perhaps in an international code on adjustment assis-
tance-for reviewing the methods employed by individual coun-
tries in responding to new developments of import competition.
In particular, as the section on safeguards argued, the right to
employ special measures to avoid market disruption should be
conditional on the provision of adjustment assistance of the appro-
priate type.
MosT-FAVOURED-NATION PRINCIPLE
The GATT system rests on two principles: a principle of recipro-
city in trade bargaining and the most-favoured-nation principle
that tariff reductions should of right be equally available uncondi-

tionally to all trading partners (except those who have not subscribed
to the GATT). There are, however, exceptions to the MFN principle:
(i) for customs unions and free trade associations, (ii) for pre-existing
preferential trading areas and now (iii) for the benefit of, and among,
developing countries. Article 24, which provides for customs unions
and free trade associations, was presumably intended originally to
facilitate the union of small and relatively unimportant countries
into larger competitive market areas; anyway, it was certainly not
intended to provide a basis for dividing the free-enterprise world
into trading blocs or economic spheres of influence. Its use as the
basis for the formation of the European Community and then of
EFTA, and finally for the enlargement of the former, makes the
principle of reciprocity largely reciprocity at the expense of non-
members of the club. The meaning of unconditional MFN treat-
ment has thus gradually been whittled away.
The situation has been exacerbated over the years by the progres-
sive extension by the European Community of its preferential trade
agreements with associated overseas territories in Africa, around the
Mediterranean and elsewhere. With the enlargement of the Euro-
pean Community, there is the prospect of a further proliferation of
similar trade agreements to incorporate in the trading bloc the
EFTA non-applicants for Common Market membership and the
Mediterranean, African and Caribbean members of the Common-
wealth, besides a number of island-states in the Pacific and Indian
oceans. These developments have been the main reason for recent
American bitterness about the European Community and the
alleged unfairness of traditional GATT methods of negotiating
tariff reductions-that they are being severely discriminated against
under the guise of a set of rules that emphasises the principle of
non-discrimination. What is to be done about the application of
unconditional MFN treatment can therefore hardly fail to be a
central issue in any meaningful discussion on the reform of the
international trading system.
If world free trade were established, there would of course be no
remaining trade discrimination, and the most-favoured-nation
principle could be reasserted to favour every nation equally. But the
essential question at the present time is whether the MFN principle
as a principle is a help or a hindrance to moving towards tariff-free
trade among developed countries. The answer, in a world already
divided into trading blocs, is that at least in its present form it does
not help. It needs reinterpretation. In its historical form, MFN was a
useful principle, guaranteeing that nations that were prepared to
bargain for tariff reductions in good faith with other nations were
not deprived of the advantages so acquired as a result of the other
nations negotiating even more advantageous deals with their
competitors on a reciprocal bargaining basis. In other words, the
MFN principle was a way of ensuring that nations that played by the
rules would not be losers, or victims of chicanery.
In the contemporary world, however, the main axis of bargaining
will be the bilateral relationship between the United States and the
enlarged European Community, although Japan and to a lesser
extent Canada and Australia, besides a number of other countries,
will have important roles. This means that the MFN principle
essentially offers a partially "free ride" to the smaller countries and,
in so doing, reduces the attractiveness to the two major bargaining
partners of multilateral negotiations. In this changed situation, the
basic principle underlying MFN treatment should be interpreted as
the principle, not of the partially "free ride" automatically available
to the light-weight passengers, but one under which those not
directly concerned in striking a bargain should have access to its
results only on a basis of reciprocity-that is, the main parties set
rules on the terms on which others can participate in the benefits.
It ought to be stressed that this principle should not be interpreted
to allow either the establishment of rules impossible for other
countries to accept, or the refusal of admission to countries if they
were willing to accept the rules.
The considerations suggest that, as part of a negotiating strategy,
the most effective basis for a further move towards free trade among
developed countries could be on the principle of conditional, rather
than unconditional, MFN treatment.2t Bargaining should proceed,
in other words, among major trading entities on the basis of seeking
an agreement that other countries could participate in if they accep-
ted its terms and offered reciprocity in a broad sense.22 It is on this
basis that the European Community and Japan apply the GATT
21The conditional MFN approach, as a negotiating technique, is explored in Chapter 8

below.
22This procedure is implicit in the liberalisation programme proposed by the International
Chamber of Commerce (referred to in Footnote 7 on Page II).
Anti-dumping Code and negotiations on industrial standards have

also been proceeding on the same basis.
This approach has its dangers. Reciprocity could consist in an
agreement to benefit each other's trade largely by discriminating
against non-participants and the agreement could be so framed that
the latter could not find it politically acceptable to participate. But
given both the political relations between the United States and the
European Community, and those of the United States with the rest
of the world, besides the general philosophy that has grown up
around the GATT, it is very probable that the conditional MFN
approach in some form could be a lever for further progress towards
trade liberalisation without running the risk of promoting further
division of the world economy into regional trading blocs.
It is not proposed that the principle of non-discrimination, as
set out in Article I of the GATT, should be abandoned. If that was
to happen the way would be opened, as pointed out in the relevant
chapter below, to an outbreak of discriminatory trade agreements
among small groups of countries and/ or in small groups of products.
But it could be said that the customs-union and free-trade-association
exceptions to Article I of the GATT constitutes a principle of
conditional MFN treatment-without imposing any obligation on
the original parties to accept new members subject to the con-
ditionality. The trade discrimination against the rest of the world
that has resulted from the use of this exception to sanction EFTA
and the Common Market can only be counteracted if the rest of the
world, and specifically the United States, makes use of the same
technique of bargaining subject to an obligation to let other coun-
tries take free advantage of the conditionality to obtain inclusion.
To be specific, it seems at the present juncture that the uncon-
ditional MFN principle, combined with the exception for customs
unions and free trade associations, has led to results completely
contrary to those it was intended to produce: that is, a world of
non-discriminatory trading relationships in which all benefit fairly
from the pursuit of the commonly agreed objective of trade liberali-
sation. To proceed further towards free trade, a negotiating technique
is needed that will exclude partially" free rides", temporarily, in order
to permit the major bargainers to concentrate on producing bar-
gains so attractive to themselves even if other parties do come in,
but especially if they do not, that the other parties will in fact feel
obliged to join once the bargain is agreed. The approach that most
obviously fits the specification would be the negot1at10n of a

multilateral free trade agreement under Article 24 of the GATT.
This approach provides the required possibilities of bargaining
leverage. It also provides a framework within which issues of non-
tariff intervention, agricultural trade and responsibility to the
developing countries can be discussed as part of the bargaining
package. And it ensures reciprocity in whatever is agreed. We
recommend the adoption of this approach.
COMPLAINTS PROCEDURE
The problem of reforming the complaints and arbitration pro-
cedures of international economic institutions is primarily a legal
and administrative question rather than an economic one and there-
fore we have no clear-cut and considered proposals to make. The
recommendations in this statement on rules to deal with non-tariff
barriers, safeguards against market disruption, agricultural trade
and adjustment assistance, not to speak of problems that may arise
over invisibles and foreign investment, obviously imply though
that some kind of complaints and arbitration procedure will be
necessary. By establishing a framework for more or less continuous
consultation and negotiation on issues in these areas of international
economic policy, the fact that governments will be required to
justify any policies or practices which meet with objections from
other governments is likely, in itself, to induce modifications to be
made where justification is not soundly based.
Any complaints and arbitration procedure that is devised, how-
ever, would be greatly strengthened, we believe, if an international
trade agreement among developed countries on the next phase in
the liberalisation of world trade could be negotiated on a conditional
MFN basis. Under the principle of unconditional MFN treatment,
it has been impossible for signatory countries do the GATT to
withdraw concessions to those trading partners who do not comply
with internationally agreed rules of behaviour. Having an effective
sanction against governments which do not comply with inter-
national agreements would strengthen the positions of all govern-
ments vis-a-vis domestic vested interests that are desirous of special
protection.23
There is another suggestion based on past experience with the
28 This proposal is discussed in Curzon and Curzon, op. cit., pp. s-ro.
GATT and other organisations concerned with international trade

and related matters that might be made. The essence of the problem
is that policies and practices which are not conducive to obtaining
the benefits of international competition and freedom of trade raise
complex issues that cannot be resolved effectively by legal-adminis-
trative process of establishing and interpreting coded rules. Both
the rules and their detached interpretation and application require
the advice of economists trained in the theory of international trade.
Unfortunately, many lawyers, especially those trained in the
Continental tradition, wherein economics is regarded and taught as
a minor branch of law, believe that economics is easier than it
really is and that a general training in some kind of economics
is enough to permit decisions on problems that the specialist knows
to be very complicated. It is accordingly recommended that any
complaints and arbitration machinery should be well staffed with
professional economists and also permit consultation with profes-
sional economists.
INSTITUTIONAL ARRANGEMENTS
As mentioned in the introductory section, there is a serious defect
in the present institutional structure governing international eco-
nomic relations inasmuch as the GATT, the institution for trade
policy, is located in the quiet city of Geneva on one side of the
Atlantic, whereas the IMF and the IBRD are located in the world-
central city of Washington. Unfortunately for the purist, inter-
national institutions tend to grow into the roles assigned to them
and acquire usefulness in those roles, so that suggestions for change
always have drawbacks. For example, in the quiet neutrality of
Geneva, the GATT has developed some limited activities and
working relationships with the United Nations Conference on Trade
and Development (UNCTAD). It would be hard to transplant the
GATT to Washington however desirable a clearer connection and
more continuous contact with the IMF and IBRD could be from
the point of view of evolving an integrated approach to problems
of world trade, development assistance, capital movements and
monetary organisation.
Nevertheless, it would seem highly desirable to establish the
institutional under-pinnings of such an integrated approach to these
problems and for that purpose to bring the GATT (and possibly
UNCTAD) officials and affairs into the regular annual review of
GENERAL STATEMEN T
international economic developments now provided by the annual

joint meetings of the IMF and IBRD. This raises two sorts of
problems.
(a) First, in most national governments the central bank and
the treasury work closely together, but trade is the responsi-
bility of a separate ministry with which neither has as close
contact.
(b) Second, while the meetings constitute a useful parliament,
operative decisions are inevitably greatly influenced by
deliberations in small groups of those countries most affected by,
and most influential in, the matters under discussion.
From the standpoint of establishing an institutional system more
capable of dealing with international economic problems in an
integrated way, it would be as well to recognise, in whatever reforms
are devised, that the industrialised countries have many problems
in commo n. The solution to these-i n particular, how to manage
their exchange-rate and international-liquidity problems, and how
to open their frontiers to imports from all sources -is of the utmost
importance to the developing countries. The developed countries
are much more likely to resolve these problems if they discuss them
among themselves, and at least clarify the issues involved, before
taking them for further discussion and fmal determination to the
larger international organis ations- the IMF, the IBRD and the
GATT-whos e policies also need to be coordinated. There are two
institutions in which the leading developed countries discuss prob-
lems; namely, the OECD and the Group of Ten, although the
latter is largely confined to international monetary questions.
We would recommend (i) the development of the proceedings
of the OECD as "a steering committee" for finance and trade for
the leading developed countries and (ii) the establishment of a
joint IMF-IBRD-GATT consultative committee.
SUMMARY OF RECOMM ENDATIO NS
In summary, the Advisory Group recommends that the govern-
ments of the leading industrialised countries should embark on a
reform of the international trading system, based on the General
Agreement on Tariffs and Trade, during the course of the forth-
coming round of multilateral commercial negotiations.
For the negotiations they should adopt a program me of objectives
covering (i) the remaining tariffs on industrial products traded
among developed cotmtries, (ii) non-tariff distortions of international

competition, (iii) constraints on invisible earnings from fmancial
and transport services and transnational investment, (iv) problems
of trade in temperate-zone agricultural commodities, (v) developing-
cotmtry exports to industrial markets and (vi) trade between free-
enterprise and centrally-planned economies.
Those objectives should be imaginative and compelling enough
to inspire widespread public support and to induce in the major
trading partners a political commitment to the eventual success of
the negotiations. This is crucially necessary in order to resume the
international momentum of trade liberalisation which, more than
five years after the Kennedy Rotmd, has been allowed to run down.
In commercial diplomacy, the world does not mark time; it is either
moving forward or it is moving backward. (It has been likened to a
man on a bicycle who, when he stops, falls off.) A major move
forward would accordingly be the most effective way of halting a
de facto retreat from the liberalisation objectives of the late 1940s
into protection and regional discrimination.
Given the close inter-relationship between trade, investment and
money, it is proposed that the proceedings of the Organisation for
Economic Cooperation and Development should be developed into
"a steering committee" for the leading developed cotmtries. There
they might discuss the many problems they have in common
relating to trade and fmance, at least clarifying the issues involved
before taking them to the larger organisations-the General Agree-
ment on Tariffs and Trade, the International Monetary Ftmd and the
International Bank for Reconstruction and Development-for
further discussion and final determination. The solution to those
problems is of the utmost importance to developing cotmtries.
Indeed, the solutions to the problems of the poor, whether by aid
or trade or a combination of both, depend upon agreement among
the rich.
There is a further recommendation regarding international insti-
tutions. In order to permit commercial, investment and monetary
issues to be discussed together, it is proposed that a joint IMF-
IBRD-GATT consultative committee should be established and
that the GATT should take part in the annual IMF-IBRD meetings.
(Negotiations on commercial, investment and monetary problems
should be conducted, however, in the appropriate international
organisation.)
GENERAL STATEMENT
Throughout the report it is emphasised that a prerequisite for an

effective round of multilateral trade negotiations will be a reform
of the international monetary system to permit greater flexibility in
exchange rates.
The features and objectives of the international programme of
trade liberalisation, as discussed above, might be summarised in the
following terms.
(a) Substantially all tariffs on industrial products traded among
developed countries should be eliminated over an agreed transition
period by progressive, linear and automatic reductions, subject to
safeguards against "market disruption" and with provision, too,
for "exceptions" on grounds of "national security" (see below).
(b) Over the transition to tariff-free trade, all developed countries
should accord tariff preferences, on a non-reciprocal most-favoured-
nation basis, to the manufactured and semi-manufactured products of
all developing countries, again subject to safeguards against market
disruption.
(c) On the basis of Part II of the GATT, necessitating the with-
drawal of the Protocol of Provisional Application, general rules of
competition-accompanied by an effective complaints and arbi-
tration procedure-should be devised to cover where appropriate
the various categories of non-tariff intervention in international
trade. These general rules should later be elaborated upon in what
would amount to a more or less continuous process of consultation
and negotiation.
(d) In addition, consideration should be given to the interactions
among trade, foreign investment and invisible transactions on trans-
port and financial services with a view to reaching agreement on
principles, rules and procedures for liberalising trade in capital
assets and the international flow of earnings on them. Indeed, as part
of the trade negotiations, an international agreement should be
negotiated to prohibit interventions on the invisible side of the
current account in balances of payments.
(e) As a principle underlying all rules of competition, govern-
ments should be got to agree not to pass on to other countries the
costs of their adjustment policies, in respect of both industry and
agriculture.
{f) Since the problems of trade in temperate-zone agricultural
commodities are largely to be found in the domestic farm-support
policies of the major trading countries, it is suggested that an indirect
approach is more likely than a direct confrontation to yield worth-

while results. While governments should be persuaded to manage
their farm-support policies in such a way as to minimise the disrup-
tion of international trade, they should establish a high-level working
party, including importers as well as exporters, to examine the
effects of the agricultural price-support programmes of the major
trading countries with respect to: (i) their effectiveness in achieving
their desired objective of obtaining income redistribution towards
the existing farm population; (ii) their disruptive effects on world
trade in agricultural products; and (iii) alternative methods of
achieving the social objectives in question that might be socially
more effective, conceivably less disruptive of world trade and at the
same time politically acceptable.
(g) With the increasing integration of the world economy, and
with the further liberalisation of international trade to be sought in
the forthcoming multilateral negotiations, greater emphasis should
be put on policies for assisting regions, firms and workers to adjust
and adapt to import competition and other economic changes. In
view of the possibilities of substituting non-tariff protection for
tariff protection, it is strongly recommended that distinctions
between appropriate and inappropriate types of adjustment assis-
tance should be incorporated in any provisions-perhaps in an
international code on adjustment assistance-for reviewing the
methods employed by individual countries in responding to new
developments of import competition.
(h) Application of safeguards against market disruption should be
allied with a complementary programme of adjustment assistance,
not substituted for it, and there should be international machinery
for the surveillance for their application and maintenance. Quota
safeguards should be required to increase automatically by a reason-
able percentage per year. In short, temporary "escape clause" pro-
tection should be made more liberally available, but under more
strict conditions than have previously been applied.
(i) As part of a broad negotiating strategy, it is recommended that,
among the developed countries, the forthcoming multilateral
negotiations should be conducted on a conditional MFN basis,
ensuring that only parties to agreements can benefit therefrom.
(As stated in [b] above, it is proposed that, in accordance with
Part IV of the GATT, the benefits of agreements should be extended
non-reciprocally to all developing countries on an unconditional
GENERAL STATEMENT
MFN basis.) An equal commitment from all the major tracling

partners would safeguard the principle of reciprocity which is
being emphasised on all sides. In order to avoid the abandonment
of the principle of unconclitional MFN treatment as expressed in
Article I of the GATT, it is suggested that the negotiations could
be conducted under Article 24. This approach would provide the
required possibilities for bargaining leverage and it would also
provide a framework within which issues of non-tariff intervention,
agricultural trade and responsibility to the developing countries
can be discussed as part of the bargaining "package".
(j) The complaints and arbitration procedure of the GATT could
be greatly strengthened if future multilateral trade negotiations
were conducted under the principle of conclitional MFN treatment.
For under the principle of unconditional MFN treatment it has been
impossible for signatory countries to the GATT to withdraw con-
cessions to those trading partners who do not comply with inter-
nationally agreed rules of behaviour.
(k) One of the most difficult areas in which to devise general
recommendations is East-West trade. It is proposed, however, that
consideration might be given to the establishment of an institutional
setting where East-West trade discussions could include China.
Studies in such a new setting, or in the Economic Commission for
Europe or in the GATT, might concentrate on how joint ventures,
sub-contracting agreements and other specific arrangements might
be developed between free-enterprise and centrally-planned
econonues.
PART II
Background Papers
Hugh Corbet
Brian Hindley
Harry G. Johnson
T. E. Josling
Seamus O'Cleireacain
David Robertson
David Wall
CHAPTER I
Commercial Policy and the Monetary

Crisis of 1971
by HARRY G. JOHNSON
In a fundamental sense, the international monetary crisis precipitated

by the United States-or, more specifically, by the annoWicement
by President Nixon of his New Economy Policy-on August IS,
I97I, had been on the cards at least since I958. It was that long ago
that Robert Triffin, of Yale University, first began to warn his
academic and official colleagues of the dangerous instability of the
International Monetary FWid (IMP) system of organising inter-
national currency relationships. 1
The focal point, though, for a potential crisis has changed over
the intervening period, with the evolution of techniques for, and
the practice of, international monetary cooperation among the
leading coWitries. Moreover, while the focal point of the crisis-the
relative exchange values of other major currencies against the dollar
-was predictable for at least five years in advance, most harbingers
of gloom, including the present writer, predicted that the crisis
would be precipitated by other coWitries exasperated with the
behaviour of the dollar rather than by the United States exasperated
with the behaviour of other coWitries. Furthermore, those in the
United States, again including the present writer, who had been
advocating for approximately a decade that the United States should
take the action on the international monetary front that President
Nixon did in fact take-that is, demonetisation of gold in the
United States or, more accurately, the "de-dollarisation" of gold-
never had in mind that the decision no longer to sell gold for
monetary purposes should be accompanied by threats, by coercive
1 Robert Triffin, "The Dollar and International Liquidity Problem Reconsidered", Kyklos,
Vol. II, 1958, and also Crisis and Reform in the International Monetary System (Kingston, Canada:
Queen's Uuiversity Press, 1962).
43
44 HARRY G. JOHNSON
measures and by recourse to a protectionist device (the temporary

import surcharge). 2
In broad and formal outline, the international monetary system
as it existed up until August 15, 1971, was a regime of fixed exchange
rates among the major currencies, an individual country's rate being
alterable by international agreement in cases of "fundamental dis-
equilibrium",3 based on the use of gold as the fundamental inter-
national resource money, the rigours of gold's discipline being
eased by the provision and gradual expansion of credit facilities in
the form of drawing rights on the International Monetary Fund.
In actual practice, as it evolved over the post-war period, the system
diverged increasingly from its formal structure in two crucial
respects. First, countries became less and less willing to alter their
exchange rates either up or down. "Down " became a confession of
economic mismanagement; "up", a condonation of mismanagement
by others, as well as a blow to vocal export groups. Second, owing
to world inflation, the gradual drying up of new supplies of mone-
tary gold, niggardliness in increasing IMF drawing rights and above
all the post-war dominance of the United States in the world
economy, the American dollar came to be the dominant form and
source of basic international monetary reserves.
FoUR SEruous PROBLEMS
The resulting international monetary system, the experts had
agreed by the early 1960s, involved three serious problems, which
came to be known as "the confidence problem ", "the liquidity
problem " and "the adjustment problem". The order of listing
corresponds to the historical order in which they have troubled the
system. A fourth problem might be added, that of "deflationary
bias".
I. The confidence problem had two facets: (i) speculation
against any major currency, which might prove contagious
and bring down the system; and (ii) speculation against the
reserve currency, which might wipe out these international
reserves by encashment for gold held by the reserve currency
•Harry G. Johnson, "The International Liquidity Problem" , in International Payments
Imbalances and the Needfor Strengthening International FinancialArrangements, Hearings before the
Subcommittee on International Exchange and Payments of the Joint Economic Committe e,
US Congress (Washington: US Government Printing Office, 1961), pp. 173-175, 204-207,
241.
3A defmition used by the IMF.
COMMERCIAL POLICY AND THE 1971 CRISIS 45
country. Early concern about this problem reflected memories

of the collapse of the gold exchange standard in the early 1930s.
In fact, the development of central bank cooperation in the
form of quick and abundant credit for countries under specu-
lative attack narrowed that danger. The process was facilitated
greatly by a growing recognition that, by contrast to the pound
sterling in 1931, the American dollar in the 1960s was too
important for other countries to permit it to collapse. The
symbol of the passing of the confidence problem was the 1967
devaluation of the pound, which had heretofore been supported
by the United States for fear of a sterling-devaluation-induced
run on the dollar. While the expected run on the dollar did
occur, it was frustrated by the decision in 1968 to adopt the
two-tier system for determining the price of gold.
2. The liquidity problem resulted from the fact that expanding
use of the American dollar as a reserve substitute for gold
implied both a growing United States deficit and an accelerating
deterioration in the ratio of United States dollar liabilities to
foreign official holders to United States gold reserves, neither
of which could go on for long without raising increasing doubts
about the stability of the value of the dollar. The obvious
solution was a new international reserve asset whose growth
would take over from both gold and the dollar the task of
providing expanding international liquidity. While recognition
of the need for this solution was for long delayed by American
pride in the dollar, and by European refusal to admit the
reserve-demand element in the chronic United States balance-
of-payments deficit, it was eventually accomplished in the 1967
agreement to institute Special Drawing Rights at the IMF.
3. The adjustment problem, like the confidence problem, had
two facets. First, for countries other than the United States,
unwillingness to change exchange rates up or down meant the
development of cumulative disequilibria that could only be
resolved by exchange-rate changes undertaken under the
pressure of national and international political and financial
crisis. The severity of the international strains involved in
obtaining in 1969 the devaluation of the French franc and the
revaluation of the German mark made the community of
international monetary officials acutely aware of this problem
in that year. An IMF study of methods for achieving greater
HARRY G. JOHNSON
exchange-rate flexibility was accordingly instituted. But the

natural conservatism of central banks and IMF officials
vented it from producing any significant proposals for radical
change. And meanwhile the decision of the Common Market
countries to work towards a common European currency
threw a road-block in the way of progress towards greater
exchange-rate flexibility.
Second, given the role of the American dollar as the basic
reserve asset of the system, the United States monetary authori-
ties did not possess the power of other countries' authorities to
change the exchange rate of their currency against world
currencies as a whole. (This fact is frequently, but in the writer's
view erroneously, ascribed to the technical detail that the
United States maintained its par value by standing ready to
buy or sell gold while other countries maintained theirs by
buying or selling dollars in the market.) Any decrease in the
American par value (the value of the dollar in terms of gold)
could be offset by changes in the par values of other currencies.
Hence any adjustment of the exchange value of the dollar in
terms of other currencies would not be achieved by United
States action with respect to the price of gold; it would have
to be implemented by opposite changes in the par values of
other currencies.
4· The fourth problem, which does not appear on most lists,
but which has recurred in discussions of the last few years, is
that of"deflationary bias", derived from the idea that under the
gold standard deficit countries must sooner or later deflate even
though surplus countries are under no pressure to inflate. For
the deficit countries in fundamental equilibrium the availability
of devaluation was intended to provide the remedy. Surplus
countries that chronically sucked reserves from the rest, and
obliged them to deflate or devalue, were to be discriminated
against under the "scarce currency clause". 4 This clause, how-
ever, has never been activated.
These four problems are of course aspects of a single whole.
More rapid adjustment of exchange rates would forestall
'Assuming that these countries carry out sterilisation operations on the inflow of reserves
to prevent them having any effect on the domestic economy.
COMMllRCIAL POLICY AND THE 1971 CRISIS 47
the confidence problem for individual countries, remove the

pressures for deflationary domestic policies and, also, reduce the
liquidity needs of the system as a whole. On the other hand more
ample liquidity and more rapid liquidity growth would both reduce
the need for adjustment by policy changes and reduce the deflation-
ary bias of the system. The Bretton Woods system attempted to
deal with the problems as such; and, as mentioned, the major irony
of international monetary history since World War II has been
that all the problems have reappeared, with the exception that
deflationary bias has been replaced by inflationary bias-though, as
one might expect, the name of the villain is still the United States.
They have, however, reappeared as separate and successive problems,
and never (at least until after the 1971 crisis) as a related package of
problems.
The result has been a series of painfully-taken ad hoc measures
which, one might argue with some plausibility, may have made the
system function far worse, rather than better, than the original
Bretton Woods scheme would have done. In my judgement, the
main reason for this is that, because the Bretton Woods agreements
represented a compromise between the Keynes and the White plans
and were therefore regarded by the dominant Keynesian view as an
undue concession to deflationary orthodoxy, the assumption of the
academic experts, and also of many of the influential officials both of
certain countries like the United Kingdom and the United States
and of the International Monetary Fund itself, has been that the
system must be deflationary and require reform in the direction
of expansionary changes.
AMERICAN Loss OF PATIENCE
The fact that any adjustment in the exchange value of the
American dollar in terms of other currencies could not be achieved
by a change in the price of gold, but had to be achieved by opposite
changes in the par values of other currencies, was the basic institu-
tional and economic fact that lay behind the 1971 monetary crisis.
As already mentioned, American economists who understood the
system had for many years recommended that the United States
cut the link between the dollar and gold, and let the other countries
choose whether to adjust their exchange rates or live with the
dollar standard and the American deficit. The intention was to free
United States domestic and foreign policy from the pretence that
HARRY G. JOHNSON
the dollar was like all other currencies and subject to the same
balance-of-payments discipline. But successive administrations in
Washington preferred the mouth-music, and the policy methods, of
equalitarian hypocrisy.
Such a policy stance made some international political sense up
to 1965. American economic policy was producing a
reasonable degree of price stability and the United States Adminis-
tration could hope that inflation elsewhere would gradually solve
the adjustment problem. And it was tactful not to emphasise to
other countries the dominance of the American dollar. But then
came the escalation of the war in Vietnam, the failure to finance it
by tax increases or cuts in other government expenditure, and the
great (by American standards) inflation. The United States was
faced with a deteriorating balance of payments and other countries
were faced with a choice between accepting American inflation or
appreciating their currencies against the dollar.
Given European dislike of both inflation and the war in Vietnam,
on the one hand, and the tougher and less diplomatic line on inter-
national economic policy that the Nixon Administration had begun
to take, on the other, it seemed reasonable to expect that the Euro-
peans would be the first to crack under the strain of an over-valued
and inflationary dollar and that they would be driven into defensive
currency appreciation. The same logic seemed to apply to Japan.
But with a combination of inertia, fear of change and, in parts of
Europe, a degree of political animosity towards the United States,
this was prevented from happening. Instead it was the United States
that lost patience.
For this the domestic situation in the United States was responsible.
On the one hand, President Nixon had decided to reverse his anti-
inflationary domestic policy, which in turn had implied a sharp
worsening of the balance of payments. On the other hand, protec-
tionist sentiment had been mounting rapidly, in important part as
the consequence of the implications for exporting and domestic-
market industries of an over-valued currency. In addition, the
United States has an image of itself as a country producing a large
export surplus by virtue of its technological supremacy, a surplus
which fmances both private investment and government expendi-
ture abroad. When the balance-of-payments statistics showed a
dramatic worsening of the balance of payments in the first half of
1971, especially in the merchandise trade accounts, 5 what more

natural reaction could there be than to blame it on the perverse
refusal of the foreigners to adjust their exchange rates-and, in
American fashion, to seek a policy over-kill by not only cutting the
link between the dollar and gold but also imposing a IO per cent
import surcharge.
DANGER IN EUROPEAN PIQUE
This somewhat infantile policy package, combining a choice and
a threat, unfortunately provoked an equally infantile reaction from
Europe, namely the determination that the Americans must be
humbled into continuing the pretence that the dollar is no different
from other currencies by forcing them to accept a token rise in the
price of gold as part of the sought-for realignment of currency
values. But the United States could not just increase the price of
gold and nothing else. And it was not properly appreciated either
that the Congress in Washington is usually far more irrascible about
foreign-imposed constraints on American policy than the Adminis-
tration. It was also overlooked that the Congress understands,
perhaps better than most Europeans, the irrelevance of the price of
gold in the present international monetary sy1.tem.
Following the Smithsonian accord-the agreement reached in
Washington by the Group of Ten on December 18, 1971-there
has been a noticeable inclination to forget the greatest risk that was
being taken during the 1971 monetary crisis. For European pique
over the Nixon Administration's blunt reminder of the realities of
the international monetary system tended to divert European
attention to the trivial issue of the price of gold and away from the
far more important issue posed by the American import surcharge,
which represented a dangerous step towards general trade warfare.
Here the crucial point was that the surcharge involved a stark use
of a nominally non-discriminatory trade-restrictive measure to force
a differential international exchange-rate realignment. There was
strong support in Washington for the line that the surcharge should
be used as a general trade negotiating weapon and not as a specific
monetary bargaining counter. In addition domestic vested interests
were becoming increasingly vocal in demanding a continuation of
the surcharge's initially incidental protective effects. While some in
to this the deficit in the United States balance of payments occurred in the overall
6 Prior
balance, there being a surplus in the trade account.
c
so HARRY G. JOHNSON
Europe were wanting to fiddle with the price of gold, others in the
United States were wanting, in effect, to burn up the liberal inter-
national trade and payments system that international monetary
arrangements are intended to promote.
International monetary experts are prone to overlook the fact
that the purpose of international monetary arrangements is not to
make life easier for central bankers. The purpose is to contribute to
a more efficiently functioning world economy. Money is not an end
in itsel£ It is a tool of economic organisation. But it can all too easily
reverse the roles of slave to and master of the public's economic
destiny.
To be specific about this, since the point is rarely understood by
the ordinary man (not his fault, because politicians and civil servants
are frequently confused themselves and, even if not, have an incen-
tive to protect themselves from criticism by keeping the ordinary
man confused), the purpose of a fixed exchange-rate system is to
facilitate international trade and payments by enabling traders,
travellers and investors to calculate confidently what their national
money will buy abroad and what foreign money will buy at home.
But that calculation facility is only worth something if the individual
is free to convert between one money and another and to spend his
money (or earn it) as he pleases. If, in order to keep the exchange
rate fixed at a certain level, the government interferes with the
individual's freedom to spend his national money, the apparent
facility becomes a hollow mockery.
Take an extreme example from a few years back. What good is it
to a British citizen anxious to enjoy a well-earned vacation to be
told that his pounds are worth $2.80 each, if he is allowed only £so
($140) maximum to spend if he wants to holiday in the United
States (and the equivalent in the relevant European currency if he
wants to holiday in Europe)? But British economic policy is riddled
with all sorts of more subtle interferences with the freedom of
British citizens to spend their hard-earned pounds as they wish, or
to the best possible advantage: interferences imposed for the sake of
"protecting" or "improving" the balance of payments. The balance
of payments of the United Kingdom has chronically needed such
help only because the pound has been chronically over-priced
(over-valued) due to the reluctance of successive governments to
make the appropriate monetary adjustments required to maintain
its international value and to maintain British competitivene ss-
COMMERCIAL POLICY AND TilE 1971 CRISIS SI
either preventing domestic inflation or offsetting its international

effects by devaluation.
Other governments have no better record, although some of them
have been much luckier. The central point is that if the international
monetary system functions badly, governments will inevitably be
drawn into restrictions on international trade and payments in an
attempt to avoid the monetary consequences. International trade
policy and international monetary arrangements are two sides of the
same coin. Unfortunately, present international institutional
arrangements, the IMF and the General Agreement on Tariffs
and Trade (GATT), are set up to deal with them separately. But
they have to be considered together, with trade being given priority
over money.
The point requires emphasis because, even though the 1971
monetary crisis was a dramatic and timely reminder of the close
inter-relationship between trade and monetary issues, the pre-
occupation with the position of gold has persisted, with the cam-
paign to get the United States to restore the link between the dollar
and gold.
COMMITMENTS ON TRADE LIBERALISATION
At the Washington meeting of the Group of Ten in December,
1971, however, when a realignment of exchange rates was agreed
and agreement was reached "on the price at which gold will not be
sold", as one British journalist put it, (the United States having
agreed to remove the import surcharge) the leading industrial
countries agreed to embark on a fundamental reform of the inter-
national trade and monetary systems. Shortly after, in two separate
statements, the European Community and the United States, on
the one hand, and the United States and Japan, on the other, agreed
to begin multilateral negotiations in 1973 further to liberalise inter-
national trade, with preparations for those negotiations beginning
almost straightaway. Other countries subsequently associated them-
selves with these commitments.
President Nixon's New Economic Policy was ominously reminis-
cent of the policy of the United Kingdom in 1931-32. Prior to the
suspension of the gold standard, Britain was living with an over-
valued pound, and had two choices-to defend the pound by
deflation and protection, or to devalue. In the event, devaluation
was accompanied by deflation and protection, though the latter was
52 HARRY G. JOHNSON
no longer necessary and led to many of Britain's subsequent woes.

It also helped to spark off a wave of retaliatory trade restrictions and
beggar-thy-neighbour policies.
The New Economic Policy did involve a similar economic over-
kill. The dollar could have been protected by sufficient deflation,
or by de facto devaluation through an export subsidy and import
surcharge, instead of by floating it downwards against other cur-
rencies. When flotation was decided on, it was economically sense-
less to add the import surcharge side of a de facto devaluation and to
cut government expenditure and foreign aid, let alone to employ
the desperate last and unavailing resort of a wage-price freeze-the
final busted flush of a government whose own inflationary policies
have rendered its currency over-valued. Like the British Govern-
ment in I93 r-32, the American Administration in I97I seriously
compromised a long-standing commitment to freer world trade;
at the same time, it freed itself from international monetary con-
straints on a liberal world trade and investment policy.
Instead of being concerned about the short-run and easily diges-
tible consequences of monetary changes, the rest of the world should
be concerned about the long-run implications of the American
resort, albeit temporary, to the tariff surcharge. For it brought to
worldwide attention the mood of protectionism that, with the
failure to maintain the momentum of trade liberalisation, has been
developing in the United States since the conclusion of the Kennedy
Round negotiations in r967. The rest of the world has a stake in
preventing the United States from drifting into economic isola-
tionism.
The whole world, developed and under-developed, capitalist and
communist, has on any reasonable overall balancing of advantages
and disadvantages benefited tremendously during the past quarter
of a century from the liberal trade and investment policies that the
United States has both pursued its.elf and persuaded other nations
into pursuing. These benefits have involved not only the classical
gains from specialising on the production of goods in which other
countries have had a comparative disadvantage, but the new-style
gains from the transmission of advanced technology mediated
through foreign investment by the large American corporations.
Successive United States governments have, in a fundamental
sense, deliberately connived in the loss through diffusion of Ameri-
can technological leadership. But as Washington now sees it, the
loss of technological leadership has been too fast and too humiliating,
and the New Economic Policy was designed to show the rest of the
world where the muscle really lies. The demonstration ought to
have been unnecessary. And the rest of the world, having made it
necessary by its complacency in maintaining under-valued exchange
rates against the dollar, ought to be concerned to see America using
its muscle again in the service of the world economy.
Concretely, the rest of the world-and especially the countries
of the enlarged European Community, to whom the United States
has thrown the challenge of leadership-should recognise that freer
trade is advantageous to themselves and particularly advantageous
with respect to their objective of catching up with American living
standards. Other countries should recognise that their prime objective
at present should be to re-enlist the United States in the cause of freer
world trade.
In this connection, it is clear that a new approach to the negotiation
of liberalisation of world trade is required.
Important sections of American public opinion remain persuaded
of the world benefits of free trade and are prepared to sacrifice
short-run commercial interests to that cause. That was clearly
demonstrated in the recent report ofPresident Nixon's Commission
on International Trade and Investment Policy (the Williams Report)
which advocated the pursuit of free trade as a long-run policy
objective. 6 What is needed is a new strategy for the freeing of world
trade that would enlist the imagination of American liberals, who
alone are capable of subordinating the protectionist interests of most
American business and now organised labour, in the cause of an
open world economy.
Discussions of trade policy alternatives following the Kennedy
Round negotiations have begun to crystallise the main elements of
the negotiating package that might satisfy the interests of most
countries. They are:
(a) the establishment of free, and not merely freer, trade in
virtually all industrial products among the developed countries
-according to an agreed time-table for tariff elimination;
(b) rub or codes of competition covering non-tariff barriers
6Presidential Commission on International Trade and Investment Policy, United States

International Economic Policy in an Interdependent World, Williams Report (Washington: US
Government Printing Office, 1971).
54 HARRY G. JOHNSON
to trade, the implementation of which would involve fairly

continuous consultation and negotiation;
(c) commitments to the regularisation and expansion of
commercial trade in temperate-zone agricultural products;
(d) understandings and perhaps specific rules and institutions
governing the operations of multinational corporations; and
(e) special provisions fostering the trade of the less developed
countries.
As a result of the Smithsonian accord, the free-enterprise world

has got itself back, at least temporarily, on the Bretton Woods
system of monetary arrangements. There has been a change in the
price of gold that keeps its average accounting value in terms of
currencies more or less unchanged. And there has been a widening
of the margins within which exchange rates can vary in the market
to 2.25 per cent either side of par values.
The "wider band" proposal was intended to put more of the
burden of stabilising speculation on private as opposed to official
asset-holders, and also allow central banks to penalise private
operators more severely for unjustified speculation against the
maintenance of the par value. The "crawling peg" proposal was
intended to provide for automatic adjustment of parities and hence
of exchange rates among countries experiencing different trends in
the rate at which price changes are taking place. Adoption of the
former but not the latter scheme in the new arrangements implies
that the new parities are expected to last and that the extra flexibility
of wider bands is intended to ensure this. In short the new arrange-
ments both restore and strengthen the Bretton Woods system.
On past experience, the crawling peg, and better still the wider
band and crawling peg together, would have been more preferable
in the present writer's view. Withou t far more provision for
automatic exchange-rate flexibility, the Bretton Woods system is
economically and politically dangerous at the present juncture. My
reasons for this opinion centre on the question of inflation and the
differing attitudes of countries towards it, together with what may
be termed the power politics among the European countries, and
together with some fundamental issues in monetary theory.
The logic of the Bretton Woods system is that of a single world
money. It points to the necessity, ultimately, of establishing the
equivalent of a world central bank. This in turn requires creating
on the international scene the equivalent of what exists on the

national scene in the relations between the central bank and the
commercial banks; that is to say, a centrally-controlled international
reserve asset the quantity of which in the possession of a national
central bank would govern the amount of domestic money it could
create. On the domestic scene the discipline is based on private
convertibility of bank deposits into central bank money. On the
international scene, however, the Special Drawing Rights (and
similar IMF assets that could be devised) are artificial creations for
circulation among official institutions, not assets in private circula-
tion.
Following in the wake of the 1971 crisis, all sorts of international
monetary experts have devised schemes of less or greater technical
sophistication for consolidating dollars, sterling and gold into a new
international reserve asset as a means of establishing central control
of world liquidity and of reducing the dollar to equality with other
currencies. But the main problem is whether this would work or
whether, instead, the private usefulness of the dollar would continue
powerful, so that the consolidation of existing dollars would simply
free the United States for another bout of injecting inflation into the
world economy.
Apart from that issue, which involves the basic theoretical
monetary issue of whether money can be created and controlled
artificially by intelligence and institutionalisation or has to ''just
grow" like Topsy, there is the question, assuming that central
control of world money could be established, of how it should be
managed-that is, the question of what rate of world inflation should
be considered tolerable. It is here that power politics interpose them-
selves. For the countries of Western Europe are demonstrably
disunited states on the issue of price stability, while the views of the
United States are likely to be based on domestic, not world, con-
siderations.
Even if agreement could be reached on the objective there would
be great difficulty in implementing that objective through control
of the growth of new international reserve assets. Putting entirely
aside the role of the private dollar, international fmance has been
characterised by all manner of innovations, notably the Euro-
currency markets, which would thus make the task of international
monetary control far more complex than central bank control at the
national level as conventionally understood.
HARRY G. JOHNSON
The disunity of the European countries also rules out an alternative

to the Bretton Woods system that has been advocated for many
years and has recently been symbolised in the objective of establishing
a common currency, and which could be a sensible form of inter-
national monetary organisation. This would be a European currency
bloc with a floating exchange rate against the dollar, other currencies
either pegging to one or other major currency or floating as they
chose.
The free-enterprise world is thus going to have to live for a long
time ahead with the Bretton Woods system which, as it has
developed, can be described as one in which all currencies are
formally equal. But in reality, as under ancient Athenian democracy,
only a few are citizens of the republic and the rest their slaves.
Among the citizens equality prevails only as long as Gulliver is
content to lie down and let himself be bound by the Lilliputians. The
explosive potentialities of the situation would, to mix the metaphor
still more, be greatly reduced if instead of trying to tie Gulliver down
more tightly with new coils of international reserve assets, the
Lilliputians attempted to provide themselves with more protection
from Gulliver's wrath-or mere "benign neglect" of the con-
sequences of his muscle-flexing-in the form of bolt-holes of
exchange-rate flexibility.
Specifically, as suggested above, the IMF system needs urgently to
be reformed in the direction of providing for more automatic
flexibility of exchange rates. The present writer is a long-standing
advocate of freely floating exchange rates; but it is obvious that
central banks and governments strongly prefer some degree of fixity.
That being so, it is eminently desirable to experiment with and
institutionalise new exchange-rate arrangements, such as the wider
band already agreed, the crawling peg and the temporary flotation
of exchange rates that become disaligned with a country's inter-
national competitive position-the adjective "temporary" being
given as elastic a defmition as possible.
In this context, the British Government's decision on June 23,
1972, to let the pound float is a hopeful precedent. It was the first
occasion under the IMF system in which a country facing a need for
devaluation floated its currency rather than go through the wringer
of distress borrowing from other governments subject to political
stipulations and large transfers to private speculators on the eventu-
ally inevitable devaluation.
CHAPTER 2
Optional Negotiating Techniques

on Industrial Tariffs
by HUGH CORBET and HARRY G. JOHNSON
Following six rom1ds of multilateral negotiations Wlder the General

Agreement on Tariffs and Trade (GATT) import duties on industrial
goods have been reduced to very low levels.1 In fact, the average
level of tariffs on manufactured and semi-manufactured products,
weighted by trade between member com1tries of the Organisation
for Economic Cooperation and Development (OECD}, is now
8.3 per cent for the United States, 8.4 per cent for the European
CommWlity, 10.2 per cent for the United Kingdom (ignoring
Commonwealth preferences} and 10.9 per cent for Japan. 2
The Kennedy Rom1d negotiations, the sixth in the GATT series,
therefore marked the end of a liberalising phase in which freer trade
could be the only realistic objective in international negotiations.
After the Great Depression and World War II, the best that policy
planners envisaged, in the late 1940s and in the 1950s, was a restora-
tion of orderly conditions in international commerce and a reform,
as well, of the autarkic and discriminatory policies which resulted
from the protectionist excesses of the 1930s. Public opinion in most
COWltries gave national full employment emphatic priority over fair
international competition. Moreover, there were fears of a great
post-war slump in the United States and expectations, too, of a
permanent dollar shortage. But with the tariff reductions and
dramatic expansion of world trade that occurred in the 1960s it is
now possible to regard free trade as not only a realistic goal but also
a necessary one.
President Kennedy's Trade Expansion Act of 1962, which made
the Kennedy RoWld talks possible, proposed a breakthrough in
1This paper is based on an article by the authors entitled "Pacific Trade in an Open
World", Pacific Community, Tokyo, April, 1970.
1 The United States in a Changing World Economy (Washington: Council on International
Economic Policy, Executive Office of the President of the United States, 1971), p. 25.
c* 57
HUGH CORBET AND HARRY G. JOHNSON
tariff-cutting negotiations. In the subsequent confrontation by Lake

Geneva, however, the across-the-board or linear approach reverted,
in effect, to item-by-item haggling over "sensitive" products and
those of concern to strong vested interests in the major trading
nations. This latter technique is widely held to have been played out.
Indeed, well before the Kennedy Round agreement was fmalised,
Sir Eric Wyndham White, as Director-General of the GATT,
suggested in a key speech at Bad Godesberg that future negotiations
would have to be of a different kind.3
When the Kennedy Round agreement was signed, more concerted
attention began to be given to the issues that might be encountered
in future negotiations and, also, to how they might be broached. In
the United States, President Johnson initiated a trade policy enquiry
headed by William Roth, his Special Representative for Trade
Negotiations. 4 And on Capitol Hill, the Joint Economic Committee
of Congress, and later the Senate Finance Committee, embarked on
their own investigations of the policy options.5 In addition, a number
of private research organisations, besides several independent
academic economists, launched intensive long-range studies. Non-
government studies were also initiated in other countries, most
notably in Canada, the United Kingdom, Japan and the Nether-
lands.6
Towards the end of 1969 another, more ambitious, series of
hearings and studies were initiated in the United States Congress by
the Joint Economic Committee and, shortly after, President Nixon
appointed a special Commission on International Trade and Invest-
3 Sir Eric Wyndham White, "International Trade Policy: the Kennedy Round and
Beyond", Address to the Deutsche Gesellschaft ftir Auswartige Politik, Bad Godesberg,
October 27, 1966. Also see The Times, London, May 16, 1967.
4 The outcome of the Roth enquiry was published just before President Johnson left office:
Special Representative for Trade Negotiations, Future United States Foreign Trade Policy,
Roth Report (Washington: US Government Printing Office, 1969).
5 See The Future of US Foreign Trade Policy, Hearings before the Subcommittee on Foreign
Economic Policy (Washington: US Government Printing Office, for the Joint Economic
Committee, United States Congress, 1967), together with the Report under the same title
and Issues and Objectives of US Foreign Trade Policy, a compendium of studies prepared for
the Subcommittee.
61n this connection see the studies published under the Atlantic Economic Studies Pro-
gramme of the Private Planning Association of Canada, based in Montreal; the monographs
published under the Atlantic Trade Study Programme, administered by the Trade Policy
Research Centre, London; the papers prepared for the yearly sessions of the Pacific Trade and
Development Conference, organised by the Japan Economic Research Centre, Tokyo; and
the symposium convened by the Kennedy Institute, University ofTilburg, in the Netherlands.
NEGOTIATIONS ON INDUSTRIAL TARIFFS 59
ment Policy (the Williams Commission). 7 Apart from a host of

studies by individual specialists, two private reports, by the National
Planning Association and the Committee for Economic Develop-
ment, have made notable contributions to the reappraisal in the
United States of commercial policy, in which the prospective needs
of the world economy have figured large.8
On negotiating strategies for carrying forward the liberalisation
of international trade, the Roth enquiry concentrated on four
options, although the final report did not discuss them in detail. 9
First, there is the possibility of another round of multilateral nego-
tiations conducted, along what might be termed traditional lines,
on a basis of reciprocal bargaining and unconditional most-favoured-
nation {MFN) treatment. This option is referred to hereafter, for
convenience, as an MFN round. In considering a seventh MFN
round, trade policy specialists usually envisage another Kennedy-
Round-type of negotiation, combining linear reductions with
reductions negotiated on an item-by-item basis. Secondly, there is
the old French proposal for the harmonisation of tariff levels, which
was revived during the Kennedy Round negotiations as a way of
dealing with the "disparities" problem, where customs duties on
certain products are very high in some countries and very low in
others. Thirdly, the Canadian proposal for a sector-by-sector, or
industry-by-industry, approach to free or freer trade has been on
the agenda of discussion since the Kennedy Round days. Fourthly,
there is the proposal for an agreement on the "progressive, linear
and automatic reduction" of tariffs among developed countries, to
use the formulation of Olivier Long, the GATT director-general.I 0
7The report of this exhaustive enquiry was published just one month after President
Nixon announced his New Economic Policy on August Is, 1971: Presidential Commission
on International Trade and Investment Policy, United States International Economic Policy in
an Interdependent World, Williams Report (Washington: US Government Printing Office,
1971), together with two volumes of papers prepared for the Commission.
8 See, respectively, US Foreign Economic Policy in the I970s: a New Approach to New Realities
(Washington: National Planning Association, 1971), and The United States and the European
Community: Policies for a Changing World (New York: Committee for Economic Develop-
ment, 1971).
8 This was disclosed in testimony before the Joint Economic Committee of the United
States Congress on February 19, r9(i8, and was subsequendy published as William Roth,
"The President's Trade Policy Study'', The Atlantic Community Quarterly, Washington,
Spring, r9(i8.
100livier Long, "Toward Better Trade Relations in the 70s", Address to the Trade Policy
Research Centre and the Foreign Affairs Club, London, January 24, 1972.
6o HUGH CORBET AND HARRY G. JOHNSON
These four options are not mutually exclusive. And there would
probably be in each of them, to varying degrees, an element of
item-by-item haggling. Indeed, strategies could be devised to com-
bine two or more of the above techniques. But in order to sort out
their advantages and disadvantages, they will be treated separately
in the below discussion.
SIGNIFICANCE OF ExTANT TARIFFS
Before examining these options it is as well though to dispose of a
comfortable notion held by some who do not appear really interested
in the achievement of an open world economy. They would main-
tain that the tariff reductions secured in the Kennedy Round agree-
ment have brought the world so close to free trade that the remaining
duties are of no practical importance. But to belittle the significance
of the extant tariff barriers is to overlook certain aspects of the
current debate pertaining to the operations of multinational cor-
porations and the challenge &om the Third World and, for that
matter, trade in agricultural products.
First, the most protective element of a tariff is generally argued to
be found in the last few remaining percentage points, which accord-
ingly represent the "hard core" of protection for the industries
concerned. Against this, it can be argued that it is the high tariff
rates that protect the really inefficient industries, and that once tariffs
have been reduced to very low levels the remaining inefficiency is
small. On the other hand, any tariff has a "nuisance value" in
yielding protection to domestic industries, in terms of customs
clearance and customs valuation problems for foreign competitors,
and the reduction of tariffs to the last few remaining percentage
points does not eliminate this protective effect.
Secondly, the relevant measure of tariff protectiveness is not
nominal rates of duty, but e.Jfective rates of duty on value added, which
are in many instances higher than the listed figures. 11
Thirdly, at the lower end of the spectrum of industrial so phis-
llThe concept of the effective rate of protection, which, in measuring the degree of pro-
tection afforded to an economic activity in terms of the value added to that activity, takes into
account the duties levied on material inputs, is discussed in W. M. Corden, "The Structure
of a Tariff System and the Effective Protective Rate", Journal of Political Economy, Chicago,
June, 1966. Also see Harry G. Johnson, "The Theory ofTariffStructure, with special reference
to World Trade and Development", in Johnson and Peter B. Kenen (eds.), Trade and Develop-
ment (Geneva: Libraire Droz, 1965). In addition see Corden, The Theory ofProtection (Oxford:
Clarendon Press, 1971).
tication, the tariff reductions on manufactured goods agreed in the

Kennedy Round were more favourable to the trading interests
of the developed countries than to those of the less developed
countries. Tariffs on goods excluded from the negotiations, either
as an automatic consequence of the bargaining process or because
they were regarded as sensitive items, are still relatively high and
bear very hard on the exports of backward economies.
Fourthly, at the other end of the spectrum, it needs to be pointed
out that in the planning by international firms of competitive,
marketing and investment strategy there is a vital qualitative
difference between, on the one hand, an international market
environment in which tariffs are low but still subject to alteration
by national governments and, on the other, an environment in
which complete tariff-free trade is guaranteed by international
agreement.
Whilst their significance has been reduced, tariffs continue to
constitute a serious problem in world trade. As they have been
lowered, however, the significance of non-tariff barriers (more
accurately described as non-tariff distortions of competition) has been
exposed. But non-tariff barriers are not so much a general problem
as a feries of specific problems relating to trades in particular goods
between particular countries. By far the most difficult issue in this
connection has to do with trade in temperate-zone agricultural
products where no appreciable impact has been made, either in the
Kennedy Round or in previous negotiations, on the rising trend in
the protection accorded to domestic farmers. These problem areas,
non-tariff barriers and agricultural protectionism, have to be taken
into accotmt in considering future negotiating techniques on tariffs.12
PRicE OF WAIT-AND-SEE PosTURE
Reverting to the courses that might be pursued in devising a

strategy for maintaining the expansion of world trade, the cautious
have been advising a "wait-and-see" policy and that, indeed, was
the thrust of the Roth Report's recommendations. Stated shortly,
the strategy consisted of (a) consolidating the achievements of the
Kennedy Round negotiations and resisting any backsliding into
12For a brief discussion of the political factors necessitating the inclusion of agriculture in
future trade negotiations, see Hugh Corbet, "Global Challenge for Commercial Diplomacy",
Pacific Community, Tokyo, October, 1971, pp. 233-35.
62 HUGH CORBET AND HARRY G. JOHNSON
protectionism, (b) preparing to deal with non-tariff barriers, especi-

ally in the field of temperate-zone agriculture and (c) relying on
time and circumstance to provide an opportunity for a major trade
initiative at a later date.
Persuasive arguments were certainly to be found for a wait-and-
see posture. It was consistent with the prevailing philosophy of
consolidation. It contained a high degree of feasibility. And it
acknowledged the balance-of-payments problems, and the other
constraints on foreign economic policy, of the United States. While
its objectives were limited, they would represent, if realised, a
respectable advance towards free trade.
Although this was the course followed, whether consciously or
not, it involved running a certain risk. For in commercial policy
matters the world does not stand still. It is in a phase of either pro-
gression or regression. Over time a policy of wait-and-see was
consequently bound to be a losing strategy. For the forces of pro-
tectionism are ubiquitous. There are always cogent reasons of
expendiency for surrendering some of the ground already gained
in the interest of holding on to what remains.
When the Kennedy Round negotiations ended it was commonly
said that governments and companies would need a pause to digest
and evaluate the potential effects of the agreement struck. Now,
nearly five years later, it is legitimate to ask, as the Director-General
of the GATT has done: How long can a pause reasonably last in a
field as dynamic as world trade before it becomes damaging and
before it undermines what has been attained with such difficulty
over the past twenty years? Because of the failure to maintain the
momentum of trade liberalisation, special interests have captured
widespread attention, which suggests that a greater effort than
before will be required to resume the movement towards an open
world economy.13
ANOTHER MFN RoUND
Of the more positive options that are under consideration, a
second Kennedy Round could perhaps build on the success of the
first. With fresh minds on the task this would seem a politically
feasible possibility. Another multilateral MFN negotiation would
18The arguments for an imaginative trade initiative are discussed in Raymond F. Mikesell,
''American Trade Policy and Changes in World Trading Patterns'', The Annals, Philadelphia,
July, 1969.
NEGOTIATIONS ON INDUSTRIAL TARIFFS
continue, moreover, the evolution of GATT negotiations and

involve no radical departure from established bargaining procedures.
Finally, a second Kennedy Round would be consistent, some still
might argue, with a continuing need for consolidation. But against
these advantages can be set a range of formidable drawbacks.
GATT experience suggests that new negotiating procedures are
subject to diminishing returns in the short and medium terms. Only
two out of the six rounds of GATT negotiations achieved substantial
succes!>, namely the first and sixth, each of which amounted to a
fresh approach to trade liberalisation. As already mentioned, the
Kennedy Round negotiations retrogressed significantly in the direc-
tion of item-by-item haggling, especially over politically sensitive
items on national tariff schedules. They nearly broke down several
times. With a repeat performance the chances of failure would be
greatly increased. For "hard core" tariffs are unlikely to yield to
conventional approaches towards liberalising trade.14 Stronger
resistance can be expected from the vested interests protected by
them. Another universal type of negotiation would thus probably
be so encumbered with "exceptions" that the effort required to
reach agreement could well far exceed the will to do so.
Secondly, another multilateral effort along traditional lines would
have to be motivated by a high objective (as was the Kennedy
Round). It would have to be compelling enough to induce in the
major trading nations a political commitment to its eventual
success. Merely halving the tariffs that are left, following the
implementation of the Kennedy Round agreement, might not be
deemed worth the effort. For governments to be galvanised into
action the goals of a seventh MFN round would need to include
the total removal of extant tariff barriers. Yet some of the leading
trading nations are likely to balk at the finality of such an aim.15
Thirdly, even if many governments are willing to proceed to
free trade between industrialised countries, GATT procedure has in
the past necessitated simultaneous agreement on the goals of a
multilateral negotiation. Arriving at a "common denominator" is
U'fhis point, and others relating to this policy option are discussed in Gerard and Victoria
Curzon, "Options After the Kennedy Round", in Johnson (ed.), New Trade Strategy for the
World Economy (London: Allen & Unwin, 1969), pp. 56-59.
"See Johnson, "Challenges Confronting Commonwealth Countries", International Journal,
Toronto, Wmter, 1969.
difficult at the best of times. While some countries hope for unfair
advantages-in terms of their balances of payments-from what
might outwardly appear fair bargains, others have an opposite
expectation and, at least in the initial stages, are very reluctant to
negotiate. The MFN clause in the GATT has the effect, therefore,
of limiting the progress of negotiations to the pace of the least
willing participants.
Among those with "low expectations", when it comes to GATT
negotiations, have been the temperate-zone which are
established exporters of farm output, notably the United States,
Canada, Amtralia, New Zealand, Argentina and Denmark. Over
the last twenty years the liberalisation of trade in agricultural
products has lagged far behind that in the industrial sector. Along
with many developing countries, for whom agriculture also consti-
tutes a vital source of foreign exchange earnings, they have been
continually pressing for the situation to be remedied. Instead, with
the implementation of the European Community's common agri-
cultural policy, it has been worsening. And herein lies the fourth
drawback to another multilateral MFN negotiation. For this
approach has placed agricultural products in a special position
considerably less amenable to bargaining than industrial products.
What is more, the provision; for "exceptions" have been used, in
six previous rounds, to exclude from the bargaining process the
labour-intensive and relatively simple products in which developing
countries often enjoy a comparative advantage.
Lastly, if the momentum of trade liberalisation is to be resumed,
a bold and imaginative initiative is required as an effective counter to
the protectionist trends which have been developing in North
America and Western Europe. From this point of view a seventh
MFN round would be too dreary and prosaic.
SECTOR-BY-SECTOR NEGOTIATIONS
Some inkling of what might be undertaken through the sector-
by-sector approach can be obtained from an examination of the
Kennedy Round negotiation on chemical products. An interesting
precedent for such a strategy lies in the "dominant supplier" author-
ity of President Kennedy's Trade Expansion Act of 1962. This act
empowered the United States Administration to negotiate tariff
reductions of up to 100 per cent on those products in which the
United States and the European Community together accounted for
So per cent of free world trade. 16 The authority could be renewed

to provide for the progressive extension of free trade through
(a) extending the defmition of the countries to be covered by the
basic statistic authorising negotiations and (b) reducing the per-
centage of free world trade required to qualify an industry for trade
liberalisation.
Since the conclusion of the Kennedy Round negotiations, how-
ever, the case for the sector-by-sector approach has been concen-
trated on the concept of free trade in those sectors of industry in
which the major trading nations have both a significant export and
a significant import interest. Free trade in both directions would thus
involve changes in the composition of specialisation. But no major
industrial readjustments would be implied.
Three broad categories of products can be identified where the
sectoral approach might be both desirable and possible: (a) products
which have a high technological content; (b) products that are
already internationally made and traded; and (c) semi-manufactured
products or investment materials that are themselves the inputs of
other industries.17
An attractive feature of the technique is that it would enable the
negotiating process to be greatly simplified as only the countries
chiefly concerned in each particular trade would be taking part in
the discussion. With this approach it would be possible, too, to
negotiate on all barriers to a particular trade, encompassing the
non-tar iff barriers which most hamper the export of sophisticated
products. In addition, the approach, where applicable, could afford
governments greater leeway in that it would divide protectionist
forces on the home front and permit the exclusion of genuinely
sensitive industries.
Apart from other problems, a number of technical impediments
to the approach have been revealed. It is not easy to isolate clearly
defined sectors of industry in which free trade could be amicably
applied. Canadian officials have found this to be the case in their
efforts to extend the Canadian-American automotive agreement to
other products. Because of the input-o utput linkages between
industries in a modern economy, the national participants in a
16The secondary authority under the Act provided for tariff reductions of up to 50 per cent
on any products that entered world trade and it was this which was exercised in the Kennedy
Round negotiations.
17 For a fuller discussion of the sectoral approach see Curzon and Curzon, op. cit., pp. 59-68.
sectoral negotiation would be put at an advantage, or at a disadvan-

tage, by differences in tariff and other policies affecting their costs,
while free trade in their products would affect the relative cost
positions of user industries.18
Research has not yet disclosed many industries in which the
technique would be at all applicable. Serious doubts are therefore
cast on the prospects for obtaining a sufficient degree of reciprocity
among the major trading nations to render a sector-by-sector
approach a worthwhile proposition. It is true, the proponents of
this approach have always envisaged it being combined with other
negotiating techniques, but the problem of achieving reciprocity
would remain extremely difficult.
The industries in which the sectoral approach would be most
applicable, at least theoretically, are the ones in which the industrially
advanced countries have a commanding lead and the economically
backward countries are at a comparative disadvantage. Not only
would a strategy based on this approach tend to discriminate against
the interests of developing countries. It would be seen to do so.
In a liberal climate of opinion, the flexibility of the approach might
be regarded as an advantage, but that very flexibility would be a
great disadvantage when protectionist forces are influencing the
QVerall situation.19 For in the latter circumstances more industries
would be by-passed as "sensitive" areas. But even in favourable
circumstances, sector-by-sector negotiations would be painstakingly
slow and subject, also, to possible default on the part of a major
trading nation.
TARIFF HARMONISATION
For much of the period of the Kennedy Round negotiations, the
issue of "tariff disparities" was pursued, mainly by the European
Community. It was argued that disparities between high and low
rates of duty in different countries on certain items made it impos-
sible to apply the linear method of tariff reduction. In the end, the
negotiations were successfully concluded, although they had to
resort to item-by-item bargaining.
After the implementation of the Kennedy Round agreement, the
18The point is analysed in Edward English, "Tariffs and Trade", in Canadian Tax Founda-
tion, 1968 Conference Report (Toronto: Canadian Tax Foundation, 1969), quoted in Corbet
.et al., Trade Strategy and the Asian-Pacific Region (London: Allen & Unwin, 1971), p. 17.
19Curzon and Curzon, op. cit., p. 72.
United States, Canada and Japan have relatively more items bearing
rates of customs duty above 15 per cent than does the European
Community. The disparities issue is therefore likely to be raised
again in the multilateral negotiations foreshadowed to begin in 1973.
But the chances of inducing the United States, never mind other
countries with high rates in their tariff schedules, to make unrequited
concessions for the sake of achieving "tariff harmonisation" are as
remote in the 1970s as they were in the 1960s. For the very idea
implies a rejection of the principle of reciprocity. And there does
not appear anyway to be any particular economic benefit to be had
from having tariff levels in line from country to country.
During the early 1950s low-tariff countries were concerned that
in bilateral negotiations (and multilateral negotiations in the GATT
are in fact a complex of bilateral exchanges with all concessions
negotiated being extended to all contracting parties on an uncon-
ditional MFN basis) they were at a disadvantage because they had
little compensation to offer in return for major or worthwhile
concessions from high-tariff countries. Two sets of proposals there-
fore received serious consideration: 20
r. Low Tariff Club: In the Council of Europe, the low-tariff
countries proposed the imposition, over a three-year period, of
a ceiling on tariffs, so that those on trade among countries
adhering to the agreement would not exceed (a) 25 per cent
on fmished industrial products and food items, (b) I 5 per cent
on semi-fmished goods and (c) 5 per cent on raw materials.
As Kenneth Dam, of the University of Chicago, has observed,
the Low Tariff Club was designed as a step in the integration of
Western Europe. All the same, the possibility of non-European
countries adhering was not excluded.21
2. French Plan: With a view to harmonising tariffs rather
than reducing those at high levels, the French proposed a plan
which, in its revised form as the GATT Plan, would have re-
quired participating countries to reduce the average unweighted
incidence of their tariffs by ro per cent in three successive
years. While governments would have been fairly free to
choose the items for reductions, ten broad sectors of traded
20The two proposals are discussed in Kenneth W. Dam, The GATT Law and International
Economic Organisation (Chicago and London: University of Chicago Press, 1970), pp. 64-68.
11 Low Tariff Club (Strasbourg: Council ofEurope, 1952), pp. 25-26.
goods were chosen where the 30 per cent reduction had to

apply, in order to ensure that adherents to the agreement did
not concentrate the reductions in a single area. Furthermore, the
full reduction would not have been required where tariffs in a
given sector were below an agreed "ceiling", and no reduction
at all would have been required where tariffs were below an
agreed "floor". 22
What attracted political support for the GATT Plan was its
attempt to substitute a formula of automatic reductions for the
uncertainties inherent in reciprocal bargaining. It represented an
attempt to overcome the disparities issue, but, more important,
it also anticipated the problem of lists of exceptions-of industrial
products deemed to to be sensitive to import competition.
The majority of contracting parties to the GATT supported the
plan. It was blocked, though, by the opposition of the United States
and Britain. In the end, the success of the European Community
and the European Free Trade Association (EFTA), in reducing
internal tariffs by an automatic formula similar to the French pro-
posals, strengthened American interest in an across-the-board
approach to tariff reductions. This was reflected in the Trade
Expansion Act of 1962 and in the Kennedy Round negotiations
which followed.
PROGRESSIVE, LINEAR AND AUTOMATIC REDUCTIONS
Since then the idea has been receiving even more widespread
attention. Moreover, serious consideration is being given in Washing-
ton to the elimination of substantially all industrial tariffs, perhaps
within ten years, as an objective of American trade policy. That
was a major recommendation of the Williams Commission as it
has been of several reports from liberal trade quarters in the United
States. 23 Indeed, as argued earlier, it is difficult to envisage any
future multilateral negotiations making progress unless they are
motivated by such a high objective.
An agreement on the progressive, linear and automatic reduction
and elimination of tariffs on industrial products traded among
developed countries, involving a treaty commitment, might be
22ANew Proposal for the Reduction of Customs Tariffs {Geneva: GATT Secretariat, 1954).
The GATT Plan is also briefly discussed in Curzon and Curzon, op. cit., pp. 28-3 I.
2SWilliarns Report, op. cit., pp. 10 and 304.
visualised as an extension of the GATT Plan of the 1950s or of the

technique successfully employed in the Common Market and EFTA
in the 1960s. Ifbroached in a similar way, it would enable countries
interested in global free trade to proceed towards that goal without
being detained by others not yet ready to advance that far. In any
case few developed countries would abstain from an agreement
which embraced the United States, Japan and the enlarged European
Community.
What such an agreement would offer is an assertive and inspiring
counter to protectionist forces in North America and Western
Europe. Yet as a fresh approach to trade liberalisation on a world-
wide scale it would avoid the diminishing returns of a second
Kennedy Round exercise.24
By contrast to another MFN negotiation, the proposal itself would
not require all, or most, leading industrial countries to agree on the
desirability of global free trade before discussions could begin.
If only those countries which adhered to the agreement were to be
allowed to benefit from its arrangements, the pace of negotiations
would thereby be decided by the most eager, not by the most
reluctant. Nor would those prepared to lower trade barriers be
obliged to give a "free ride" to countries unwilling to reciprocate.
The GATT' s interpretation of the principle of non-discrimination
in international trade would not be infringed because the strategy
could be authorised under the article of the GATT which provides
for exceptions from this general rule. 25
By contrast to the sectoral approach, an automatic formula for
progressive and linear tariff reductions would eliminate prevarication
and present, instead, a clear and over-riding objective for trade
policy. The set timetable, along with the pre-arranged goal of
zero tariff positions, would make it very difficult to exclude pro-
tectionist strongholds from the system. A treaty commitment to
eliminate all, or substantially all, tariffs would indeed be a powerful
instrument for overcoming "hard core" tariffs. Provision would
have to be made though for certain industries to be excepted from
the movement to tariff-free trade on grounds of "national security"
24Fora succinct comparison of the results of six rounds of GATT negotiations, see Curzon
and Curzon, op. cit., p. 57.
25The position of MFN in multilateral trade negotiations is discussed in Corbet, "Position
of MFN Principle in Future Trade Negotiations", Chapter 9 below.
or "market disruption", although in the latter case the negotiations

might focus on the conditions for such exceptions and, too, for
temporary "escape clause" protection for the industries affected
(see Chapter 5 below).
If the developed countries could agree on an all-embracing
strategy governing trade among themselves, they should also be able
to agree on how to embolden the less developed countries to exploit
the opportunities of world trade rather than indulge, as they often
do, in uneconomic import substitution. Whether it is to be by aid or
trade, or a combination of both, an international solution to the
problem of the poor depends upon agreement among the rich. A
tariff-free trade arrangement among developed countries could
provide for a self-eliminating scheme of non-reciprocal tariff
preferences, encouraging less developed countries to penetrate
industrial markets. 26
In the United States the question of "fair competition" is well to
the fore. There have been proposals that governments should
develop international rules of competition, or codes of conduct, for
dealing with "unfair trade practices" including techniques by which
governments are thought to enhance the ability of their products to
penetrate the markets of other countries by indirect subsidies, either
for their manufacture of for their export. By providing a treaty
commitment, an agreement to eliminate tariffs according to a pre-
arranged schedule could probably provide a more effective institu-
tional framework for "harmonising" non-tariff distortions of
international competition than have the ad hoc procedures of GATT
experience.
Tied to the agreement there could be, as there is in the Stockholm
Convention (the EFTA constitution), an undertaking to consult and
negotiate on those policies and practices which have the effect of
frustrating the benefits expected from free trade. The agreement
could, indeed, require adherence to rules of competition covering
such difficult issues as restrictive business practices, rights of estab-
lishment (a serious bone of foreign contention with Japan), public
26The possibilities oflinking to a general trade liberalisation agreement a system of general-

ised tariff preferences in favour of developing countries are examined in David Wall, "Oppor-
tunities for Developing Countries", in Johnson (ed.), Trade Strategy for Rich and Poor Nations
(London: Allen & Unwin, 1971). Also see Mr. Wall's paper in the present volume "Develop-
ing Countries in the Liberalisation of World Trade", Chapter 4 below.
procurement policies, anti-dumping measures and government

aids to industry. 27
When it comes to non-tariff barriers the trade in temperate-zone
agricultural products is the most sorely affected. Solving the complex
problems relating to this trade, given the social and political issues
posed by the farming communities of industrialised countries, will
necessitate considerable patience and goodwill whatever policy
option is adopted. Through the commitment to consult and
negotiate, it should be possible, however, to devise as part of a
broad trade agreement a programme for harmonising support
policies (as may, in any case, be required in a seventh MFN round or
under a sector-by-sector approach). The longer-run purpose of the
programme should be the elimination of protective devices that
distort and disrupt without achieving appreciable domestic benefits.
17A general discussion of non-tariff barriers and rules of competition can be found in
David Robertson, "Scope for New Trade Strategy", in Johnson (ed.), New Trade Strategy
for the World Economy, op. cit., pp. 287-89; Curzon and Curzon, Hidden Barriers to International
Trade, Thames Essay No. r (London: Trade Policy Research Centre, 1970); and Harald B.
Malmgren, "Negotiating Non-Tariff Barriers: the Harmonisation of National Economic
Policies", in US Foreign Economic Policy for the 1970s, op. cit., pp. 79-109.
CHAPTER 3
Expansion of Commercial Trade

in Agricultural Products
by T. E. JOSLING
Progress in reorgamsmg the world market for temperate-zone

agricultural products has come to be seen as a political necessity
if the international trading system is to continue to develop in the
interests of peace and prosperity. It also holds out the possibility
for considerable economic advantage to both industrial and develop-
ing countries. A recent study by the Food and Agriculture Organisa-
tion (FAO) has attempted to estimate the loss in income resulting
from agricultural protectionism. The study puts this loss at about
6 per cent of the income of less developed countries (see Table r). 1
From a narrower point of view, the United Kingdom has an interest
in promoting, within Western Europe, sensible and responsible
policies in the area of agricultural trade.
The present unsatisfactory, indeed chaotic, state of international
trade in agricultural products has been primarily due to the prolifera-
tion of national farm-support programmes which have as their
main aim the elimination of effective competition between domestic
producers and foreign suppliers. The process is cumulative; as
world markets take on a more residual character, so countries
redouble their efforts at isolation. The scope for one country (or
group) alone to reverse this process is limited. 2 In fact importing
countries may have a vested interest in agricultural protectionism.
Is is probable that the United Kingdom gained more through the
depression of world prices due to protection abroad than it has lost
from reduced income from protection at home. But countries, in
cooperation with each other, could find common ground and reduce
1 "A World Price Equilibrium Model", in Agricultural Commodity Projections, I97o-8o,

CCP 71/20 (Rome: Food and Agriculture Organisation, 1971).
2 This should not be taken to imply that there is no scope for countries to make changes in
their domestic policies in a way that would benefit trade. But the task of reforming the
trading system is beyond any individual country.
73
74 T. E. JOSLING
TABLE I
BENEFITS OF THE REMOVAL OF AGRICULTURAL
PROTECTION IN ALL COUNTRIES IN 1980
Present Agricultural
policies protection
removed
ToTAL (US$'ooom)
Gross domestic product
World 4,985.6 5.009.9
Developed countries 3,416.6 3.443·0
Developing countries 648.0 685.6
Centrally-planned countries 921.0 941.3
Value added in agriculture

World 428.1 493·5
Developed countries II8.8 137·8
Developing countries 139·5 167.2
Centrally-planned countries 169.8 188.5
PER CAPUT (US$)

Gross domestic product
World 1,090 1,109
Developed countries 4,242 4,275
Develo8ing countries 281 298
Centra y-planned countries 629 643
Value added in agriculture

World 201 231
Developed countries 1,380 l,ss6
Developing countries 103 123
Centrally-planned countries 247 275
SoURCE: "A World Price Equilibrium Model", in Agricultural Commodity Pro-

jections, CCP 71{20 (Rome: Food and Agriculture Organisation, 1971).
at least some elements of protection. The future of negotiations in

this area depends on the identification of such mutual interest.
The European Community's common agricultural policy (CAP)
has, by focussing attention on agricultural protection, forced a
TRADE IN AGRICULTURAL PRODUCTS 75
reconsideration of trading policies. The enlargement of the Common

Market presents the Community with an opportunity to re-examine
its farm arrangements, both internally and in conjunction with
other parties to the General Agreement on Tariffs and Trade (GATT).
Specific questions of trade policy were postponed rather than
settled during the "enlargement" negotiations.
EUROPEAN CoMMUNITY's CoMMoN AGRICULTURAL Poucy
Protection of the European Community's market for agricultural
commodities is based on three sets of prices that are fixed by the
European Community's Council of Ministers:
(a) Target prices are theoretical prices fixed with the purpor-
ted objective of ensuring reasonable prices to consumers and
reasonable incomes to producers. For some commodities, such
as beef, "guide prices" are fixed instead of target prices, but
these are similar in intent.
(b) Intervention prices are guaranteed prices at which
government agencies will undertake support buying of some
commodities if necessary. Producer organisations may under-
take support buying of some other commodities. The inter-
vention price represents a floor to the market, although
producers pay for the cost of transportation of their produce
to the intervention centres.
(c) Threshold prices are minimum prices at which imports
can enter the Community market. If trade prices on the world
market are below threshold prices, a (variable) levy is imposed
to the extent of the difference. Imports entering at the threshold
price should sell at around the target price on internal markets
because the two prices are linked by the notional cost of
transportation.
Farmers are thus encouraged to produce, to the limit of their
technical capabilities, commodities for which intervention prices
are in force or support buying is conducted by their organisations.
Sugar is the only commodity on which production controls are
attempted.
About half the agricultural imports of the present European
Community are subject to "variable import-levies", the main
commodity affected being grains. Other commodities are subject
to fixed tariffs. In the case of beef, fruit and vegetables, fixed tariffs
may be supplemented by levies equal to the difference between
T. E. JOSLING
duty-paid import prices and threshold prices. Levies on grain-fed

products, such as pork, poultry and eggs, take account of dif-
ferences between grain prices in the Commu nity and in world
markets; levies on processed products, such as milled rice, contain
an element for the protection of Commu nity processors.
The European Commu nity's protectionist machinery is completed
by its provision for export subsidies or "restitutions". In principle
the subsidy per unit of export may not exceed the export levy
currently applying to the particular commodity. The commo n
agricultural policy also has a safeguard clause for some commodities,
allowing approapriate measures to be taken if imports cause, or
threaten to cause, grave disturbances in members' markets which
might interfere with the basic objectives of the policy.3
It is not particularly important as to whether the emergence of
the CAP from the set of existing national farm prices policies among
the six original members of the European Commu nity has increased
or decreased agricultural protection in Western Europe. The evidence
appears to show that the removal ofbarriers to trade in farm products
within the Commo n Market and the consolidation of protection
from outside competition, by means of the commo n variable import-
levy, has led to some trade creation through specialisation coupled
with a considerable trade diversion as low-cost foreign suppliers
(Denmark, the United States, Canada) have lost markets to protected
European production. This shows up partly in the European Com-
munity's market for imports and partly in competition for third
markets through subsidised exports. In addition to changes in the
volume of trade, the somewhat higher average level of protection
of the CAP, relative to the national policies it replaced, has depressed
prices on world markets to the detriment of other producers.
Benefits accrued to producers of goods which substituted for the
high-priced grain and milk products within the European Com-
munity : the United States in particular made spectacular gains in
exports of soyabeans to the Commo n Market, as the Netherland
feed industry switched away from grain.
3How the CAP might operate in the United Kingdom, following the European Com-
munity's enlargement, is described in John Marsh and Christopher Ritson, Agricultural
Policy and the Common Market (London: Royal Institute oflnternat ional Affairs, and Political
and Economic Planning, 1971). For an analysis of the international transfer of funds inherent
in the CAP, see T. E. Josling, Agriculture and Britain's Trade Policy Dilemma, Thames Essay
No.2 (London: Trade Policy Research Centre, 1970).
Enlargement of the European Community promises to continue

this trend if policies are not modified (see Table 2).4 The "enlarge-
TABLE 2
IMPACT OF EEC ENLARGEMENT ON EEC TRADE IN
AGRICULTURAL GOODS
(increase in net exports shown as positive values)
'ooo metric tons
Change in total (a) Change due to (b) Change in EEC (c)

trade 1968-1980 enlargement 1980 trade 1968-1980
Grains 9,085 623 1,073

Milk (in b.f.)
equivalent 260 284 -94
Beef and veal 71 319 280
Mutton and
lamb -190 -65 -507
Pig meat 413 162 645
Poultry meat 211 14 233
Eggs 148 -2 222
SouRcE: T. E. Josling and Denis Lucey, "The Market for Agricultural Goods in
an Enlarged European Community", a paper given to the Irish Agricultural
Economics Society, Dublin, October 22, 1971.
ment effect" has been estimated to reduce the European market for
all products except mutton and lamb; although within the cereals
sector there may be a small increase in demand for coarse grains,
offset by a contraction in the market for wheat. 5 This should be set
in the context, however, of a general contraction in the market over
the next decade and a weakening of world prices for many tem-
perate-zone food commodities (see Table 3).
4Josling
and Denis Lucey, "The Market for Agricultural Goods in an Enlarged European
Community'', a paper given to the Irish Agricultural Economics Society, Dublin, October 22,
197!.
5 SeeJohn Ferris et al., The Impact on US Agricultural Trade of the Admission of the United
Kingdom, Ireland, Denmark and Norway to the European Community (East Lansing: Institute of
International Agriculture, 1972).
T. E. JOSLING
TABLE 3
CHANGES IN WORLD MARKET PRICES REQUIRED FOR WORLD
BALANCE IN AGRICULTURAL PRODUCTS IN 1980
Commodity Percentage change in

price relative to 1970
Wheat -14-5
Rice 1.7
Coarse grains -14.8
Sugar 1.7
Vegetable oils -s-7
Citrus fruit -0.7
Beef and veal 0.9

Mutton and lamb 22.0
Pig meat -17.6
Poultry meat -16.8
Fish 7·9
Whole milk 3-0

Consumer milk 3·9
Cheese 3·8
Butter 3·8
Coffee -1.8
Cocoa !.2
Tea 8.7
SoURCE: "A World Price Equilibrium Model", in Agricultural Commodity Pro-

jections, 197o-8o, CCP 71/20 (Rome: Food and Agriculture Organisation, 1971).
PREssuREs FOR PoLICY REFoRM

But the European Community has internal problems regarding
the CAP's development. Any changes in its external policy are
likely to be more acceptable if they:
(a) coincide with the desirable reform of the CAP due to
internal pressures,
(b) appear to be generated from within the Community
institutions rather than appear to be dictated by foreign pressure,
and
TRADE IN AGRICULTURAL PRODUCTS 7C)
(c) can be shown to be consistent with the underlying

principles of the CAP that were established during the 1960s.
These constraints preclude, for example, a rapid and unilateral
move to conditions of free trade in farm products between the
European Community and the rest of the world. They do not
exclude though a modification of the working of the CAP in
the direction of a more desirable pattern of production and trade.
Room for manoeuvre may be small, but it may still be very important.
The internal problems of the CAP have come about because of its
failure either to maintain average incomes in agriculture at levels
considered satisfactory to the farm sector (in spite oflarge payments
to a small number oflarge farmers)6 or to organise markets in such a
way as to contribute adequately to the development of the European
Community's economy as a whole. This should not be surprising.
The history of agricultural policies in industrial countries shows
clearly the difficulty of raising earnings on resources in a sector
characterised by free entry of resources above that level which is
dictated by the opportunity cost of marginal resources. The trend
in most industrial countries, in respect to their agricultural sectors,
has been to operate market intervention in the direction of reducing
competition and hindering the development of production and
trade along the lines indicated by comparative cost advantage. A
reform of the CAP has to be based, then, on conscious choices
regarding the direction that this policy should take.
One distinct possibility is that the failures of the common policy
will lead to a reversion to national measures to maintain farm in-
comes. This would imply that member countries of the European
Community would once again be responsible for their trade
policies. For it would be difficult to run divergent national price
policies without also differentiating the degree of protection against
imports from third countries. By implication, trade negotiations
8For an analysis of the income-distribution effects of the deficiency-payments system of
farm support in the United Kingdom, and of the effects on income distribution that might
be expected on shifting to the European Community's variable import-levy system, see
Josling and Donna Hamway, "Distribution of Costs and Benefits of Farm Policy", in
Josling et al., Burdens and Benefits of Farm-Support Policies, Agricultural Trade Paper No. I
(London: Trade Policy Research Centre, 1972).
Also see James T. Bonnen, "The Distribution of Benefits from Selected US Farm Pro-
grams", and Vernon C. McKee and Lee M. Day, "Measuring the Effects of US Department
of Agriculture Programs on Income Distribution", in the President's National Advisory
Commission on Rural Poverty, Rural Poverty in the United States, Report (Washington: US.
Government Printing Office, 1969), pp. 461-505 and So6-2I respectively.
So T. E. JOSLING
would have to take place between third countries and each of the
members of the European Community. This could have some
advantage for traditional exporters. Italy, Germany and Britain might
be more willing to countenance agreements to allow access of
imports from third countries, even if other Common Market
members had some measure of preference. The common financial
responsibility embodied in the creation of the Fonds Europeen
d'Orientation et de Garantie Agricole (FEOGA) and the provision
of a budget with its own resources would presumably be a casualty
of a reversion to national prices. Member countries would have to
be again responsible for fmancing their own policies.
Such fragmentation is unlikely. Equally remote is a continuation
of the policy as it developed over the transition period 1964-67 before
currency realignments forced border taxes and price differences to be
reintroduced and, too, before surpluses escalated the fmancial cost of
the CAP to the importing members. Some changes in the market
support system appear inevitable in the middle 1970s.
The most likely development seems to be an initiative from the
Commission of the European Community, in Brussels, to modify
the CAP to take into account the diversity of conditions in European
agriculture and the situation in the world market. Some of these
changes will be defensible from the European point of view insofar
as they take into account wider objectives such as population density
in remote areas. Others may be a direct result of the desire by
certain farm groups to obtain further protection. In each case the
external effects of policy changes will have to be examined. The
prospects for such international responsibility are better now than
they have been for some years.
The "aims" of the CAP should be distinguished from its "prin-
ciples". The aims were established following the Stresa conference
in 1958 set up in accordance with the Treaty of Rome. They
include the improvement of farm income through productivity
increases, better alternative earnings and, where necessary, direct
transfers, and the capture by the economy as a whole of the benefits
from specialisation following trade liberalisation within the Euro-
pean Community and with third countries. The principles which
become associated with the policy are a common level of protection
at the frontier, free movement within the European Community of
farm goods and joint financial responsibility. If suggestions for
policy changes conform with these principles then their chances of
acceptance are enhanced. A further principle might be added.

The overall economic and fmancial cost of the policy should decrease
over time.
PossmLE REFORMS IN PRESENT FRAMEWORK
There are certain measures which could be taken within the

present CAP framework. These would reduce the cost of the policy
and also reduce the disruptive effect on world trade. They could be
introduced unilaterally by the European Community and require no
negotiations with other countries. They relate largely to the inter-
vention system and the export restitutions that are necessary to make
intervention effective.
(a) The number of intervention centres should be reduced,
thus improving the flow of goods and allowing more com-
petition among regions. For the £xing of intervention prices
across the Community, differing only by transport cost,
effectively blocks competition among farmers within the
Community.
(b) Intervention should be limited in the case of grains to,
say, three months of the year, as the Brussels Commission
has already suggested. Intervention prices should be based on an
export port for those goods, such as soft wheat, where the
Community is more than self-sufficient.
(c) The gap between intervention and target prices (the
degree of "Community preference") should be increased,
thereby allowing more competition among regions.
(d) Export restitutions should be paid only on the difference
between the intervention price and the world price-thus
eliminating the incentive to produce for export.
Another set of reforms require more major adjustments to the
market system, while still being consistent with the "principles".
These involve the introduction of producer subsidies for those
products which have close substitutes in use which are not produced
by European farmers. In particular, a system of direct payments
could be instituted for butter production so as to reduce by, say,
30 per cent the domestic wholesale price for this commodity.
A similar, but more complex, system would be introduced for
grains, along the lines of the market certificate programme in the
D
82 T. E. JOSLING
United States. 7 It works in the following way. The farmer receives

for his output (a) the price at which he sells it on the market and
(b) the value of a certificate set by the government to bring the net
price to a level considered satisfactory. The scheme differs from the
deficiency-payments system in two ways:
1. The users of the product, such as domestic millers, can be
made to "purchase" the certificates on grain used domestically,
thus recouping some of the cost of the certificate payments to
farmers. The cost of the certificates to the miller need not be the
same as their redemption value to the farmer, any difference
being made up by the Treasury or, in the European Com-
munity, by FEOGA.
2. Certificate payments on exported products can be set at a
lower level to discourage surplus production. On introducing
marketing certificates in the European Community it would be
possible to reduce threshold prices.
The extent to which imports would be increased and farm prices
reduced in the European Community would depend on the way in
which the policy was run.
The advantage of a marketing certificate system would be that
it would provide much more flexibility in the management of the
CAP. Prices could diverge between farmers for structural or equity
reasons if desired. Grain costs to the livestock sector could be
lowered. Export restitutions could be contained. Rather than
relying on the instrument of the variable import-levy, or the export
restitution, to achieve various policy objectives, a certificate system
would allow a much greater degree of control over the various facets
of the market.
Under a marketing certificate system, producers in the European
Community would therefore receive a price based on a weighted
average of the prices paid by millers and feed merchants (who would
pay some portion of the certificate cost in addition), by other
farmers and by exporters. The aim would be to reduce feed costs
by at least 25 per cent whilst retaining the net price to grain farmers
near the present level. But under the system the price on exported
grain could be lowered where it was felt desirable to limit restitution
7This proposal differs from that proposed in Denis Bergmann et al., A Future for European
Agriculture (Paris: Atlantic Institute, 1970), which argued for subsidies specific to farmers
rather than tied to production. But that would entail a major change in the principles of
the CAP.
TRADE IN AGRICULTURAL PRODUCTS
costs. In this respect it would be a partial reversion to the pre-CAP

French system without the need for fixing quotas. The payments
through marketing certificates could be limited to a fixed ceiling
if necessary to avoid very large payments to individual farms-but
American experience suggests that this has negligible effects on the
programme cost. 8
This system would retain a (lower) variable import-levy and
export restitutions. Whilst it would be less necessary to intervene
in the market, the mechanism would remain. Each year the certifi-
cate value would be set so as to give a target (pooled) price based on
projected use for food, feed and export. The proportion of the
certificate paid by FEOGA would be variable. There would be no
differentiation between countries as regards the payments, although
the European Community could add in special grants for "geo-
graphically disadvantaged" regions. Price ratios among grains would
come to reflect their value in feedstuffs.
INTERNATIONAL AGREEMENT ON AGRICULTURAL TRADE
Whatever method ofsupport is used, the level ofprice set internally
will be important in determining the external effect and domestic
cost of the CAP. There are four criticisms of the pricing policy:
1. Price ratios are inappropriate among goods; in particular,
wheat is over-priced relative to maize, maize relative to
non-grain feeds, all grains relative to livestock products and
butter relative to vegetable oils and fats. These problems
could be resolved by the certificate system described above, but
will no doubt be corrected slowly over time even without a
policy change.
2. Administered prices (in particular intervention prices)
are fixed among regions in a way that blocks competition.
The present system resembles a "basing-point" pricing policy
occasionally used in oligopolistic markets.
3. Price levels in general are set without regard to world
price trends. The variable import-levy protects the European
farmer from fluctuations in the external price; at the moment,
it also negates the influence of a secular trend in such prices.
Without regard to the economic cost of the policy, prices would
8Payments could be based on average yields in the European Community. Bergmann et al.,
op. cit., argues that this procedure would tend to concentrate payments on the lower-income
farmers.
T. E. JOSLING
tend to rise for those conunodities which are imported into

the Conunon Market. But this could result in prices moving
counter to world trends and hence the policy becoming
potentially more costly. To determine price levels in accordance
with medium-term world trends requires no change in the CAP;
only the political will of the Council of Ministers would be
necessary. There is a danger that prices may in the future be
based on an "income parity" or "cost recoupment" basis.
Again, if costs or productivity move out of line with those
of overseas suppliers then this could lead to an increase in
economic costs. Such pricing systems block competition and
specialisation among countries. Internationalagreementregarding
levels of protection may be necessary to regulate price trends.
4· Price levels uniform across the European Conununity
may not reflect the social valuation of output. This is especially
true when exchange rates are out of line; currency adjustments
remove these distortions. Attempts to argue for differential
prices to groups disadvantaged by exchange-rate changes should
be resisted; this distorts competition within the economies
concerned. Where farmers expectations have been based
on government assurances about stable rates, compensation
should be paid. Otherwise prices should be fixed taking into
account foreseeable currency changes. Intervention prices can
be fixed in national currencies for each season while levies are
based on threshold prices in units ofaccount, so long as exchange
rates fluctuate by less than 3 per cent during the intervention
period. In other cases of distortion, non-price subsidies are
usually preferable; these cases might be (a) hill farmers and
inhabitants of regions where it is agreed that population density
should be maintained, (b) farmers providing conservation and
environmental benefits, and (c) farmers who could become
competitive at lower prices if their enterprises were enlarged,
thereby reaping economies of scale. It may be necessary to grant
these groups higher prices even though better forms of subsidy
are available. On the other hand farmers with low incomes due
to poor alternative earnings, because of regional unemployment,
lack of education or age, should be given aid, as is being done
in most European countries today by non-price means.
The European Conununity needs to develop its external
policy regarding agricultural trade. The proposals in the preceding
TRADE IN AGRICULTURAL PRODUCTS ss
paragraphs will lower the overall level of protection. These actions
could with advantage be taken unilaterally; however, it is more
probable that they would be acceptable within a multi-country
agreement on farm-support levels. Such a pact could comprise
(a) an agreement to limit export subsidies on farm goods,
(b) an agreement to hold strategic reserves in both importing
and exporting countries of products subject to price fluctuations
arising from natural conditions,
(c) an agreement on the maximum level of support to be
afforded the farm sector as measured by an agreed procedure
which takes into account the different trade effects of various
support measures,9 and
(d) an agreement to include generous access commitments in
any trade arrangement with developing countries, in particular
for products competitive with tropical agricultural goods.
All these measures are consistent with the operation of the CAP
and the political position of the European Community as presented
in international discussions. It is probable though that internal
changes, such as those suggested above, will be necessary before
significant moves can be made on the international level.
A further precondition is that besides the European Community,
other countries should be willing to discuss and modify their own
domestic farm programmes.
Of particular importance would be changes in the policy of the
United States and Japan, although no country is entirely innocent
of the charge of exporting its farm problems. The United States,
it should be acknowledged, has within the last decade made signifi-
cant changes in its domestic policies. Its feed-grain, wheat, soyabean
and cotton programmes have all explicitly been geared to the export
(or world market) price. Export subsidies on feed-grains have been
unnecessary in most years. 10 But countries wishing to export to
the United States can still point to the quota restrictions on dairy
'The FAO is initiating a study along these lines. A parallel proposal has been made by
D. Gale Johnson, "Agricultural Trade: Policy Recommendations", an address to the Trade
Policy Research Centre, London, September 16, 1971, based on a paper in Presidential
Commission on International Trade and Investment Policy, United States International
Economic Policy in an Interdependent World, Williams Report, Papers I (Washington: US
Government Printing Office, 1971), pp. 873-96.
10These changes are documented in John Schnittker, "A Look Ahead: Trade Policy
Recommendations", in United States International Economic Policy in an Interdependent World,
Papers, Vol. I, op. cit., 897-910.
86 T. E. JOSLING
products and those which potentially limit the growth of meat

imports. Indeed, under the well-known "Section 22" of the Agri-
cultural Adjustment Act, the Secretary of Agriculture has power to
impose quotas on the importation of any product deemed likely to
threaten the effectiveness of a domestic farm programme. The
United States could take unilateral action to modify their dairy
regulations and reduce further the export subsidies on wheat. This
would require domestic legislation. But it is probable that such a
move would be made more easy by the willingness of other
countries to modify their trade distorting policies at the same time.
Japan has emerged as one of the leading importers of agricultural
goods. Access to the Japanese market has been eased in recent
years-i n particular with regard to grain. 11 But imports of many
commodities are tightly controlled by import boards and on those
goods where quotas have been removed the Japanese Government
has introduced high tariffs. Despite the immense problems which
face Japanese agriculture it is desirable that the trade liberalisation
policies continue. Once again the negotiations should provide an
opportunity for this process of liberalisation to be linked with
changes in the trade policies of other countries.
On the timing of such agreements, one might imagine some
action on freezing protection levels and limited export restitutions to
come out of the GATT discussions under Article 24(6) of the General
Agreement. But these would be limited in scope to a few com-
modities of interest to the "injured" parties. The more extensive
negotiations would presumably occur after 1974, the agreement
perhaps coming into effect in I977· On this time scale, changes in
the CAP due to internal pressures will have had five years to
materialise.
The willingness of governments to modify their domestic
policies either in their own direct interest or in return for a favourable
change in the policy of another country is a necessary precondition
for the development of agricultural trade. But negotiations must
begin from an agreed basis. Such agreement will not be easy.
Countries differ as to the place of institutions such as the GATT
in the reconciliation of conflict. Agricultural trade negotiations
within the GATT framework have a checkered history. Attitudes
usee Michael Tracy,]apanese Agriculture at the Crossroads, Agricultural Trade Paper No.2
have been formed based on past experience and have given rise to
elaborate mythologies fed by mistrust. But a compromise should be
possible if each country recognises the position of others. Such a
compromise statement might take the following form.
PRELIMINARY POSITION ON TRADE NEGOTIATIONS

The agricultural sector has to a large extent remained on the
fringes of the process of trade liberalisation that has developed
during the post-war period. The rules of the GATT cover agri-
cultural trade. But countries have found it expedient both to ask for
derogations to protect their own domestic agricultural interests and
also to be less rigorous in the enforcement of such rules even when
recognise that agricultural trade based on the international division
derogations have not been requested. The principles of the GATT
of labour is to the advantage of each country whether importer or
exporter. Even so, the existence of extensive domestic farm-support
policies has meant that such trade has often become divorced from
considerations of efficient production. Moreover, such trade as
exists has been characterised by price instability and uncertainty of
income for producing countries.
Several considerations dictate that a serious attempt should be
made to reach agreement on desirable reforms of the system of
trade in temperate-zone farm products:
(a) Denial of the benefits of specialisation reduces the standard
of living of people in all countries below what it might other-
wise be.
(b) As some countries have a strong interest in agricultural
trade liberalisation, progress in other areas appears to be
dependent on a satisfactory agreement on agriculture.
(c) Many of the domestic farm policies are themselves a
costly reflection of the need to offset the implications of those
of other countries. Mutual "disarmament" may be possible
where each country cannot act alone.
(d) Much of the developing world is still dependent on
exports of primary commodities. In many cases development
is hindered by the effects on world markets of farm-support
policies in developed countries.
(e) There is evidence that distortions to rational trading
patterns have increased at a time when other sectors of the
88 T. E. JOSLING
economy have become adjusted to a regime of freer trade.

Even though agricultural trade has been increasing over the
last decade there have been considerable changes in trade
patterns due largely to the influence of agricultural policies. The
best pattern and level of trade is not necessarily the greatest
volume of trade. Although it is probably true that trade
volume would increase with liberalisation, to improve the
pattern of trade is more significant than to increase the quantity
of traded goods.
(f) The problems of agriculture are increasingly becoming
recognised to be similar to those in other industries which have
to undergo adjustment to rapid technical change. Each country
has an obligation to its citizens to aid this adjustment and pursue
its social objectives. To attempt to shift the burden of such
adjustment onto other countries through trade impediments
has proved neither effective in itself nor desirable from the
viewpoint of international harmony.
(g) Price-support policies themselves are coming under
scrutiny as to whether they are successful in achieving the aims
of maintenance of farm income. There is increasing evidence
that support through high food prices not only puts a heavy
burden on poorer consumers, but also benefits dispropor-
tionately the more affluent farmer. It is very probable that farm-
support systems will themselves be modified for this and other
reasons to put greater emphasis on direct income-payments.
Such a move would reduce considerably the problems of agri-
cultural trade as farm prices come more into line with price
levels on world markets. Similarly, a concentration on struc-
tural policies would make it easier to reduce price levels;
although at high levels of price-support, structural change
could increase pressure on world markets.
Three main developments would seem possible: (i) a movement
towards the removal of support policies which impede trade,
including those which encourage output by means of high prices,
thus reverting to a relatively free market for farm goods; (ii) an
attempt to "manage" world markets by international accord so as
to substitute a multilateral price-support system for those at present
in domestic operation; and (iii) a further retreat to autarchy and
isolation in national policies, accentuating the residual nature of
trade.
The third development is undesirable for the reasons given above.

Food production would be unnecessarily costly and the basis of the
world trading system would be undermined.
The second possibility of a managed market could be appropriate
for some goods. International commodity agreements have broken
down largely because the burden of their survival has fallen heavily
on a few countries. With an appropriate system of burden-sharing
it would be possible to develop international policies that allowed
some of the advantages of liberal trade whilst at the same time
protecting the farm sectors of the participant countries. But insofar
as the problems of agricultural adjustment would still be evident,
such policies would have to be carefully constructed to avoid
widescale waste and economic cost to consumers. For commodities
where instability is seen as a major problem such managed markets
have a potential role.
The first alternative, however, the establishment of domestic
farm policies which are less disruptive of trade, has the wider
application. Countries would still preserve their right to run as
extensive a farm programme as they see fit either individually or in
conjunction with other countries. But over time these policies
should be brought into line with the principles governing the GATT
and be subject to the usual procedures for settling grievances.
Although it may be taken that all countries signatory to the
GATT would welcome in principle such a development, it is
equally clear that even a limited step in this direction will require
intensive negotiation. This should not be hampered by an attempt
to achieve comprehensive inter-governmental statements or by the
desire to seek further studies and deliberations by committees,
though as such these might be useful. The problems are already well
known and the positions of member governments of the Organisa-
tion for Economic Cooperation and Development are well estab-
lished. Nor need negotiations as such be concerned with individual
methods of farm-support practised in the various countries, where
these methods do not themselves infringe GATT rules. In particular,
governments should be free without scrutiny to pursue policies
which impinge directly on the farm labour market, on the use of
land and on the social conditions in rural areas. Schemes providing
for amalgamation grants, pensions, retraining, land retirement,
income supplements and so on would be outside the area of inter-
national discussion. By contrast, those policies which directly raised
o*
90 T. B. JOSLING
the price level of farm products and reduced the cost to producers
of inputs from the non-farm sector would be subject to discussion
among countries even where these measures did not directly imply
import barriers or export aids.
To negotiate on the basis of the trade inhibiting effects of domestic
farm-support policies does not of course imply that such policies
would be abandoned. Specifically, it is most unlikely that levels of
protection in agriculture would be allowed to fall below that
accorded other sectors of the economy. It is therefore important to
elucidate the extent to which specific methods of price-support
conflict with GATT rules. Of particular importance in this context
is the variable import-levy and its counterpart the variable export-
restitution. Exporting countries see such policies as denying them
by price means the opportunity to compete even when they become
relatively more efficient; importing countries often regard such
policies as a convenient way of protecting their own farmers from
the vagaries of market price fluctuations and the aggressive export
subsidies of other nations. In those cases where price fluctuations
occur and export subsidies persist variable import-levy policies
should be allowed. Variable export-restitutions, on the other hand,
should be circumscribed in such a way as to ameliorate their effect
on trade patterns. Present GATT rules should be applied diligently
to protection by means of quantitative import restrictions. Only
where a policy of domestic output control is practised should coun-
tries use quota or licence arrangements to limit imports.
It is natural that countries should insist on a gradual adoption of
these precepts. Problems of adjustment in the agricultural sector are
likely to be more severe than in most other sectors. Income guaran-
tees may be needed in cases where high price-supports are reduced.
But to delay adjustment often increases its cost. There is a need to
inform the farm population of government intentions whilst at the
same time assuring adequate adjustment measures.
Adoption of this approach to the development of agricultural
trade necessitates a means of monitoring progress. For this the
concept of montant de soutien has much appeal. The level of farm-
support afforded by policies raising domestic prices and lowering
direct input costs should be measured against a reference price. This
price should broadly correspond to the level which might obtain in
the absence of trade distorting policies. The reference price would
be changed occasionally if and when it became unrealistic. Average
levels of support with respect to the reference price would be bound

by an upper limit, as in the case with duties (including those on
many agricultural products) at present under the GATT. These
levels would then be subject to negotiation as with industrial tariffs.
Countries would be free to use whatever means they wish, subject
to the prescriptions of the GATT, to maintain these levels of sup-
port. Discussions between countries would be initiated by allega-
tions of an increase in the montant de soutien. Self-sufficiency ratios,
by contrast, have little value as indicators ofthe desirable level of trade.
Negotiations on the reduction of the level of support must rest
on the principle of reciprocal advantages. No country or group of
countries should be required to act unilaterally, although they might
wish to do so for domestic reasons. Offsetting advantages may of
course be in the market for other commodities both in the farm and
non-farm sectors. Export subsidies would also be limited to the
difference between the domestic price and the reference price.
Support reductions might concentrate initially on (i) the main
problem commodities, (ii) reducing the "peaks" in support levels,
(iii) removing any "water" in import-levies indicated by protection
unnecessary to maintain the domestic price, and (iv) removing quota
restrictions.
CHAPTER4
Developing Countries in the

Liberalisation of World Trade
by DAVID WALL
In response to a variety of factors, serious inter-governmental

discussions got under way at the time of the monetary crisis of
of 1971 on how trade between developed countries might be further
liberalised. While fresh trade negotiations between developed
countries are greatly to be welcomed, it is important that the
effects of the resulting liberalisation on the trading interests of less
developed countries should be taken into consideration, in order that
they might be accommodated. Some aspects of trade liberalisation
in the past have tended to harm such interests both relatively and
absolutely.
BACKGROUND TO GENERAUSED TARIFF PREFERENCES
Over the last decade or so, much attention has been given, by
economists and politicians, to devising ways in which the trading
interests of developing countries might not only be safeguarded but
also enhanced.1 In fact the enhancement of the trading interests of
developing countries is a stated policy objective of the governments
of all developed countries. It has to be recognised though that the
methods, currently under discussion, for liberalising trade among
some or all developed countries could worsen the trade prospects of
developing countries, unless special measures are taken. For instance,
the extension of free trade agreements by the enlarged European
Community to those members of the European Free Trade Associa-
tion which are not applying to become full members ofthe Common
Market-name ly Austria, Finland, Iceland, Portugal, Sweden and
Switzerland-i s likely to reduce the value to the Third World of
the European Community's scheme of generalised tariff preferences.
lSee, for example, Harry G. Johnson, Economic Policies toward Less Developed Countries
(Washington: Brookings Institution, 1967), and John Pincus, Trade, Aid and Development
(New York: McGraw-Hill, for the Council on Foreign Relations, 1967).
93
94 DAVID WALL
Several developed coootries introduced, in the early 1970s,

schemes of generalised tariff preferences in favour of imports of
manufactured and semi-manufactured products from less developed
coootries.9 Others promised to do so. Another departure from the
principle of non-discrimination, alternatively described as most-
favoured-nation (MFN) treatment, was written into the General
Agreement on Tariffs and Trade {GATT} to allow preferential
trade arrangements for the benefit of, and among, less developed
coootries, thereby providing a "legal" framework for the schemes.3
The developed coootries agreed in principle, at the first United
Nations Conference on Trade and Development {UNCTAD},
held in Geneva in 1964, to introduce a worldwide scheme of
generalised tariff preferences in favour of developing coootries.
It was not ootil 1967, however, when President Johnson took the
first steps towards reversing the long-standing objection of the
United States towards all preferential trade arrangements, that a
worldwide scheme could be seriously contemplated.' Through the
Organisation for Economic Cooperation and Development (OECD},
the developed coootries tried to agree on a worldwide scheme,
appointing for the purpose a high-level study group. But in a
climate of protectionism, in the aftermath of the Kennedy Roood
agreement, and with no effort being made further to liberalise
trade between developed coootries, no agreement could be reached
on a single worldwide scheme of generalised tariff preferences.
Instead the developed coootries agreed to introduce their own
differing schemes.
The benefits of the various schemes are dependent on the donor
coootries maintaining at least some tariffs higher than the preferential
rates on trade with at least some of their major trade partners. If
there are no tariffs on imports into developed coootries of products
of export-interest to less developed coootries there can be no
preferences. It was for this reason that an effort was made, during
the OECD discussions on the subject, and earlier, to avoid the use
of the term "tariff preferences" in favour of the term "special tariff
•A general discussion of these schemes can be found in Brian Hindley, "The UNCTAD
Agreement on Preferences",]ournal of World Trade Law, London, September, 1971.
apart IV, General Agreement on Tariffs and Trade, in Basic Instruments and Selected Docu-
ments, Vol. IV (Geneva: GATT Secretariat, 1969), pp. 53-7·
"This change of policy was reflected in a speech by President Johnson at a regional con-
ference of heads of state at Punta del Este, in Uruguay, early in 1967.
DEVELOPING COUNTRIES IN WORLD TRADE 95
treatment". For it was felt that if the developing coWltries got to

consider themselves entitled to tariff preferences in the markets of
industrialised coWltries, they could come to represent an obstacle to
the reduction, and eventual removal, of tariffs on trade between
industrialised coWltries. It was argued that what the developing
coWltries needed to be accorded was an equal opportW1ity to be
able to sell their products in developed coWltries.
It has been further argued that, even though the removal of tariffs
(and other barriers) on trade among developed coWltries would
eliminate the possibilities of extending preferential treatment to
exports from developing coWltries, the resultant expansion of
economic activity in the developed coWltries would be in the
interest of Third World coWltries. Even if this "spillover effect" did
occur, however, experience in recent years suggests that the relative
trade position of developing coWltries would probably worsen and
the gap between standards of living in rich and poor coWltries would
widen even more. In fact, the spillover effects resulting from the
past liberalisation oftrade among developed coWltries have stimulated
reactionary forces into seeking ways of minimising them, by
adding to the arsenal of protective devices in developed coWltries
aimed at excluding imports from poor coWltries, or at least slowing
down their rate of growth.
Uninhibited spillover effects of a liberalisation programme would
in all probability be positive and significant. There is no evidence to
establish whether or not they would be greater or smaller than the
actual and potential gains to developing coWltries of existing
preferential trading arrangements. Although most of the schemes of
generalised tariff preferences introduced to date have been severely
limited by quotas and other devices, thus tending to frustrate the
purpose of tariff preferences, namely to provide an incentive for
exports and investment, the schemes could well serve in the end to
encourage developing coWltries to exploit opportWlities in world
trade rather than engage in often Wleconomic import substitution. 5
Therefore if moves to liberalise trade among developed coWltries
are to proceed in any case-and there are plainly strong arguments
that they should-then it is important, if not imperative, that the
•For an analysis of the European Co=unity's scheme of generalised tariff preferences,
see Richard N. Cooper, "The EEC Preferences: a Critical Evaluation", Intereconomics,
Hamburg, April, 1972. Also see David Wall, "Trade Issues for the Developing Countries", in
Britain, the EEC and the Third World (London: Overseas Development Institute, 1972),
pp. 38-46.
DAVID WALL
pressing needs of the Third World are met. What sort of measures
are available?
HARMONISATION OF PREFERENCE SCHEMES
As a minimum, less developed countries should be compensated
against any presumed loss of trade interests which might result from
changes in the trade policies of developed countries. To this end,
developed countries should agree to extend, immediately, to all less
developed countries any concessions they negotiate among them-
selves. As far as tariffs on industrial products are concerned, this
would simply entail confirmation of the benefits conferred by
existing and proposed schemes of generalised tariff preferences until
the time arrives when the tariffs are finally eliminated. To the extent
that negotiations among developed countries cover products not
included in the preference schemes, and barriers other than tariffs,
the immediate application of the agreements to developing countries
would constitute new preferences which would last until the
liberalisation agreements were fully implemented.
Such new preferences, and the confirmation of existing or
proposed generalised preferences, would have a limited time horizon,
all being completely eliminated at the end of the liberalisation
programme. This limited time horizon would ensure the eventual
re-introduction of the non-discriminatory trade arrangements which
many feel to be desirable. It would also go some way towards
preventing the establishment of industries in developing countries
which do not have a comparative advantage. It does mean, however,
that other measures would have to be sought to ensure that the
long-term trading interests of developing countries are conserved
and enhanced.
Many protective devices in developed countries have been
specially designed, it must be acknowledged, to prevent less developed
countries from taking full advantage of the comparative advantage
they enjoy in the production of certain commodities. Obvious
examples of this are textiles, footwear and plastic goods. Insofar as
these products are included in a general programme of trade
liberalisation, developing countries will gain long-term benefits.
Most developed countries, however, have made common cause
over such products and are unlikely to include them in a liberalisation
programme, unless common measures can be agreed upon to mitigate
the consequences. The products in question are relatively labour-
intensive and tend to be produced in highly populated areas in

developed countries. As a result the discussion of conditions facing
imports of these products is often predominately political in nature.
In the context of discussions on trade liberalisation, based as they
are on the rationality of an international division of labour derived
from comparative advantage, these issues must be taken up and
dealt with in such a way that the rational international distribution
of production facilities is not thwarted in order to safeguard sectional
interest groups in developed countries. Even so, the two objectives
of(a) increasing trade liberalisation and (b) ensuring that the burdens
of domestic adjustment to import competition are not unfairly
borne by declining industries are mutually incompatible.
Political leaders in most industrialised countries have decided-
as evidenced by past, present and proposed moves towards trade
liberalisation among their countries-that on balance the benefits
to their economies from trade liberalisation are greater than the costs
of adjusting to the consequences. These last have in any case been
comparatively light to bear. No one has argued, though, that there
would not be large costs of adjustment to be borne by Britain on
joining the European Community. The debate has been over whether
the benefits accruing to Britain would be greater or smaller than the
costs.
IMPORTANCE OF ADJUSTMENT AssiSTANCE
The argument against opening, more liberally, the markets of
industrialised countries to imports from less developed countries
has been based on the notion that such a move would not entail
the kind of quid pro quo that is automatically built into reciprocal
trade agreements between developed countries. This explains why
all schemes of generalised preferences refer to the concessions in them
as imposing "burdens" on the developed countries to be equitably
shared among them. While such a belief can be understood in con-
nection with generalised preferences on their own, it is totally
misplaced in the context of measures to promote multilateral trade
liberalisation among developed countries. In that context, the
benefits of unilateral concessions would both complement the
liberalisation programmes and help meet the costs of adjusting
to them. 8
6There is a political point, too, that might be mentioned. If an American scheme of tariff
preferences is to be implemented, the necessary enabling legislation might only be got through
98 DAVID WALL
In the first case, as liberalisation of trade among developed coWl-

tries proceeds and stimulates economic activity in them, there will be
increasing demands for resources by the industries which expand on
the basis of comparative advantage. By substituting imports from
the Third World for domestically-produced goods in which less
developed coWltries have a comparative advantage, a supply of
such resources-in particular, skilled manpower-w ould be released.
And secondly, the costs of establishing adjustment assistance
programmes, needed to facilitate the adaptation of industry in the
developed coWltries to greater import competition, could be met
pardy out of the gains from the adapatation itself (from standard
taxes on increased profits and incomes) and pardy from the benefits
derived by consumers from lower-cost imports (from consump-
tion taxes). In addition, it can be confidendy expected that less
developed coWltries would spend most of their increased foreign
exchange earnings on imports from developed coWltries, thus
benefiting industry in those coWltries, with a further accrual of tax
revenues to governments with which to finance adjustment assis-
tance programmes.
Although non-reciprocal trade concessions by developed coWltries
to less developed coWltries would, in principle, complement
reciprocal trade agreements among developed coWltries, it cannot
be denied that considerable human problems and political resistance
could be created if the adjustment process was to proceed too fast.
In order to ensure that the momentum of any move towards a
more open world economy is not slowed down, it is important that
adjustment assistance programmes should include short-term pro-
tection measures for alleviating the problems of industries which
might be confronted too quickly with changing circumstances.
Wherever loopholes are created some interests will always
atempt to take Wldue advantage of them. To guard against this,
industries which believe their markets are being threatened with
disruption, and to an extent which appears to be beyond the capacity
of the established adjustment assistance programmes, should be
asked to substantiate their case for short-term exemption from full
liberalisation. Such cases should be heard in open before a public
the United States Congress if it is part of a broad strategy, covering the general h"beralisation
of trade in both industrial and agricultural products, accompanied by a comprehensive
domestic adjustment assistance programme. See Hugh Corbet, "Global Challenge to Com-
mercial Diplomacy", Pacific Community, Tokyo, October, 1971, p . .231.
enquiry at which consumers, foreign suppliers and other interested

parties should be allowed to give evidence. International rules
establishing conditions for invoking safeguard measures should be
established with an appeals procedure designed to achieve inter-
national uniformity of application.
If and when initiatives are taken to move to a multilateral regime
of more liberal trade relations among developed countries, it is
important that some action should be taken on the complementary
measures just discussed. Such actions could be taken in relation to
the various schemes of generalised preferences. At present, the
potential benefits of the schemes are modified in a variety of ways,
mostly in order to safeguard the markets of developed countries
from disruption, but also to protect the interests of traditional
trading partners and in an attempt, too, to ensure that the burden they
are claimed to represent is equitably shared. Efforts to liberalise
trade among developed countries which do not include com-
plementary measures designed (a) to improve the value ofgeneralised
preferences and (b) to remove remaining impediments to develop-
ing-country exports trade would be seen by the Third World as
self-interested and inward-looking moves by developed countries.
In such a situation, less developed countries would be inclined to
move away from multilateral means of solving international prob-
lems and would increasingly discriminate against developed
countries in their markets by placing increasing reliance on bilateral
trade arrangements and on group arrangements among themselves.
This could create both economic and political difficulties that do
not need to be gone into here.
There are already clear signs that less developed countries are
becoming disenchanted with multilateral rules, conventions and
institutions. To forestall a hardening in this attitude, the developed
countries should begin to liberalise their schemes of generalised
tariff preference as soon as possible after, or as part of, any trade
liberalisation programme that is agreed among themselves, especially
where those arrangements cover products of export interest to
Third World countries. 7
(a) In the first place, developed countries which are currently
?for a discussion of arrangements for tariff preferences in favour of developing countries

as an integral part of a trade initiative for further liberalising world trade, see
Wall, "Opportunities for Developing Countries", in Johnson {ed.), Trade Strategy for Rich and
Poor Nations (London: Allen & Unwin, 1971), pp. 27-94.
100 DAVID WALL
delaying the implementation of their schemes should be

prevailed upon to pass the enabling legislation.
(b) Secondly, products excluded from the schemes, and which
are of export-interest to developing countries, should be
included. And the various safeguard devices which defeat the
purpose of preferences (which is to encourage new exporters
and new investors), such as tariff quotas, limited tariff cuts and
escape clauses, should be removed and be replaced by inter-
nationally supervised safeguard mechanisms and adjustment
assistance programmes such as those outlined above.
(c) Thirdly, now that it has been accepted that trade con-
cessions to less developed countries do not have to be recipro-
cated, as agreed with the insertion ofPart IV in the GATT, it is
no longer necessary for developed countries to require "reverse
preferences" in order to justify discriminatory treatment in
favour of developing countries under Article 24 (the free trade
area clause) of the General Agreement and they should be
abolished.
(d) Finally, political objections to generalised preferences
could be reduced, and possible future international tensions
could be forestalled, if (i) international agreement could
be reached on common criteria for determining beneficiary
status under a harmonised scheme and if (ii) international agree-
ment could also be reached on non-trade measures designed to
assist the development efforts of the least developed countries.
So far the measures discussed in this paper have only been con-
cerned with safeguarding the trading interests of less developed
countries, interests which may be harmed if developed countries
establish free trade arrangements among themselves. The proposed
measures have related to a proposal for a harmonised and improved
system of tariff preferences accorded by developed to less developed
countries. As recognised earlier, however, such a system of pre-
ferences could only be operated during the progress towards the
free trade arrangements. Once free trade is established among
developed countries, all developing countries would have to compete
on an equal footing with all developed countries for each market in
the industrialised countries.
While some industries in some less developed countries could be
expected to cope successfully with such competition, many industries
in most less developed countries would not be strong enough. In
these cases other positive measures would have to be taken to

encourage the exports of the countries concerned. Such non-
discriminatory measures might include: (a) the establishment of
offices in developed countries to identify market opportunities for
less developed countries; (b) the provision of technical assistance,
possibly via the International Trade Centre, to identify and encourage
the production of products in which less developed countries have a
comparative advantage; and (c) the extension or introduction of
measures to encourage the re-location of labour-intensive, low-
technology processes in less developed countries. To go beyond this
would take the discussion into the field of aid which is outside the
scope of this paper.
CHAPTER 5
Provision for Escape Clauses

and other Safeguards
by DAVID ROBERTSON
"Escape clauses" are an accepted feature of all types of international

trade agreement and are an expression of national sovereignty.
Following the bitter experience of the 1930s, governments involved
in the negotiation of commercial treaties since 1945 have been
anxious to retain adequate powers to safeguard their economies from
unexpected problems that might arise, either directly from their
commitments to an agreement or indirectly from unrelated develop-
ments which adherence to an agreement might exacerbate. The
actual contents of escape provisions therefore have a decisive
influence on the scope of obligations undertaken in international
trade agreements.
An escape clause in an international trade agreement is a provision
allowing the participating countries the right in a given situation
to derogate from the strict obligations they incur under the agree-
ment. Such action is permitted on economic grounds for two reasons.
General escape provisions apply in cases of balance-of-payments
difficulties. "Specific" escape provisions refer to economic difficulties
encountered by a particular sector ofindustry or a region. The terms
of the escape clause may allow action to be taken unilaterally by a
country or it may require approval and consent from the other
parties to the agreement. The duration of any measures implemented
according to these clauses is usually only temporary and may some-
times be exercised only during a transition period.
In addition to these two types of economic safeguard included in
trade agreements, it is customary to include at least one article
covering general exceptions and derogations in the interests of
national security. Economic considerations are secondary in this
case although, if misused, such provisions can have important
economic effects.
One of the surprising features of the last twenty-five years, in
103
104 DAVID ROBERTSON
respect ofinternational commercial treaties, has been the comparative

infrequency with which escape provisions have been invoked. This
is partly explained by the relative ease with which economic
adjustments have taken place in the advanced industrial countries
under conditions of rapid economic growth. But, more especially,
the types of economic measures permitted in the escape clauses have
been too cumbersome; that is to say, they have been inappropriate.
In consequence, governments have either introduced measures
not specifically prohibited by international agreements, or they have
resorted to "illegal" devices by bending the rules.
There appear to be three lessons to be drawn from these experiences
which must be taken into account in connection with any agree-
ments on further trade liberalisation.
(a) Any loop-holes in existing agreements that provide
opportunities to avoid obligations, or that allow measures not
included in an agreement to be introduced, should be closed.
(b) Measures prescribed for use in the event of a need to
invoke an escape clause should be appropriate and effective.
(c) Consultative machinery should exist in the agreement to
review periodically the escape provisions in order to ensure
that they do not become obsolete (as quantitative restrictions
have become as a corrective for balance-of-payments
difficulties). A complaints procedure would help to ensure
that escape clauses are not misused.
Escape clauses are regarded, by most countries, as essential in
order to allow strict economic agreements to be negotiated, because
the circumstances in which they are to be pursued in future cannot
be foreseen at the time they are concluded. The need for recourse to
escape provisions, however, should be kept to a minimum if
agreements are to be truly effective. Where difficulties can be
anticipated, special "exceptions clauses" should be included.1
Exceptions clauses enable certain countries to be released in advance
from carrying out certain obligations. By contrast, escape clauses
provide for participating countries to derogate temporarily from the
common obligations because of unforeseen circumstances which
justify speedy reaction (that is, they provide a safety valve).
The distinction between escape clauses and exceptions clauses is
for example, Annex G, on special arrangements for Portugal, in the Stockholm
1 See,
Convention, the constitution of the European Free Trade Association (EFTA). Building
EFTA: a Free Trade Area in Europe (Geneva: EFTA Secretariat, 1968).
PROVISION FOR SAFEGUARDS 105
important. In view of the likely scope of a new trade initiative for the
1970s it seems probable that many expections will need to be
negotiated. They should not provide permanent derogations from
obligations entered into; instead, they should perhaps allow a
longer period for adjustment where abnormal difficulties can be
foreseen.
GENERAL CmcuMSTANCEs OF NEGOTIATIONs
In the intensive review of the international trading system that
has been taking place among commercial policy specialists since the
middle of 1967, when the Kennedy Round of tariff-cutting negotia-
tions were at last successfully concluded, a broad consensus began to
develop at the outset of the 1970s on the form of the next initiative to
extend trade liberalisation among the advanced countries. Many
differences remain, of both a political and an economic nature, but
one set of proposals that has been advanced in similar forms from
various quarters has attracted widespread attention. There are four
aspects to these " consensus , proposaIs:
(a) across-the-board, or linear, reduction and elimination
of substantially all tariffs on industrial products traded among
developed countries according to an agreed schedule over a
period of five to ten years;
(b) negotiation of rules of competition covering non-tariff
distortions of international competition;
(c) measures to regulate national policies on the production
of, and trade in, temperate-zone agricultural products; and
(d) increased opportunities in the markets of developed
countries for exports from less developed countries, including
non-reciprocal tariff preferences during the transition to
tariff-free trade. 2
If such an imaginative programme could be negotiated under
the General Agreement on Tariffs and Trade (GATT), the agree-
ment would have to embody an effective framework of"safeguards",
accompanied by the establishment of appropriate complaints and
2 Such a formulation was advanced in William D. Eberle, "Trade Issues for the 1970s",
an address to the Trade Policy Research Centre, London, November 23, 1971. Mr. Eberle,
as President Nixon's Special Representative for Trade, was speaking as a key spokesman in
the United States Administration on American foreign economic policy. For a broader
reflection of the consensus, see the proposals of the International Chamber of Commerce,
based on the report by Jean Royer, The Liberalisation of International Trade during the Next
Decade (Paris: International Chamber of Commerce, 1969).
106 DAVID ROBERTSON
arbitration machinery. The present articles of the GATT, the

instrument by which international trade has been regulated during
the post-war period, would require extensive revision, if only to
provide comprehensive coverage of non-tariff measures and to
infuse greater respect for the conditions under which escape clauses
and safeguards may be invoked. In particular, since the obligations
incurred under the new agreement must be honoured, the Protocol
of Provisional Application in the GATT, the so-called grand-
father clause, would have to be dispensed with.
The Protocol of Provisional Application of October 30, 1947, is
the formal instrument or document whereby the United States and
other countries which took part in the original GATT negotiations
undertook to apply the General Agreement. In substance, the
signatory countries agree in this protocol to apply provisionally
(a) Parts I and III of the General Agreement and (b) Part 11-
covering non-tariff barriers-to the fullest extent not inconsistent
with legislation existing on October 30, 1947. Such provisional
application may be withdrawn upon 6o days' notice by a country
desiring to terminate its GATT obligations. This is equivalent to
saying that contracting parties, under the Protocol of Provisional
Application, undertake to put into effect the schedules of tariff
concessions and to grant general most-favoured-nation (MFN)
treatment on and after agreed dates, but are not required immedi-
ately to make changes in their existing laws which are inconsistent
with the GATT provisions relating to non-tariff trade barriers and,
finally, that they may withdraw from the GATT on 6o days' notice.
The very broad scope of the multilateral trade negotiations
promised for 19734 suggests that a single and all-embracing agree-
ment is unlikely to be sought. A schedule for dismantling the
industrial tariffs that are left after the implementation of the Kennedy
Round agreement and any arrangements to accord special non-
reciprocal tariff treatment to less developed countries are relatively
straightforward. Agreements on non-tariff distortions and on
agricultural trade, however, are a different matter.5 It will not be
Sfor a discussion of the "grandfather clause", as the protocol is called, see Kenneth W.
Dam, The GATT Law and International Economic Organisation (Chicago and London:
University of Chicago Press, 1970), pp. 341-44.
4In two separate joint statements, the European Community and the United States, on the
one hand, and the United States and Japan, on the other, committed themselves in January,
1972, to begin multilateral negotiations in 1973 further to liberalise international trade.
5 See Gerard and Victoria Curzon, Hidden Barriers to International Trade, Thames Essay
PROVISION FOR SAFEGUARDS I07
possible to conclude agreements in these areas on a basis of reciprocal

bargaining for concessions, as was possible in six previous rormds
of GATT negotiations on tariffs.
The ftrst stage should be to obtain an equal commitment by the
major trading cormtries to the principles of an international agree-
ment for the further liberalisation of world trade. Following such a
commitment, trade liberalisation should then pursue, in subsequent
stages, a frmctional approach. It would not be feasible to seek one
comprehensive agreement, or code of conduct, covering all non-
tariffbarriers. Likewise, it would not be feasible to attempt a single
agreement covering all agricultural trade and the many forms of
agricultural protection that are employed at present. In both
these fields, gradual progress, by a process of more or less con-
tinuous consultation and negotiation, offers the greatest likelihood
of successfulliberalisation.
General escape clauses are relevant to any balance-of-payments
difficulties arising from further trade liberalisation. But they are not
remedial. They are merely an interim relie£ The remedy requires
the application of suitable economic, financial and monetary policies,
including exchange-rate adjustment.
Specific escape clauses are most relevant in the consensus proposal
to linear tariff reductions and rules of competition. Where national
governments are forced to introduce special safeguard measures
rmder escape provisions, it is probable that in many cases they will
affect the trade of less developed cormtries, but there is no need to
have special escape provisions from tariff preferences granted to less
developed cormtries. The problems of agriculture are different from
those in industrial trade, and any safeguard provisions should be
specifically embodied in agricultural agreements. Experience in
the GATT has shown that a generous and flexible system of excep-
tions for agricultural trade and production is liable to misuse from
excessive application and loose interpretation.
Specific escape clauses mainly relate then to developments in
industrial trade. Experience with tariff dismantling in the GATT, the
European Commrmity and the European Free Trade Association
(EFTA) should have convinced governments that adjustment by
No. I (London: Trade Policy Research Centre, 1970); and also Harald B. Malmgren,
"Negotiating Non-Tariff Barriers: the Harmonisation of National Economic Policies", in
US Foreign Economic Policy for the 1970s: a New Approach to New Realities (Washington:
National Planning Association, 1971).
108 DAVID ROBERTSON
industries to loss of tariff protection is a fairly painless process that

seldom leads to serious problems, given a reasonable "transition"
period. There were very few cases in the Common Market or in
EFTA where the movement to tariff-free trade caused industrial
difficulties requiring special offsetting measures. In any commodity
categories where difficulties are defmitely anticipated, exceptions
agreements should be negotiated {by, for example, allowing tariffs
to be dismantled over a longer period).
Agreement on rules of competition on non-tariffbarriers involves
escape clauses in two respects. First, the removal of some measures
giving non-tariff protection is likely to have more disruptive effects
on industries than the removal of tariff protection, partly because
of the way governments employ devices like quantitative restrictions
or voluntary export restraints that are more certain in their effects
on trade than tariffs, and partly because industries protected by such
measures are often facing strong competition from foreign suppliers.
Second, the types of measures permitted under escape provisions are
not likely to be tariffs, which at acceptable levels do not usually
afford enough protection from efficient foreign suppliers. As a
result, the safeguard measures permitted, and the method of their
employment under escape clauses, must be compatible with the
relevant rules of competition. Thus, agreements on rules of com-
petition for certain categories of non-tariff protection are likely to be
both a cause of difficulties requiring special safeguards and, at the
same time, a constraint on alternative safeguard measures.
ExPERIENCE OF EscAPE CLAUSES
The consensus proposals aim, in effect, at applying to a wider
group of countries the objectives of EFTA and so the experience
with the operation of its constitution, the Stockholm Conven-
tion, is worth careful consideration. The Treaty of Rome, the
constitution of the European Community, offers less guidance on
safeguard provisions under a free trade agreement because of the
considerable powers vested in the Brussels Commission, the
executive of the Common Market.
Both the Stockholm Convention and the Treaty of Rome contain
provisions for special safeguards during the transition to tariff-free
trade between member countries, in addition to permanant escape
clauses. General escape clauses, covering balance-of-payments
difficulties, apply equally to the transition period and the long-term
operation of these agreements (Articles 108 and 109 in the Treaty of

Rome and Article 19 of the Stockholm Convention). These clauses
follow closely the provisions in Article 12 of the GATT. Specific
escape clauses, referring to difficulties in individual sectors or regions
in member states, were thought by the founders of both the Euro-
pean Community and EFTA to be relevant only to temporary
difficulties arising from the implementation of trade liberalisation
and they were therefore confmed to the transition period.
Article 226 of the Treaty of Rome allows resort to protective
measures in the event of economic difficulties in an industrial sector
or region during the transition period. The article specifies neither
the types of measures a member of the European Community could
introduce nor their duration, leaving these for the Commission to
decide. Any measures introduced under these provisions, however,
have to be abolished by the end of the transition period.6 With the
completion of the transition period in July, 1968, Article 226 has
lapsed. Yet difficulties can arise in a particular sector ofindustry, or a
region, for reasons quite outside the implementation of the trade
agreement, and the corrective measures adopted could still seriously
interefere with the operation of the customs union. In the European
Community, the Commission has authority to safeguard the interests
of the Common Market, and can make recommendations to member
countries accordingly, which provides a source of corrective
measures if an occasion should arise.
Since no supra-national institutions could be contemplated in
a multilateral free trade agreement, the escape clauses must be
specific and effective. The evolution of specific escape clauses in
EFTA is interesting in this context.
Article 20 of the Stockholm Convention provided for temporary
derogations during the transition period. It allowed the EFTA
Council to authorise an alteration in the rate of reduction of an
import duty if it could be established that "an appreciable rise in
unemployment in a particular sector or region is caused by a
substantial decrease in internal demand for a domestic product"
resulting from "an increase in imports from ... other member
states as a result of the progressive elimination of duties, charges and
quantitative restrictions". Any derogations under this article had to
6 Presumably the provisions of Article 226 of the Treaty of Rome must be reactivated
during the transitional stage of the European Community's enlargement beginning on
January 1, 1973·
IIO DAVID ROBERTSON
be removed before the end of the transition period and the approval
of the EFTA Conncil was necessary if restrictions continued for more
than eighteen months.
Because EFTA involves a less intense harmonisation of national
policies than the European Commnnity, it has taken a rather different
view of the need for a permanent escape clause on gronnds of
sectoral or regional difficulties. Recent discussions among EFTA
conn tries have resulted in amendments to Article 20. 7 The transitional
escape clause in paragraph 4 of that article has been deleted. But
certain types of derogations from commitments nnder the Stockholm
Convention will be allowed to continue, subject to majority approval
by the EFTA Conncil, if''nnforeseen and serious difficulties arise or
threaten to arise in a particular sector of industry or a region".
Moreover, in order to safeguard EFTA interests it was tacitly agreed
that there should be prior discussions in all cases where member
governments intend to invoke Article 19 of the GATT, which
covers emergency action on imports of particular products. In
effect, EFTA has recognised that sectoral and regional problems
requiring corrective policies can develop for reasons other than the
implementation of the Stockholm Convention and that, in order to
safeguard the interests of the free trade association, strictly regulated
procedures must be specified in a permanent escape clause which
itself must be compatible with commitments nnder other inter-
national treaties.
The GATT offers many types of escape provision for its con-
tracting parties, the signatory conntries, which perhaps reflects its
vintage. The GATT was intended to introduce a code ofbehaviour
into the chaos of protectionism that was created in the 1930s and
1940s. Apprehension about the effects of trade liberalisation made
safeguards an important consideration. Article 12 provides for
quantitative restrictions to be used (by signatory conntries) to
safeguard their balance of payments. Article 19 allows for the sus-
pension of obligations and the withdrawal, or modification, of
concessions in the event of increased imports of a particular product
causing or threatening to cause serious injury to domestic producers.
Article 18 permits the introduction of protective measures against
imports in order to implement programmes of economic develop-
ment. In addition to these three specific criteria for escape clauses,
7Amended by the EFTA Council on December 3, 1970 (Decision No. 15 of1970).

PROVISION FOR SAFEGUARDS III
however, there are provisions for specific exceptions to several

articles in the General Agreement which, because of their loose
interpretation, offer many opportunities to derogate from the
treaty. Many types of trade interference are not even mentioned in
the GATT and these are widely used in spite of obligations under
the General Agreement.
It is clear that escape clauses in the GATT have been employed
too liberally. There are too many ways in which the rules can be
avoided, and more acceptable and more effective safeguards have
been devised than those prescribed in the escape clause regulations.
Since a multilateral free trade agreement would involve a greater
commitment from participating countries than was ever envisaged
in the GATT, the regulations must be tightened considerably and
the escape provisions must be effective and clearly constrained. There
is another point worth stressing. The GATT was intended to make
tariffs the only authorised restriction on trade; with a few exceptions,
other trade barriers were prohibited. Because this has not succeeded,
it is now necessary to recognise existing non-tariff barriers in order
to regulate their use. The General Agreement will therefore require
radical revision if it is to be the vehicle for supervising a multilateral
free trade agreement among developed countries.
PREREQUISITES FOR EFFECTIVE MA.CmNERY
A preliminary step to any agreement on non-tariff measures would
seem to be to revoke, as mentioned earlier, the Protocol of Pro-
visional Application in the GATT. This escape from obligations
was presumably intended as a transitional measure to prevent undue
disruption of domestic economic policies. There can no longer be
any real reason for this avoidance of commitments, which is now
used as an excuse for maintaining protection introduced before the
GATT was established without the need to respond to pressures
for liberalisation. Moreover, in connection with non-tariff barriers,
it is necessary that various loopholes in GATT articles should be
closed.
A view must also be taken about the future functioning of the
international monetary system. The need for general escape clauses
depends upon the alternative forms ofbalance-of-payments correc-
tion. If recent experience of more frequent adjustments in exchange
rates and the widening of bands around parities is indicative of a
more flexible "managed" exchange rate system, then the need for
112 DAVID ROBERTSON
temporary trade restrictions as a balance-of-payments device will

diminish. In most situations, trade restrictions provide only tem-
porary relief and they tend, in any case, to exacerbate the funda-
mental misallocation of domestic resources causing the trade deficit.
Before an economy can adjust to a new equilibrium, additional
measures must be introduced. If governments prove to be more
willing to alter exchange rates, and if the structure ofthe international
monetary system is adapted to that end, then recourse to general
escape clauses in trade agreements should diminish.
Nevertheless, circumstances may arise in which temporary trade
restrictions may be the most suitable corrective policy for balance-
of-payments difficulties in the short-run;8 for example, where the
causes of an external imbalance are difficult to diagnose or where an
imbalance is expected to be short-lived. In such circumstances, a
precipitate alteration in an exchange rate may upset confidence in
the foreign exchange market, when if ignored the situation would
have corrected itself without any change in parities. General escape
clauses remain necessary, therefore, in order not to restrict too
severely the policy alternatives open to governments. But the
measures permitted under such provisions must be effective and
swift-acting, subject to the approval of other participating countries,
and available only for a limited period.
A major problem of future trade relations between industrial
countries arises out of the sharp contrast in recent years between the
trend towards liberalisation in international economic relations and
the tendency towards more extensive government intervention in
domestic economic affairs. The former was achieved through the
mobilisation of mutual interests in trade by international organisa-
tions. But it was made possible by the relative success of domestic
economic policies which brought full employment and high and
growing prosperity. Combined with international monetary coopera-
tion this produced a climate in which trade liberalisation and trade
expansion faced little opposition. All the same, the opening of
domestic markets to foreign competition in this way caused strains
of "structural adjustments", which have been increasingly felt in
all industrial countries. These structural adjustments have been
partly met using more sophisticated economic policies than protec-
tion. Perhaps more frequently, though, the problems have been
8 Where demand elasticities are low, an exchange-rate adjustment would be inappropriate.
See E. Sohman, Flexible Exchange Rates (Chicago: University of Chicago, r9(19), Ch. r.
masked by employing disguised or sometimes more obvious forms

of protectionism, such as quantitative restrictions and voluntary
export restraints. These latter devices are now generally included
under the heading of non-tariff barriers to trade (more accurately
described as non-tariff distortions or interventions).
Many non-tariff barriers are simply the outcome of countries
using different national economic policies. If an attempt is made to
harmonise non-tariff measures, by drawing up codes of conduct or
guidelines, the room for manoeuvre of national governments faced
with structural adjustment problems will be further reduced,
while in some cases the removal of the protection could reveal
very grave industrial problems.
The first responsibility of any government is its domestic
economy. Regional unemployment or unemployment in an indus-
trial sector have a prior claim over external commitments in the
eyes of almost all governments. Hence, if the range of actions
available to them is heavily proscribed by an international trade
agreement, it has to be accepted that appropriate escape provision
will be necessary. Without them the wider objectives of a multi-
lateral free trade agreement would be jeopardised. The aim of all
escape clauses should be to balance the individual interests of the
signatory countries and the collective commitment to the agree-
ment.
NECESSARY ESCAPE PROVISIONS
There appears to be no way in which the three traditional types of
escape clauses can be reduced in number, although it is possible that
the scope of the "general" escape clause could be contracted now
that exchange-rate flexibility appears to be more acceptable to
governments.
It seems probable, however, that an additional kind of problem
will be raised by some countries and perhaps a case made out for a
fourth type of escape provision. Some prospective participants in a
multilateral negotiation aimed at tariff-fee trade are already involved
in regional free-trade groupings under Article 24 of the GATT, most
notably the European Community, and they are pursuing the
harmonisation of other economic policies. These countries may seek
some kind of assurance that their integration plans will not be
impeded by any new commitments arrived at in multilateral trade
negotiations. For this reason they may attempt to include in any
E
II4 DAVID ROBERTSON
resultant trade agreement an escape provision permitting the same

discriminatory practices at present enjoyed under Article 24 of the
GATT.
The manner in which Article 24 has been used to undermine the
basic objectives of the GATT indicates that such an escape provision
would be dangerous to the fundamental aims of a new multilateral
trade agreement. Adoption of the principle of conditional MFN
treatment, however, should provide other participating countries
with the machinery to establish wider agreements on rules of
competition whenever regional integration arrangements seem
likely to cause unacceptable discrimination against outside countries.
National Security Clause
An essential escape clause in any agreement is one that covers
national security because in its absence governments would act
anyway if warranted in the national interest or if an emergency
arose. Even so, it is not an important provision from an economic
point of view, provided its use is carefully supervised to prevent
malpractice.
Almost all commercial treaties embody at least one provision for
escape from obligations on grounds of national security and another
for "escape" on general exceptions, for protection for instance of
health and public morals {see the GATT's Article 21 and 20, the
EFTA's Article 18 and 12 and the European Community's Article
36 and 223-4). Usually these clauses cover disclosure of information,
trade in arms and war materials (including nuclear materials and
equipment), actions in time of war and international emergencies
and trade in items such as drugs and pornography. One danger
associated with these safeguards is that the term "strategic" could
be applied to some imports simply as a means of giving protection
or that health standards could be employed protectively. These
practices become particularly relevant if agreements are reached on
public procurement or industrial standards when they could be
used to avoid negotiated rules or guidelines. Adequate supervision
of the use of these clauses will be necessary.
General Escape Clause
The need for a "general" escape clause for balance-of-payments
difficulties has already been discussed. It is possible that improve-
ments in international economic adjustment mechanisms will
reduce the occasions on which it is necessary to have recourse to

general trade restrictions as a policy alternative. On the other hand,
there are circumstances in which temporary trade restrictions may
be the most appropriate policy alternative, in whi,:h case the
measures permitted should be effective and swift-acting, their
duration in time should be restricted and they should be subject to
surveillance while in force. The conditions under which deroga-
tions can be made should be carefully circumscribed, but in order
that they can provide a flexible response to changing circumstances,
it is possible that they should be subject to review in some kind of
consultative procedure.
In terms of effectiveness, it is evident that quantitative restrictions
on imports, which are the recommended device in the GATT, the
European Community and EFTA, are no longer a swift-acting or
effective measure since most advanced industrial countries no longer
have the administrative machinery to operate licensing schemes.
Furthermore, with the development of integrated regional trading
blocs, it is difficult to see how they could be applied in a non-dis-
criminatory fashion, as required by the GATT, without disrupting
the regional trading agreements. It has become the fashion to
introduce import surcharges or other fmancial measures in cases of
external disequilibrium, because these seem likely to bring the most
rapid results in most advanced industrial countries. 9
The EFTA committee on escape clauses considered in 1970 a
suggestion that quantitative restrictions should be replaced by other
measures in Article 19, but it decided not to alter the existing
provisions. But in the revisions to Article 20 of the Stockholm
Convention the range of possible measures was extended to include
"import duties, quantitative import restrictions and other measures".
Financial measures, such as import surcharges and import deposit
schemes, were mentioned in the EFTA discussions. Presumably the
wording was left vague in order to retain compatibility with the
GATT. So far, the GATT has been unwilling to revise its articles to
permit import surcharges, import deposits and so on which have
not yet been shown to be generally a superior means of correcting a
trade imbalance than quantitative restrictions. It seems evident,
however, that in cases where balance-of-payments difficulties are
most suitably corrected with trade restrictions the measures should
8See Trade Measures and Adjustment of the Balance of Payments (Paris: OECD Secretariat,
1971).
II6 DAVID ROBERTSON
be the most effective, which means extending the range of measures

permitted under this escape clause.
Specific Escape Clauses
Some perplexing problems arise in connection with "specific"
escape clauses, which seem likely to be the safeguards in most
frequent use during the next phase in the liberalisation ofworld trade.
How can the conditions be defmed in which these clauses can be
invoked? Should countries be able to invoke them unilaterally or
should some form of authorisation be required?
In the GATT, Article 19 gives countries the right to introduce
quantitative restrictions, or to withdraw tariff concessions already
granted, where imports of a particular commodity cause or threaten
to cause serious injury to domestic producers. Since governments
using Article 19 have not been required to show injury, these pro-
visions have been freely interpreted. Under EFTA's revised Article
20, measures which derogate from the Stockholm Convention are
permitted, subject to authorisation by the Council, in the event of
"unforeseen and serious difficulties arising or threatening to arise
in a particular sector ofindustry or region". The measures introduced
are subject to examination by the EFTA Council, which is required
to ensure that they have a minimum effect on the objectives of the
free trade association. The implementation of measures requires a
majority approval from the Council, but they may comprise import
duties, quantitative restrictions and "other measures with similar
effects" which offers a much wider choice than is customary.
"Specific" derogation would presumably rest with the Council if
any cases arose.
The types of "specific" escape clause under discussion here for a
free trade arrangement must be more comprehensive than would be
the case in an organisation with a powerful central authority
pursuing extensive policy harmonisation such as the European
Community. It is more relevant therefore to turn to some of the
issues raised in the GATT and EFTA articles.
The concept of"injury" employed in the GATT is now probably
out of date, except in the context of dumped or subsidised exports,
which are covered by the Anti-dumping Code and the counter-
vailing duties section of Article 6. Extensive dismantling of tariffs has
revealed few cases of injury in the last 25 years, although it must be
recognised that adjustment to trade liberalisation has been facilitated
by the Wlprecedented economic growth among the advanced

industrial coWltries. When Article 19 has been invoked it has usually
had litde association with previously negotiated tariff reductions.
More often the difficulties have arisen as a consequence of structural
changes in world markets, especially involving exports from new
sources of production, principally in less developed coWltries. The
original Article 20 in the Stockholm Convention referred to "an
appreciable rise in Wlemployment in a particular sector ofindustry or
region" rather than to "injury". The revised Article 20 has dropped
the reference to Wlemployment because of the difficulty ofmeasuring
Wlemployment and relating it specifically to changes in imports.
Thus, if it is considered that "injury" might occur during transi-
tion towards the total elimination of tariffs and that special safeguards
may be necessary, then proof of material injury should be a pre-
condition for the implementation of new protective measures or the
withdrawal of concessions. Emphasis on the establishment of
material injury before provisions can be invoked is foWld in the
Anti-dumping Code agreed during the Kennedy RoWld of GATT
negotiations.
A second difficulty about existing "specific" escape clauses in the
GATT and EFTA is the idea of "preventative" measures. The
GATT's Article 19 and EFTA's Article 20 both allow measures to
be introduced if there is a "threat" of disruption in an industry or a
region. This makes the task of supervising the use of such clauses
even more difficult because "injury" (however that may be defined)
has to be assessed as a basis ofanticipated effects. And yet, if disruption
and hardship are to be avoided, action is necessary as early as possible
in order to facilitate economic adjustment. The answer appears to
rest with a link between trade restricting measures and domestic
policies of adjustment, which face similar problems of timing.
(The American adjustment programme under the Trade Expansion
Act of 1962 involved serious delays between an "injury" and accep-
tance of the case by the Tariff Commission and payment of com-
pensation. The system is now quicker acting and has been given
wider scope.) 10
10Presidential Commission on Trade and Investment Policy, United States International

Economic Policy in an Interdependent World, Williams Report (Washington; US Government
Printing Office, 1971). See the papers on governmental responses to import competition
prepared by various specialists (pp. 139-548) in the two volumes of papers published with
the report under the same title.
II8 DAVID ROBERTSON
One danger of allowing access to selective protective devices too

readily is that once implemented such measures create vested
interests in their retention. This could be prevented by putting an
effective time-limit on any measures introduced to protect a sector
of industry or a region. Governments seeking derogations from an
agreement would thus be compelled to introduce domestic adjust-
ment policies to correct the difficulties within the agreed period.
Elimination of remaining industrial tariffs seems likely to cause
few difficulties which will involve the use of escape clauses. It has
already been argued that where difficulties can be foreseen special
exceptions agreements should be embodied in the basic agreements
and that the burden should not fall on escape clauses. On the other
hand, fundamental disturbances in product markets do inevitably
occur from time to time, and these can require extensive derogations
from general commitments to trade liberalisation. The disturbances
may arise from a sudden flood of low-priced imports. But equally
an increase in imports may arise from a decline in the competitive
position of a particular national industry, or leading firms in an
industry, in which case the emphasis should be on internal adjustment
and not protectionist measures. Some of the most restrictive non-
tariff barriers have been introduced or maintained for the general
purpose of counteracting "market disruption", and these are likely
to present major negotiating difficulties in the future. "Residual"
quantitative restrictions are still extensive and new "voluntary
export restrictions" are being used increasingly to protect domestic
industries.11
These measures can form an important element in national
economic strategies and represent an essential means of achieving
orderly adjustment to changing market forces. They are often used
of course as a very effective form of protection. (Voluntary export
restraints avoid the need to show injury, as would be the case if
quantitative restrictions on imports were introduced under Article
19 of the GATT.) Negotiations for agreements on non-tariff
measures are therefore likely to encounter great difficulties because
they involve domestic economic policies. The best outcome that
can be expected is agreement on the phasing out of quantitative
restrictions over an agreed period, by integrating domestic policies of
adjustment with a gradual relaxation of the existing restraints.
11 The United States has forced a number of import suppliers to accept voluntary export
restraints.
Because "specific" escape clauses are expected to be so important

within the framework of wider free trade, and because it is necessary
to prevent the widespread use of non-tariff measures, these pro-
visions must be carefully defmed.
(a) "Market disruption" can be used as a general excuse for
protectionism if it is not clearly defined. An attempt was
made to define market disruption in the GATT in 1960 and it
was pursued further in the Long-term Cotton Textile Agree-
ment in 1962. 12 Aspects of that defmition, however, are too
vague and need to be made more exact; for example, to
defme "a sharp and substantial increase or potential increase
of imports", to propose a way to measure "serious damage"
to a market, to define what is meant by "a market", and to
suggest a method for determining domestic and imported
prices to assess whether the latter is "substantially below" the
former. This definition must be improved if countries are to be
obliged to show "material injury" before safeguard measures
affecting trade can be introduced.
(b) Market disruption is linked closely with dumping and
subsidised exports. Proof of dumping is often difficult to
establish, but the Anti-dumping Code agreed in the Kennedy
Round negotiations offers some guidance. It is to be hoped
that this kind of agreement may be reached in the near future
regarding countervailing duties on subsidised exports. Both
dumping and subsidised exports are illegal forms of market
disruption, but it is the intent behind these which differentiates
between them and market disruption under (a) above. The
previous section was concerned with low-priced competitive
imports that are not subject to special treatment by an exporter
or an exporter's government. Predatory dumping or temporary
dumping may be highly disruptive and leave an economy
weakened when they cease. If imports at a low-price are
permanent and do not involve subsidies then there is a structural
adjustment problem for the competing local industry, but this
should be handled with adjustment policies (possibly including
temporary protection) and not with permanent protection.
(c) Where widespread market disruption (without dumping
12 Decision of the contracting parties to the GATT of November 19, 1960, reproduced in
Annex C to Agreement Regarding International Trade in Cotton Textiles (Geneva: GATT
Secretariat, 1971).
120 DAVID ROBERTSON
or subsidies) is occurring, and several COWltries have applied

for derogations for the same product, a multilateral agreement
should be sought. This situation seems likely to be fairly com-
mon in the case of products where less developed coWltries
have an actual or potential comparative advantage and where
several industrial coWltries' markets are likely to be affected
simultaneously. The Long-term Cotton Textile Agreement
offers a rather poor example of the type of multilateral agree-
ment that might be negotiated. The aim should be to provide a
balance between the collective interests of import-competing
industries in advanced coWltries and the interests of exporters,
by providing for growth in export shares, thereby encouraging
adjustment in the affected industrial sectors.
(d) Difficulties in a particular industrial sector can develop
for many reasons. An increasing share of imports in a national
market may be a symptom of the declining competitive ability
of domestic producers arising from their own inadequacies,
such as insufficient investment in new plant or product develop-
ment, a deterioration in management standards, poor industrial
relations, too much concentration of ownership in the industry
leading to complacency, and so on. Where industrial or
regional problems arise from shortcomings in the domestic
industry, or part of the industry, there may still be a need for
some temporary protection from foreign competition while
the defects are rectified; there will certainly be demands for such
protection. But the main emphasis ofadjustment policy must be
on domestic policies and the burden that foreign suppliers are
obliged to bear should be minimised.
(e) Any measures introduced to safeguard an industry facing
duress should be temporary and of decreasing incidence, and
should be part of a general programme of economic adjustment
in the industrial sector or region facing market disruption,
since measures should be fully integrated with domestic adjust-
ment assistance. In particular, before any measures are approved
for preventing or curtailing market disruption, an effort should
be made to establish the capacity of an economy to adapt
its structure. If there is no evidence that adaptation will be
achieved, then introducing protective measures may be an
invitation to permanent protection, which is contrary to the
objectives of a free trade arrangement.
(f) There is a case for recommending that tariffs or similar

financial measures should be the only permitted form of
trade restriction that may be imposed under escape clauses.
Tariffs and similar measures give a clear margin of preference
to domestic producers and involve an element of competition
for the less efficient firms in an industry from the most
efficient foreign suppliers. The tariff equivalents of many
import quotas now in force would, however, be several
hundred per cent, and few governments would be prepared
to reveal the magnitude of such protection. Because of the
failure of the GATT to achieve its objective of making tariffs
the only legal restriction, it seems safer to recognise that
quantitative restrictions will be preferred in some cases. Non-
discriminatory import quotas are preferable to voluntary export
restraints applied on a bilateral basis. Any non-tariff measure
introduced under an escape clause must be compatible with
negotiated rules of competition for non-tariff barriers; where
exceptions are made they should be acceptable within these
agreements. The important point, however, is that measures
introduced to prevent market disruption should be temporary
and their duration stated at the time of authorisation.
Specific escape clauses appear to represent the most important
type of safeguards for national interests in any future trade agree-
ments for the 1970s, providing our assumptions about the inter-
national adjustment mechanism are acceptable. Because there are
differences in national economic policies, over time there will be
interferences with trade flows from non-tariff measures. At the same
time, agreements on rules of competition will increasingly reduce
the policy alternatives available to governments when faced with
particular policy objectives. For these reasons the escape clauses
relevant to specific difficulties in an industry or a region must be
flexible and yet remain compatible with the main objectives of the
agreement. It is essential to balance national and social interests
with the collective objective of an agreement.
Conditional Treatment
Unconditional MFN treatment, which expresses the GATT
principle of non-discrimination, has been coming under increasing
attack over the last decade or so.18 The widespread use of the
13Randall Hinshaw, The European Community and American Trade (New York: Praeger,
for Council on Foreign Relations, 1964).
E*
122 DAVID ROBERTSON
GATT' s Article 24, which authorises departures from the principle

to form customs Wiions and free trade areas, has brough t about very
extensive divergence from Wlconditional MFN treatment. More-
over, the proliferation of the European CommWiity's discriminatory
trade agreements with associated overseas territories, and with other
COWltries, has seriously aggravated the situation. In addition, the
growin g use of volWitary export restraints, which are determined by
bilateral negotiation, has carried discrimination a step further by
tending to single out major suppliers for restriction. The equity of
the principle of non-discrimination has in fact been criticised by
theorists for many years because it refers only to non-discrimination
by coWitry whereas individual coWitries can be discriminated
against by adjusting tariffs on selected commodities.14
In the post-Kennedy RoWid review of commercial policy,
therefore, attention has been given to the question of reasserting, or
abandoning altogether, the notion of Wiconditional MFN treatment.
If proposals to move to multilateral free trade among developed
coWitries are taken up, the number of instances in which the prin-
ciple will apply may not be enough to warrant its retention. Getting
governments to accept the objective of free trade may, however,
require special attention. The necessary impetus might be given if
the negotiations were to be carried out on a conditional MFN basis,
Wider Article 24, as proposed in Chapter 9 below, which would
mean that the benefits of a resulting agreement would only go to
the coWitries prepared to accept its obligations.
As far as tariffs are concerned, a conditional MFN approach to
negotiations should not present problems, because it might be
hoped that all developed coWltries will be able to negotiate terms
enabling them to participate in arrangements involvi ng-quit e
possibl y-the progressive, linear and automatic elimination of
customs duties. It might be envisaged that, with agreements depend-
ing on the support of Japan, the enlarged European Commu nity
and the United States, very few if any developed coWitries will
in fact abstain from multilaterally negotiated trade agreements.
Non-reciprocal tariff preferences are likely to be granted to develop-
ing coWitries (subject to provisions against market disruption).
Conditional MFN treatment could be more significant with regard
to non-tariff barriers. There is already a tendency to accept that
usee Trends in International Trade, Haberler Report (Geneva: GATT Secretariat, 1958,
and Harry G. Johnson, World Economy at the Crossroads (Oxford: Clarendon Press, 1965).
only the parties to an agreement should be allowed to benefit

therefrom (which is how the European Community and Japan
interpret the GATT Anti-dumping Code). Some such ruling has
been written into a number of proposals for carrying forward the
liberalisation of international trade. An agreement on industrial
standards, for example, will benefit only the participants, and
guidelines for government procurement may have similar conse-
quences if the EFTA approach is followed. 15
Groups such as the European Community which are seeking
close harmonisation of their economic policies, should stimulate
more urgency within the multilateral free trade arrangment to
negotiate general rules of competition. In many fields the European
Community, if it agrees on common policies, could discriminate
seriously against countries outside. In some fields, of course, other
countries may not be concerned that discrimination occurs. But
where serious trade discrimination would result, other major
trading countries may seek a wider agreement, subject to conditional
MFN. Adopting the approach of conditional MFN would give
governments a choice between accepting such discrimination or
being prepared to offer reciprocity in order to prevent it. If a code of
conduct or guidelines can be negotiated in the wider free trade
a sub-group must of course respect the constraints this
Imposes.
Implementation of Escape Clauses
The content of the escape clauses that can be agreed may have a
decisive influence on the scope of the obligations eventually assumed
in a multilateral free trade arrangement. But supposing tli.e contents
of the escape clauses mentioned can be negotiated, there still remains
the problem of ensuring compliance with these conditions. In the
GATT one of the greatest problems has been avoidance of the
regulations, either by ignoring certain unacceptable conditions
relevant to the use of particular measures, or by devising measures
not specifically excluded under GATT provisions. In the much
more comprehensive agreement envisaged in a multilateral free
trade arrangement the regulations must be more rigorously applied
and yet the need for safeguards must also be recognised.
Safeguard provisions must be immediately available to countries
16Public Procuremmt in EFTA (Geneva: EFTA Secretariat, 1968).

124 DAVID ROBERTSON
faced with economic difficulties, otherwise governments will not

accept the escape provisions in the agreement. The conditions in
which both "general" and "specific" escape clauses may be involved
and the nature of the policy measures a government may introduce
should be clearly defined. Prior examination of the case for imple-
menting such measures would be disruptive and counter-productive.
But as soon as possible after an escape clause is invoked an examina-
tion committee should be established to investigate the economic
difficulties, the trade measures introduced and the accompanying
domestic measures to bring about the necessary economic adjust-
ment. The committee should be empowered to recommend changes
in policies and propose a maximum period during which the
measures may be applied, bearing in mind the collective interests in
the free trade arrangement.
Enforcement of international regulations is an especially difficult
problem. As a fmal step, the GATT allows compensation for
nullification or impairment of benefits expected from the agree-
ment (GATT's Article 28). In general, however, the GATT has
been operated "by consensus", which really means interminable
consultations in an attempt to wear down an opponent. Since most
disputes arise because both parties have a case, it is no easy matter to
adjudicate, but long delays in reaching a solution, as occurs in the
GATT, tend to encourage repudiation of agreements.
Clearly the European Community's supra-national approach to
infringements of provisions in the Treaty of Rome, by which
decisions rest with the Commission or the Court of Justice, is not
appropriate to a free trade agreement among sovereign nations.
EFTA experience seems more relevant.16 The escape clauses in the
Stockholm Convention attempt to achieve a balance between
national interests and those of the association as a whole. Both
Article 19 and Article 20 provide that if any trade restrictions last
for more than eighteen months, the EFTA Council shall examine
the situation and may make recommendations to alleviate the
problems by majority decision. In the discussions of revisions to
Article 20 the possibility of a permanent consultative machinery
16for a discussion of EFTA experience in relation to future trade negotiations, see David
Robertson, "Perspectives on New Trade Initiatives", and Johnson, "Global Strategy for
Trade Expansion", in Hugh Corbet and Robertson (eds.), Europe's Free Trade Area Experiment:
EFTA and Economic Integration (Oxford and New York: Pergamon Press, 1970), pp. 205-22
and 223-38 respectively.
was mentioned. Consultative machinery to supervise all aspects of

the operations of an agreement does not ensure compliance with its
decisions by recalcitrants, but it does impose continuous pressure on
governments. Moreover, supported by comprehensive provisions,
governments are able to resist pressures for protection from their
own producers, on the grounds that they, the government, have to
justify such measures to their trading partners.
The sort of agreements envisaged for non-tariff measures are
themselves likely to require permanent consultative machinery.
A precedent was established with the GATT Committee on Anti-
dumping Practices. Once trade liberalisation moves beyond tariffs,
which are quantifiable, the notion of reciprocity becomes difficult
and a functional approach, progressing stage by stage, becomes more
appropriate. This requires a commitment by participating countries
to broad-based agreements (that is, codes of conduct or guidelines).
The process of negotiating an operational system will take time;
discussions already taking place in the GATT on customs valuation
procedures and industrial standards indicate the possibility of this
type of approach.
Consultative procedures for the operation of escape clauses would
fit into this general pattern. In the early stages continuing super-
vision of exceptions agreements on pre-existing quantitative import
restrictions and voluntary export restraints will be necessary, and
there will be important experience to be learnt from the operation of
comprehensive programmes of economic adjustment. In addition,
problems of structural adjustment to foreign competition will
require constant review and assessment in order to establish where
safeguards should be allowed or withdrawn and whether, too, such
safeguard measures are compatible with policies directed towards
domestic adjustments.
Commitment to such a wide programme of trade liberalisation
requires a permanent state of negotiation on the part of the partici-
pants if it is to operate effectively. The "functional" approach means
that escape clauses must be applied in a frequently changing environ-
ment as the scope of the agreement is extended. They must therefore
be subject to changing interpretation which requires general approval
from the participating countries.
CHAPTER6
Negotiations for Overcoming

Non-tariff Barriers to Trade
by BRIAN HINDLEY
Virtually all developed cmmtries fmd some aspect of international

trading arrangements unsatisfactory. It is a moot point whether
existing arrangements are creating bad blood or whether bad blood is
creating an exaggerated dissatisfaction with existing relationships.
Whatever the direction of causation, however, the problem is
multi-dimensional, extending over agriculture, conventional tariffs,
non-tariff distortions and multinational corporations. It seems
likely that international negotiations will embrace all of these (and
possibly others besides). Non-tariff distortions of international
competition, commonly referred to as non-tariff barriers, would be
only a small part of the whole. Nevertheless, their importance
should not be underestimated.
In the preparations that are being made for further multilateral
trade negotiations, several general surveys of non-tariff barriers have
been carried out by inter-governmental agencies, such as the
secretariat of the General Agreement on Tariffs and Trade (GATT),
and by private institutions, as preparation for further multilateral
trade negotiations.1 An inventory of over 8oo barriers, listing com-
plaints reported by more than one government, has been drawn up
by the GATT Secretariat and classified into five broad categories:
(a) government participation in trade, (b) customs and administrative
entry procedures, (c) industrial standards and specifications,
(d) specific limitation on imports and exports, and (e) charges on
imports. The 8oo non-tariff barriers notified by governments have
since been reduced to the thirty which appear to be the object of
1See, for example, Non-tariff Obstacles to Trade (Paris: International Chamber of Commerce,
1969); Gerard and Victoria Curzon, Hidden Barriers to International Trade, Thames Essay
No. I (London: Trade Policy Research Centre, 1970); and Robert E. Baldwin, Non-tariff
Distortions in International Trade (Washington: Brookings Institution, 1970).
!27
!28 BRIAN IDNDLEY
most concern. 2 With non-tariff distortions, however, it is not only

their range and variety but the difficulties of coping with them which
gives cause for alarm.
DIFFICULTIES OF NEGOTIATING ON NoN-TARIFF BARRIERs
Whereas the application and effects of tariffs are similar from one
country to another, non-tariff distortions are extremely diverse, the
same type of measure frequently having very different effects in
one country from those in another. Eliminating the measure may be
difficult in one country and comparatively easy elsewhere. The scope
for administrative discretion, in respect of the same category of
non-tariff intervention, can also vary greatly between countries.
In considering how non-tariff protection might be modified by
multilateral negotiation and agreement, it is important to realise,
therefore, the extent to which the significance of particular types of
intervention vary from country to country.
The increase in the visibility and prominence of non-tariff
barriers, as conventional tariff barriers have been lowered, was not
least among the causes of the lassitude which affected free traders in
North America and Western Europe following the conclusion of
the Kennedy Round negotiations. Tariff barriers are a sufficiently
intractable problem. But at least they are readily identifiable and the
effects of changes in them are quantifiable. Non-tariffbarriers, on the
other hand, are frequently concealed in administrative practice.
Moreover, for all practical purposes their effects are difficult, if not
in some cases impossible, to quantify. Thus the problems of negotiat-
ing a reduction in stated tariff rates pale in comparison with those
entailed in agreeing and enforcing a pact to reduce, modify and
eliminate half-hidden practices and procedures. Because non-tariff
measures do not lend themselves to quantification, as far as their
effects are concerned, they do not lend themselves to reciprocal
bargaining in a multilateral context, in the way that it has been
2 The thirty non-tariff measures of most concern are: trade-diverting investment, export
subsidies on industrial goods, government procurement, state-trading enterprises, counter-
vailing duties; Brussels Convention or Valuation and associated valuation questions in various
countries, certain anti-dumping practices; disparities in industrial health and safety standards,
avoidance of future disparities, mutual recognition of tests, unreasonable application of tests,
pakaging, labelling and marking; licensing, quantitative restrictions, bilateral agreement,
export restraints, motion picture regulations, restrictions on national security grounds, mini-
mum import pricing, embargoes, copyright and tied aid. This list only runs to 23 items
because some non-tariff interventions which are specific to a single country have been
grouped under a general heading, such as "associated valuation questions in various countries".
NEGOTIATIONS ON NON-TARIFF BARRlERS 129
possible to lower tariff barriers-to now very low levels-in six

previous rounds of GATT negotiations.
On top of all this, there is a plausible suspicion that the negotiation
of the Kennedy Round agreement was facilitated by each govern-
ment's knowledge that it could, if necessary, substitute non-tariff
methods of protection for the explicit tariff protection it was giving
up. Since no such facilitating reservation is possible for non-tariff
barriers this suspicion leads to the belief that negotiations on them
must deal with the hardest core of governmental impulses to
protectionism. The two problems together, administrative and
political, almost amount to a recipe for the purpose of discouraging
advocates of free trade.
The case for discussing non-tariff distortions of international
competition is that the solution to the problems caused by them is a
sine qua non of further genuine trade liberalisation and even of a full
realisation of the gains from past tariff reductions.3 It is a case, more-
over, that can stand substantial weakening and yet remain important.
It has two principal elements.
I. There is fist the problem that, given thenumberofin struments
of trade intervention, it is likely to be impossible to negotiate
successfully on any one of them unless there is some guarantee
against the deployment of others in its place. This aspect of the
problem has become obvious since the Kennedy Round negotia-
tions with the increasingly strident accusations of unfairness
hurled by one party or another. It is quite possible that the
substitution of non-tariff measures for conventional tariffs is
more imaginary than real. The provision of facts and figures on
non-tariff barriers is rendered difficult by the very nature of
them so that the scope for imagination is largely unimpeded.
But imaginary or not, the process has provided ammunition for
protectionist lobbies in all countries and has made it easy for
prevaricating governments to rationalise their position. This
aspect of the problem merely calls for some form of guarantee
against substitution: not for the outright elimination of non-
tariff methods of protection.
2. The second element, the resource-allocation cost of non-
8 Action on non-tariff distortions should be regarded as a necessary, rather than a sufficient,

condition for carrying forward the liberalisation of world trade. The other important
condition is for some action to be taken to resolve the problems of agricultural protectionism.
130 BRIAN HINDLEY
tariff measures, is sometimes interpreted to mean that they,

along with conventional tariffs, should ideally be eliminated.
But the economic case against non-tariff devices can be over-
stated: not all of them are equivalent to tariffs. This confuses
economic assessments of what ought to be done and discussions
on how it should be accomplished.
The economist's case against conventional tariffs is founded on
the proposition that their imposition reduces world income. But the
reasoning that leads to this conclusion also implies the possibility that
a nation that imposes tariffs may gain at the expense of the rest of the
world. The general case for freeing trade from tariff restrictions
therefore has a cosmopolitan-as opposed to a nationalistic-
orientation. Of course, a case can be made against particular tariffs,
or levels of tariffs, from a nationalistic point of view; but the argu-
ment depends upon estimates of empirical magnitudes. There is no
general case against tariffs judged in the light of national advantage.
With some non-tariff distortions, however, this position is
reversed. "Voluntary" export restraint-a quota system with
quota rights allocated to foreigners rather than nationals, export
subsidies to the production of exportables, and certain forms of
discriminatory government procurement policy-all have the
property that, judged on conventional economic criteria, they might
worsen the welfare of the country imposing the policy but improve
that of the rest of the world."
This changed outcome gives rise to a problem of prescription.
The imposition of tariffs gives rise to an economic loss both to the
world as a whole and to the "rest of the world": all countries other
than the one imposing the tariff. With conventional tariffs there
is accordingly no need to distinguish between these two concepts.
With the distorting instruments cited above, however, it is quite
possible that the world as a whole loses while the rest of the world
gains. The question thus arises: should international trading arrange-
ments be concerned with the welfare of the world or that of the
rest of the world?
'A more complete analysis is to be found in Brian Hindley, Britain's Position on Non-tariff
Protection, Thames Essay No.4 (London: Trade Policy Research Centre, 1972). This study,
part of an international programme, examines (a) quantitative restrictions on imports and
exports, (b) customs valuation and procedures, (c) anti-dumping and countervailing
duty laws, (d) public procurement policies and practices, (e) government aids to industries
and (f) industrial standards.
NEGOTIATIONS ON NON-TARIFF BARRIERS IJI
The difference between the two is simply the welfare of the

country using the instrument. To assert the interest of world
against that of the rest of the world is therefore in effect to advocate
that international trading arrangements should seek to prevent
governments from pursuing policies that reduce their citizens'
welfare, as measured in conventional economic terms, even though
the welfare of the rest of the world is not impaired by those policies.
This seems to be an untenable position. Such policies might provide
good reason for the residents of the country to protest, but that is a
matter between them and their government. It is not an appropriate
aim or function of international agreements to prevent a contracting
party from "damaging its interests" should it wish to do so; the aim
of such agreements should be to prevent the actions ofone party from
damaging the interests of another.
It does not follow that policies which have no deleterious effect
on the rest of the world should be permitted. The "rest of the world"
is an aggregated abstraction: a policy which is of benefit to it will
normally be of equal benefit to all of the countries which comprise
it and, in general, some will lose and others gain. Such distributional
consequences are of the essence in international negotiations. It
might prove expedient to aim for abolition of all non-tariff devices
rather than risk the ill-feeling entailed in haggling over distributional
consequences. But this is not something that can be determined
a priori. The fact remains that on conventional resource-allocation
grounds there is no reason to reject all non-tariffinterventions as bad.
This problem, however, affects the study of non-tariff measures
in a quite different way. To the extent that governments adopt
policies which would be irrational if they accepted the criteria of
welfare economics, it may be inferred that other criteria guide their
actions. Even where their policies are consistent with the ends
traditionally postulated by economists, they may in fact be aimed
at very different goals.5
A negotiating scenario which appeals to economists may (and
on past experience frequently will) be rejected by governments. In
5The most ambitious and stimulating attempts to deal with this problem can be found in
Harry G. Johnson, "An Economic Theory of Protectionism, Tariff Bargaining and the
Formation of Customs Unions",]ournal cifPolitical Economy, Chicago, June, 1965, pp. 254-83.
The argument there is based on the hypothesis that domestic industrial production possesses
"public good" properties-the utility of members of the nation is directly affected by the
volume of domestic industrial production. It is worth noting in the present context that
there is no presumption that world optimality requires zero intervention in trade flows.
132 BRIAN IDNDLEY
that light, the problem of non-tariff barriers, from an economist's

point of view, lies in defining a negotiating set-up whose outcome
could satisfy economic criteria of welfare improvement and stand
some chance ofofficial acceptance-which is to say, does not threaten
to rob governments of all means of achieving their ends. This is a
difficult trick to perform. Recognition that not all distorting
instruments are objectionable on grounds of resource allocation may
simplify its accomplishment.
CONSIDERATION OF NEGOTIATING STRATEGIES
Whether or not it is yet feasible to negotiate a further liberalisation
of international trade, the issue may be posed in another way. Should
trade liberalisation, in the sense of a further movement away from
governmental interference in trade flows, be the objective to which
governments commit themselves?
There are two alternative goals. The first is genuine free trade.
The second is an environment in which national objectives are
achieved with a minimum of harm to other countries: a situation in
which world resources may be misallocated by interferences in trade
flows, but in which any one country has policies available to make
it as well-off as it would be under universal free trade.
One might accept the second alternative as a fmal objective even
while agreeing that complete free trade would be, in some sense,
"best". The desirability of free trade does not make it attainable. If
one believes that governments will inevitably adopt objectives
which require intervention in trade flows, the relevant question is
whether they can be persuaded to give up, or limit their use of the
"worst" policy instruments for achieving them; and in an inter-
national context, "worst" must mean those which cause most harm
to other countries.
Five principal proposals for the further liberalisation of world
trade have been mooted in GATT discussions. Two of these, the
elaboration of existing international rules and the elimination of
certain practices, are really variants of a third, namely treaty-bound
codes of good conduct or rules of competition. Any negotiation
aimed at the formulation of codes of good conduct obviously may
result in the elaboration of existing rules; and the elimination of any
practice, to be effective, would require some form of multilateral
assent or treaty.
A fourth proposal is for the international harmonisation ofpolicies.
NEGOTIATIONS ON NON-TARIFF BARRIERS 133
Different writers attach different meanings to this phrase. Unless it

is taken to imply the creation of an international agency with
supranational powers, an implausible prospect at best, whatever
harmonisation is visualised must presumably also be on the basis of
treaty-bound agreement.
Finally it is sometimes suggested that the problem could be solved
by cooperation between industries in the affected countries. No
such proposal could be defended on grounds of resource allocation.
Even if the non-tariff problem could be removed from the political
sphere by this means, the risk of international cartelisation is an
exorbitant price to pay.
Given, as indicated at the outset of this brief paper, that reciprocal
bargaining on non-tariff barriers, in the style of traditional GATT
negotiations, is out of the question, some form of treaty-bound
rules of competition would appear to be the only feasible course for
dealing with the problems raised by non-tariff distortions of inter-
national trade. The preceding comments, however, imply a par-
ticular format for the negotiations.
For a start, and as also mentioned earlier, substantive discussions
on non-tariffbarriers are likely to be part of much wider negotiations
on the problems of trade and payments between essentially the
United States, the enlarged European Community, Japan and other
major developed countries. Such wider negotiations are expected to
cover the conventional tariffs that have been left after the implemen-
tation of the Kennedy Round agreement, the expansion ofcommercial
trade in temperate-zone agricultural products, constraints on
"invisible" earnings and, perhaps, the operations of multinational
corporations, besides greater export opportunities for developing
countries.
As the first stage of a process that will involve fairly continuous
consultations and negotiations, governments should aim initially at
obtaining international accord on a set of general rules of com-
petition, these being envisaged as part of the final multilateral
"package" agreement containing international accords on the
other areas of policy. These general rules might be based on Part II
of the General Agreement, covering non-tariff barriers, in which
case it would be necessary to dispense with the Protocol of Provisional
Application (the so-called "grandfather clause").6 In order to induce
6 TheProtocol of Provisional Application is explained in David Robertson, "Provision for
Escape Clauses and Other Safeguards", Chapter 5 above in this report.
134 BRIAN HINDLEY
governments, in the course of time, to give up or limit their use of

the "worst" policy instruments from a free trade point of view,
they might be persuaded to agree that, as an underlying principle
of rules of international competition, the costs of national policies
designed to assist regions, firms and workers to adjust to import
competition and other changes should not be passed on to other
countries. 7
Since, in the nature of things, governments are inclined to proceed
only on a basis of reciprocal bargaining, the principle of reciprocity
could be written into rules of competition by requiring equal
commitment, with the added proviso that only those countries
which adhere to them can benefit therefrom. Such is the basis on
which the European Commu nity and Japan apply the GATT
Anti-dumping Code (the United States not being a signatory) and
negotiations on industrial standards are proceeding on that basis.
Having established a framework for consultations and negotiations
to proceed, together with a suitable complaints procedure, govern-
ments could move to a second stage, namely the elaboration of the
general rules of competition. Since not all non-tariff barriers can be
regarded as equally injurious, since there can be no presumption that
all interferences with trade flows can be negotiated away, and since
there is a considerable risk that those which remain uncontrolled
will be substituted for those which are controlled or eliminated, it is
logical to start the negotiating process with those which cause the
most harm to the world outside the country applying them.
Thus, if the various forms of intervention in trade flows were
listed in order, with those most damaging to the rest of the world
at the head of the list, negotiation could start with the first. Its aim
would be to achieve one of four outcomes with respect to that
instrument:
(a) Its outrigh t elimination.
(b) Its elimination by the substitution for it of instruments
further down the list. For example, subsidies to import-
competing production in place of quotas of tariffs.
7Harald B. Malmgren, "Negotiat ing Non-tariff Barriers: the Harmonisation of National
Economic Policies", in US Foreign Economic Policy for the 1970s: a New Approach to New
Realities (Washington: National Planning Association, 1971), pp. 79-109.
An international code covering adjustment assistance programmes is briefly discussed in
Seamus O'Cleireacain, "Adjustm ent Assistance to Import Competiti on", Chapter 8 below.
Also see Gerard and Victoria Curzon, Global Assault on Non-tariff Trade Ba"iers, Thames
Essay No.3 (London: Trade Policy Research Centre, 1972).
NEGOTIATIONS ON NON-TARIFF BARRIERS 135
(c) Its conversion to a form which would allow it to be shifted

to a lower level on the list. For example, the conversion of
simple restrictive quotas to quotas with rights allocated to
foreign governments.
(d) Control of its application.
As soon as one of these outcomes is achieved, negotiations could
focus on the second instrument on the list and so on to the third,
fourth and n'th.
Although it is perhaps an unlikely outcome, this negotiating
procedure could in principle result in unrestricted multilateral
trade. Whether or not this proves possible, however, any move-
ment beyond the first item on the list should produce gains; and the
range of'possibilities for dealing with that item is so broad that
there can be very little excuse for failure to move beyond it.
Before this process could start, it would be necessary to construct
the list of instruments to be negotiated. There are two aspects that
need to be considered.
The first is that it would not be appropriate to include everything
designated as a non-tariff barrier in the same negotiating list. Such
distorting factors as industrial and health and safety standards,
customs evaluation and anti-dumping legislation are not instru-
ments of policy with the same power and flexibility as tariffs,
quantitative restrictions, subsidies or procurement policy. It is
therefore desirable to treat the two groups separately. Considerable
progress has already been made on the first group; and should the
United States find it possible to abandon its more objectionable
practices in the area-in particular the American Selling Price
system of customs valuation and the non-conformity of its anti-
dumping practices with the GATT code-what remains is a process
of consolidation and development which need not interfere with or
complicate the much less settled business elsewhere.
In the second place, the list must be ordered, and this would itself
be a matter for negotiation. Economists, using economic criteria,
may well be able to agree upon an ordering of instruments by
degree of harm imposed upon the rest of the world by their use;
but the political element confuses the interpretation of "harm".
The Government of the United Kingdom would probably be
shocked and dismayed, and feel its interests to be threatened, if the
United States promised to supply computers, or Japan television
sets or automobiles, in perpetuity and at half their cost of production
BRIAN HINDLEY
to all non-residents of their respective coWltries. Economists and

politicians may not agree on what constitutes "harm", but this
problem is not peculiar to the proposal made here and dogs any
attempt to liberalise trade or rationalise the institutions surroWiding
it.
Indeed, there is a strong case for bringing such disagreements into
the light of day for criticism and analysis; and for initially creating
a framework of international discussion and negotiation which
does not commit the participating governments to action. Trade is
restricted because governments believe it is in their interest to restrict
it. That belief, if it can be dislodged at all, will not disappear over-
night. But the process of discussion of what is harmful, and the
policies available to deal with ostensible harm, may lead to an
atmosphere in which the worst interferences could be eliminated and
the application of the rest improved.
CHAPTER7
Adjustment Assistance to
Import Competition
by SEAMUS O'CLEIREACAIN
With the increased tempo of initiatives for renewed multilateral

negotiations aimed at the further liberalisation of international trade
and the simultaneous fear that the world economy is threatened by
renewed protectionism, the use of adjustment assistance policies,
governed if possible by an international code of behaviour, has been
widely suggested. The proponents of such programmes argue that
they would tend to weaken the opposition of interests which feel
threatened by further removal of protection. Even in cases where
there was no question of trade concessions causing loss of markets,
and the threatened parties sought protection with the intention of
remaining permanently in the industry, the existence of an adjust-
ment programme would have advantages in widening the range of
production activities open to an enterprise that feels itself in some
danger in its traditional line of production. Such a programme
would also, by providing a temporary form of assistance, prevent
other forms of protection which could prove more difficult to
remove in the long run.
This paper, then, (i) briefly reviews the case for adjustment
assistance policies, (ii) describes some general programmes ofassistance
of a non-trade nature, (iii) defmes "injury" and establishes criteria
for assistance, (iv) assesses the costs of adjustment for the firm and
labour, and (v) outlines the design of an adjustment programme.
The case for adjustment assistance has been argued on the grounds
of efficiency, equity and practicality. On efficiency grounds, it would
lead to greater flexibility in the allocation of resources. On equity
grounds, the welfare gain to society as a whole resulting from the
further trade would not be obtained at the expense of injury to the
particular group of (inefficient) producers. On practical grounds, it
is argued that adjustment assistance would weaken the protectionist
trend which has begun to appear as increases in imports have
137
SEAMUS o'CLEIREACAIN
threatened domestic producers. The temporary nature of assistance

programmes is stressed by those who see them as an improvement on
protective measures, such as quotas, which later prove difficult to
remove. Subsidies to threatened industries under adjustment
programmes are designed not to improve their competitive position
vis-a-vis imports, but to hasten their exit from an activity in which
it has been demonstrated they do not possess a comparative advan-
tage. While normal protection would impose welfare losses through
both consumption and production effects, it is claimed that adjust-
ment assistance either:
(a) reduces such effects,
(b) makes them purely temporary, or
(c) involves only accounting and not economic costs.1
One of the most convincing arguments for adjustment assistance
is found in a dissenting statement in the report ofPresident Nixon's
Commission on International Trade and Investment Policy (the
Williams Report). 2 Among the points made by the dissenting mem-
bers are the following:
(a) The budgetary "costs" will be recouped if the policy
programme is successfUl in increasing mobility and up-grading
the quality of a country's resources.
(b) Even if it fails to promote mobility and becomes merely a
compensation programme for the injured parties, the economic
costs are less than those which would have resulted from pro-
tection.
(c) Protection does not avoid the costs of adjustment; it merely
shifts them to others, since the General Agreement on Tariffs
and Trade (GATT) requires compensation of trading partners or
the risk of retaliation.
(d) Protection costs persist over time while adjustment costs
are once-and-for-all.
(e) Adjustment assistance has less prospect of inviting retalia-
tion from other nations than the alternatives of import quotas
and so on.
lfor a standard treatment of the static welfare costs of protection, see Harry G. Johnson,
"The Cost of Protection and the Scientific Tariff", Journal of Political Economy, Chicago,
August, 19(10. A slight discussion is found below.
1 Presidential Commission on International Trade and Investment Policy, United States
Government Printing Office, 1971), p. 318.
ADJUSTMENT ASSISTANCE 139
Before proceeding to discuss the policies of the major trading

countries which relate to adjustment assistance, it ought to be stressed
that, at the macro-economic level, a greater degree of flexibility on
rates of exchange would ease the problem of adjustment where
imports increase as a result of a currency being in fundamental
disequilibrium. The point might also be stressed that adjustment
assistance to import competition should be part of the larger and
continuing process of adjustment that is a feature of any competitive
and innovative economy.
GOVERNMENT PROGRAMMES
Few countries today have government-sponsored programmes
geared specifically to cushioning the effects on domestic producers of
increased imports.3 Canada and the United States rank among the
exceptions in this regard. 4 Both of these countries introduced such
programmes in anticipation of the effect of concessions agreed in the
Kennedy Round negotiations. This does not imply that other
governments do not provide assistance to domestic producers in
facing the effects of the growth of imports. It rather reflects a differ-
ence in attitudes among governments.
West European and Japanese governments make use of widespread
regional and industrial policies geared to the modernisation and
rationalisation of their economies. In fulfilling their general purposes
these programmes do not necessarily distinguish between assistance
required as a result of injury caused by import competition and aid
sought or granted on other grounds. Insofar as such general pro-
grammes are aimed at closing a technology gap between the rest of
the world and the United States they may be seen as providing
assistance to cushion industries from flows of trade in high technology
products and are in practice implicit import adjustment assistance
programmes.
The European approach of making general regional or industrial
programmes available to industries or firms experiencing immediate
difficulty in adjusting to imports avoids the difficulty of establishing
3 SeeFrances M. Geiger, "1'he US Adjustment Assistance Programme and Analogous
Programmes in other OECD Countries", in US Foreign Economic Policy for the 1970s: a New
Approach to New Realities (Washington: National Planning Association, 1971), pp. 194-2II.
The paper is a supporting document for a report of an advisory committee of the National
Planning Association.
'West Germany is also an exception. The German plan is not, however, widely used as
more general programmes perform similar functions. See Geiger, op. cit., pp. 204-5.
140 SEAMUS o'CLEIREACAIN
causation of injury. In the past the North American programmes

have contained stringent eligibility criteria that included the require-
ment that the need for adjustment assistance should be shown as
being caused by increased imports. Frances Geiger, of the National
Planning Association in Washington, points out that the inability to
compete with imports may be due to the small size of firms, leading
to limited fmancial resources and credit facilities, poor management
or an out-of-date labour force. These factors may lead to ignorance
of, or inability to adapt to, technical changes or changes in consumer
preference. The European approach attempts to solve the under-
lying problems which the increases in imports suggest exist. In
cases where assistance is given and there is no import injury, the
assistance is forestalling future increases in imports.
In France, the Commissariat du Plan includes import effects in
its projections of the difficulties to be encountered in meeting
targets set in its five-year plans. The financial and fiscal inducements
to achieve plan targets represent, in some cases, import adjustment
assistance. These inducements, however, were not introduced for
that specific purpose, and that is indeed a minor effect of what are,
after all, wide-ranging programmes.
While an adjustment assistance programme related to import
competition exists in West Germany, other regional and sectoral
programmes have provided most of the assistance as part of more
general policies. Following the European pattern, the Bonn Govern-
ment conducts regional, specific industry and advanced technology
programmes affecting shipbuilding, aerospace, computer and nuclear
energy industries. The Rationalisation Commission has encouraged
the modernisation of industry. Mergers are encouraged by fiscal
incentives where economies of scale are considered likely to occur.
Labour retraining programmes include an unemployment compen-
sation premium of 20 per cent for workers who enter retraining
programmes.
In Italy an extensive regional planning effort is being conducted
in the South, while State-owned conglomerates provide technical
and fmancial assistance to private companies in which they hold a
minority interest. The Japanese Government is supporting an
extensive government assistance programme to encourage indus-
trial modernisation, and sectors of the economy which are un-
favourably affected by policy changes receive assistance.
The question arises whether these general regional and industrial
ADJUSTME NT ASSISTANCB 141
policies should be seen as performing all the functions of adjustment

assistance programmes or whether they require to be comple-
mented by a more explicit programme. The existing programmes
undoubtedly have trade effects. But the general rationale for such
programmes should not be questioned on grounds of their effects on
trade flows, since trade effects are often of secondary importance.
Trade flows are, after all, a residual between production and con-
sumption. Regional and industrial programmes are aimed at altering
directly the production and consumption patterns of an economy.
The argument for developing import adjustment assistance
programmes in those countries with regional and industrial policies
is based on multilateral considerations. It will be argued below that a
GATT requirement that countries have such a programme would
allow further multilateral trade concessions on non-tariff distortions
of international trade.
CRITERI A FOR ADJUST MENT AssiSTA NCE
As already noted, the purpose of adjustment assistance policies
is to switch resources from industries where it has been demon-
strated they do not possess a comparative advantage, towards
activities where it is hoped they may be more efficiently employed.
Such assistance might be made available on the satisfaction of criteria
similar to those presently used in certifying "injury " due to the
granting of trade concessions. The injury issue has to date been con-
fmed to protective measures used to soften the effects of trade
liberalisation in other respects; for example, following a "round "
of tariff cuts. It has been used to bolster the case of those seeking the
activation of the "escape clause" under Article 19 of the GATT, or
the imposition of so-called "volunt ary" export restraints, such as
the Long-term Agreement on Cotton Textiles introduced in 1962.
The defmition of injury or "marke t disruption" from imports is
still not agreed upon internationally. The initiative for such a
defmition was made to the GATT by the United States in 1959 in
what Stanley Metzger, of Georgetown University, has seen as a
retreat from the constraints of Article I I (on quota prohibition) and
Article 19 (the escape clause).5 A GATT workin g party on the subject
failed either to agree on a defmition of injury or to propose a
5Stanley D. Metzger, "Injury and Market Disruption from Imports", Williams Report,
Papers, Vol. I, op. cit., pp. 167-92.
SEAMUS 0 'CLEIREACAIN
programme to cope with it. But a "description" of market disruption

is found in the draft produced by the executive secretary of the
working party, in general terms of"a sharp or substantial increase or
potential increase of imports of particular goods from particular
sources", substantial price cuts and serious damage or threat of
damage to domestic producers.6
A formula for the more precise defmition of disruption is found in
the United States Trade Bill of 1970, where disruption is considered
to have occurred, and quotas to be warranted, if imports exceed I 5
per cent of domestic consumption in a base year and if their growth
rate exceeds that of domestic consumption by at least 3 percent in the
preceeding year and by at least 5 per cent in the year before that. 7
While the use to which such a mechanistic definition would have
been put by the Trade Bill of 1970 is particularly odious, the formula
or similar formulae, if agreed internationally, have much to be
said for them.
First, such formulae are, by definition, commonly agreed stan-
dards and violation of them is readily calculable by both importing
and exporting nations. Secondly, when the standards are based on a
time trend, the appearance of a problem can be forecast and appro-
priate policy planning can be initiated, including the application of
the injured domestic industry for assistance. Thirdly, such formulae
would represent a move in the direction oflooking at the allocation
of from an international point of view.8
If adjustment is included as a possible option for policy-makers
responding to complaints of injury to domestic industries and
workers, guidelines need to be agreed internationally to establish
the conditions in which nations should be allowed to use each of the
three solutions: "voluntary" export restraints, "escape clauses"
and adjustment assistance.
The ground rules for the escape clause are already well established. 9
•General Agreement on Tariffs and Trade: Basic Instruments and Selected Documents, 9th
Supplement (Geneva: GATT Secretariat, 1961), p. 26.
7H.R. 18970. The session ended before the bill could be passed. Substantially the same bill
was reintroduced in 1971 at the start of the 92nd Congress.
8Adjustment assistance programmes would represent a recognition on the part of the
international community that some of the most developed economies still possess industrial
structures which no longer represent the comparative productive strengths of these
economies.
8ln this connection, see David Robertson, "Provision for Escape Clauses and Other
Safeguards", Chapter s above in the present volume.

The escape clause is introduced when an industry has suffered a

temporary loss of "efficiency which can be regained through
consolidation". It is therefore not a full alternative to adjustment
assistance if it is used strictly according to the motives which led to
its establishment. The use of adjustment assistance in parallel with
the escape clause would be justified in cases where the industry or
firm is not dying. It might be expected that the time period of
protection through the use of the escape clause would be shortened
with the addition of adjustment aid.
Adjustment assistance may be even more valuable in coping with
the problems posed by "voluntary" export restraint schemes. Such
export limitations are more likely to be used in situations where the
lack of competitiveness necessitating their use is really not a tem-
porary phenomenon. A policy of adjustment assistance, which
recognises the permanence of shifts in international comparative
advantage, is preferable to export restriction schemes that require
periodic renegotiation. In this more serious case of a dying firm or
industry, the coupling of export quotas and adjustment assistance
should be such that the quotas may be rapidly removed so that
consumers may benefit from low-priced imports, and the burden of
the industry's contraction should be borne by the adjustment
programme. It is in these cases that adjustment assistance seems
likely to confer most benefits to international trading relations.
The Williams Commission's recommendations concerning the
conditions under which other forms of protection are preferable to
adjustment assistance should not be accepted by other countries. Its
report argues that adjustment assistance is appropriate for small
groups of workers or businesses, but that protection, coupled of
course with adjustment assistance, is preferable for major industries. 10
The reasoning that the size of the problem should govern the choice
of response on the part of policy-makers may reflect both political
conditions within the United States and the peculiar composition of
the Williams Commission. While it is likely that in practice the
economic and political power exercised by the injured firm/workers/
industry will influence the extent of the protection granted, there is
no reason why such a principle should become enshrined in inter-
nationallegislation.11 The result would be that measures designed to
lOWilliams Report, op. cit., p. 49·

11Members of the Williams Commission who preferred import quotas or "orderly mar-
144 SEAMUS 0 'CLEIREACAIN
provide temporary protection will continue to be misused.

The international legal code should, indeed, include devices
designed to allow trading partners to bring pressure on the importing
country to increase its adjustment assistance so that the recourse to
the other two measures may be minimised. Export restraints are
usually relied upon when the rate of growth of imports and the
ratio of imports to domestic sales are considered excessive. Adjust-
ment assistance, though, should not be relegated behind quotas just
because of the speed of market penetration. This speed depends on
information gleaned from market research studies often undertaken
for the first time by foreign suppliers. This information is already in the
hands of the domestic producers. When the foreign suppliers possess
an undisputed comparative advantage, what is to be considered an
orderly rate of market penetration should depend on how fast the
importing economy can react in the presence of adjustment policies.
In deciding whether to use the alternatives to adjustment assistance
basic trends in variables such as productivity and so on, which have
some relation to comparative advantage, should be considered.
Costs: Avoiding a Piifall
In no sense should the loss of the domestic market through
increased imports be seen as either an economic cost or economic
"injury". Whatever injury is done to domestic producers or factors
of production should be seen in terms of international legal termino-
logy, not in terms of an economic or social loss of welfare to the
importing economy. (A similar point may be made with respect to
"dumping". Dumping represents a welfare transfer not from the
importing economy to the dumper but vice versa. The welfare
transfer is from the dumping producers to the importing consumers
and as such should be seen as something that the importing economy
should not complain about.)
The complaints which commonly arise in such cases are based in
part on non-economic considerations, such as some notion of"fair"
competition, and in part on the premise that it is in the national
interest to have guaranteed sources of supply. There are, of course,
economic considerations in the complaints of market dislodgement,
but they invariably represent merely sectoral interests. Removing
keting procedures" included the chairmen of Burlington Industries, Honeywell, General

Electric, Sears Roebuck and Monsanto. See Dissent No. 13, Williams Report, op. cit., p. 318.
injury-induced protection involves an income transfer from protec-

ted producers to domestic consumers; its installation equally involves
a transfer from consumers to producers. Consumer lobbies need to
be made more aware of the fact that producer's injury is usually
consumer's gain.
COSTS OF ADJUSTMENT
Establishment of formulae for assessing market disruption will
need to be followed by agreements on how to defme the costs of the
adjustment necessitated by the increased imports, and how to spread
these costs over both society and time; that is, on the design of an
adjustment assistance programme. Two cases may be distinguished:
first, where the adjustment is needed immediately; and, secondly,
where the need for it is spread out over time through the more
gradual removal of protective devices. National and sectoral
costs must also be distinguished.
As noted, the costs of adjustment vary with the circumstances
under which adjustment is made. The unleashing of import com-
petition and the subsequent contraction of an industry or firm will
result in two opportunity costs being borne by the import-competing
sector:
(a) the income which would be earned if the imputs were
allowed to continue in their present activity, with the previous
_of import pressure, until the end of the life-span of the
IDJuries;
(b) the income-differential of another occupation compared
with the protected position of the present activity, assuming
the inputs could be switched to their alternatives immediately.
The first of these costs to the affected sector is due to the introduc-
tion ofliberalisation immediately rather than gradually. It should be
stressed again that this is a cost to the inputs involved, not to society,
since there is a parallel benefit in lower prices to domestic consumers.
The second cost to the activity-specific inputs should be seen as
the cost of liberalisation per se rather than of its timing. The social
costs of adjustment may be described in a fashion similar to the
above, but in terms of nationally efficient allocation of resources.
SOCIAL COSTS OF INSTANTANEOUS ADJUSTMENT
In the case of the immediate opening up of the import market
some costs which existed in the past are removed; namely, the
F
net conswnption and production welfare losses normally associated

with protection. A social gain results. The conswnption loss refers
to the reduction in real purchasing power of conswners caused by
the need to pay high prices for domestically-produced commodities
which could be purchased from foreign sources at lower prices. The
production loss refers to the output lost by an economy as a result
of employing resources in activities other than those in which they
would make a maximwn contribution to national output.
If one asswnes that immediate liberalisation causes workers and
capital to become unemployed, the output which they could produce
in alternative employment, if the adjustment to the new productive
activity were immediate, may be seen as the cost ofthe trade liberalisa-
tion being instantaneous. Since this cost arises because markets are
unable to respond quickly enough, costs ascribed to this heading
might be more properly attributed to the imperfect operation of
markets. Indeed, where the plant and equipment employed in the
dying industry is specific to that activity, some costs to the economy
of the liberalisation are zero in the economic sense, since the cost of
the plant and equipment has already been paid out and may be
regarded as bygone.
So-called "external costs" are a major source of the political
pressure for protective devices which has been too often neglected in
the past. These arise particularly when the threatened industry is
confined within a narrow geographical base. If the tax base of
communities and the public services provided by the revenues
therefrom are too narrowly identified with the contracting industry,
the deliberate running down of particular industries by the central
government may leave local authorities facing considerable losses in
revenue. This will occur if the industrial contraction leads to a
reduction in the rateable value of industrial land. The cut-backs in
local community services which result are an example of external
costs. Another external cost exists insofar as a local area suffers a
depression which inhibits the attraction of new firms to the locality.
Thus, policies aimed at the relief of the social costs of immediate
adjustment (whether based on economic or political rationales)
should deal with these "spill-over" or "external" costs.
Private Costs of Instantaneous Adjustment
From the viewpoint of the affected sector, the costs of instan-
taneous adjustment will be greatest where the plant and equipment
is new, demand is expected to grow and future technological

improvements are likely to be minor. In such cases, the future
income stream which might have been expected to accrue to
inputs presently in the industry suddenly faced with adjustment, is
most likely to be large. While the fact that the plant and equipment
may be specific to the industry and has no value elsewhere in the
economy, and results in zero social cost in the eyes of the economist,
the accounting losses or costs which are entailed in the writing-off
of the equipment will be seen as very real to the owners of the capital
and to the fmancial markets which may be asked to fmance their
replacements.
It has already been pointed out above that the transitional unem-
ployment oflabour which may follow from the lack of staging in
the liberalisation process should be seen as a social cost to be attributed
to the imperfect operation of markets. For the affected individuals
the obsolescence of labour skills which found a market only in the
affected industry involves a private cost. While plant and equip-
ment, however, may often have no mobility to other industries
after installation, this is not true oflabour. The technology embodied
in labour in the form of acquired skills may be altered. It is possible
to move labour to other industries by retraining programmes.
Social Costs of Gradual Adjustment
When industries/firms are allowed time to adjust to a growth in
import pressure, for example through resort to a gradual staging of
trade liberalisation, a number of social costs are apt to arise which do
not appear in the case of instantaneous adjustment. The welfare gains
from the removal of protective devices alluded to earlier are post-
poned. The decision to forfeit these gains for the duration of the
transition period involves a real cost to society.
Another social cost to be attributed to gradual adjustment arises
from the continued encouragement {in the form of revenue not yet
diverted to import-producers) of enterprises to renew inputs which
wear out during the transition to free trade. Machinery which be-
comes depreciated during the transition period is likely to be
renewed, representing an economic waste of resources from a
national viewpoint.
Similarly, workers who are encouraged to undertake training for
an occupation which will become defunct before the end of their
working lives will involve society in the incurring of a social cost.
SEAMUS 0 'CLEIREACAIN
Gradual liberalisation does, however, maintain employment. Since

monetary and fiscal policy take time to have an effect on the
economy, immediate liberalisation would cause unemployment.
Thus, it may be argued that the lower unemployment in a gradual,
as .compared with an immediate liberalisation, represents a social
gam.
Private Costs of Gradual Adjustment
While additional social costs may be shown as likely to occur when
adjustment is gradual, this is not true in the case of private costs.
The continued guarantee of revenue from markets not yet diverted
to import-producers will lessen the costs of adjustment since these
costs have been defmed in terms of the loss of revenue.
Budgetary "Costs" of Adjustment
From the above it is clear that, from a national point of view,
adjustment assistance policies would be best conducted so as to
accomplish the adjustment as rapidly as possible. A sectoral view,
as represented by those directly involved inthecontractingindustryor
firm, would show the costs of adjustment as being considerably
greater if a rapid pace of adjustment were required through the
immediate opening of markets to the more efficiently produced
imports. The political forces mounted in opposition to free access of
imports, and the deliberate running down of some industries, find
their support in the fears of dislocation on the part of workers and
firms. Removal of these obstacles depends upon the allaying of
these fears. A case may accordingly be made that it is in the national
interest to adopt a generous compensation programme to cover
most of the private costs caused by the repercussions of government
policy.
It should, however, be realised that the case for such assistance
rests on non-economic, namely equity, grounds. While it may seem
cavalier to suggest that the budgetary "costs" of any policyshouldbe
ignored, this is, in fact, what should be done from a national view-
point, as the budgetary expenditures do not reflect social costs,
merely income-transfers within society.12
12In closing this section, the reader's attention is drawn to two excellent studies on adjust-
ment assistance: Ronald and Paul Wonnacott, Free Trade between the United States and Canada
(Cambridge: Harvard University Press, 1967), Ch. 16, pp. 307-22; and Roy A. Matthews,
Industrial Viability in a Free Trade Economy (Toronto: University of Toronto Press, for the
Private Planning Association of Canada, 1971).
DESIGN OF AN ADJUSTMENT AssiSTANCE PROGRAMME

In the light of the discussion of adjustment costs there are several
characteristics which a good adjustment assistance scheme should
exhibit and any proposed international code of behaviour should
encourage these features where possible. The possible general
characteristics of such a code are discussed now before turning to
some specific details which might be included in any programme in
the light of the United States' experience with a programme in
operation since 1962.
An International Adjustment Assistance Code
Gerard and Victoria Curzon, of the Graduate Institute of Inter-
national Studies at the University of Geneva, have suggested that an
international adjustment assistance code should:
(a) "commit countries to setting up domestic adjustment
programmes;
(b) draw the line between proper and improper assistance;
and
(c) commit countries to multilateral negotiations for replacing
improper forms of assistance (that is, tariffs and non-tariff
barriers) by legitimate ones, on a reciprocal, conditional MFN
(most-favoured-nation) basis".13
When adjustment assistance is coupled with other forms of pro-
tection the programme should encourage the rapid removal of
the latter. In this respect, any international code should, if necessary
allow pressure from trading partners for the introduction of adjust-
ment policies, and for the reduction of reliance on alternative
protective measures. Such a feature would accelerate gains from the
increased trade, and also set consumer interest before those of
producers. Too much of existing GATT legislation possesses the
reverse bias. The major problem is that of requiring the importing
economy to bear some of the burden of adjustment instead of
shifting it all backwards to the exporting economy through trade
restrictions. The suggestion of Nathaniel Weinberg, the American
labour union economist, that the GATT should require countries
to have extremely generous compensation programmes for "lame-
duck" firms or labour in order to remove political obstacles to
Gerard and Victoria Curzon, Global Assault on Non-tariff Trade Barriers, Thames Essay
13
No.3 (London: Trade Policy Research Centre, 1972), pp. 31-33.

trade and liberalisation deserves consideration.14 This could take

the form of a requirement that a conntry's compensation to workers
nnemployed as a result of trade liberalisation be equal to the average
earnings in the affected industry.
As has been suggested, adjustment assistance might be triggered,
or the request for such aid documented, by mechanistic formulae
relating to "injury" through import growth rates. In deciding on
the commodity classification of imports to be used in such formulae,
the lessons learned from the operation of the Long Term Agreement
on Cotton Textiles should be borne in mind. It has been argued
that the narrow import categories used in that case have restricted
the flexibility of less developed conn tries in alterations of product-
mix.15 On the other hand, excessively wide commodity classes would
result in some efficient producers becoming eligible for relief just
because this product fell inside the classification. Whatever means of
classification is decided upon should not be arbitrary, but based on
the weights it is wished to attach to these two effects.
The timing or "staging" of such trade liberalisation as the adjust-
ment assistance programme is to accompany should be as short as is
politically possible. Ronald and Paul Wonnacott, of the University
of Western Ontario and the University of Maryland respectively,
point out that the speed of liberalisation may be both too fast and
too slow at the same time. It may be too fast in that even the first
stage of the liberalisation programme may confront enterprises with
bankruptcy and disturb domestic fmancial markets. It may be too
slow in that capital appropriate only for protection may be re-
installed as it wears out, imposing a social cost. 16 While a gradual
staging reduces the rate of obsolescence of the capital stock of the
affected industry, the costs associated with obsolescence are snnk
costs and should be disregarded. Further, if the adjustment to
increased imports is of an intra-industry nature, trade liberalisation
should be rapid. 17
The periodic exchange of information on the on-going national
programmes would allow greater forward planning and discussion
of the likely discriminatory effects of each conntry's programme.
1'Nathaniel Weinberg, Reservation No. 29, US Foreign Economic Policy for the I970s, op. cit.,
P· 54·
UKenneth W. Dam, The GATT Law and International Economic Organisation (Chicago:
University of Chicago Press, 1970), pp. JII-12.
liWonnacott and Wonnacott, op. cit., p. 312.
17Ibid., p. 308-n.
ADJUSTMENT ASSISTANCE
Governments need to be more aware of shifting trends in inter-

national productivity etcetera, to allow them to make forecasts of
the likely impact of such changes on domestic sectors. Information of
this type needs to be more readily available to industries likely to be
threatened. Each country's adjustment assistance programme should
be open to international scrutiny at such meetings so that account
may be taken of possible objections to proposed policies before they
are made operational.
National Adjustment Assistance Programmes
The private or sectoral costs alluded to in the previous section
of the paper are due to the two elements which comprise the process
of adjustment to changed market conditions. These elements may be
termed search and investment. The purpose of an adjustment
assistance policy should be the underwriting of the costs associated
with these two activities. The funds available to both labour and the
firm to support these activities vary with the time period available
for adjustment. The more the pressure from imports is staged through
gradual rather than immediate liberalisation, the less will be the
need for government assistance.
The process and cost of search refers to the market research a
company must undertake if it decides to keep the enterprise intact
and merely switch its production activity. Where labour becomes
unemployed, the affected individuals must look for jobs. The size
of these costs will, of course, depend on whether the enterprise is
being phased out or merely redirected. The costs of labour search
are already partly subsidised by national employment services for
all job dislocation, whether import-induced or not. The costs,
however, are far from being fully under-written. For unemployed
labour the amount of search, or period of unemployment, depends
on the wage rate the individual considers he is worth and the
opportunity cost of the search activity. Government retraining
programmes included in adjustment assistance provide state fmance
for a longer search than would otherwise be open to the unemployed,
while the retraining alters the distribution of the wage offers facing
the searcher.18
It has become common practice to consider, as a cost of adjust-
ment, the extra investment needed, for example, to switch product-
18See J. J. McCall, "Information and Job Search", Quarterly Journal of Economics, Cam-
bridge, Massachusetts, February, 1970, pp. IIJ-26.
152 SEAMUS o'CLEIREACAIN
lines. As already pointed out at an earlier stage of this paper, this is

not a social but a private cost. In addition to the sums to be spent on
new capital stock, there is a cost of adjusting the capital stock. Search
and investment activities are only undertaken by enterprises which
are to be kept intact although with a possible change in the com-
modities produced. Where it is deemed impossible to switch to a
new productive activity, an adjustment assistance policy should
encourage the closing down of inefficient firms and the payment of
compensation for capital losses incurred.
Turning to the detailed assistance to be provided to underwrite
these costs as well as capital losses, a policy programme might
include the following components:
ASSISTANCE TO LABOUR
1. As part of an international code of conduct, income losses

experienced by unemployed workers should be generously com-
pensated. As suggested above, these payments should be equal to the
average earnings in the affected industry prior to the need for
adjustment. The increase in the net budgetary cost of such generous
adjustment compensation may not be very great since the payments
are only made to those unable to fmd alternative employment and
the net increase in budgetary costs will be the difference between
the average industry earnings and the existing unemployment
compensation payments available to all workers.
2. Provision should be made for compensation for loss of pension
benefits, seniority rights and so on during any retraining or job-
search period. The effect of such losses on labour immobility is
considerable.
3· Job retraining and job-search costs should be adequately
financed. Grants or loans should be available to cover not only
family re-location costs, but also maintenance and travel costs
associated with both the search for job interviews, and the interviews
themselves. As mentioned above, the German industrial modernisa-
tion programme allows for a premium of 20 per cent to be added
to unemployment benefits of workers who undergo retraining.
Some such incentive should be incorporated in any labour adjust-
ment assistance programme.
4. The programme should avoid situations in which workers
accept unsuitable jobs under duress; that is, a "sit-and-wait" tactic
ADJUSTMENT ASSISTANCE !53
should not be heavily penalised. This would suggest a long period of

eligibility for adjustment assistance.
5· Allowance should be made for the early retirement of middle-
aged workers who have difficulty in obtaining new employment.
This should include an early waiving of age requirements for state
pensions, health schemes etcetera.
ASSISTANCE TO FIRMS
In cases where an industry, or part of it, may be made competi-

I.
tive again through economies of scale to be experienced from the
merger of firms, this should be encouraged if it is felt that consumer
interests are not likely to face monopolistic practices. An attempt
should somehow be made though to safeguard against the continued
subsidisation of such mergers. The "economies of scale" argument
has been considerably abused by West European governments in
recent years.
2. If it appears that the affected enterprise should be closed down,
compensation should be made for capital losses incurred.
3. Tax credits, accelerated depreciation allowances or subsidised
loans should be provided for firms that attempt to alter the com-
position of their plant and equipment in preparation for switching
lines of production. Subsidised switching to new products raises
again the defmitional problem surrounding the term "industry".
International agreement is needed to ensure that firms are not
subsidised to produce products which are in direct competition with
those in which it has been decided it does not possess a comparative
advantage. The fiscal assistance could include longer tax carry-back
of losses sustained in the sale of obsolete assets and longer carry-
forward of losses involved in the first few years of investment in
new activities.
4. Interim fmance should be made available during the period in
which the enterprise is still in the stage of conducting research into
new product-lines and drawing up its application for capital
assistance once it has been deemed eligible.
ASSISTANCE TO COMMUNITIES
Finally, in cases where the contraction of an industry or firm is

likely to result in severe local hardship to communities which have
relied heavily on the affected industry/firm for jobs and tax-revenue,
F*
154 SEAMUS o'CLEIREA CAIN
adjustment assistance policies should embrace commu nity develop-

ment projects to cushion the local effects of industrial contraction.
Administrative Dljficulties
In conclusion, the specific details of any program me should not
ignore United States' experience with the Trade Expansion Act of
1962.19 A number ofpoints deserve stress in the light of the American
experiences, and other economies may avoid repeating earlier
mistakes in the operation of such schemes.
In the United States' case, the time between initiation of an
application for assistance and actual receipt of assistance may be
divided into a number of clearly defmed stages, ranging from the
certification of injury, consideration of the application once injury
is established, to fmal delivery of assistance. The administration of
any proposed scheme must be streamlined to avoid the early Ameri-
can experience that sixteen months was needed on average between
application for assistance and final delivery. Such delays increase
uncertainty concerning eligibility and strengthen the protectionist
case. A further result of excessive delay is that much compensation
for workers may be retroactive. Under the United States system
workers are eligible to a maximu m of eighteen months of trade
adjustment assistance payments; in many cases, however, more than
eighteen months had elapsed since the application for assistance was
first considered. A primary concern of any adjustment assistance
program me should be to ensure that workers never exhaust their
entitlement to benefits. Such a target provides an implicit standard
of how successful the program me has been in not only bearing the
costs of adjustment, but, more importantly, an increasing flexibility
in resource allocation.
SUMMAR Y
The introduction of trade liberalisation involves both social and
private sectoral adjustment costs. These costs vary with the time
period allowed for liberalisation. They are due to the unemployment
of resources, which varies depending on whether the adjustment to
freer trade must be made instantaneously or may be staged.
The case for an adjustment assistance program me is strong on
UA detailed account is found in Marvin M. Fooks, "Trade Adjustment Assistance",

Williams Report, Papers, Vol. I, op. cit., pp. 343-66.
efficiency, equity and practical groWids. Adjustment assistance

schemes reduce the need for protection, and ensure that the benefits
of liberalisation to society are not excessively at the expense of a
small sector of society, albeit an inefficient sector. The introduction
of adjustment assistance should lessen the use made of the escape
clause, and of "volWitary" export restraints. Provision should be
made for sanctions to be imposed by trading partners in cases where
there is an Wiwillingness to use adjustment assistance in preference
to protective devices.
The time to elapse before adjustment programmes are triggered
could be agreed internationally by a formula similar to that pro-
posed in the United States in the Trade Bill of 1970 to define
market disruption. The trend of imports in previous years, and the
fraction of the home market captured by foreign suppliers, appear
in this formula.
CHAPTER 8
Position ofMFN Principle in

Future Trade Negotiations
by HUGH CORBET
The ftrst public sign that the United States Administration was
giving favourable consideration to the principal recommendations
of the Presidential Commission on International Trade and Invest-
ment Policy (the Williams Commission)! was a major policy
statement in London by William Eberle, President Nixon's Special
Representative for Trade Negotiations, in the course of which he
said:
"There are many alternative bases on which . . . wide-ranging
negotiations might be started. One possible approach which has
been proposed both in and out of government is an agreement
covermg:
(a) a formula and time-table for an across-the-board elimina-
tion of substantially all industrial tariffs;
(b) rules of competition relating to non-tariff barriers to
trade, services and investment;
(c) specific commitments aimed at opening world markets
for agricultural products and rationalising national farm
policies; and
(d) non-reciprocal tariff preferences in favour of developing
countries over the transition to tariff-free trade.
At the present time this particular set of propositions may seem very
grand. However started, on whatever basis, the need for starting
a continuous process of negotiation is increasingly evident."2
Mr. Eberle's London statement, like the Williams Report it
reflected, was in line with the broad measure of agreement which
1 Presidential Commission on International Trade and Investment Policy, United States
Government Printing Office, 1971), together with two volumes of papers prepared for the
Commission.
1 William D. Eberle, "Trade Issues for the 1970s", an Address by the Trade Policy Research
Centre, London, November 23, 1971.
I 57
rss HUGH CORBET
has been emerging from the comprehensive reappraisal of inter-

national economic policy that began in the United States immedi-
ately after the completion of the Kennedy Ronnd of tariff negotia-
tions nnder the General Agreement on Tariff and Trade (GATT)
and have since been extending to other conntries.
For a start, there has developed in Washington an inclination to
accept that the only constructive way of overcoming preferential
trading arrangements and restoring the principle of non-discrimina-
tion to respectability, and of avoiding an economic "cold war"
between the enlarged European Commnnity and the United States,
is for the developed conntries to enter into negotiations aimed at
dismantling all, or substantially all, tariffs on industrial goods
traded among themselves. There is the added argument that another
multilateral effort would have to be impelled by an objective
inspiring enough to induce in the major trading entities a political
commitment to its eventual success. Merely halving the tariffs that
remain might not be deemed worth the effort.3
In this connection, the GATT Director-General has urged that
"the experience of Europe, in the Common Market and EFTA
[the European Free Trade Association], has shown the value, in
getting rid of industrial tariffs, of the technique of progressive,
linear and automatic reductions". Olivier Long continued: "If the
Europeans have done this, cannot the other industrialised conntries
of the world do the same? The idea of achieving over a period of
years full industrial free trade among developed conntries is one
which deserves serious consideration."4
Another part of the general consensus is that the only constructive
way of dealing with the problem of "nnfair trade practices", more
academically described as non-tariff distortions of international
competition, is by negotiating commitments by governments to
codes ofbehaviour or rules of competition which are later elaborated
upon in further negotiations. It is also commonly argued-as in the
Williams Report-that, in order to provide as much scope as
possible for agreement to be reached, the removal of extant tariffs,
the solution to non-tariff methods of protection and the opening of
agricultural markets should be tackled in the same negotiations.
1 See Hugh Corbet and Harry G. Johnson, "Optional Negotiating Techniques on Industrial
Tariffs", Chapter 2 above.
4 0livier Long, "Toward Better Trade Relations in the 70s", Address to the Trade Policy
Research Centre and the Foreign Affairs Club, London, January 24, 1972.
POSITION OF MFN PRINCIPLE 159
In fact, it appears that if the United States is to gain Congressional

support for a worthwhile scheme of tariff preferences in favour of
developing countries, the proposals should be put to the legislature
in the framework of a broad trade strategy. And for such a strategy
to obtain enough political support not only in the United States
but also elsewhere, it will have to include provisions for large-scale
adjustment assistance to import competition.
To what extent this general consensus in the United States is
shared in other countries remains to be seen. From the studies that
have been published in other countries-especially in Canada,
Japan, the Netherlands, Germany and the United Kingdom-it
appears that there would be a close identity of views between trade
policy specialists in developed countries. In any event, the question
has arisen in discussions in the Organisation for Economic Co-
operation and Development (OECD) as to whether negotiations
on the above lines should be conducted on the traditional GATT
basis of non-discrimination. Article 1 of the General Agreement
requires most-favoured-nation (MFN) treatment to be accorded
unconditionally among all signatory countries except where, under
conditions laid down in Article 24, a customs union or a free trade
association is being formed. Two other exceptions are also provided
for in the General Agreement: for pre-existing preferential trading
areas and, under Part IV, for the benefit of and among developing
countries.
iMPACT OF EUROPEAN POLICY ON AMEluCAN 'fmNKING
The European Community's burgeoning portfolio of "associa-
tion" and other preferential trade agreementss has been compelling
Americans to reconsider their own continued adherence to the
principle of non-discrimination. In order to promote for politico-
strategic reasons a European political union, the United States
encouraged in the late 1950s the formation of the European Com-
munity, which broadly conformed with Article 24 of the GATT.
The United States was obliged to accept, because it also broadly
satisfied Article 24, the European Free Trade Association which the
United Kingdom negotiated with other members of the Organisa-
tion for European Economic Cooperation (OEEC) who were not
prepared to adhere to the Treaty of Rome with all it was then meant
6For a discussion of these agreements see various issues of European Community, London,
published by the Information Service of the Commission of the European Community.
I6o HUGH CORBET
to imply in political as well as economic terms.6

Americans were quite happy about the preferential trade agree-
ments which, in the name of European unity, the Common Market
negotiated in I958 with eighteen ex-colonies of members of the
European Community. They anyway supported the waiver of
GATT rules that had to be obtained. The United States went along
in the r96os with the extension by the Community of its association
agreements to four ex-colonies of a non-member. But it was not
happy about the preferential trade agreements that the Common
Market negotiated at the outset of the I970s with a number of
non-colonies around the Mediterranean, namely Spain, Israel and
some North African countries, adding to those negotiated earlier
with Greece and Turkey.?
Much of the European Community's "association" policy is
difficult if not impossible to reconcile with the GATT. And the
same goes for the thinly-disguised preferential trading areas since
been formed in other parts of the world. Apart perhaps from the
Anglo-Irish Free Trade Agreement, all of them, like their European
predecessors have failed to comply with the strict conditions laid
down in Article 24. s
There is another, maybe more potent factor, affecting the Ameri-
can attitude towards the European Community's association and
other preferential trade agreements. The political justification for
the agreements, the cause of European unity, is wearing rather thin
as events are viewed from across the Atlantic. The countries of the
European Community are free to unite themselves as tightly as they
wish, but to outside observers they have shown few signs of really
doing so, even for the proclaimed purpose of matching the United
States in power and influence. The "European idea" is of course
vigorously promoted by the Commission of the European Com-
munity and the old guard of the European Movement. But as the
6 The OEEC negotiations and the origins of EFTA are critically examined in Haruko
Fukuda, "First Decade of EFTA's Realisation", in Corbet and David Robertson (eds.),
Europe's Free Trade Area Experiment: EFTA and Economic Integration (Oxford and New York:
Pergamon Press, 1970).
7American attitudes towards the European Community's "association" arrangements have
been expressed on a countless number of occasions. But attention might be drawn to the
testimonies before the current series of hearings before the Joint Economic Committee:
A Foreign Economic Policy for the 1970s (Washington: US Government Printing Office, for
the Joint Economic Committee, United States Congress, 1970 and 1971), Parts 1-5.
8Kenneth W. Dam, The GATT Law and International Economic Organisation (Chicago and
London: University of Chicago Press, 1970), pp. 274-95.
POSITION OF MFN PRINCIPLE 161
Soviet threat to Western Europe has receded, and as the countries

of Western Europe have recovered their wealth and position, there
has been a noticeable decline of public interest in a supra-national
European union.9 Indeed, there is a tendency for proponents of
European unity to resort, unhappily, to le diji Americain {mistaking
it for le diji technologique) as the principal argument for the cause.
It is therefore understandable that serious doubts have been
expressed abroad about the wisdom of planning in the expectation
that Western Europe will unite in a full political sense. A distinction
needs to be drawn here between economic integration and political
unification.I o
Besides invoking the cause of European unity, the European
Community also emphasises "historical ties" and "special responsi-
bilities" to explain to the world at large its discriminatory trading
arrangements. Similar soi-disant explanations might have been pro-
claimed by others to justify discriminatory trading arrangements of
their own. To date both the United States and Japan have forgone
that option. And historical ties and special responsibilities were not
reason enough for the United Kingdom to develop the system of
Commonwealth preferences which already existed when the GATT
was agreed.
Thus the United States appears to be even less happy about the
prospect of the enlarged European Community of ten countries
negotiating: (i) a series of free trade agreements with the EFTA
neutrals-Austria, Finland, Sweden and Switzerland-a nd the other
non-applicants for full membership-P ortugal and Iceland-thereb y
bringing about the single market in Western Europe that the
OEEC sought in the late 1950s; and (ii) a further round of"associa-
tion" agreements designed to accommodate the Mediterranean,
African and Caribbean members of the Commonwealth, as well
as a number of island-states in the Indian and Pacific oceans. The
result could be a polarisation of the world economy around the
two major trading entities.
The enlarged European Community will account for well over
40 per cent of world trade. And if the EFTA and other associates
9At the Anglo-French summit meeting in May, 1971, President Pompidou and Edward
Heath, the British Prime Minister, played down the possibility of the European Community
devdoping the supra-national authority which is a prerequisite for an ecouomicand monetary
uuion.
1 0'J'his distinction is discussed in Corbet, "Role of the Free Trade Area", in Corbet and
Robertson, op. cit., pp. 31 and 32·
162 HUGH CORBET
are added the bloc will accoWlt for over half of international trade.
Indeed, if the centrally-planned economies are put to one side, the
European sphere of influence will accoWlt for over 6o per cent of
free world trade.
A possible division of the non-Communist world into economic
spheres of influence is alarming informed opinion in Washington
and Brussels. To date the United States has not given any public
indication of interest in a special trading bloc. But for monetary,
trade and political reasons, increasing attention is being paid in
American policy circles to the possibilities of "a dollar area" and
"the Pacific basin idea", which have provoked expressions of
concern in Brussels about the implications of America also embark-
ing on a deliberate policy of developing special economic ties.u
The prospective trend towards North-South zones is thus serving
to crystallise opinion on the position of the MFN principle in future
multilateral trade negotiations.12
EMPHASIS ON PRINCIPLE OF RECIPROCITY
Serious doubts about the continued usefulness of the MFN
principle go back a number of years. The principle has been criti-
cised on the groWlds that it is expressed only in terms of coWltries
even though coWltries can still be discriminated against by shifting
tariffs up or down on the commodities in which they have an
interest.13 This may be a theoretical argument. But there is nothing
theoretical about the imposition of "voluntary export restraints" on
coWltries possessing too much competitive power.
The principle of non-discrimination has long ceased to be con-
sidered sacrosanct in American policy quarters. At the end of 1966,
when the Kennedy RoWld negotiations were in serious difficulty,
there was a proposal in the Joint Economic Committee of the
United States Congress that the Administration should continue
to negotiate with coWltries willing to reduce tariffs, but the reduc-
tions should not be passed on to coWltries unwilling to reciprocate.14
11For example, see the address by Ralf Dahrendorf, the European Community's Com-
missioner for External Trade, to the European-Atlantic Group, London, March 27, 1972.
lBJn this connection, see Theodore Geiger, Transatlantic Relations in the Prospect of an
Enlarged European Community (London, Washington and Montreal: British-North American
Committee, 1971).
llpanel of Experts, Trends in International Trade, Haberler Report (Geneva: GATT Secre-
tariat, 1958).
11Henry Reuss and Robert Ellsworth, Off Dead Centre: Some Proposals to Strengthen Free
POSITION OF MFN PRINCIPLE
That was in fact American policy up to 1923. There was then, and
there remains still to a certain extent, a reluctance to abandon alto-
gether the principle of unconditional MFN treatment.
But the emphasis is increasingly being put on the principle of
reciprocity.15 Ever since President Nixon's first foreign trade
message to the United States Congress on November 18, 1969,
senior members of his Administration have been stressing the need
for reciprocity in American trade dealings. It is as a means of
ensuring reciprocity that renewed and greater interest has been
shown in "MFN on condition".
If, however, the United States and other developed countries
were to discard unconditional MFN, the way would be opened to
an uncontrolled outbreak, all round the world, of discriminatory
trade arrangements in small groups of products and among small
groups of countries.16 Much that has been achieved in six rounds
of GATT negotiations would be undone and the achievement of
an open world economy would suffer a severe setback.
This would be more serious, fundamentally, than is generally
realised in that two groups of countries have been beginning to
expect more, not less, from the international trading system. With
the restoration of some semblance of order in world economic
affairs, following the disorders of the 1930s and 1940s, they have
begun to entertain hopes that a coordinated approach to their
problems might at last be possible. The two groups overlap.
First, there are the exporters of temperate-zone agricultural
products, some of which have been parties to the GATT from the
outset, but have not benefitted greatly to date from its principles
and rules. Then there are, secondly, the developing countries,
which are not in a position to negotiate on a reciprocal basis with
industrially advanced countries, but are looking to them for markets
for their products.17
The Williams Report went some way towards reconciling the
World Economic Cooperation (Washington: US Government Printing Office, for the Joint
Economic Committee, United States Congress, 1965).
15For a discussion by an experienced trade negotiator, see Randall Hinshow, The European
Community and American Trade (New York: Praeger, for Council on Foreign Relations, 1964).
16The point is discussed more fully in Gerard and Victoria Curzon, "Options After the
Kennedy Round", in Johnson (ed.), New Trade Strategy for the World Economy (London:
Allen & Unwin, 1969), pp. 54-56.
17The point is discussed more fully in Corbet, "Global Challenge to Commercial Dip-
lomacy", Pacific Community, Tokyo, October, 1971.

HUGH CORBET
fundamental conflict which has existed in American commercial

policy between adherence to the principle of non-discrimination
and the objective of achieving reciprocity in multilateral trade
negotiations. The report recommended that reciprocity should not
be interpreted as an objective to be achieved within self-contained
compartments of trade, investment or finance. Rather it "should
be conceived in terms of the whole set of negotiations".ts The
problem is how to reassure the United States Congress in advance
that such a broad interpretation of reciprocity is going to be more
effective than the more specific interpretation of the past. This is
important because other governments have to be satisfied that in
whatever negotiations are eventually embarked upon the United
States Administration has the support of Congress.
Recalling what happened with the American Selling Price Sys-
tem of customs valuation, which the United States agreed in the
Kennedy Round negotiations to abolish but was unable in the end
to do so because of Congressional objections, the European Com-
munity-or rather spokesmen for it-has been underlining the need
for the United States to obtain legislative authority in advance of
the next round of multilateral trade negotiations. The Community
has also been underlining the need for reciprocity in whatever
negotiations are embarked upon. On the question of conditional
MFN, it is interesting to note that the European Community,
along with Japan, has adhered to the GATT Anti-dumping Code
on that basis and negotiations on industrial standards have been
proceeding on the same basis. 19
As The Guardian has observed editorially, the implication of
Mr. Eberle's London statement was "a free trade association in
manufactured goods embracing all the world's developed coun-
tries".2o The "fundamental conflict" might therefore be resolved in
a negotiation under Article 24 of the GATT. This would enable
the goal of overall reciprocity to be pursued without raising the
question of dispensing with the general application of the principle
of non-discrimination. Yet in practice it would not detract from
the universality of the negotiations since none of the major trading
countries could afford to abstain.
lBWilliams Report, op. cit., p. 310.

19Brian Hindley, Britain's Position on Non-tariff Protection, Thames Essay No. 4 (London:
Trade Policy Research Centre, 1972), p. 47·

2°The Guardian, London, November 24, 1971.
UsE OF ARTICLE 24
If an Article 24 negotiation embraced all developed cmmtries,
how would it differ from the unconditional MFN approach, as
applied in previous rounds? In considering a negotiation under
Article 24 it would not be necessary for all major trading countries,
or for all the major industries within them, to agree simultaneously
on the desirability of further freeing trade. By contrast to the
unconditional MFN approach, the pace of negotiations would thus
be determined-in the words of Chapter 2 above-by the most
eager, not by the most reluctant. Those willing to make concessions
on tariffs, non-tariff barriers and agricultural policy would not be
obliged to give a "free trade" to those unwilling to reciprocate.
Future trade negotiations will mainly be between the United
States, Japan and an enlarged European Community. If conducted
again on an unconditional MFN basis there could be a greater
temptation than before for Canada, Australia, New Zealand, South
Africa and perhaps the European neutrals besides others to hold
back and enjoy the "free ride", benefiting from the concessions
negotiated by the economic super-powers without making any, or
as many, concessions in return.Zl It is doubtful though whether
they would get away with that for very long.22
There is a final point that ought to be made. Any complaints and
arbitration procedure that is designed to accompany a multilateral
effort to overcome remaining tariffs, non-tariff barriers and agri-
cultural problems would be greatly strengthened if an international
trade agreement among developed countries on the next phase in
the liberalisation of world trade could be negotiated on a con-
ditional MFN basis The idea have been explored by Gerard and
Victoria Curzon of the Graduate Institute of International Studies
at the Universitv of Geneva.23
Previously, negotiations under the GATT have required con-
cessions by any one country to be extended unconditionally to all
other signatory countries, regardless of what concessions the latter
make in return. Enforcement has always been one of the GATT's
problems, the Curzons argue, "there being no provision for punish-
21 Curzon and Curzon, Global Assault on Non- Tariff Trade Barriers, Thames Essay No. 3
22The foregoing argument on conditional MFN was developed, as a basis for a broad trade
strategy, in Corbet, "Ein Programm fur den Wirtschaftsfrieden", Wirtschaftsdienst, Hamburg
January, 1972.
23 Curzon and Curzon, Global Assault on Non-tariff Trade Barriers, op. cit., pp. 8-Io.
166 HUGH CORBET
ing a member for failure to conform to internationally agreed

rules". Moreover, the MFN clause itself is an obstacle to enforce-
ment, because it makes it impossible to ostracise a country as a
punishment for misconduct-an effective way of guaranteeing
respect for international trade rules.
Three reasons can be given as to why retaliation under the
present GATT system is a puny weapon.
First, it is not applied collectively against the offender, but
individually by the plaintiff. And if the plaintiff is economically
smaller than the offender, as is all too often the case, there is little
hope of a satisfactory settlement.
Secondly, retaliation is not applied to the entire trade of the
offender, but selectively in order to achieve a rough balance
with the size of the offence.
Thirdly, retaliation (under Article 23) implies a collective
authorisation for the plaintiff to suspend the application of an
obligation to the trade of the offending party, without ostensibly
obtaining its consent to the treatment. This has meant that the
signatory countries to the GATT have been very parsimonious
in this respect.
Professor and Mrs. Curzon put forward proposals for strengthen-
ing the GATT' s enforcement mechanism. They suggest that a
country imposing trade restrictions in violation of GATT obli-
gations should be made to pay a fine, which could be used to com-
pensate injured producers abroad for their loss of markets. For this
there would need to be an appropriate complaints and arbitration
procedure.
"The next step in a graduated enforcement mechanism", the
Curzons continue, "would be collective ostracism of the offending
member if it refused to pay the fine assessed. In practical terms, this
would imply the temporary suspension of GATT tariff rates by all
members of the system against the trade of the offender and the
re-introduction of basic general duties in respect of that one mem-
ber." This would be possible if international trade agreements were
put on a conditional MFN basis.
"If the offending member still refused to comply with the award
of the GATT's court of arbitration, the signatory countries would
have to threaten it with expulsion and, if necessary, actually expel
it in the unlikely event of its remaining indifferent to these collective
pressures. "
Under the principle of unconditional MFN treatment, it

has been impossible for signatory countries to the GATT to with-
draw concessions to those trading partners who do not comply with
internationally agreed rules of behaviour. Having an effective
sanction against governments which do not comply with inter-
national agreements would strengthen the positions of all govern-
ments vis-a-vis domestic vested interests that are desirous of special
protection.
Selected Bibliography
Set out below is a selected bibliography of, for the most part, recent
contributions to the very considerable literature that has been built
up on current international commercial policy issues. The biblio-
graphy has been designed for the benefit of both general readers and
specialists. But it is in no sense meant to be a comprehensive list.
On the contrary, contributions to professional journals have been
put to one side, although some general articles are given. Included in
the bibliography are a number of publications of the Trade Policy
Research Centre.
System and Conditions

of World Trade
HENRY G. AuBREY, Atlantic Economic Cooperation: The Case of the OECD (New
York: Praeger, for the CoWicil on Foreign Relations, 1967).
GERARD CURZON, Multilateral Commercial Diplomacy (London: Michael Joseph,
1965).
KENNETH W. DAM, The GATT Law and International Economic Organisation
(Chicago and London: University of Chicago Press, 1970).
RicHARD N. GARDNER, Sterling-Dollar Diplomacy, revised edition (New York:
McGraw-Hill, 1969).
THEODORE GEIGER, Transatlantic Relations in the Prospect of an Enlarged European
Community (London, Washington and Montreal: British-North American
Committee, 1971).
HARRY G. JOHNSON, The World Economy at the Crossroads (Oxford: Clarendon
Press, 1965 ).
CHARLES P. KlNDLEBERGER, Power and Money (London: Macmillan, 1970).
KAREN KocK, International Trade Policy and the GATT 1947-67 (Stockholm:
Almqvist & Wiksell, 1969).
GARDNER PATTERSON, Discrimination in International Trade: Policy Issues 1945-65
(Princeton: Princeton University Press, 1966).
PANEL OF EXPERTS, Trends in International Trade, Haberler Report (Geneva: GATT
Secretariat, 1958).
I7I
172 BIBLIOGRAPHY
ALFRED MAI:ZELS, Industrial Growth and World Trade (Cambridge: Cambridge

University Press, 1963).
DAVID W. SLATER, World Trade and Economic Growth (Toronto: University of
Toronto Press, for the Private Planning Association of Canada, 1968).
General Trade Policy Issues

F. A.M. ALTING VON GEUSSAU (ed.), Economic Relations after the Kennedy Round
(Tilburg: John F. Kennedy Institute, 1969).
BELA BALASSA, Trade Liberalisation among Industrial Countries: Objectives and Alter-
natives (New York: McGraw-Hill, for the Council on Foreign Relations, 1967).
BELA BALASSA et al., Studies in Trade Liberalisation: Problems and Prospects for the
Industrial Countries (Baltimore: Johns Hopkins Press, 1967).
C. FRED BERGSTEN, "Crisis in US Trade Policy", Foreign Affairs, New York,
July, 1971.
C. FRED BERGSTEN et al., Reshaping the International Economic Order (Washington:
Brookings Institution, 1972).
JAGDISH BHAGWATI, Pure Theory of International Trade: a Survey, Surveys of
Economic Theory, Vol. II (London: Macmillan, 1965).
DUNCAN BURN and BARBARA EPSTEIN, Realities of Free Trade: Two Industry Studies
(London· Allen & Unwin, for the Trade Policy Research Centre, 1972; and
Toronto: University ofToronto Press, 1973).
RICHARD N. CooPER, The Economics of Interdependence: Economic Policy in the
Atlantic Community (New York: McGraw-Hill, for the Council on Foreign
Relations, 1968).
HUGH CoRBET, "Global Challenge to Commercial Diplomacy", Pacific Com-
munity, Tokyo, October, 1972.
W. M. CoRDEN, Recent Developments in the Theory ofInternational Trade (Princeton:
International Finance Section, Princeton University, 1965).
W. M. CoRDEN, The Theory of Protection (Oxford: Clarendon Press, 1971).
THOMAS B. CURTIS and RoBERT VASTINE, The Kennedy Round and the Future of
American Trade (New York: Praeger, 1971).
WILLIAM DIEBOLD, JR., The United States and the Industrial World: American Foreign
Economic Policy in the 1970s (New York: Praeger, for the Council on Foreign
Relations, 1972).
JoHN W. EvANs, US Trade Policy: New Legislation for the Next Round (New
York: Harper and Row, for the Council on Foreign Relations, 1967).
Future of US Foreign Trade Policy, Vols. I and II (Washington: US Government
Printing Office, for the Joint Economic Committee, Congress of the United
States, 1967).
H. EDWARD ENGLISH, Transatlantic Economic Community (Toronto: University
ofToronto Press, for the Private Planning Association of Canada, 1968).
BIBLIOGRAPHY 173
A Foreign Economic Policy for the 1970s, Vols. I-IV (Washington: US Government
Printing Office, for the Joint Economic Committee, Congress of the United
States, 1970).
Foreign Trade: a Survey of Current Issues (Washington: US Government Printing
Office, for the Committee on Finance, United States Senate, 1971).
Foreign Trade, Hearings before the Subcommittee on International Trade, Com-
mittee on Finance, United States Senate, Vols. 1 and 2;(Washington: US Govern-
ment Printing Office, for the Senate Committee on Finance, United States
Congress, 1971).
THOMAS M. FRANCK and EDWARD WEISBAND (eds.), A Free Trade Association
(New York: New York University Press, 1968).
THEODORE GEIGER and SPERRY LEA, "The Free Trade Area Concept as Applied
to the United States", in Issues and Objectives of US Foreign Trade Policy (Wash-
ington: US Government Printing Office, for the Joint Economic Committee,
Congress of the United States, 1967).
H. G. GRUBEL and HARRY G. JoHNSON (eds.), Effictive Tariff Protection (Geneva:
GATT Secretariat and Graduate Institute of International Studies, 1971).
GoiTFRIED HABERLER, A Survey of International Trade Theory (Princeton: Inter-
national Finance Section, Princeton University, 1961).
RANDALL HINSHAW, The European Community and American Trade (New York:
Praeger, for the Council on Foreign Relations, 1964).
Issues and Objedives of US Foreign Trade Policy (Washington: US Government
Printing Office, for the Joint Econmnic Committee, Congress of the United
States, 1967).
HARRY G. JoHNSON, Money, Trade and Economic Growth (London: Allen & Unwin,
1962.
HARRY G. JOHNSON, Comparative Costs and Commercial Policy Theory for a Develop-
ing World Economy (Stockholm: Almqvist & Wiksell, 1968).
HARRY G. JoHNSON {ed.), New Trade Strategy for a World Economy {London: Allen
& Unwin, for the Trade Policy Research Centre, 1969; and Toronto: University
ofToronto Press, 1970).
HARRY G. JoHNSON, "Some Aspects of the Multilateral Free Trade Association
Proposal", Manchester School, Manchester, September, 1969.
HARRY G. JOHNSON, "Trade Challenges Confronting Commonwealth Countries",
International Journal, Toronto, Winter, 1969-70.
HARRY G. JOHNSON, "The Case for a Multilateral Free Trade Association: the
Asian Interest", The Philippine Economic Journal, Manila, Vol. IX, No. I, 1970.
HARRY G. JoHNSON {ed.), Trade Strategy for Rich and Poor Nations {London: Allen
& Unwin, for the Trade Policy Research Centre, 1971; and Toronto: University
ofToronto Press, 1971).
HARRY G. JoHNSON, Aspeds of the Theory of Tariffs {London: Allen & Unwin,
1971).
MoRDECHAI KREININ, Alternative Commercial Policies: Their Effid on the American
Economy {Ann Arbor: Institute for International Business and Economic
Development Studies, Michigan State University, 1967).
174 BIDLIOGRAPHY
MORDECHAI KREININ, Trade Arrangements among Industrial Countries: EJfects on

the United States {Baltimore: Johns Hopkins Press, 1967).
FRANK McFADZEAN et al., Towards an Open World Economy {London: Macmilla n,
for the Trade Policy Research Centre, 1972).
JAMES E. MEADE, The Theory of Customs Unions {Amsterd am: North-H olland,
1955).
JAMEs E. MEADE, The Theory of International Economic Policy: Trade and Welfare
{London : Oxford Universi ty Press, 1955).
HARALD B. MALMGREN, "The New Posture in US Trade Policy", The World
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HARALD B. MALMGREN, International Economic Peacekeeping in Phase II (New York:
Quadran gle, for the Atlantic Council of the United States, 1972).
RoY A. MATTHEWS, Industrial Viability in a Free Trade Economy (Toronto : Univer-
sity of Toronto Press, for the Private Planning Association of Canada, 1971).
RAYMOND F. MIKESELL, "Changin g World Trade Patterns and America' s Leading
Role", The Annals, Philadelphia, July, 1969.
JoHN M. MUNRo, Trade Liberalisation and Transportation in International Trade
(Toronto : Universi ty of Toronto Press, for the Private Planning Association
of Canada, 1969).
ALFRED C. NEAL, "Econom ic Necessities for the Atlantic Commun ities", Foreign
Affairs, Mew York, July 1967.
A New Trade Strategy for Canada and the United States {Washin gton D.C. and
Montreal : Canadian -America n Committ ee, 1966).
PETER G. PETERSON, A Foreign Economic Perspective {Washin gton: Council on
Internatio nal Economi c Policy, Executive Office of the President, 1971 ).
RICHARD CAVES, HARRY G. JOHNSON and PETER B. KENEN (eds.), Trade, Growth
and the Balance ofPayments, Essays in Honour of Gottfried Haberler {Amsterdam:
North-H olland, 1965).
BERm OmiN, Interregional and International Trade, revised {Cambrid ge, Mass.:
Harvard Universi ty Press, 1967).
ERNEST H. PREEG, Traders and Diplomats {Washin gton: Brooking s Institutio n,
1970).
PRESIDENTIAL COMMISSION ON INTERNATIONAL TRADE AND INvESTMENT PoLICY,
United States International Economic Policy in an Interdependent World, Williams
Report(W ashingto n: US Governm ent Printing Office, 1971), with two volumes
of technical papers under the same title.
HENRY S. REuss and RoBERT ELLSWORTH, Off Dead Centre: Some Proposals to
Strengthen Free World Economic Co-operation {Washin gton: US Governm ent
Printing Office, for the Joint Economi c Committ ee, Congress of the United
States, 1965).
DAVID RoBERTSON, International Trade Policy (London: Macmilla n, 1972).
PETER RoBSON {ed.), International Economic Integration, Readings (Harmon dsworth,
Middx.: Penguin, 1971 ).
BIBUOGRAPHY 175
WILLIAM RoTH, "The President's Trade Policy Study", The Atlantic Community
Quarterly, Washington 1968).
JEAN RoYER, The Liberalisation of International Trade during the Next Decade (Paris:
International Chamber of Commerce, 1969).
PAUL A. SAMUELSON (ed.), International Economic Relations (London: Macmillan,
for the International Economic Association, 1969).
SPECIAL REPRESENTATIVE FOR TRADE NEGOTIATIONS, Future United States Foreign
Trade Policy, Roth Report (Washington: US Government Printing Office,
1969).
PAUL STREETEN and HuGH CoRBET (eds.), Commonwealth Policy in a Global Context
(London: Frank Cass, for the Oxford Institute of Commonwealth Studies and
the Trade Policy Research Centre, 1971).
The United States and the European Community: Policies for a Changing World
Economy (New York: Committee for Economic Development, 1971).
US Foreign Economic Policy for the 1970s: a New Approach to New Realities, a Policy
Report by a NPA Advisory Committee (Washington: National Planning
Association, 1971).
SIDNEY WELLS, Trade Policies for Britain (London: Oxford University Press, for
the Royal Institute of International Affairs, 1966).
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Agricultural Adjustment in Developed Countries (Rome: Food and Agriculture
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DENIS BERGMANN et al., A Future for European Agriculture, Atlantic Paper No.4
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BYRON BERNSTON, 0. H. GooLSBY and C. 0. NoHRE, The European Community's
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JoHN 0. CoPPOCK, Atlantic Agricultural Unity: Is it Possible! (New York: McGraw-
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BRIAN FERNoN, Issues in World Farm Trade: Chaos or Cooperation! Atlantic Trade
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JoHN FERRis et al., The Impact on US Agricultural Trade of the Accession of the United
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Institute of International Agriculture, Michigan State University, 1971).
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J. PrucE GITTINGER, North American Agriculture in a New World (Washington and

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FRANK 0. GROGAN (ed.), International Trade in Temperate-Zone Products (Edinburgh:
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T. E. JosLING, Agriculture and Britain's Trade Policy Dilemma, Thames Essay No.2
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JoHN MARsH and CHRISTOPHER RITsoN, Agricultural Policy and the Common Market
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BELA BALASSA, "Trade Creation and Trade Diversion in the European Common
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Towards An Open-World-Economy by Frank McFadzean, Sir Alec Cairncross, W. M. Corden, Sidney Golt, Harry G. Johnson, J. E. (James Edward) Meade, T. M. Rybczynski (1972)

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Towards An Open-World-Economy by Frank McFadzean, Sir Alec Cairncross, W. M. Corden, Sidney Golt, Harry G. Johnson, J. E. (James Edward) Meade, T. M. Rybczynski (1972)

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© Trade Policy Research Centre 1972

So ftc over reprint of the hardcover 1st edition 1972

All rights reserved. No part of this publication

First published 1972 by

ISBN 978-1-349-01714-0 ISBN 978-1-349-01712-6 (eBook)

Sir Alec Cairncross W. Corden

with Background Papers by

in charge of the Centre's research activities, while the Director is Mr.

Part I General Statement

Part II Background Papers

JAMES MEADE, a Fellow of Christ's College, University of

T. M. RYBCZYNSKI, Chief Economist at Lazard Bros. & Co.

Authors of Background Papers

T. E. JOSLING, a Lecturer in Economics at the London School of

SEAMUS O'CLEIREACAIN is a Trade Policy Research Centre

DAVID ROBERTSON is a Reader in Economics at the University

DAVID WALL, Lecturer in Economics at the University of Sussex,

Proposals for Future Trade Strategy

the IBRD hold common annual meetings at which specific prob-

fact or in the general tlllderstanding of the issues and objectives of

placency about the international system that had developed since

The statement begins with a brief outline of what is considered

Since the conclusion of the Kennedy Round negotiations there

associated with agriculture, the rules governing trade in agricultural

trade, if they are tackled simply on a piecemeal or an item-by-item

The latter is the declared objective of the European Commu nity,

further multilateral trade negotiations, one of the objectives should

(d) negotiations for an agreement on progressive, linear and

is such to make bargaining possible among advanced countries on a

"national security" or "national interest", from a general movement

11 The position of developing-country exports is discussed in Chapter 4 below.

Tariff-free trade among the developed countries would eliminate

cope with increased foreign competition. But a sharp and sudden

There is a case for fixing quotas in terms of physical quantities

attracted more attention in recent years, notably public procurement

much effect in distorting comparative advantage among countries in

barriers to trade should be broached in stages. As a :first stage, effort

assistance policies has been emphasised. The point is developed

is as desirable as competition in the provision of visible goods;

with the aforementioned defects of the international monetary

principles and procedures for liberalising trade in capital assets and

ing average farm size and promoting efficiency by various

programmes in the United Kingdom in T. E. Josling and Donna Hamway, "Distribution of

labour migration and improved efficiency with short-run direct

(a) The users of the produce, such as domestic millers,

coWltries. First, foreign trade per se is a subordinate consideration

payments grounds, and on the other to the social and political

of help is needed; hence the case for adjustment assistance. If we

that tariff reductions should of right be equally available uncondi-

21The conditional MFN approach, as a negotiating technique, is explored in Chapter 8

Anti-dumping Code and negotiations on industrial standards have

obviously fits the specification would be the negot1at10n of a

GATT and other organisations concerned with international trade

international economic developments now provided by the annual

among developed cotmtries, (ii) non-tariff distortions of international

Throughout the report it is emphasised that a prerequisite for an

approach is more likely than a direct confrontation to yield worth-

MFN basis.) An equal commitment from all the major tracling

Commercial Policy and the Monetary

In a fundamental sense, the international monetary crisis precipitated

measures and by recourse to a protectionist device (the temporary

country. Early concern about this problem reflected memories

exchange-rate flexibility was accordingly instituted. But the