Press Release: IMF Executive Board Approves Trade Integration Mechanism
April, 13, 2004

Fund Support for Trade-Related Balance of Payments Adjustments
February 27, 2004

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Conditionality

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IMF Quotas -- A Factsheet

The IMF's Trade Integration Mechanism (TIM) -- A Factsheet

The IMF and the World Trade Organization -- A Factsheet

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Transcript of a Teleconference with Journalists on:
"Trade Integration Mechanism"

Hans Peter Lankes, Trade Policy Division Chief, Policy Development and Review Department; and William Murray, Media Relations Division, Deputy Chief, External Relations Department
International Monetary Fund
Tuesday, April 13, 2004

MR. MURRAY: Thank you very much. Thanks for joining us today. I'm Bill Murray, Deputy Chief of Media at the IMF in Washington. We're briefing on discussions by the Executive Board related to trade issues. By now, you should have received a press release regarding the Board discussions earlier this month. And on the Fund's external website, you will find now a paper entitled, "Fund Support for Trade-Related Balance of Payments Adjustments."

Hans Peter Lankes, who is the Chief of our Trade Policy Division, within the IMF's Policy Development and Review Department, will have some opening remarks, and then we'll take questions from you regarding the paper and regarding the press release we just issued.

Now, let me turn the table over to Mr. Lankes. Hans Peter?

MR. LANKES: Thank you very much, and good morning. I'd like to first give you a little bit of background.

In the context of the Doha Round, there has been a number of mostly smaller countries that have been concerned about the possible downsides of liberalization. And the WTO and several individual members of the WTO have, on different occasions over the past year, called on the IMF and the World Bank to help allay these concerns.

Now, apart from the well-known worries about loss of tariff revenue and dislocation from reduced protection, there are also issues that have played less of a role in the past. One is the erosion of the value of preferential market access in the context of multilateral liberalization. Another is changes in the food terms of trade as a result of reductions in agricultural subsidies.

Now, in addition to these worries, which are specific to agreements under negotiation in the Doha Round, there are also worries about possible adverse effects of the phasing out of textile quotas, which are part of the implementation agenda of the Uruguay Round, but are becoming particularly relevant towards the end of this year.

These issues, three issues I mentioned, have in common that they relate to the liberalization of export markets and of the subsidy regimes of other countries and not changes in the country's own import regime. Together, they have led a number of countries to question the value to them of an ambitious liberalization agenda under the Doha Round.

Now, having analyzed the implications of third country liberalization, we here at the Fund believe that in the large majority of cases, countries have very little to fear. The effects tend to be small, and they tend to be distributed over a long period of time, but there is a minority of countries where the effects may be larger, and there is some uncertainty over their timing, especially for the impact of the phase out of textile quotas and preferences under certain commodity regimes such as sugar and bananas.

These changes in the trade environment within the Doha Round or similar nondiscriminatory liberalization require the affected economies to adjust either by strengthening the competitiveness of existing export sectors or developing new ones and may have temporary balance of payment implications. It is the purpose of the Trade Integration Mechanism which is the policy that the IMF Board has now approved to provide added assurances to countries that the IMF will support them, both in identifying the nature and the size of the shocks and, where necessary, through financial assistance to help strengthen their balance of payments.

Quickly, on the modalities of this Trade Integration Mechanism, let me briefly describe how this will work:

First, countries that face such shocks, again, shocks caused by liberalization in third country markets, not their own, a country facing such shocks and asking for assistance will need to do so either in the context of an existing Fund arrangement, standby arrangement, PRGF or an extended Fund facility or in requesting a new one. The TIM is not a stand-alone facility. It is, in fact, not a facility, but a policy operating through the conventional facilities of the Fund.

Second, following a request, Fund missions would establish with the authorities a baseline on the anticipated size and timing of the shock. This baseline would be factored into the medium-term balance of payments and may give rise, if necessary, to additional access to funding through the underlying arrangements. If this happens in the context of a regular review of the underlying arrangements, then the TIM—the Trade Integration Mechanism—offers scope for augmenting that underlying arrangement.

And, third, if at a later date it turns out that the shock was larger than anticipated, the TIM offers the possibility of a rapid topping-up of access up to 10 percent of their quota with the IMF and, if necessary, outside the regular review cycle and following simplified procedures. This is the so-called deviation feature.

It would, however, have to be established that the larger-than-anticipated shock was due to third country liberalization and not the result of other factors and that the Fund-supported program remains broadly on track.

Conditionality in a program that incorporates the TIM would not necessarily differ from a program without, although, of course, there would be a particular focus on those measures and policies that would allow the economy to adjust rapidly to the new trade reality. Augmentation under the deviation feature is not expected to give rise to additional conditionality.

Now, to close, just briefly on the financial implications that we expect. The balance of payment shock identified under the TIM, could, in principle, be tackled under regular arrangements in the absence of the TIM, as well, but we expect the TIM to result in a sharper focus on these issues, more analytical work to identify the problems, and most likely a greater willingness by the Board having established this policy to provide additional access to Fund resources in order to mitigate the balance of payment implications.

All together, in a high-case scenario in which all countries potentially affected would avail themselves of the TIM, that is, 31 PRGF countries and 17 non-PRGF countries in our preliminary estimates, we have projected the funding associated with the TIM at a maximum of $600 million in the PRGF and $850 million in the general resources account. Now, again, this is a high-case scenario. It is very hard to predict exactly, in part, because the counterfactual is difficult to construct—even if countries do not avail themselves of the TIM, these events are obviously going to happen, are going to have an impact on their balance of payments and on their discussions with the Fund.

Thank you.

MR. MURRAY: That's great. Thanks, Hans Peter.

Now, let me open the floor to any questions you might have regarding TIM, regarding the paper that we have just released today.

QUESTION: I have a question just to clarify when this mechanism would be appropriate. It's going to be for the effects related to the Doha Round or could this also be for effects resulting from regional Free Trade Agreements? And I have a follow-up, too.

MR. LANKES: It is limited to the effects of nondiscriminatory liberalization. That could be in the context of the Doha Round or it could be done unilaterally. For instance, if the European Union were to reform its sugar regime, then that would be covered because it would be essentially equivalent to actions that might have been agreed in the Doha Round. It will not cover liberalization in a discriminatory context, such as regional arrangements or bilateral arrangements.

QUESTION: And for the amount of money that you said would be available for the PRGF countries and the 18 non-PRGF countries, it's $600 million per country for PRGF and $850 million did you say for non-PRGF? And what are some of the—well, I can look that up, I guess. Which countries? I'm just assuming it's like Malaysia, you mentioned a lot of the textile-exporting countries might be good candidates for this mechanism?

MR. LANKES: Well, first, there's not a particular amount earmarked for this policy. This is just an estimate of what, under certain scenarios, we would expect to happen.

QUESTION: But it was per country rather than aggregate for the countries. That is all I was just trying to—

MR. LANKES: It was aggregate across all those countries that we think are vulnerable and either have a Fund program or may request one as a result. Now, many of these are fairly small countries. So, as a percentage of their quota with the IMF, these amounts can be more significant than that.

The type of countries that you have are, first of all, a number of countries that may have difficulties competing in the new non-quota environments in the textiles market. Now, there are all sorts of estimates out there which countries will be competitive, and which will not, and what sectors, et cetera, and it's very hard to be very precise about that. But we do have, based on existing work and some simulations we have done ourselves, we have come up with some 10 to 20 countries that we would feel might be vulnerable to those shocks.

Then, there is a second group of countries, mostly very small countries heavily dependent on one particular commodity, that has preferential access, such as sugar and bananas. You have several island economies in the Caribbean, certain smaller African countries that might be particularly vulnerable to that. So that's kind of the realm of countries.

The paper, which has been now posted on our website, on Pages 9 and 10, shows some results of our empirical estimates. It lists countries that seem to be particularly vulnerable to preference erosion, and it also shows which countries have fared badly in the past 2 years when certain quotas in the textile markets were lifted. That doesn't necessarily tell us whether those will be the same countries that will have trouble going forward, but it may be an indication.

QUESTION: Thanks.

QUESTION: I just have a quick question here.

If you can clarify, can the countries use this money basically for what? I mean, this TIM funding, these additional resources, what can they use it for—basically, to restructure, to build roads, retrain workers? Do they decide? Is that part of the conditionality?

MR. LANKES: No. They would use the money in the same way they would use any IMF funding, which is meant to strengthen international reserves of countries that face shortfalls in their balance of payments. So the money would be made available, if you want, essentially, to the central banks of these countries and would allow the countries to have a somewhat less-harsh adjustment to the reductions in exports. They would soften the impact and allow them to take measures to redress the situation. That is typical of any IMF program. It's kind of the basic principle underlying IMF's programs.

The TIM is, in this sense, only a window that would allow some additional funding and a particular focus on these issues.

QUESTION: I have a follow-up or a slightly different question.

For instance, if the five Central American countries that are signing the CAFTA free trade deal with the U.S., would they qualify for this? Because they're getting greater access, I mean, they wouldn't qualify. This would be, because they're getting greater access to the U.S. market. So they wouldn't qualify for this, right? Am I understanding this correctly?

MR. LANKES: Well, they wouldn't qualify under the CAFTA. Some of these countries are quite dependent on textile exports, take Honduras, for instance, to some extent El Salvador. Some are big in sugar exports or relatively big in sugar exports. Now, these are markets that would be liberalized in the WTO, if you take the textiles markets, or under some other scheme, say, in the sugar sector and, as a result, these countries might be facing more competition and possible losses in their export markets. And with regard to those, they would be eligible under the TIM, not under the CAFTA, per se, but under other trade events that might occur.

QUESTION: Thank you.

QUESTION: Could you talk a little bit about what impact you think this might have on the Doha Round, which seems to be dead in the water right now after Cancun. Have any of these countries indicated that they're willing to go back to the bargaining table? Would this help? What impact do you see with this?

MR. LANKES: Well, in the Doha Round, the problem with preference erosion and the like has been that you've quite a number of countries that are just questioning the value of liberalization for them. They might understand the rationale that more open world trade is good for the world economy as a whole, but these are often countries that already have tariff-free access under all sorts of preference schemes. So the reduction of tariffs, to take an example, in the Doha Round is of no particular direct benefit to them. On the contrary, it will expose them to greater competition.

That has led groups of countries, such as the LAC group and the African group in the WTO, to put forward proposals to essentially delay liberalization in sectors that are particularly important for them. Now, that obviously is going to create obstacles to broader agreement in the Doha Round and is a cause of worry. That has actually been one of the factors, if you want, that caused difficulties in the run-up to Doha itself and then again at Cancun.

If you want, you have a large group of small countries that are beginning to define their interest in the multilateral trading environment that haven't been as conscious of their interests in the past, haven't been as engaged in the past and are becoming more engaged. And they are becoming active in this particular way.

Now, we believe that even if countries would face difficulties in selected sectors as a result of what I've been talking about, they would still, in general, benefit from a strengthening of the world economy if you have an ambitious liberalization outcome in the Doha Round.

Also, the trade relations that are particularly at stake here are exports of certain commodities into the U.S. market or into the EU markets. A particularly interesting dimension in the Doha Round is South-South trade, where there's a lot more potential, and these concerns here don't cover that. So we feel it's shortsighted to kind of oppose multilateral liberalization because of certain preferences that you have today and then not take advantage of these broader opportunities.

So the bottom line for us is that countries should also see the larger picture. And this facility is aimed at helping them have these broader objectives in mind and to have assurances that any disruptions, if they face any disruptions, the IMF would help them, both analytically and financially.

So we would hope that it will make it easier to move forward in the Doha Round, which by the way has, over the past 2 weeks or so, has shown new signs of life. I think there's a little bit of an increasing optimism that there would be some progress this year.

QUESTION: Thank you.

MR. MURRAY: It sounds like we've covered the ground.

If you have any follow-up questions, if you come across something in the paper that's on the web that you want clarification of, drop me an e-mail: wmurray—m-u-r-r-a-y—@IMF.org. Again, wmurray@imf.org.

Thank you, and thanks to Hans Peter, as well.

MR. LANKES: Thank you.

[Whereupon, the teleconference was concluded.]




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